Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Procurement

What it is:

Procurement is a purchasing process that controls quantity, quality, sourcing and timing to ensure the best possible total cost of ownership.

How it works (Example):

Procurement may be a simple purchasing arrangement with a supplier. It may also involve a more complex arrangement with the seller or a group of suppliers that ties required quantity, quality, and delivery into a production process.

The stages of procurement include information gathering (i.e. who are potential suppliers), supplier contacts (i.e. gathering information about the potential suppliers, background reviews (i.e. vetting, screening, checking references of potential suppliers), negotiations (i.e. setting the price and terms), fulfillment (i.e. delivery and installation), consumption, maintenance, and disposal (i.e. monitoring the actual delivery and use of the supplies or equipment), and renewal (i.e. reorders and continuing relationship with the supplier).

For example, direct procurement systems involve the integration of purchasing into a company's supply-chain management system, delivering the right supplies at the right time.  This procurement method is classified in manufacturing systems as "just-in-time," which minimizes inventory holding costs and ensures the smooth delivery of supplies needed in the manufacturing process. 

Why it Matters:

Primarily, a procurement process ensures that the company's purchasing is competitive, fair, and provides the best possible prices available in the market.   Because of the efficiencies gained through a formal procurement process, procurement is an important systems component in a company's overall management structure.  Some problems on a company's cash flow and balance sheet can be traced to problems with procurement, including holding supplies and inventory too long and having the terms of payables for supplies not matched to their respective receivables.