Definition of procurement

Procurement helps ensure the ‘supply’ in a supply chain.  Also termed supply management or purchasing, procurement is concerned with the broad task of coordinating the inbound flow of materials - including supplier selection, risk management and material planning and control.

The purpose of procurement is to ensure that supplies of goods and services are in place so that a company can produce its products and ship them to its customers. Tactically, procurement also contributes to basic value drivers - such as price competitiveness and service levels. Strategically, procurement holds the potential to accelerate innovation and drive step changes in costs and performance levels.

Example

Procurement has traditionally been tasked with buying goods and services at the cheapest price.  Since companies typically spend some 60 to 80 per cent of their cost of sales on bought-in goods and services, this is not surprising.  But cost savings are not the only contribution that procurement can make.

When an assembly plant relies on just in time deliveries to maintain production at low levels of inventory, reliability is as important.  The Seat car plant at Martorell near Barcelona has a supplier park 2km down the road, which delivers major modules like the cockpit ‘just in sequence’ to the assembly line.

Suppliers are instructed only a few hours beforehand the exact configuration (colour, left- or right-hand drive, instruments, etc) of the module, so they must have reliable processes in place to be able to respond so quickly.

Avoiding the risk of discontinued supply, interruptions to supply and supplier bankruptcies are examples of other contributions that procurement can make.  This means taking additional aspects of a supplier’s capability than price performance into account – such as financial stability, technical capability and quality performance, This is achieved by rating suppliers on several criteria, a process called vendor rating.  The aim is to jointly improve supplier and customer processes.

Ethical sourcing - obtaining goods from sustainable raw materials using socially responsible methods – is another important area where procurement has a major role to play. Following a consumer backlash in its mature markets, sports goods supplier Nike and others worked with local authorities to eliminate the use of child labour at suppliers in Pakistan.  The main local supplier became Saga Sports, who established factories which banned the use of child labour, and the outsourcing practices which had allowed it to flourish. [1]