Procurement is an essential part of effective business operations and refers to the buying of goods  and services required for the final product/service. Efficient procurement means that businesses can meet their needs for materials and services, from sourcing to payments for competitive edge and operational smoothness. Procurement in business also involves selection of vendors, establishing payment terms and negotiating contracts. The procurement process, therefore impacts the business’s production capabilities and finances. Businesses use different procurement types to tailor their strategies to market conditions and needs. Here, let’s take a look at procurement meaning, the types of procurement, procurement processes, and its role in manufacturing and the overall supply chain.

Also read: How procurement efficiency can improve demand aggregation

What is procurement?

Let’s look at procurement meaning. Procurement is the acquisition of goods and services for business use. The process ensures that businesses get the best products and services at the right prices for effective operations management. Goods can be raw materials or semi-finished goods or any other services that are required in production.

There are different procurement types that businesses follow that impact their competitiveness. The procurement process, right from analysing needs, to evaluating suppliers, setting payment terms and signing a contract, requires precision to maintain quality standards and cost-efficiency.

Focusing on efficient procurement practices therefore, is the secret to enhancing production, supply-chain optimisation, and secure financial health.

What is procurement in simple words?

Procurement in business, in simple words refers to how it buys or acquires goods and services at the right time and price, from the right vendor. It involves analysing needs, setting payment terms with vendors, signing contracts and other important steps. Based on the business needs, it can be a direct purchase or strategic partnership type of procurement. Many organisations conduct periodic assessment of their vendors to ensure they adhere to standards or find new vendors.

Efficient procurement processes enable businesses to keep production lines running, manage business operations, and bring cost efficiency.

What is the difference between procurement and sourcing?

When discussing what is procurement, we also need to understand how sourcing and procurement are different (two sides of the same coin).

Procurement:

This involves the process of securing goods and services once the vendor/supplier has been selected. It focuses on the transaction phase – managing purchase, delivery of goods, checking quality and quantity, making payments. Procurement ensures that the deal is in alignment with the policies of the company, agreement made, budgets and other terms and conditions for efficiency in the buying process.

Also read: Tata Steel procurement process

Sourcing:

This refers to identifying, finding and selecting vendors and suppliers that offer required goods and services and meet the eligibility requirements set by the business. It’s about establishing policies, strategic goals, and a strong organisational foundation before purchasing happens. Sourcing therefore comes ahead of procurement process in identifying vendors based on value, quality, pricing and reliability.

Also read: Raw material sourcing strategy

Procurement vs Sourcing

What is an example of procurement?

From understanding procurement meaning, let’s take an example of procurement. An excellent example of steps in procurement can be observed in the electronics industry.

Procurement in manufacturing (electronics industry):

Consider a company (Company S) that manufactures smartphones. The procurement process begins when Company S identifies need for new components (microchips, screens, batteries) for assembling the final product as per its latest design.

Part 1:

The Sourcing team immediately gets active and contacts its pool of suppliers and vendors who can provide high quality components at the best prices, and as per scheduled delivery timelines.

Part 2:

The Procurement team then takes over to identify the most suitable vendor/supplier, negotiate payment terms, quantity, delivery timelines, and other details that aligns with the budget and project timelines. Once the vendor is finalised, the order is placed, and agreement made based on project requirements.

Part 3:

Once the deliveries are made, the Procurement team will evaluate goods, match quality/quantity as per the agreement (SLAs), and either accept or reject. If the goods are accepted then it will be sent for production, and clearance for payments (as per agreed terms) will be provided. If the goods are rejected, then it will be returned and a new timeline for a fresh batch will be set.

Note: When buying goods/services from MSE businesses, as per Section 43B(h) of Income Tax Law, all payments have to be made within 45 days.

Part 4:

If the goods are rejected, the Procurement team will also have to send a report to the required teams (e.g., Sourcing and Production) with reasons and next steps.

What is the meaning of procurement process?

