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Procurement is the process of finding and agreeing to terms, and acquiring
goods In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...

goods
,
services Service may refer to: Activities :''(See the Religion section for religious activities)'' * Administrative service, a required part of the workload of Faculty (academic staff), university faculty * Civil service, the body of employees of a governm ...
, or works from an external source, often via a tendering or competitive
bidding Bidding is an offer (often competitive) to set a price tag by an individual or business for a product or service ''or'' a demand that something be done. Bidding is used to determine the cost or value of something. Bidding can be performed by a p ...
process. Procurement generally involves making buying decisions under conditions of
scarcity Scarcity as an economic concept "refers to the basic fact of life that there exists only a finite amount of human and nonhuman resources which the best technical knowledge is capable of using to produce only limited maximum amounts of each econom ...
. 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 as an organizational process is intended to ensure that 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 In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods a ...
, and fluctuations in the prices of goods. Organisations which have adopted a
corporate social responsibility Corporate social responsibility (CSR) is a form of international private business self-regulation which aims to contribute to societal goals of a philanthropic, activist, or charitable nature by engaging in or supporting volunteering or ethically-o ...
perspective are also likely to require their purchasing activity to take wider societal and ethical considerations into account. On the other hand, the introduction of external regulations concerning accounting practices can affect ongoing buyer-supplier relations in unforeseen manners.


History

Formalized acquisition of goods and services has its roots in
military logistics Military logistics is the discipline of planning and carrying out the movement, supply, and maintenance of military forces. In its most comprehensive sense, it is those aspects or military operations that deal with: * Design, development, , stora ...
, where the ancient practice of foraging and looting was taken up by professional quartermasters, a term which dates from the 17th century. The first written records of what would be recognized now as the purchasing department of an industrial operation is in the railway companies of the 19th century. An early reference book from 1922 explains that


Overview

An important distinction should be made between analyses without risk and those with risk. Where risk is involved, either in the costs or the benefits, the concept of best value should be employed. Procurement activities are also often split into two distinct categories, direct and indirect spend. Direct spend refers to the production-related procurement that encompasses all items that are part of finished products, such as raw material, components and parts. Direct procurement, which is the focus in
supply chain management File:Supply and demand-stacked4.png , 400px, In an efficient supply chain agreements are aligned In commerce, supply chain management (SCM), the management of the flow of good (economics), goods and Service (economics), services, between busi ...
, directly affects the production process of manufacturing firms. In contrast,
indirect procurementIndirect procurement is the sourcing of all goods and services for a business to enable it to maintain and develop its operations. The goods and services classified under the umbrella of indirect procurement are commonly bought for consumption by in ...
concerns non-production-related acquisition: obtaining "operating resources" which a company purchases to enable its operations. Indirect procurement comprises a wide variety of goods and services, from standardized items like office supplies and machine
lubricants A lubricant is a substance that helps to reduce friction Friction is the force In physics Physics (from grc, φυσική (ἐπιστήμη), physikḗ (epistḗmē), knowledge of nature, from ''phýsis'' 'nature'), , is th ...
to complex and costly products and services like heavy equipment, consulting services, and
outsourcing Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity that is or could be done internally, and sometimes involves transferring employees and assets from one firm to another. Th ...

outsourcing
services.


