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Procurement is the process whereby companies purchase goods and services from various
suppliers. These include everything from indirect goods like light bulbs, uniforms, toilet paper,
and office supplies, to the direct goods used for manufacturing products. Procurement also
involves the purchase of temporary labor, energy, vehicle leases, and more. Companies negotiate
discount contracts for some goods and services, and buy others on the spot. Procurement can be
an important part of a company's overall strategy for reducing costs. Historically, the individuals
or departments responsible for purchasing a company's goods and services relied on various
methods for doing so. The most basic included placing orders via telephone, fax, or mail.
Electronic procurement methods, generally referred to as e-procurement, potentially enable the
procurement process to unfold in a faster, more efficient manner, and with fewer errors. These
methods include electronic data interchange (EDI), online marketplaces or e-marketplaces, and
various blends of the two.

In a January 2001 u


 article, a report from e-Net revealed that 70 percent of
companies in the finance and retail sectors used the Internet for some purchases. The adoption
rate was much less among manufacturers, where only 17 percent used formal e-procurement
systems. Besides varying from industry to industry, different companies use different blends of
traditional and electronic procurement methods, and individual e-procurement systems
themselves may incorporate traditional capabilities like telephone or fax.

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2ince the 1960s, many large companies have relied on electronic data interchange (EDI) for the
procurement of goods. EDI deals more with the way information is communicated during
procurement than it does with the act of linking buyers and suppliers. By definition, EDI is the
electronic exchange of business information²purchase orders, invoices, bills of lading,
inventory data, and various types of confirmations²between organizations or trading partners in
standardized formats. EDI also is used within individual organizations to transfer data between
different divisions or departments, such as finance, purchasing, and shipping. Two characteristics
set EDI apart from other ways of exchanging information. First, EDI only involves business-to-
business transactions; individual consumers do not directly use EDI to purchase goods or
services. 2econdly, EDI involves transactions between computers or databases, not individuals.
Therefore, individuals sending e-mail messages or sharing files over a network does not
constitute EDI.

EDI can occur point-to-point, where organizations communicate directly with one another over a
private network; via the Internet (also known as open EDI); and most commonly, via value-
added networks (VANs), which function like telephone lines by allowing for the transfer of
information. In the early 2000s, although many companies still relied on VANs, the Internet was
playing a larger role in EDI. It is possible for companies to translate the files used during EDI
and send them to another company's computer system over the Internet, via e-mail, or file
transfer protocol (FTP). Because it is an open network and access is not terribly expensive, using
the Internet for EDI can be more cost effective for companies with limited means. It has the
potential to provide them with access to large companies who continue to rely on large,
traditional EDI systems. The low cost associated with open EDI also means that more companies
are likely to participate. This is important because the level of value for participants often
increases along with their number.

While the automotive and retail industries have experimented with open EDI for some time, the
efforts didn't result in widespread adoption by small suppliers, usually due to cumbersome
requirements like the installation of on-site software. Incorporating EDI into e-marketplaces was
an approach that held more potential. In March 2000, an e-marketplace called the WorldWide
Retail Exchange (WWRE) was established. It allowed suppliers and retailers in various industry
sectors²including retail, general merchandise, food, and drugstores²to conduct transactions
over the World Wide Web. After one year of operation, the WWRE had 53 retailer members
with combined annual turnover of $722 billion. Leading retailers, among them Kmart, Rite Aid,
Best Buy, and Target, planned to offer a Web-to-EDI translation service on the WWRE so it
would be easier for smaller suppliers to do business with them. In this arrangement, the retailers
send purchase orders to a data center where they are translated to a language that can be read
with a Web browser. 2uppliers are then notified about the PO and allowed to respond. This is a
break from true EDI, since orders are handled manually by suppliers.

For companies using open EDI, a language called extensible markup language (XML), similar in
some respects to hypertext markup language (HTML), allows users to share information in a
universal, standard way without making the kinds of special arrangements EDI often requires
and regardless of the software program it was originally created in.XML played an important
role in the development of online marketplaces like WWRE.

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Online marketplaces bring many buyers and sellers together in an online environment and
function as intermediaries between the two parties. In the early 2000s, third-party companies like
Commerce One Inc. and Ariba Inc. offered high-end e-procurement software and services that
were used to operate different online marketplaces. Numerous other companies provided similar
kinds of services and applications. Online marketplaces existed for many different industries,
ranging from the food and beverage industries to consumer packaged goods and interior design.
The costs for participating in an online marketplace varied. In some cases, participating
companies (suppliers, purchasers, or both) were required to purchase special software from a
third party. Third parties also levied different charges for making transactions, joining the
network, and updating catalogs of available products.

