Procurement is simply the process of acquiring goods and services. You may also know it as purchasing. The two major procurement categories are direct spend and indirect spend. Let's look at each of these. Direct spend refers to raw materials and components that will go directly into manufacturing or assembly operation to make a product which the company then sells to the marketplace. For example, a manufacturer of red toy wagons may purchase cheap metal and red paint as their direct spend. While the bakery's direct spend would include flour, sugar, salt, baking powder, and other ingredients for their baked goods. In these examples, the quantities needed are directly proportional to the quantities of goods produced. Indirect spend on the other hand, refers to the procurement of items that are necessary for a firm to sustain its operations. They are not directly related to the volume of products produced. These may include office supplies such as pens, staples, and paperclips. Capital equipment such as forklifts, air conditioning systems, or plant machinery. Service contracts maintenance such as a contract with the landscaping maintenance provider and maintenance repair, and operating inventory. Or MRO such as shop floor rags and plant machinery lubricants. Procurement begins with the need for an item. This may take several forms depending on the type of product, industry, and whether there's an ongoing need for the good or service. An item needed for a single use typically referred to as a (indistinct), is often generated by a purchase requisition. That purchase requisition may call out a specific items such as vendor part number one two, three, four, five, or include a detailed description as one half inch, stainless steel, or Phillips head machine screw. Alternatively, the requisition could include a generic description of the need such as paper towels for the cafeteria. But what if you have an ongoing need for service or goods? In this case, you'll likely have long time contracts in place. Those contracts may be a single issue purchase order with multiple lines representing multiple deliveries. This is known as a blanket purchase order. These contracts could also be open purchase orders without defined quantities or set deliveries. In this case, the company would need to schedule deliveries as the need occurs. Manufacturers purchasing direct spend items would use systems such as material requirements planning, reorder point or pull systems to generate replenishment orders to their suppliers. Once you identify your need, the next step is to identify potential suppliers. Companies often have a process in place to qualify or certify potential suppliers to meet their established criteria. The final selection of supplier may be determined by bidding or negotiation. Bidding typically awards the contract to the lowest bidder from among those who met the minimum qualifications. Supplier negotiations often include: managing trade-offs between lead times, service levels, quality, communications, pricing and the other factors deemed a priority. Select your preferred supplier based on the factors that are most important to your organization. The next step is order placement and most importantly monitoring. It'll be beneficial to you to have metrics in place to monitor supplier performance regarding on-time delivery, schedule flexibility, quality, return policy, and customer service. This process will be ongoing for you from the time you place your order up to the receipt of that product and through invoice payment. When suppliers lag in performance, you may have to give them guidance or warnings, and when necessary, they may be eliminated from your future consideration. To summarize, the sequence of procurement activities is as follows: identify your product or services need, identify potential suppliers, select a preferred supplier, place the order, monitor the order until receipt, and track supplier performance.