Topics


Procurement vs. sourcing vs. acquisition

Procurement is one component of the broader concept of sourcing and acquisition. Typically procurement is viewed as more tactical in nature (the process of physically buying a product or service) and sourcing and acquisition are viewed as more strategic and encompassing. The
Institute of Supply Management Institute for Supply Management (ISM) is the oldest, and the largest, supply management association in the world. Founded in 1915, the U.S.-based not-for-profit A nonprofit organization (NPO), also known as a non-business entity, not-for-prof ...
(ISM) defines strategic sourcing as the process of identifying sources that could provide needed products or services for the acquiring organization. The term procurement is used to reflect the entire purchasing process or cycle, and not just the tactical components. ISM defines procurement as an organizational function that includes specifications development, value analysis, supplier market research, negotiation, buying activities, contract administration, inventory control, traffic, receiving and stores. Purchasing refers to the major function of an organization that is responsible for acquisition of required materials, services and equipment. The United States
Defense Acquisition University The Defense Acquisition University (DAU) is a corporate universityA corporate university is any educational entity that is a strategic tool designed to assist its parent organization in achieving its goals by conducting activities that foster ind ...
(DAU) defines procurement as the act of buying goods and services for the government. DAU defines acquisition as the conceptualization, initiation, design, development, test, contracting, production, deployment, Logistics Support (LS), modification, and disposal of weapons and other systems, supplies, or services (including construction) to satisfy
Department of DefenseDepartment of Defence or Department of Defense may refer to: Current departments of defence * Department of Defence (Australia) The Department of Defence (DoD) is a Government department, department of the Government of Australia charged with ...
needs, intended for use in or in support of military missions. There is also an important distinction between the terms Procurement and Purchasing and the clear distinction between the two is often lost amidst the ambiguities of international English. As a broad definition, “Procurement” is the overarching function that describes the activities and processes to acquire goods and services. Importantly, and distinct from “purchasing”, it involves the activities involved in establishing fundamental requirements, sourcing activities such as market research and vendor evaluation and negotiation of contracts. It can also include the purchasing activities required to order and receive goods. Acquisition and sourcing are therefore much wider concepts than procurement. Multiple sourcing business models exist, and acquisition models exist.


Acquisition processes

A linear acquisition process used in industry and defense is shown in the next figure, in this case relating to acquisition in the technology field. The process is defined by a series of phases during which technology is defined and matured into viable concepts, which are subsequently developed and readied for production, after which the systems produced are supported in the field.''Systems Engineering Fundamentals.''
Defense Acquisition University Press, 2001
The process allows for a given system to enter the process at any of the development phases. For example, a system using unproven technology would enter at the beginning stages of the process and would proceed through a lengthy period of technology maturation, while a system based on mature and proven technologies might enter directly into engineering development or, conceivably, even production. The process itself includes four phases of development: * Concept and technology development is intended to explore alternative concepts based on assessments of operational needs, technology readiness, risk, and affordability. * The concept and technology development phase begins with concept exploration. During this stage, concept studies are undertaken to define alternative concepts and to provide information about capability and risk that would permit an objective comparison of competing concepts. * The system development and demonstration phase could be entered directly as a result of a technological opportunity and urgent user need, as well as having come through concept and technology development. * The last, and longest phase is the sustainable and disposal phase of the program. During this phase all necessary activities are accomplished to maintain and sustain the system in the field in the most cost-effective manner possible. Many writers also refer to procurement as a cyclical process, which commences with a definition of business needs and develops a specification, identifies suppliers and adopted appropriate methods for consulting with them, inviting and evaluating proposals, secures an contract and takes delivery of a new asset or accepts performance of a service, manages the ownership of the asset or the delivery of the service and reaches an end-of-life point where the asset becomes due for replacement or the service contract terminates. At this point the cycle would recommence.


