Understanding Procurement – What Is It, Types & Process

Have you ever wondered how that complex bridge gets built or that sleek new gadget gets manufactured? It all starts with procurement.

The success of any engineering project relies on a smooth-running supply chain management system. Procurement is central to this system, making sure the right materials and services are obtained at the right price, on time and with minimal risk through various effective procurement activities.

What Is Procurement?

Procurement, often referred to as strategic sourcing, is the process of acquiring the goods and services a company needs to operate.

In the engineering world, this translates to securing the essential materials, equipment and specialised services required to bring projects to life. It encompasses everything from sourcing high-quality raw materials, like steel and concrete, to procuring specialised machinery and components needed for the production process of a product.

Think of it this way: procurement is the bridge between your engineering needs and the resources that make your designs a reality. Building and maintaining this bridge is where the procurement team comes in. They act as strategic partners, collaborating with engineers, suppliers and other stakeholders to ensure the smooth flow of essential resources throughout the project timeline.

Procurement vs Purchasing – What Is the Difference?

Procurement goes beyond the simple transaction of acquiring goods (placing orders and making payments) – that is the core function of purchasing. Procurement takes a broader perspective, encompassing the entire lifecycle of acquiring goods and services through well-defined procurement processes.

This strategic approach involves:

• Identifying Needs: What materials and services are required for the project?

• Developing a Procurement Strategy: How will you source these materials and services?

• Supplier Research: Who can provide the best quality at the most competitive price?

• Negotiating Contracts: How can you secure the most favourable terms and conditions in the contract for your organisation?

• Managing Supplier Relationship: How can you build and maintain strong, collaborative partnerships with your suppliers?

Ultimately, procurement aims to optimise the entire acquisition process and deliver value beyond just cost savings.

[ Figure 1: Procurement vs. Purchasing Comparison Table]

Why Is Procurement Important?

Efficient procurement management practices contribute significantly to the success of business projects, including engineering projects, in several ways:

• Cost Management: Procurement helps negotiate the best deals with suppliers, optimise inventory levels, and identify cost-saving opportunities. Managing costs translates to stretching the project budget further and maximising value.

• Quality Assurance: The procurement process ensures sourcing high-quality materials and services that meet the project specifications. This minimises defects, rework and project delays.

• Risk Mitigation: Procurement mitigates risk by diversifying suppliers, using clear contracts, implementing supplier evaluation and risk assessment, and optimising the supply chain. This proactive approach identifies and addresses potential issues before they disrupt projects.

• Enhanced Project Execution: Procurement ensures upholding strong, collaborative partnerships with reliable suppliers. Maintaining supplier relationships is vital for smooth project execution.

• Enhanced Project Efficiency: Procurement optimises the supply chain (network of tier suppliers, transportation and logistics) through streamlined procurement processes, ensuring timely delivery of materials and services. This minimises disruptions and frees up engineers’ time to focus on core design and development tasks, ultimately enhancing overall project efficiency.

• Business Objectives Alignment: Procurement provides a wealth of data that can be used to track and measure performance through Key Performance Indicators (KPIs). These procurement KPIs can help identify areas for improvement and ensure that procurement is aligned with overall business objectives.

In essence, good procurement practices pave the way for smoother project execution, improved quality, and ultimately, a successful business project. This can be further enhanced by leveraging consulting services that specialise in optimising procurement processes and identifying cost-saving opportunities.

Types of Procurement

Procurement strategies adapt to business needs. Understanding the two main types of procurement helps categorise the needs effectively:

Direct Procurement

This focuses on acquiring essential goods directly related to production, such as raw materials (steel, concrete) and specialised equipment (welding machines, testing instruments). These directly influence the final product or service being delivered.

Indirect Procurement

Indirect procurement encompasses goods and services that support day-to-day operational needs but are not directly involved in production. Examples of these goods and services include office supplies (paper, toner), IT equipment (computers, software) and maintenance services (building upkeep, equipment repairs).

Understanding these distinctions is critical for prioritising resource allocation and implementing appropriate procurement strategies tailored to the specific project requirements.

Procurement Methods

There are several common procurement methods used by procurement teams to select the best suppliers and acquire goods and services for their projects. Here are six frequently used methods:

1. Open Tendering: This method is a competitive bidding process open to all interested suppliers who meet the basic qualifications. A public announcement is made outlining the project requirements and specifications. Suppliers then submit bids detailing their proposed price, terms and qualifications. The contract is awarded to the supplier offering the most competitive bid that meets all the requirements.

2. Restricted Tendering: Similar to open tendering, this goods procurement method involves a bidding process. However, instead of being open to all, invitations to bid are sent only to a pre-selected list of qualified suppliers. This approach can be used when specific expertise or experience is required for the project.

3. Request for Proposal (RFP): An RFP is a formal document outlining the project scope, requirements and evaluation criteria. Companies seeking complex goods or services issue RFPs to qualified vendors. The RFP allows for a more in-depth evaluation of a supplier’s capabilities, beyond just price, such as their technical expertise, project experience and past performance.

4. Two-Stage Tendering: This goods procurement method is a variation of open tendering with an added qualification stage. In the first stage, potential vendors submit basic information about their qualifications and experience. Based on this information, a shortlist of qualified suppliers is created. Only shortlisted suppliers are then invited to submit formal bids in the second stage.