In addition to connecting buyers and sellers, online marketplace providers add value to the
procurement process by offering various services, ranging from inventory management and
process improvement to tracking shipments and arranging financing. In addition to adding value,
online marketplaces also can simplify the process of procurement. For example, some allowed
suppliers to choose the manner in which they received orders from purchasers, such as XML,
fax, e-mail, or EDI.
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In addition to EDI and online marketplaces, there are other approaches to e-procurement. One
involves software applications that allow purchasing agents to establish systems for managing
things like invoices, purchase orders, receipts, and requests for quotations (RFQs). These
applications also enable companies to place orders for products from many different suppliers
through one simple interface. 2ome companies relied on third-party organizations to use these
systems via the Web. Acting like an outsourced purchasing department, the third party hosted the
software instead of selling it to the user off-the-shelf. This approach was useful to companies
without the resources to develop and maintain their own e-procurement systems. 2ome
companies also purchased pre-packaged software products that performed many of the same
functions.

Online auctions were another tool companies used to procure goods and services for both
contract and spot buys. A number of factors were critical to the success of online auctions,
including the kind of bidders involved, the number of bidders, and the length of the bidding
periods. Although it's not directly part of the auction, online negotiation also can be a factor if
the auction involves complicated elements like delivery and support.

No matter what method is used, there are many advantages to using e-procurement systems as
opposed to those involving paper-based forms or oral communications. The main benefits are
increased efficiency and cost savings. For example, EDI allows business transactions to occur in
less time and with fewer errors than do traditional, paper-based means. It reduces the amount of
inventory companies must invest in by closely tying manufacturing to actual demand, allowing
for just-in-time delivery. By doing away with paper forms, EDI also reduces postage costs and
the expenses and space considerations surrounding paper-based record storage.

Online marketplaces provide similar benefits. As Commerce One explains, they "make the entire
business-to-business marketplace more efficient by expanding the range of sellers and buyers
and by making the entire market mechanism more transparent. They reduce procurement and
sales costs and improve the efficiency of the process. For buyers, these e-marketplaces aggregate
content so it's easier to find new sources and pricing. For sellers, the e-marketplaces break down
geographic barriers and make product catalogs available to a wider market of buyers."

In some large organizations, purchasing responsibilities are distributed over several different
areas of the company. E-procurement systems may enable a company to consolidate orders for
similar items with one supplier, resulting in deeper volume discounts and cost savings.
Additionally, e-procurement may allow a company to simplify purchasing by reducing the
number of variables (available products) involved. Instead of having to sort through large
volumes of paper or electronic catalogs, purchasing professionals are able to build custom
catalogs that include only the items the company is interested in. Besides simplifying matters,
this approach also drives up volumes of smaller numbers of items, which is another possible way
of generating volume discounts.

Along with all of the positives, there also are disadvantages to e-procurement. 2ome EDI users
have experienced snags. In     Proctor & Gamble, a leading packaged goods
manufacturer, reported that it found errors in more than 30 percent of its electronic orders,
although they were mainly due to human error. Additionally, some companies have been
disappointed by e-procurement software applications that don't meet their needs.


 u  revealed that two of the leading obstacles to successful e-procurement are
enabling suppliers to support e-transactions and generating and maintaining electronic product
information.

Additionally, 

 u  explains that numerous firms "sign on for E-procurement
without anticipating the long road ahead. They dive into projects only to learn that E-
procurement applications are limited in the types and scope of purchasing activity they address.
Managing electronic catalogs with thousands of products, providing employees with the right
mix of products and adequate information about them, and making it easy to search for items can
also be tricky, requiring additional tools and threatening the efficiencies promised by moving
purchasing to the Web."




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 is the acquisition of goods and/or services at the best possible total cost of
ownership, in the right quality and quantity, at the right time, in the right place and from the right
source for the direct benefit or use of corporations, individuals, or even governments, generally
via a contract, or it can be the same way selection for human resource.[|   ] 2imple
procurement may involve nothing more than repeat purchasing. Complex procurement could
involve finding long term partners ± or even 'co-destiny' suppliers that might fundamentally
commit one organization to another. Procurement can refer to buying, outsourcing, etc of any
resources.

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Almost all purchasing decisions include factors such as delivery and handling, marginal benefit,
and price fluctuations. Procurement generally involves making buying decisions under
conditions of scarcity. If good data is available, it is good practice to make use of economic
analysis methods such as cost-benefit analysis or cost-utility analysis.

An important distinction is made between analysis without risk and those with risk. Where risk is
involved, either in the costs or the benefits, the concept of expected value may be employed.

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Based on the consumption purposes of the acquired goods and services, procurement activities
are often split into two distinct categories. The first category being direct, production-related
procurement and the second being indirect, non-production-related procurement.

Direct procurement occurs in manufacturing settings only. It encompasses all items that are part
of finished products, such as raw material, 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 activities concern ³operating resources´ that a company
purchases to enable its operations. It comprises a wide variety of goods and services, from
standardised low value items like office supplies and machine lubricants to complex and costly
products and services like heavy equipment and consulting services.
 


