Purchasing and Procurement | Importance of Procurement

Engr. Fahad Mahmud 
Lecturer (Technical), Department of textiles at SKTEC

The terms procurement and purchasing are often used interchangeably; however, there are important similarities and differences between them. This certification track employs the following definitions for each term:

Procurement is the management of all processes involved in obtaining the goods and services necessary for manufacturing products and providing services to customers. Procurement focuses on sourcing activities, negotiation with suppliers, and the strategic selection of goods and services that enable an organization to achieve maximum value from a select group of key supplier partners.

Purchasing is a function within the procurement process that is largely transactional and associated with how goods and services are ordered. Purchasing involves receiving and processing purchase requisitions (requirements) and converting them to purchase orders (POs) (awards to suppliers).

A Procurement Example

Procurement professionals interact with a wide array of internal and external organizations; they work with suppliers, other functions in the supply chain, and other functions within the company, such as marketing and engineering.

Purchasing and Procurement | Importance of Procurement
Figure: Blue text items indicate procurement
focus in a cereal manufacturing and distribution process. Developed by LINCS in
Supply Chain Management Consortium.

The above figure shows an example of a cereal manufacturing and supply chain process and the key role that procurement plays to purchase grain and other raw materials, along with packaging and labelling products needed to make breakfast cereal, the finished product in this example. The heavy blue lines above the raw materials, corrugated paper plant, and label plant boxes indicate the areas where purchasing needs to focus to procure the materials needed for cereal manufacturing.

In addition, to the raw materials, the company also purchases paperboard from a paper manufacturer and labels from a label manufacturer. In turn, the paper manufacturer purchases trees to make the paper, and the label manufacturer purchases semi-finished stock to make the labels. After making the cereal and packaging it, the cereal manufacturer sends the cereal to the distributor, which then ships the product to the grocery store at which the end customers purchase their cereal. Throughout this sample supply chain, the purchasing of goods and services takes place between the various entities.

The figure shows how materials and products move from one entity to another while information (e.g., specification, quantities, and desired receiving date) also flows between the various entities. This information flow is important because it is needed to ensure the right products are delivered at the right place, the right time, and the right price.

The Importance of Procurement
The procurement function plays a critical role in supporting the ongoing functioning of a firm by ensuring a continuous flow of materials, products, and services to supports the firm’s operations while continually seeking opportunities to reduce costs, minimize supply risk, and maintain expected quality levels. The importance of the procurement department can be seen by the key inputs it provides firms, including:
  • The raw materials and intermediate goods and services needed in the production of goods and services.
  • Finished goods and services required for resale or for operational purposes.
  • Capital goods and consumables needed for the business.

These inputs are critical to a business. The procurement department plays a key role in obtaining these inputs at appropriate levels of cost, quality, and on-time delivery to ensure continuity of inputs from suppliers. As noted above, the procurement function plays a vital role in the supply chain; the following list describes several major benefits of effectively managing procurement:

Cost reduction: Procurement represents an excellent opportunity for saving money because organizations can spend up to 50% or more of their revenues on raw materials, work in process, finished goods, spare parts, services, and other goods needed to keep operations going. Significant savings can be achieved by applying effective procurement techniques.

Quality improvement: Procurement directly impacts the quality of the overall products sold by companies, because it is responsible for purchasing raw materials and other unfinished or finished goods. The quality of raw and other materials used in producing goods almost always affects the quality of the end products.

Product enhancement: Procurement can also improve products and process designs by helping introduce new technologies into companies’ product and service offerings. For example, procurement can work with internal and external engineering personnel and suppliers to improve product reliability and performance while also reducing costs.

In collaboration with other internal functions, here is an example of how the procurement function can help reduce costs in a company. Consider a beverage company that sells 200,000,000 cases of a product in a year, and there are 12 plastic bottles in each case. If a procurement department identified a combined savings of even a ¼ of a penny for each bottle, label, and cap, that would result in a cost savings of $6,000,000 per year, calculated as follows:

  1.  200,000,000 cases × 12 bottles-/case = 2,400,000,000 bottles
  2.  2,400,000,000 bottles × ¼ cent savings ($0.0025) per bottle = $6,000,000/year

This example shows that even a small per unit savings can result in significant savings on high-volume products.

Reference: Warehousing Operations Certification Track. LINCS in Supply Chain Management Consortium. May 2016. Version: v2.22. www.LINCSeducation.org.


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