Sourcing business model

Procurement officials increasingly realize that their make-buy supplier decisions fall along a continuum from simple buying transactions to more complex, strategic buyer-supplier collaborations. It is important for procurement officials to use the right sourcing business model that fits each buyer-seller situation. There are seven models along the sourcing continuum: basic provider, approved provider, preferred provider, performance-based/managed services model,
vested In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and influenced by its environment, is described by its bo ...
business model,
shared servicesShared services is the provision of a service by one part of an organization or group, where that service had previously been found, in more than one part of the organization or group. Thus the funding and resourcing of the service is shared and the ...
model and equity partnerships. * A basic provider model is transaction-based; it usually has a set price for individual products and services for which there are a wide range of standard market options. Typically these products or services are readily available, with little differentiation in what is offered. * An approved provider model uses a transaction-based approach where goods and services are purchased from prequalified suppliers that meet certain performance or other selection criteria. * The preferred provider model also uses a transaction-based economic model, but a key difference between the preferred provider and the other transaction-based models is that the buyer has chosen to move to a supplier relationship where there is an opportunity for the supplier to add incremental value to the buyer's business to meet strategic objectives. * A performance-based (or managed services model) is generally a formal, longer-term supplier agreement that combines a relational contracting model with an output-based economic model. It seeks to drive supplier accountability for output-based service-level agreements (SLAs) and/or
cost reduction Cost reduction is the process used by companies to reduce their cost In production, research Research is "creativity, creative and systematic work undertaken to increase the stock of knowledge". It involves the collection, organization, ...
targets. * A vested sourcing business model is a hybrid relationship that combines an outcome-based economic model with a relational contracting model. Companies enter into highly collaborative arrangements designed to create and share value for buyers and suppliers above and beyond. * A shared services model is typically an internal organization based on an arm's-length outsourcing arrangement. Using this approach, processes are often centralized into an SSO that charges business units or users for the services they use. * An equity partnership creates a legally binding entity; it can take different legal forms, from buying a supplier (an acquisition), to creating a subsidiary, to equity-sharing joint ventures or entering into cooperative (co-op) arrangements.


Roles in procurement

Personnel who undertake procurement on behalf of an organisation may be referred to as procurement officers, professionals or specialists, buyers or supply managers. The US
Federal Acquisition Regulation The Federal Acquisition Regulation (FAR) is the principal set of rules regarding Government procurement in the United States A government is the system or group of people governing an organized community, generally a state. In the ca ...
refers to
Contracting Officer#REDIRECT Contracting OfficerA Contracting Officer (CO, also KO) is a person who can bind the Federal Government of the United States to a contract which is greater in value than the federal micro-purchase threshold ($10,000). This is limited to the ...
s. Staff in managerial positions may be referred to as Purchasing Managers or Procurement Managers. A Purchasing or Procurement Manager's responsibilities may include: *approving orders *seeking reliable vendors or suppliers to provide quality goods at reasonable prices *
negotiating Negotiation is a dialogue between two or more people or parties intended to reach a beneficial outcome over one or more issues where a conflict exists with respect to at least one of these issues. Negotiation is an interaction and process ...
prices and contracts *reviewing technical specifications for
raw materials A raw material, also known as a feedstock, unprocessed material, or primary commodity, is a basic material that is used to produce goods, finished Product (business), products, energy, or intermediate materials that are feedstock for future finish ...
, components, equipment or buildings *determining and monitoring quantity and timing of deliveries (more commonly in small companies) *
forecasting Forecasting is the process of making predictions based on past and present data and most commonly by analysis of trends. A commonplace example might be estimation Estimation (or estimating) is the process of finding an estimate, or approximation ...
upcoming demand *supervision of other procurement staff and agents. Category management represents a system of organising the roles of staff within a procurement team "in such a way as to focus ... on the xternalsupply markets of an organisation", rather than being organised according to the organisation's internal departmental structure. In many larger organizations the procurement and supply function is led by a board-level or other senior position such as a Director of Supply Chain or a
Chief Procurement Officer A chief procurement officer (CPO) undertakes an executive Executive may refer to: Role, title, or function * Executive (government), branch of government that has authority and responsibility for the administration of state bureaucracy * Executive, ...
. Independent or third party personnel who undertake procurement or negotiate purchases on behalf of an organization may be called purchasing agents or
buying agent Buying agents or purchasing agents are people or companies that offer to buy goods or property on behalf of another party. Indent agents or indenting agents (or firms) are alternative terms for buying agents. An indent is an order for goods under s ...
s. A commercial agent may both purchase and sell on behalf of a third party. US Bureau of Labor Statistics research found that there were 526,200 purchasing manager, buyer and purchasing agent positions in the United States in 2019. Various writers have noted that businesses may reduce the numbers of purchasing staff during a recession along with staff in other business areas, despite a tendency to become more dependent on bought-in goods and services as operations contract. For example, US business executive Steve Collins observed that in one major company the purchasing staffbase "was downsized some 30% during the [2010] Great Recession in the United States, recession, 'but the expectations for the remaining employees remained unchanged ... The additional workload placed on the remaining employees following the downsizing created a much more challenging environment'". In 2021 the Australasian Procurement and Construction Council (APCC) put forward an appeal asking everyone working in the procurement profession in Australia to include the term in their Job title, occupational title when completing their August 2021 2021 Australian census, census return. The European Commission issued a recommendation in October 2017 directed towards the "professionalisation of public procurement" so that Member state of the European Union, Member States could "attract, develop and retain" staff in public purchasing roles, focus on performance and "make the most of the available tools and techniques".


