Procurement

The Institute for Supply Management (ISM) defines procurement as an organizational function that includes specification development, value analysis, supplier market research, negotiation, buying activities, contract administration, inventory control, traffic, receiving and stores. Federal US legislation defines procurement as including A company's procurement function, specifically its spending on suppliers, typically accounts for more than half of the company's total budget. 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. 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 raw materials, 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. 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. 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 that makes use of preferred supplier contracts and negotiated payment rates and terms. ==History==

The Romans developed a military logistics 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 companies of the 19th century: ==Sourcing and acquisition==

Procurement is one component of the broader concept of sourcing and acquisition. Typically procurement is viewed as more tactical in nature (the process of physically buying a product or service) and sourcing and acquisition are viewed as more strategic and encompassing. The term procurement is used to reflect the entire purchasing process or cycle, and not just the tactical components. Procurement software (often labeled as e-procurement software) manages purchasing processes electronically. Acquisition processes Some aspects of a procurement process may need to be initiated ahead of the majority of the project, for example where there are extensive lead times. Such cases may be referred to as "advance procurement". 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. Bunn notes that search activities are a central preliminary action to be undertaken before buying decisions can be made. Decision-making Procurement decisions fall along a continuum from simple buying transactions to more complex buyer-supplier collaborations, and the buying behaviour of staff involved in purchasing decision-making has been widely studied. Some writers treat purchasing decisions as examples of rational behaviour made in the context of a business aim such as profit maximisation and make the assumption that decision-makers have access to the information they need for their decision. Feldman and Cordozo questioned this approach in a 1969 article, suggesting that industrial buyer decision-making had similarities with consumer buying behaviour. David T. Wilson suggested in a 1971 article that an individual buyer's personality should be considered in understanding buyers' decision processes. Three distinct personality traits have been described in the literature on this subject: • a trait displaying a high need for certainty • a trait reflecting a high degree of generalised self-confidence • a need to achieve a trait. Wilson found that there was some correlation between personality traits and decision-making styles among the Canadian buyers who participated in his research study. 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. Sourcing business model There are a number of models along the sourcing continuum: basic provider, approved provider, preferred provider, performance-based contracting, managed services model, vested business model, shared services model and equity partnerships. • A basic provider model is transaction-based; it usually has a set price for individual products and services for which there are a wide range of standard market options. Typically these products or services are readily available, with little differentiation in what is offered. • An approved provider model uses a transaction-based approach where goods and services are purchased from prequalified suppliers that meet certain performance or other selection criteria. • The preferred provider model also uses a transaction-based economic model, but a key difference between the preferred provider and the other transaction-based models is that the buyer has chosen to move to a supplier relationship where there is an opportunity for the supplier to add incremental value to the buyer's business to meet strategic objectives. • A performance-based (or managed services model) is generally a formal, longer-term supplier agreement that combines a relational contracting model with an output-based economic model. It seeks to drive supplier accountability for output-based service-level agreements (SLAs) and/or cost reduction targets. • A vested sourcing business model is a hybrid relationship that combines an outcome-based economic model with a relational contracting model. Companies enter into highly collaborative arrangements designed to create and share value for buyers and suppliers above and beyond. • A shared services model is typically an internal organization based on an arms-length outsourcing arrangement. Using this approach, processes are often centralized into an SSO that charges business units or users for the services they use. • An equity partnership creates a legally binding entity; it can take different legal forms, from buying a supplier (an acquisition), to creating a subsidiary, to equity-sharing joint ventures or entering into cooperative (co-op) arrangements. == Specific types ==

