Procurement: understanding the need and why does it matter

Well to start off, every purchasing decision involves considerations such as marginal benefit, handling and delivery. A well-structured procurement function provides better buying decisions, saving tremendous costs without compromising on quality.

Thus procurement is a process that is split into two categories: the first one is known as direct and the second one is known as indirect spend. Direct spend refers to the procurement of the finished products such as the parts, components and raw materials. While indirect procurement refers to the non-production related acquisition like the acquisition sources to enable operation.

Furthermore indirect spend involves a variety of services and goods which range from items like office supplies to costly equipment like heavy machinery.

Comparison Chart

Direct Procurement Indirect Procurement
Inputs Production goods and raw materials Supplies, outsourcing, repair and maintenance Services and capital goods
Quantity High Less Less
Frequency High Relatively High Low
Value According to the industry norms Low Value High Value
Nature Follows operational method Follows tactical method Follows strategic method
Examples Involves the petroleum industry precisely crude oil Spare parts and lubricants Storage facilities like the crude oil

Sourcing vs acquisition vs procurement
Procurement requires a deeper understanding than acquisition and sourcing. While procurement is viewed as more of a tactical function, sourcing and acquisition on the other hand is considered more encompassing and strategic in nature.

The Institute of Supply Management (ISM) defines sourcing as the process that fulfills the procurement needs for an organization. On the other side, ISM defines procurement as the function that portrays the entire purchasing process, which is not limited to tactical components.

Thus procurement, in general terms, refers to the negotiation, contract administration, supplier market research and inventory control. Thus procurement has various models and therefore has a much wider concept than sourcing and acquisition.

HASHTAGS
#supplychain #procurement #SCM #automation #businesstransformation #efficiency #bestpractice #digitization #outsourcing

Author – Aval Sethi, Founder

Aval Sethi is the founder & CEO of ProTaiga and is based in New Delhi, India. As a result driven entrepreneur, Aval leads Business Transformation and Procurement Automation initiatives focusing on new-age innovation for businesses through his company.

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