Procurement software

Procurement software (often labeled as e-procurement software) manages purchasing processes electronically or via cloud computing.


Procurement performance

The Chartered Institute of Procurement & Supply (CIPS) promotes a model of "five rights", which it suggests are "a traditional formula expressing the basic objectives of procurement and the general criteria by which procurement performance is measured", namely that goods and services purchased should be of the right quality, in the right quantity, delivered to the right place at the right time and obtained at the right price. CIPS has in the past also offered an alternative listing of the five rights as "buy[ing] goods or services of the right quality, in the right quantity, from the right source, at the right time and at the right price. Right source is added as a sixth right in CIPS' 2018 publication, ''Contract Administration''. CIPS also notes that securing savings is "one measure of purchasing performance", but argues that savings should only be used as a measure of performance where they are "a reflection of the [organisation]'s ... expectations of the purchasing and supply management function". CIPS distinguishes between "savings", which can reduce budgets, and "cost avoidance", which "attempts to thwart price increases and to keep within budget".CIPS
Positions on Practice: Savings
accessed 21 August 2020
Examples of savings as a beneficial outcome include: *agreeing a reduction in price, obtaining the same item for less cost *sourcing, or developing a supply of, a lower quality item at a reduced cost, where the item is still fit for purpose *obtaining added value for the same cost, e.g. negotiating extended warranty, extended warranties, additional spare parts etc. Ardent Partners published a report in 2011 which presented a comprehensive, industry-wide view into what was happening in the world of procurement at that time by drawing on the experience, performance, and perspective of nearly 250 chief procurement officers and other procurement executives. The report included the main procurement performance and operational benchmarks that procurement leaders use to gauge the success of their organizations. This report found that the average procurement department manages 60.6% of total enterprise spend. This measure, commonly called "spend under management" or "managed spend", refers to the percentage of total enterprise spend (which includes all direct and indirect spend) that a procurement organization manages or influences. Alternatively, the term may refer to the percentage of addressable spend which is influenced by procurement, "addressable spend" being the expenditure which could potentially be influenced. The average procurement department also achieved an annual saving of 6.7% in the last reporting cycle, sourced 52.6% of its addressable spend, and has a contract compliance rate of 62.6%. Consultants A.T. Kearney have developed a model for assessing the performance of a procurement organisation or the procurement function within a wider organisation, known as ROSMAService mark symbol, SM (Return on Supply Management Assets). According to the 2016 ROSMA℠ Performance Check Report, ''What Good Looks Like'', CIPS promotes organisational self-assessment using the ROSMA Performance Check, arguing that it enables a procurement department to "measure and explain procurement and supply’s value in terms your Chief financial officer, CFO and CEO will understand, using a common financial standard". Findings in 2020 suggested that "top quartile procurement performers have ROSMA scores two to three times higher than those in the middle two quartiles". A.T. Kearney's report suggests a close match between the self-reported performance of CPOs in the best performing departments and the view of procurement held by the CFO and the organisation more widely, and also notes that weaker performers or "inconsequentials" share a distinct profile marked by lack of "identifiable leadership accountable for procurement's performance. Spend under management also contributes to an additional measure of procurement performance or procurement efficiency: procurement operating expense as a percentage of managed spend.


