Product Code Database
Procurement is the process of locating and agreeing to terms and purchasing goods, services, or other works from an external source, often with the use of a tendering or competitive bidding process. The term may also refer to a contractual obligation to "procure", i.e. to "ensure" that something is done. When a government agency buys goods or services through this practice, it is referred to as government procurement or public procurement.
Procurement as an 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. 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, and fluctuations in the prices of goods. Organisations which have adopted a corporate social responsibility perspective are also likely to require their purchasing activity to take wider societal and business ethics into account.Salam, M. A. (2007), Social responsibility in purchasing: the case of Thailand, International Journal of Procurement Management, vol. 1, issue 1/2, 97-116, accessed 27 January 2021. Salam refers to CSR in a purchasing context as "purchasing social responsibility" (PSR). On the other hand, the introduction of external regulations concerning accounting practices can affect ongoing buyer-supplier relations in unforeseen manners.
Purchasing is a subset of procurement that specifically deals with the ordering and payment of goods and services. Organizational procurement is also referred to as "organizational buying" or "institutional buying", for example in studies of the buying behaviour of staff involved in purchasing decision-making.Webster, F. E. and Wind, Y., A General Model for Understanding Organizational Buying Behavior, Journal of Marketing, Volume 36, Issue 2, April 1972
Procurement activities are also often divided 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 , components and parts. Direct procurement, which is the focus in supply chain management, directly affects the production process of manufacturing firms. In contrast, indirect procurement concerns non-production-related acquisition: a wide variety of goods and services, from standardized items like office supplies and safety equipment to complex and costly products and services like heavy equipment, consulting services, and outsourcing services.Lewis, M.A. and Roehrich, J.K. (2009), Contracts, relationships and integration: Towards a model of the procurement of complex performance. International Journal of Procurement Management, 2(2):125–142.Caldwell, N.D., Roehrich, J.K. and Davies, A.C. (2009) Title needed.
A 2011 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.Jaggaer, How do you optimize addressable spend?, published 24 May 2016, accessed 16 January 2018 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%. A more restrictive definition of "spend under management" includes only expenditure which makes use of preferred supplier contracts and negotiated payment rates and terms.Britt, H., How to Bring More Spend Under Management, Una Group Purchasing Organisation, published 27 April 2021, accessed 15 June 2023
Formalized acquisition of goods and services has its roots in military logistics. The Romans developed a system of supply depots that were located throughout their empire. These depots were stocked with food, weapons, and other supplies that could be quickly distributed to troops in the field. This system helped to ensure that the Roman army was always well-supplied, even when it was fighting far from home.
The first record of what would be recognized now as the purchasing department of an industrial operation relates to the railway company of the 19th century:
Many writers also refer to procurement as a cyclical process, which commences with a definition of business needs and develops a specification, undertakes search activities or places advertising aimed at identifying suppliers and adopts appropriate methods for consulting with them, inviting and evaluating proposals, secures on 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.Delta eSourcing, What is the Procurement Cycle?, accessed 21 January 2021Chartered Institute of Procurement & Supply, Procurement and Supply Cycle, accessed 21 January 2021 Bunn notes that search activities are a central preliminary action to be undertaken before buying decisions can be made.
