Businesses are reinventing their operations to adapt to the new normal and steady the ship. For manufacturing and production units, procurement of raw materials and other essential goods is an integral part of their daily activities.
In the post-pandemic world, businesses witness a makeover, and logistics is one of the critical components. If you are a manufacturing business, learning about procurement nitty-gritty becomes binding.
The more informed you are about the processes, the better decision-making abilities you will possess. Continue reading to learn about procurement in detail.
What is Procurement?
Procurement is the complete spectrum of activities within an enterprise related to purchasing goods, services, and works. It is an essential part of supply chain management in businesses, typically pertaining to manufacturing and production.
Since your business operations require raw materials to manufacture the end product, acquiring these materials at pre-negotiated prices and conditions is called procurement. You must note that procurement happens when one business purchases goods from the other business on a large scale.
Key Principles of Procurement
The procurement team or department of your business should have the following principles as the bedrock of procurement activities:
- Value: While pricing remains the pivotal factor, you must also look for the quality of products or services and overall business experience while procuring.
- Fair Competition: Your business should maintain transparency in the procurement process. It will help you in two ways: one, you won’t fall into any legal troubles. Second, you can find a supplier that provides the best deal.
- Ethics: Ensure that your business does not get involved in unethical practices. It will harm your reputation and skew the vendor selection process. Thus, the overall procurement process will suffer.
- Keeping Records: Accountability becomes easy when you have complete records of the activities.
- Equity: You should follow this principle to present the existing and potential suppliers with a level playing field to thrive.
Components Of A Procurement Plan
Your procurement team needs to include the following components while devising a plan:
- People: Depending upon your business and purchase order size, you can build a procurement team capable of handling the complete procurement process. While small and medium enterprises (SMEs) can prefer a smaller group of people, big firms require dedicated personnel for each stage.
- Processes: Your business should maintain transparency in the procurement process to avoid any legal repercussions and fraud. A well-designed process from placing the order to the final receipt would help you keep track of activities at every stage.
- Records: A comprehensive record-keeping, including transactions, messages, and other mission-critical information, ensures accountability of both buyer and vendor at any stage of the process. Also, your procurement team can analyze the vendor’s performance and relative costs.
The series of steps associated with procurement defines the procurement model. Your business should follow one of the three procurement models listed below:
- Local Procurement Model: In this model, making decisions is at the local or departmental level. No centralization of the process means no involvement of higher management. It adds agility to the model but risks overspending.
- Centralized Procurement Model: Central management has complete control over procurement processes. Businesses keep overall budget and expenditure in mind before making purchase decisions.
- Hybrid Model: A combination of local and centralized procurement models is called a hybrid model. It gives an edge over both models, as local departments enjoy autonomy under the central management.
Types Of Procurement
You can divide the procurement process into two types: Direct Procurement and Indirect Procurement. Let us understand them in detail.
The raw materials your business procures to manufacture the end product is direct procurement. Its input cost and efficiency determine the performance and profitability of your company. Any hindrance to its supply can hamper the manufacturing process.
It refers to the procurement of services not linked with the manufacturing process directly but essential for daily activities. Maintenance services of equipment and office supplies are indirect costs borne by your company. Any challenges to indirect procurement can hamper business operations.