Joint procurement

Joint procurement takes place when two or more organisations share purchasing activities, and therefore has a more specifically buyer-side focus than many examples of collaborative buyer-seller relationships. Kamann, van der Vaart and de Vries propose a "theoretical frame of reference" to explain various approaches to understanding "why would companies work together in the first place?" *a transaction cost economics approach, where the total transaction costs of the actors involved are lower when they work together *a Resource dependence theory, resource dependence approach, and the resource based view, where the group of actors is able to ''create'' a resource, market power, which they would be unable to exercise independently *neo-classical economics' case, arguing that certain functions become separate, specialised units in order to obtain economies of scale, scale effects *neo-institutionalism - the argument that actors work together because it is ''the'' thing to do these days.Kamann D. J. F., van der Vaart T., and de Vries, J. (2004) ''Joint purchasing: theory and practice'', International IPSERA Conference, 4–7 April 2004, Catania, Italy They note also that many large and powerful companies "do not have - nor feel - the need to go together".


Relationship with Finance

Procurement and Finance have, as functions within the corporate structure, been at odds. The contentious nature of their relationship can perhaps be attributed to the history of procurement itself. Historically, Procurement has been considered Finance's underling. One reason behind this perception can be ascribed to semantics. When Procurement was in its infancy, it was referred to as a "commercial" operation. And so the procurement department was referred to as the ''commercial'' department rather than the procurement department: the word "commercial" was understood to be associated with money. And so it was obvious that Procurement would become directly answerable to Finance. Another factor, equally grounded in semantics, was that procurement departments (or rather, commercial departments) were always seen as "spending the money". This impression was enough to situate Procurement within the Finance function. It's easy to see why Procurement and Finance are functions with interests that are mutually irreconcilable. Whereas Procurement is fundamentally concerned with the spending or disbursal of money, Finance, by its very nature, performs a cost-cutting role. That is fundamentally the reason why Procurement's aspirations have been constantly checked by Finance's cost-cutting imperatives. This notion, however, has been changing as more chief procurement officers have begun to argue for more autonomy and less interference from Finance departments.


Electronic procurement

Electronic procurement is the purchasing of goods by businesses through the internet or other networked computer connection. Electronic data interchange (EDI) was a forerunner to electronic procurement, this consisted of standardized transmission of data such as inventories and good required electronically. Schoenherr argues that EDI developed from standardized manifests for deliveries to Berlin during the Berlin Airlift which were applied by DuPont in the 1960s and argues that Material requirements planning and Enterprise resource planning were both forerunners to electronic procurement.


Public procurement

Public procurement generally is an important sector of the economy. In Europe, public procurement accounted for 16.3% of the Community GDP in 2013.


Green public procurement

In public procurement, contracting authorities and Legal entity, entities take environmental issues into account when tendering for goods or services. The goal is to reduce the impact of the procurement on human health and the environment. In the Government procurement in the European Union, European Union, the Commission has adopted its communication on public procurement for a better environment, where proposes a political target of 50% Green public procurement to be reached by the Member States by the year 2010. The European Commission has recommended GPP criteria for 21 product/service groups which may be used by any public authority in Europe. The EU has also launched the GPP 2020, which aims to implement 100 low-carbon tenders. Social and environmental considerations can be applied to contracts both above and below the threshold for application of the EU Procurement Directives. The 2014 Procurement Directives enable public authorities to take environmental considerations into account. This applies during pre-procurement, as part of the procurement process itself, and in the performance of the contract. Rules regarding exclusion and selection aim to ensure a minimum level of compliance with environmental law by contractors and sub-contractors. Techniques such as life-cycle costing, specification of sustainable production processes, and use of environmental award criteria are available to help contracting authorities identify environmentally preferable bids.