Government procurement Sustainable procurement Electronic procurement Electronic procurement is the purchasing of goods by businesses through the internet or other networked computer connection. Electronic data interchange (EDI) was a forerunner to electronic procurement, this consisted of standardized transmission of data such as inventories and good required electronically. Schoenherr argues that EDI developed from standardized manifests for deliveries to Berlin during the Berlin Airlift which were applied by DuPont in the 1960s and argues that Material requirements planning and Enterprise resource planning were both forerunners to electronic procurement. E-procurement involves various components like e-sourcing, e-tendering, e-auctions. Joint procurement Joint procurement takes place when two or more organisations share purchasing activities, and therefore has a more specifically buyer-side focus than many examples of collaborative buyer-seller relationships. Companies may decide to work together for the following reasons: • transaction cost economics approach, where the total transaction costs of the actors involved are lower when they work together • resource dependence approach, and the resource based view, where the group of actors is able to create a resource, market power, which they would be unable to exercise independently • neo-classical economics' case, arguing that certain functions become separate, specialised units in order to obtain scale effects • neo-institutionalism - the argument that actors work together because it is the thing to do these days. Joint or collaborative procurement is a common practice within public sector procurement. There are central purchasing bodies in many countries which coordinate joint purchasing activities for public sector organisations. A report commissioned by the European Parliament's Committee on the Internal Market and Consumer Protection (IMCO) has recommended that EU Member States "should consider creating Central Purchasing Bodies (CPBs)" in order to secure "coherent and coordinated procurement". 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. Other types • • ==Measuring performance==

The Chartered Institute of Procurement & Supply (CIPS) promotes a model of "five rights", which it suggests are "a traditional formula expressing the basic objectives of procurement and the general criteria by which procurement performance is measured", namely that goods and services purchased should be of the 'right quality', in the 'right quantity', delivered to the 'right place' at the 'right time' and obtained at the 'right price'. CIPS has in the past also offered an alternative listing of the five rights as "buy[ing] goods or services of the right quality, in the right quantity, from the right source, at the right time and at the right price. 'Right source' is added as a sixth right in CIPS' 2018 publication, Contract Administration. 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. 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". Examples of savings as a beneficial outcome include: • agreeing a reduction in price, obtaining the same item for less cost • sourcing, or developing a supply of, a lower quality item at a reduced cost, where the item is still fit for purpose • obtaining added value for the same cost, e.g. negotiating extended warranties, additional spare parts etc. Findings in 2020 suggested that "top quartile procurement performers have ROSMA scores two to three times higher than those in the middle two quartiles". 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. Spend under management also contributes to an additional measure of procurement performance or procurement efficiency: procurement operating expense as a percentage of managed spend. The intensity of competition during procurement can be measured by the number of bids. Competition law can prevent bid rigging. ==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. The US Federal Acquisition Regulation refers to Contracting Officers. Staff in managerial positions may be referred to as Purchasing Managers or Procurement Managers. The ISM refers to "the supply profession". A Purchasing or Procurement Manager's responsibilities may include: • approving orders • seeking reliable vendors or suppliers to provide quality goods at reasonable prices • negotiating prices and contracts, and securing cost savings • reviewing technical specifications for raw materials, components, equipment or buildings • determining and monitoring quantity and timing of deliveries (more commonly in small companies) • forecasting upcoming demand • supervision of other procurement staff and agents. Bartolini and Dwyer note that allocating the benefits of savings across an organization, e.g. by negotiating departmental budget reductions, should not be treated as a procurement role: this is a financial role. 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. Specialist procurement roles include construction buyers and travel buyers. Part of the work of a corporate travel buyer is the formulation and implementation of a corporate travel policy. 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. Independent or third party personnel who undertake procurement or negotiate purchases on behalf of an organization may be called purchasing agents or buying agents, 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. A commercial agent may both purchase and sell on behalf of a third party. 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. 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. 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 occupational title when completing their August 2021 census return. 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". Research undertaken in 2020 highlighted the importance of social or "soft" skills within the skill sets of professional procurement staff. 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. 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. ==Legal aspects ==

A contractual obligation to procure refers to an absolute obligation to ensure that the action is done or the condition is met. 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. 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 claimant] puts it 'see to it'". In this case, the obligation to "procure the payment" of the loan amounted to a guarantee of that loan. ==Future scenarios==

Various commentators have made projections regarding the future of procurement. 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==