What Is Procurement?Procurement is the act of obtaining or purchasing goods or services, typically for business purposes. Procurement is most commonly associated with businesses because companies need to solicit services or purchase goods, usually on a relatively large scale. It can also include the overall procurement process, which is critically important for companies leading up to their final purchasing decision. Companies can be on both sides of the procurement process as buyers or sellers though here we mainly focus on the side of the soliciting company. Show
Key Takeaways
How Procurement WorksProcurement and procurement processes can require a substantial portion of a company’s resources to manage. Procurement budgets typically provide managers with a specific value they can spend to procure the goods or services they need. The process of procurement is often a key part of a company's strategy because the ability to purchase certain materials or services can determine if operations will be profitable. In many cases, procurement processes will be dictated by company standards often centralized by controls from the accounts payable (AP) division of accounting. The procurement process includes the preparation and processing of a demand as well as the end receipt and approval of payment. Comprehensively, this can involve purchase planning, standards, specifications determination, supplier research, selection, financing, price negotiation, and inventory control. As such, many large companies may require support from a few different areas of a company for successful procurement. There are several steps involved in the procurement process:
Competitive Bidding and ProcurementCompetitive bidding is a part of most business deals involving multiple bidders. The competitive bidding process for goods is usually more simplified than for services. Procurement is also the term used for purchasing goods and services on behalf of the government which has its own bidding processes and requirements. Competitive bidding for all types of goods generally involves proposals that detail the per-unit price, shipping, and delivery terms. Competitive bidding for the procurement of services can be more complex since it may involve different things like individuals involved, technology services, operational procedures, client servicing, training, service fees, and more. In each case, the solicitor of bids chooses the supplier they want to work with based on both operational business aspects as well as costs. The solicitor is then responsible for accounting for expenses depending on the goods
or services involved. Government agencies and large companies may choose to solicit procurement proposals on an annual or scheduled basis to ensure that they continue to maintain the best relationships for their business. Comprehensively, procurement can involve support from several areas of a company. Types of ProcurementThere are a few different kinds of procurement that businesses can undertake. These include:
Procurement vs. PurchasingProcurement and purchasing are both processes that involve the exchange of goods and services, so it isn't uncommon for people to confuse the two. But there are certain distinctions between the two. For instance, procurement is more of a strategic process that involves the acquisition of goods and services. It places a greater emphasis on the value of products and uses a series of steps (as outlined above) to complete the acquisition. Businesses generally take a proactive approach when they submit procurement orders. Doing so allows them to identify future deficiencies and fill them before they are needed. Purchasing, on the other hand, is a transactional process. As such, it involves buying goods and services. When an entity purchases goods and services, it places greater importance on price rather than value. Purchasing is usually a reactive process that satisfies a more immediate need. The table below highlights the comparison between these two processes.
Accounting for ProcurementProcurement costs are generally integrated into the financial accounting of a business, as procurement involves acquiring goods and/or services for the revenue goals of the business. As such, some companies may hire a chief procurement officer (CPO for short) to lead these efforts. The CPO:
Procurement processing can be divided and analyzed from several angles. Companies and industries have different ways of managing the procurement of direct and indirect costs. Goods companies, as compared with services companies, will also have different ways of managing costs. Direct vs. Indirect Procurement CostsDirect spending refers to anything related to the cost of goods sold and production, including all items that are part of finished products. For manufacturing companies, this can range from raw materials to components and parts. For merchandising companies, this will include the cost at which merchandise is purchased from a wholesaler for sales. For service-based companies, direct costs will primarily be the hourly labor costs of employees performing services. Procurement for items pertaining to the cost of goods sold directly affects a company’s gross profit. By contrast, indirect procurement involves non-production-related purchases. These are purchases a company uses to facilitate its operations. Indirect procurement can involve a broad range of purchases including office supplies, marketing materials, advertising campaigns, consulting services, and more. Companies will generally have different budgets and processes for managing direct costs as compared with indirect costs. Goods vs. Services Procurement AccountingProcurement is part of the expense process for all types of companies, but goods and services companies account for revenues and costs differently. As such, accounting for procured goods will also differ from accounting for procured services. Companies focused on goods will need to deal with the procurement of those goods as inventory. These companies place a lot of importance on supply chain management. Service-based companies provide services as their primary revenue generator so they do not necessarily rely as heavily on a supply chain for inventory although they may need to purchase goods for technology-based services. In general, the cost of sales for many service companies is based on the hourly labor cost of employees providing the service so procurement as a direct expense is not a major factor. However, service-based companies will usually have higher relative indirect costs because they typically deal with their own procurement as an indirect expense through marketing. What Is Meant by Procurement?Procurement is the process involved in obtaining or sourcing something that is needed. Businesses procure supplies and raw materials, while governments may procure contractors or service providers. Is Procurement the Same As Purchasing?While they are similar, procurement typically deals with finding suppliers and sourcing materials, whereas purchasing involves the costs and transactions related to buying those goods or materials. What Are the Types of Procurement?Procurement can be carried out in several ways. Organizations may submit an open tender to allow competitive bidding among potential suppliers. They may also restrict the number of bidders or establish criteria for who is allowed to bid. As an alternative to an auction process, an organization may solicit a request for proposals (REP), where applicants then compete with one another on price along with competencies. Sometimes procurement is done under contract with a single source or small group of exclusive suppliers. The Bottom LineProcurement is a strategic process that involves the acquisition of goods and services. Unlike purchasing, it involves a series of steps that are usually taken by businesses to meet certain needs, such as production, inventory, and sales. It often involves a series of documents like demands and receipts for payment. But don't confuse procurement with purchasing. Although the two terms are often used interchangeably, they are very different. Unlike procurement, purchasing is transactional and normally fulfills more immediate needs. Which of the following contracts is riskiest for a buyer quizlet?Which of the following contracts has the MOST risk for the buyer? The Time & Materials (T&M) contract is the riskiest one for the buyer, because if the project costs are much higher than the original estimates, the buyer has to swallow them, while the seller keeps getting paid for the time worked.
Which contract carries the least risk for suppliers?An FP-EPA contract carries the least risk for a supplier. What is one drawback of outsourcing? it can make an organization become overly dependent on particular suppliers. While outsourcing, organizations should protect strategic information because it can become vulnerable in the hands of suppliers.
Who bears the majority of the risk in a fixed price contract quizlet?The seller has the most cost risk in a fixed-price contract and the buyer's risk is lower because the buyer will not pay more if the seller does not control costs. The seller has the risk; if they do not control the costs, they could erode the profit margin and even lose money. 17.
Which type of contract has the least amount of risk for the buyer?Fixed Price Contracts
These are also known as Lump Sum contracts. The seller and the buyer agree on a fixed price for the project. The seller often accepts a high level of risk in this type of contract. The buyer is in the least risk category since the price the seller agreed to is fixed.
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