Accessible procurement

The United States Section 508 and European Commission standard EN 301 549 require public procurement to promote accessibility. This means buying products and technology that have accessibility features built in to promote access for the around 1 billion people worldwide who have disabilities.


Alternative competitive bidding procedures

There are several alternatives to traditional competitive bid tendering that are available in formal procurement. One approach that has gained increasing momentum in the construction industry and among developing economies is the selection in planning (SIP) process, which enables project developers and equipment purchasers to make significant changes to their requirements with relative ease. The SIP process also enables vendors and contractors to respond with greater accuracy and competitiveness as a result of the generally longer lead times they are afforded. University of Tennessee research shows that Request for Solution and Request for association (also known as request for partner or request for partnership) methods are also gaining traction as viable alternatives and more collaborative methods for selecting strategic suppliers – especially for
outsourcing Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity that is or could be done internally, and sometimes involves transferring employees and assets from one firm to another. Th ...

outsourcing
.


Fraud

The OECD has published guidelines on how to detect and combat bid rigging. Procurement fraud can be defined as dishonestly obtaining an advantage, avoiding an obligation or causing a loss to public property or various means during procurement process by public servants, contractors or any other person involved in the procurement. An example is a Kickback (bribery), kickback, whereby a dishonest agent of the supplier pays a dishonest agent of the purchaser to select the supplier's bid, often at an inflated price. Other frauds in procurement include: * Collusion among bidders to reduce competition. * Providing bidders with advance "inside" information. * Submission of false or inflated invoices for services and products that are not delivered or work that is never done. "Shadow vendors", shell companies that are set up and used for billing, may be used in such schemes. * Intentional substitution of substandard materials without the customer's agreement. * Use of "sole source" contracts without proper justification. * Use of prequalification standards in specifications to unnecessarily exclude otherwise qualified contractors. * Dividing requirements to qualify for small-purchase procedures to avoid scrutiny for contract review procedures of larger purchases. Integrity pact, Integrity Pacts are one tool to prevent fraud and other irregular practices in procurement projects. The G20 has recommended their use in their 2019 Compendium of Good Practices for Promoting Integrity and Transparency in Infrastructure Development. A major European Commission pilot project entitled ''Integrity Pacts - Civil Control Mechanism for Safeguarding EU Funds'' is seeking to evaluate the effectiveness of Integrity Pacts in reducing corruption in 17 EU-funded projects in 11 Member States with a total value of over EUR 920 million.


See also

* Agreement on Government Procurement * Bidder conferences * Contract management * E-procurement * Expediting * Global sourcing * Group purchasing organization * National Association of State Procurement Officials * Procurement outsourcing * Performance Based Contracting * Selection in planning * Strategic sourcing * Tender notification


References


Bibliography

* * Benslimane, Y.; Plaisent, M.; Bernard, P.: Investigating Search Costs and Coordination Costs in Electronic Markets: A Transaction Costs Economics Perspective, in: ''Electronic Markets'', 15, 3, 2005, pp. 213–224. * Hodges Silverstein, S.; Sager, T.: 2015.
Legal Procurement Handbook
' (New York
Buying Legal Council
. * Transportation services procurement. * Keith, B.; Vitasek, K.; Manrodt, K.; Kling, J.: 2016. ''Strategic Sourcing in the New Economy: Harnessing the Potential of Sourcing Business Models for Modern Procurement'' (New York: Palgrave Macmillan).


Attribution

*


External links


Federal Procurement Data System
(United States)

(European Commission)
''Systems Engineering Fundamentals.''
Defense Acquisition University Press, 2001
Disability:INclusive Workplaces – Accessible Technology Procurement Toolkit
{{Authority control Procurement, Business terms Systems engineering Supply chain management