Let us now take a look at the procurement process briefly. Listed below is a break down of the steps in procurement process providing a clear, actionable guide to streamline procurement activities.

Procurement process to follow

• Identifying needs
• Selection of vendor
• Negotiating prices
• Signing of contract
• Issuing purchase order
• Inspecting and accepting deliveries
• Invoicing
• Record keeping and auditing

Each of these steps is pivotal for efficiency. Additionally, check these tips to improve procurement processes in business.

The above serves as a brief overview for quick understanding only. If you wish to delve deeper into this process and understand the intricacies involved, we invite you to explore our comprehensive guide on the 7 Steps of Procurement Stages, which provides a detailed roadmap to mastering procurement excellence.

What is procurement in manufacturing?

The manufacturing sector has different procurement needs. Procurement in manufacturing is crucial for maintaining smooth operation of production lines. It involves securing the raw materials required in production of the final product. For instance, a garments manufacturer will require to procure textile or cloth for producing garments.

Procurement in manufacturing usually follows the general procurement steps, by need identification based on production demands and inventory levels. Accordingly, vendors are selected for the procurement of raw materials, followed by contract negotiation, signing agreements, sending the purchase order, receiving goods, and making payment.

However, there are different types of procurement in manufacturing businesses:

• Direct procurement: Buying raw materials directly for the production of actual products
• Indirect procurement: Supplying products/services that support the production process, like machinery and office supplies

Each type has its own challenges including volatility in prices and disruptions in the supply chain. For manufacturers in India therefore, mastering procurement is the key to stay competitive, minimise waste, reduce costs and improve production pace.

What is an example of steel procurement?

Steel is a vital component in manufacturing, construction, real estate and other sectors. Procurement of steel therefore is a crucial step for these industries. Let’s understand it with the example of steel procurement in the construction industry with the building of high-rise apartments.

• Identify the type of steel required (e.g., TMT bars, rebars, beams, channels, iron rods)
• Negotiate with suppliers for the best prices and delivery terms
• Ensure details of quality standards and specifications are clearly understood and challenges of supply chain are discussed
• Select vendor, set the contract, send purchase order
• Inspect steel procured, check for quality and quantity, approve invoices

Must Read: New 45 days payment rules for MSEs. 

Steel procurement process

Let’s take the example of procuring 100 TMT bars for a house construction. Here, one will have to be precise and specific with requirements – type of TMT bar required Fe 415 or Fe 500; specifications of the TMT bar, 12mm, 8mm, 16mm; any specific brand of TMT, or any other.

• The contractor or engineer will identify the needs based on structural requirements and send the request to the Procurement team.
• The Procurement team will begin identifying the best steel supplier, prioritising local steel suppliers to reduce transportation costs.
• Supplier credibility is evaluated, sample TMT bars are requested for quality checks, prices and delivery timelines are agreed upon and the contract drawn. Here, quality is essential ensuring that the TMT bars meet all quality standards regulations for durability and safety. Many engineers might even specify steel brands for maintaining quality. (Also read: Top 10 steel TMT bars in India)
• A purchase order for 100 kgs TMT bars is sent out.
• Upon delivery, inspection is performed, and once the invoice is provided, payments are processed.
• The TMT bars are stored securely on-site at the construction site. This stage of materials handling and storage is crucial to ensure there’s no rust, corrosion or other damage done to the steel.

Must read: Steel Buyers Beware! Avoid These Costly Procurement Mistakes

Why is procurement in business important?

We now understand what is procurement, its process and how procurement is carried out. Let’s now understand the importance of procurement in business:

• Efficient procurement strategies enable better cost management by selecting vendors with the best price offers and reducing costs.
• It ensures quality standards are met.
• Through strategic supplier relationships, there’s stability in the supply chain ecosystem and can even lead to innovation through recommendations on new products and technologies.
• It mitigates risks associated with price volatility and supplier unreliability which is critical for operational planning.

Procurement therefore is not just a business necessity but a significant driver of success and sustainability in the business ecosystem of the country.