The Chartered Institute of Procurement & Supply (CIPS) recommends involvement of procurement staff and skills from an early stage in the cycle, noting that such "early procurement involvement" can have a beneficial impact on the nature and timing of any approach to market, the specification and the sourcing strategy and supplier selection approach adopted.Rogers, P., Early Procurement Involvement, Procurement Glossary, Chartered Institute of Procurement & Supply, accessed 31 August 2023
There are wide variations in the involvement of procurement staff in purchasing decisions across types of organisation and across varying purchasing situations. Some purchasing decisions are made by individuals or groups of individuals referred to as a "buying center" or "decision-making unit", where procurement personnel may in some cases be central, in other cases peripheral, to the purchasing decision. From a marketing perspective, buying center research has looked at which individuals and organisational divisions become part of the decision-making group, how they interact, and the internal and external factors which influence purchasing outcomes. Wesley Johnson and Thomas Bonoma, in a 1981 research paper, found situations where "the purchasing manager's centrality is likely to be high", and equally situations where their centrality "is likely to be low", recommending that "purchasing managers desiring to increase their influence" should aim to play a pivotal role in the internal communications linking the various individuals and organisational divisions involved.Wesley J. Johnston and Thomas V. Bonoma, The Buying Center: Structure and Interaction Patterns, in Journal of Marketing, Vol. 45, No. 3 (Summer, 1981), pp. 143-156, accessed on 1 November 2024
On a trans-national scale, Guyana, Barbados and Rwanda announced "a programme of mutual support for the local manufacturing of vaccines and medicines" in July 2023 for which a "pooled procurement mechanism" would be required.Allen, A., Rwanda looks to work with Caribbean countries for vaccine production, Supply Management, published 6 July 2023, accessed 12 July 2023
Delivery on savings goals is an important part of the procurement function, but this objective is generally seen as value generation rather than cost reduction.GEP, The Next Frontier in Procurement Transformation, accessed 7 December 2022 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:
A.T. Kearney has developed a model for assessing the performance of a procurement organisation or the procurement function within a wider organisation, ROSMASM (Return on Supply Management Assets), arguing that it enables a procurement department to "measure and explain procurement and supply's value in terms your CFO and CEO will understand, using a common financial standard".CIPS (2016), ROSMASM Performance Check, accessed 10 July 2021 Findings in 2020 suggested that "top quartile procurement performers have ROSMA scores two to three times higher than those in the middle two quartiles".Supply Chain Digest, Supply Chain News: Annual Research from AT Kearney as Usual Finds Outsized Benefits for Procurement Leaders, published 10 February 2020, accessed 10 July 2021 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.A T Kearney (2016), What Good Looks Like, accessed 10 July 2021
Spend under management also contributes to an additional measure of procurement performance or procurement efficiency: procurement operating expense as a percentage of managed spend.OpsDog, Inc., Procurement Operating Expense as a Percentage of Managed Spend, accessed 2 February 2021
The intensity of competition during procurement can be measured by the number of bids. Division of the procurement into smaller lots and the possibility of negotiation can increase competition. Competition law can prevent bid rigging.
A Purchasing or Procurement Manager's responsibilities may include:
Category management represents a system of organising the roles of staff within a procurement team "in such a way as to focus ... on the external supply markets of an organisation", rather than being organised according to the organisation's internal departmental structure.CIPS Knowledge Works: Category Management, July 2007, page 2
Specialist procurement roles include construction buyers and travel buyers.TravelPerk, The role of a corporate travel buyer, published 19 July 2021, accessed 11 June 2024 Part of the work of a corporate travel buyer is the formulation and implementation of a corporate travel policy.
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 (CPO). In other cases, procurement is overseen by the chief financial officer (CFO) or Director of Finance, or the growing need for liaison between the CFO and the procurement function has been recognised. A 2006 report by the National Audit Office in the UK commented that in the further education sector, where procurement practice was not well developed and college organisations were relatively small, oversight of procurement by the Director of Finance was a typical arrangement.National Audit Office, " Improving procurement in further education colleges in England", HC 1632, Session 2005-2006, published 25 October 2006, accessed 20 January 2024.
Independent or third party personnel who undertake procurement or negotiate purchases on behalf of an organization may be called purchasing agents or , although the term "purchasing agent" has a longer and broader history: the Institute for Supply Management in the United States was originally called the National Association of Purchasing Agents from its formation in 1915.Arnseth, L., Inside Supply Management, January/February 2015, page 19, accessed 14 June 2023. A commercial agent may both purchase and sell on behalf of a third party.O'Donovan, D., " Commercial Agents Directive - Termination of Commercial Agency", Orpen Franks Solicitors, accessed 2 December 2020.
