Every organization acquires material or services to complete its business needs. The process of buying materials and obtaining services from vendors or dealers is called procurement. Procurement should be done in such a way that materials are ordered in correct quantity, with a proper value at the proper time. It is subdivided into following parts −
Basic procurement is a process of acquiring goods or services in the right quantity, at the right price, and at the right time. However it is critical to maintain a right balance between quantity, price, and time. Consider the following example −
Organizations try and keep inventory levels at a minimum, due to the prices associated with high levels of inventory; at the same time, it can be detrimental to stop production due to shortage of raw materials.
Getting the minimum price for a product or service is often necessary, however it is equally important to maintain a balance between the product availability, quality, and vendor (seller) relations.
Procurement in most modern organizations follow some sequential steps which are described below −
Procurement process starts with gathering information about a product and its quantity. Then for the required products and services, it is necessary to look for suppliers who can satisfy the requirements.
After gathering the requirements, one looks for the suppliers who can fulfill those requirements. Based on that, quotation requests or information requests are sent to the suppliers or they are contacted directly.
Once the supplier is known, the product/service quality is checked, and any necessities for services such as installation, warranty, and maintenance parameters are investigated. Some samples of the products can be obtained for quality examination.
Some negotiations with suppliers is made regarding the price, availability, and delivery schedule of the products/services. Thereafter, a contract is signed that is a binding legal document between the supplier and the ordering party. A contract will include all necessary information such as price and quantity of material, delivery date, etc.
Ordered material is shipped, delivered to the ordering party, and the supplier is paid accordingly. Training and installation of product or services may also be included.
As the products/services are consumed, the performance of the products or services is evaluated and any follow-up service support, if required, is analyzed.
Once the products or services are consumed or the contract expires and needs to be renewed, or the product or service is to be re-ordered, the experience with the vendors and service providers is reviewed. If the products or services are to be re-ordered, the company decides whether to order from the previous supplier or think about new suppliers.
The following figure illustrates the flow of basic procurement activities −
A brief introduction of the procurement activities is given below −
|Sr.No.||Procurement Activities & Description|
Determination of requirement
It is the logical subdivision where it is determined what material or services are required, and which supplier can fulfill the requirements.
Creating Purchase Requisition
It is the phase in which the purchasing department is informed about the requirement of items or services. A requisition is an internal document.
Creating Purchase Order
It is the phase when an order is created from requisition and it is approved and assigned to a supplier.
Goods receipt/ Invoice Received
It is the phase in which the material is received by the company and its condition and quality are being inspected. In this phase, an invoice is received from the vendor (seller).
Invoice verification/ Vendor Payment
It is the phase in which the vendor (seller) is paid from the company and reconciliation of the invoice and PO is accomplished.
There are two types of basic procurement −
Procurement for Stock vs Consumption
External vs Internal Procurement
The following points show the difference of Procurement for Stock vs. Consumption −
Procurement for Stock − A stock material is a material that is kept in stock. These materials are kept in stock once received from the vendor. The stock of this material keeps on increasing or decreasing based on the amount of quantity received or issued. To order a material for stock, the material must have a master record within the system.
Procurement for Direct Consumption − When the procurement is for direct consumption, i.e., it will be consumed as soon as it is received, the user should specify the consumption purpose. To order a material for consumption, the material may have a master record within the system.
The following points show the difference of External vs Internal Procurement −
External procurement − It is the process of procuring goods or services from external vendors. There are three basic forms of external procurement generally supported by the purchasing component of the IT system.
One-time orders are generally used for material and services that are ordered irregularly.
Longer-term contracts with the subsequent issue of release orders − For materials that are being ordered regularly and in large quantities, we can negotiate deal with the vendor (seller) for pricing or conditions & record then in a contract. In a contract you also specify the validity date.
Longer-term scheduling agreements and delivery schedules − If a material is ordered on an everyday basis and is to be delivered according to an exact time schedule, then you set up a scheduling agreement.
Internal Procurement − Large corporate organizations may own multiple separate businesses or companies. Internal Procurement is process of getting material and services from among identical company. So, each of these companies maintains a complete bookkeeping system with separate Balance, Profit & Loss Statements so that when trade occurs between them it will be recorded.
Special stocks are the stocks that are managed differently, as these stocks do not belong to the company. Special stocks are kept at some particular location. Special procurement and special stock types are divided into the following categories −
Consignment stocks are those material that is available at our store premises, however it still belongs to the vendor (seller) of the material. If you utilize the material from consignment stocks, then you have to pay to the vendor.
In third-party processing, a company passes on a sales order to the associate external vendor (seller) who sends the goods directly to the customer. The sales order is not processed by the company, but by the vendor (seller). Third-party items can be entered in purchase requisitions, purchase orders, and sales orders.
In pipeline handling, the company need not order or store the material involved. It is obtainable as and when required via a pipeline (for example, oil or water), or another style of cable (such as electricity). The material that is consumed is settled with the vendor (seller) on a regular basis.
The company orders goods from a vendor (seller). The goods are delivered with returnable transport packaging (pallets, containers) that belongs to the vendor (seller) and is stored at the customer premises until they return it to the company.
The vendor (the subcontractor) receives components from the ordering party with the help of which it produces a product. The product is ordered by your company through a purchase order. The components required by the vendor (seller) to manufacture the ordered product are listed in the purchase order and provided to the subcontractor.
Goods are procured and supplied within a company. One plant orders the goods internally from another plant (receiving plant/issuing plant). The goods are procured with a special type of purchase order – the stock transport order. You'll be able to request and monitor the transfer of goods with a stock transport order.