Procurement is the process of finding acquiring goods and services, or an external source, for tendering competitive bidding process. Procurement is used to ensure the buyer receives goods, services, or works at the best possible price when aspects such as quality, quantity, time, and location are compared. Corporations and public bodies often define processes intended to promote fair and open competition for their business while minimizing risks such as exposure to fraud and collusion.
Almost all purchasing decisions include factors such as delivery and handling, marginal benefit, and price fluctuations. Procurement generally involves making buying decisions under conditions of scarcity. If sound data is available, it is good practice to make use of economic analysis methods such as cost-benefit analysis or cost-utility analysis.
Procurement Life Cycle
Most of the organizations think of their procurement process in terms of a life cycle. Different consulting firms and experts have developed various frameworks. Some of the most common steps from the most popular frameworks include:
- Identification of need and requirements analysis: It is an internal step that involves an understanding of business objectives by establishing a short term strategy (three to five years) for overall spend category followed by defining the technical direction and requirements.
- External macro-level market analysis: Once an organization understands its requirements, it should look outward to assess the overall marketplace. A key part of a market analysis is understanding the overall competitiveness of the marketplace and trends that are likely to impact the organization.
- Cost analysis: It is the accumulation, examination and manipulation of cost data for comparisons and projections. A cost analysis is important to help an organization make a make-buy decision.
- Supplier identification: It includes identifying particular suppliers that can provide the required product or services. There are many sources to search for potential suppliers. One good source is trade shows. Modern procurement software often incorporates a supplier catalog for standardized goods and services.
- Non-disclosure agreement (NDA): It is quite normal to request vendors to sign an NDA prior to engaging with them. This protects the organisation where sensitive information is shared with multiple potential vendors ahead of releasing detailed requirements which often point to strategic decisions a firm has taken.
- Supplier communication: When one or more suitable suppliers have been identified, an organization will typically conduct a competitive bidding process. Organizations can use a variety of competitive bidding methods including requests for quotation, requests for proposals, requests for information, requests for tender, request for solution or a request for partnership. Some institutions choose to use a notification service in order to raise the competition for the chosen opportunity. These systems can either be direct from their e-tendering software, or as a re-packaged notification from an external system. During this step direct contact may be made with the suppliers. References for product/service quality are consulted, and any requirements for follow-up services including installation, maintenance, and warranty are investigated. Samples of the product/service being considered may be examined, or trials undertaken. Organizations should do a risk assessment, total cost of ownership analysis and best value assessment before selecting the final suppliers/solution.
- Negotiations and contracting: Negotiations are undertaken that often include price, availability, customization, and delivery schedules. The details are outlined in a purchase order or more formal contract.
- Logistics and performance management: Supplier preparation, expediting, shipment, delivery, and payment for the product/service are completed, based on contract terms. Installation and training may also be included. An organization should evaluate the performance of the product/service as they are consumed. A supplier scorecard is a popular tool for this purpose. When the product/service has been consumed or disposed of, the contract expires, or the product or service is to be re-ordered, the organization should review their experience with the product/service. If the product/service is to be re-ordered, the company determines whether to consider other suppliers or to continue with the same supplier.
- Supplier management and liaison: Organizations that have more strategic goods or services that require ongoing interfaces with a supplier will use a supplier relationship management process. Strategic outsourcing relationships should set up formal governance processes.