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.Bureau of Labor Statistics, Occupational Outlook Handbook: "Purchasing Managers, Buyers and Purchasing Agents", published 21 September 2020, accessed 28 December 2020. 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 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.Supply Chain Digest, " Supply Chain News: In times of Reduce Staff in Procurement, New Tool to Help Prioritize the Work", published 16 May 2010, accessed 29 December 2020. 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 when completing their August 2021 census return.Australasian Procurement and Construction Council, Promoting procurement in the census, accessed 29 July 2021
The European Commission issued a recommendation in October 2017 directed towards the "professionalisation of public procurement" so that Member States could "attract, develop and retain" staff in public purchasing roles, focus on performance and "make the most out of the available tools and techniques".Publications Office of the EU, " Commission Recommendation (EU) 2017/1805 of 3 October 2017 on the professionalisation of public procurement — Building an architecture for the professionalisation of public procurement (Text with EEA relevance)", accessed 28 April 2021. Research undertaken in 2020 highlighted the importance of social or Soft skills within the skill sets of professional procurement staff.Harper, M., " Closing the Skills Gap in Procurement Part 2: The Solution", American Productivity & Quality Center, published 2 April 2020, accessed 6 January 2022.
Management consultant Oliver Wyman reported in 2019 that, based on a survey of over 300 CPOs in Europe, US, and Asia working across 14 industries, 38% of the staff in the procurement organizations surveyed were women: 60% of CPOs stated that there were more women in their organization than three years previously, while 6% said that the number of women had decreased. The effect of this growing involvement of women in procurement was recognised in the form of "more creativity and innovation", acknowledged by 76% of the CPO's surveyed.Oliver Wyman, " Women in Procurement: Gender Parity is a Key to Better Performance", published February 2019, accessed 3 April 2023.
The use of the word "procure" in a joint venture agreement between Nearfield Ltd., Lincoln Nominees Ltd., and other partners, in relation to the utilisation of a bank loan, gave rise to a dispute between the parties regarding the meaning of the word "procure", which was resolved in 2006 by the judge, Peter Smith, confirming that the "normal meaning of the word" is clear and well understood: "I do not see that procure means anything other than as Nearfield the puts it 'see to it'".England and Wales High Court (Chancery Division), Nearfield Ltd v Lincoln Nominees Ltd & Anor 2006 EWHC 2421 (Ch), delivered 9 October 2006, accessed 26 February 2023 In this case, the obligation to "procure the payment" of the loan amounted to a guarantee of that loan.Coulter, C. and Swinson, M., " European Union: Beware The Promise "To Procure": The Risk Of Giving An Inadvertent Guarantee In English Law Contracts", Morrison & Foerster LLP, published 11 June 2009, accessed 26 February 2023.
Personnel and roles
Personnel who undertake procurement on behalf of an organization may be referred to as procurement officers, professionals or specialists, buyers or supply managers.CIPS, Find the latest supply chain and procurement vacancies in buying, category management, planning and logistics, accessed 1 December 2020 The US Federal Acquisition Regulation refers to Contracting Officers.FAR, 1.603-1 General, accessed 1 December 2020 Staff in managerial positions may be referred to as Purchasing Managers or Procurement Managers. The ISM refers to "the supply profession".
Participation of women
Some writers have observed that there is limited opportunity for women to enter procurement because of stereotypes viewing some roles as not appropriate for women.
Legal aspects
A contract obligation to procure refers to an absolute obligation to ensure that the action is done or the condition is met.LexisNexis, " What is the legal effect of a contractual obligation to 'procure' that something happens? How is this affected by adding the qualification 'reasonable endeavours'?", updated 10 November 2022, accessed 26 February 2023. For example, when a party to a construction contract is obligated to apply for the permits required to commence work, that party is obligated to apply for them. Where such a contract is silent as to which party is responsible to seek permits, but only one party is capable of doing so, it is implicit within the contract that the capable party will obtain permits within a reasonable time frame so as to allow the work to proceed. (2025). 9781315619262, Taylor and Francis. ISBN 9781315619262
Future scenarios
Various commentators have made projections regarding the future of procurement.CIPS Knowledge & Insight, What does the future hold for procurement and supply?, published on 26 October 2023, accessed on 22 June 2024 Charlotte Payne, general manager of CIPS in Australia and New Zealand, suggests that "procurement's role in sustainability is going to be massive", while a CIPS general overview anticipates that "there is little chance that procurement and supply will enter a period of calm any time soon".
See also
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