5. Request for Quotation (RFQ): An RFQ is a simpler method used to obtain price quotes from a small number of pre-selected suppliers for well-defined goods or services. Unlike an RFP, an RFQ focuses primarily on price and may not involve a detailed evaluation of supplier capabilities.

6. Single Source Procurement: This method involves purchasing goods or services from a single pre-selected supplier without a competitive bidding process. This approach may be justified in specific situations, such as when a supplier has unique expertise or holds a patent on a required technology. However, it’s important to have a strong justification for using single-source procurement due to the lack of competition.

[ Figure 2: Procurement Methods Comparison Table]

The procurement methods represent different approaches to acquiring goods and services:

• Distinct characteristics: Each method has a unique process, level of competition and focus area (price vs expertise).

• Independent application: Each method can be used independently based on project needs. For instance, a project might utilise an Open Tender for standard materials and an RFP for a specialised service.

There are, however, some similarities between certain methods:

• Open Tendering and Restricted Tendering: These methods are similar in structure (bidding process) but differ in the pool of invited suppliers, and hence, level of competition. Open tendering is open to all qualified suppliers, while restricted tendering invites only pre-selected suppliers.

• Two-Stage Tendering: This method combines the elements of Open Tendering and Restricted Tendering. In the first stage, similar to Restricted Tendering, prospective suppliers are pre-qualified based on their capabilities. Then, only shortlisted candidates participate in a competitive tendering process (like Open Tendering) for the final selection. This ensures receiving bids from qualified suppliers while maintaining a competitive element.

• Request for Proposal (RFP) and Request for Quotation (RFQ): Both involve soliciting information from suppliers, but RFPs go beyond price to evaluate supplier capabilities, while RFQs are simpler, primarily focusing on quotes for well-defined goods or services.

• Single Source Procurement: This method stands alone as it bypasses competition entirely, relying on a single pre-selected supplier.

Choosing the most suitable procurement method depends on several factors:

• Project complexity and requirements

• Budget and timeline constraints

• Level of competition and desired supplier expertise

• Risk tolerance and project criticality

By carefully considering these factors, procurement teams can select the method that offers the best balance of cost efficiency, timeliness and quality for their specific project needs.

Procurement Process

A well-established procurement process ensures that the goods and services needed by a company to operate are obtained at the right price, quality and time to meet project needs. Here is a breakdown of the stages of a rather typical procurement process:

1. Needs Identification: This stage initiates the process by identifying the specific goods or services required for a project. This involves understanding project requirements, specifications and quantities.

2. Requisition & Approval: A formal purchase request is created, detailing the required goods or services, estimated cost and justification for purchase. This requisition is submitted for approval by authorised personnel.

3. Supplier Sourcing & Selection: Once needs are identified and procurement requisition is approved, the process of assessing potential suppliers is commenced. The prospective suppliers are researched, evaluated and qualified based on factors like quality, price, reliability and past performance.

4. Tendering Process & Quotation Evaluation: Proposals are requested for comparison and evaluation using the suitable procurement method. Multiple suppliers submit quotes outlining their proposed technical specifications, price, terms and delivery schedule. The quotes are then evaluated to identify the most advantageous option.

5. Negotiation & Contract Formation: After evaluation, negotiations with the chosen supplier(s) take place to finalise pricing, terms and delivery conditions. A formal contract is then established by the procurement department with the involvement of applicable stakeholders, like Legal Counsel, Accounts Payable as well as Health, Safety and Environment (HSE) and others as needed, outlining the agreed-upon terms.

6. Order Placement & Order Management: Once the contract is signed, a purchase order is issued to the supplier, formally placing the order. Order management involves monitoring order status and ensuring delivery according to the contract.

7. Goods/Services Receipt & Inspection: Upon delivery, the received goods or services are inspected to ensure they meet the contract specifications and quality standards.

8. Invoice Processing & Payment: Once goods or services are received, inspected and approved, the supplier’s invoice is reviewed by accounts payable for accuracy and processed for payment according to the agreed-upon terms. However, some agreements may require pre-payment, partial payment upfront, or other tailored payment conditions depending on the specifics of the transaction.

9. Project Completion: Once payment is completed, the project is officially closed out and a Final Acceptance Certificate is issued to the supplier.

10. Record-keeping & Performance Management: Throughout the procurement cycle, all relevant documents and records are maintained for future reference and performance evaluation of various aspects, including supplier performance.

To Sum It Up

Understanding the procurement cycle empowers various stakeholders, including engineers, to actively contribute to project success. By strategically acquiring resources through a well-defined procurement process, organisations can gain a significant edge.

Effective procurement process practices not only optimise costs, ensure quality and manage risks, but also foster strong vendor relationships that can be leveraged for future projects. This collaborative approach throughout the supply chain ultimately paves the way for efficient project execution, improved time-to-market and a higher chance of achieving a successful outcome.

As the business landscape continues to evolve, procurement will play an increasingly critical role in ensuring organisational agility and responsiveness to changing market demands. By continuously refining strategies and embracing innovative procurement technologies, organisations can further optimise their resource acquisition processes and gain a lasting competitive advantage.