 


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The U2 Defense Acquisition University (DAU) defines procurement as the act of buying goods
and services for the government.[1]

DAU defines acquisition as the conceptualization, initiation, design, development, test,

contracting, production, deployment, Logistics 2upport (L2), modification, and disposal of
weapons and other systems, supplies, or services (including construction) to satisfy Department
of Defense (DoD) needs, intended for use in or in support of military missions.[1]

Acquisition is therefore a much wider concept than procurement, covering the whole life cycle of
acquired systems. Multiple acquisition models exist, one of which is provided in the following
section.

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The revised acquisition process for major systems in industry and defense is shown in the next
figure. The process is defined by a series of phases during which technology is defined and
matured into viable concepts, which are subsequently developed and readied for production, after
which the systems produced are supported in the field.[2]

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The process allows for a given system to enter the process at any of the development phases. For
example, a system using unproven technology would enter at the beginning stages of the process
and would proceed through a lengthy period of technology maturation, while a system based on
mature and proven technologies might enter directly into engineering development or,
conceivably, even production. The process itself includes four phases of development:[2]

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Another common procurement issue is the timing of purchases. Just-in-time (JIT) is a system of
timing the purchases of consumables so as to keep inventory costs low. Just-in-time is commonly
used by Japanese companies but widely adopted by many global manufacturers from the 1990s
onwards.

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In order to achieve greater economies of scale, an organization¶s procurement functions may be

joined into shared services. This combines several small procurement agents into one centralized
procurement system.


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Procurement may also involve a bidding process i.e, Tendering. A company may want to
purchase a given product or service. If the cost for that product/service is over the threshold that
has been established (eg: Company X policy: "any product/service desired that is over $1,000
requires a bidding process"), depending on policy or legal requirements, Company X is required
to state the product/service desired and make the contract open to the bidding process. Company
X may have ten submitters that state the cost of the product/service they are willing to provide.
Then, Company X will usually select the lowest bidder. If the lowest bidder is deemed
incompetent to provide the desired product/service, Company X will then select the submitter
who has the next best price, and is competent to provide the product/service. In the European
Union there are strict rules on procurement processes that must be followed by public bodies,
with contract value thresholds dictating what processes should be observed (relating to
advertising the contract, the actual process etc).


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Procurement life cycle in modern businesses usually consists of seven steps:

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Procurement quality is a mixed measure of the quality of purchased products and the
performance of the procurement process itself since there is, not only, a need to purchase quality
products by companies, but also the need for quality companies to purchase products.

   





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Public procurement generally is an important sector of the economy. In Europe, public

procurement accounts for 16.3% of the Community GDP.[3]

 


 

Procurement fraud can be defined as dishonestly obtaining an advantage, avoiding an obligation

or causing a loss to public property or various means during procurement process by public
servants, contractors or any other person involved in the procurement[4].


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In Green public procurement (GPP), contracting authorities and entities take environmental
issues into account when tendering for goods or services. The goal is to reduce the impact of the
procurement on human health and the environment.[5]
In the European Union, the Commission has adopted its Communication on public procurement
for a better environment, where proposes a political target of 50 % Green public procurement
(GPP) to be reached by the Member 2tates by the year 2010.[6]

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In many organizations, indirect procurement has been a low priority compared with direct
procurement, according to NelsonHall, a Boston-based business process outsourcing (BPO)
analyst firm whose recent study reveals that more than half of companies think reducing costs
and managing large numbers of suppliers were the bigger challenges of indirect procurement.

According to NelsonHall research, the major indirect procurement challenges for organizations
are as follows:

‡ A strong corporate requirement to reduce the cost of indirect goods and services;
‡ Difficulties in managing large numbers of suppliers in the absence of adequate breadth of
internal category management expertise;
‡ Difficulties in managing large numbers of suppliers in the absence of common indirect
procurement systems, processes and interfaces; and
‡ Lack of indirect spend visibility.

As a result, some organizations are now outsourcing indirect procurement services to improve
the management of the increasingly important processes.

2upplyManagement.com recently noted the top three reasons why 326 global companies
surveyed by NelsonHall choose to outsource indirect procurement:

‡ Reducing process costs (84 percent of companies);

‡ Accelerated sourcing times (79 percent); and
‡ Improved ability to manage supplier performance (78 percent).

(Another interesting finding of the study is that 70 percent of those companies are looking
forward to implementing a shared service center ² or, centralizing indirect procurement ²
before going outsourcing. Currently, only 30 percent of firms implemented a shared service
center.)

The first issue to be addressed in the majority of organizations is improved management of

suppliers, according to NelsonHall:

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As such, NelsonHall's research supports the conclusion that organizations need to implement
"best-practice" indirect procurement processes and systems as part of an indirect procurement
outsourcing contract.

Moreover, Rachael 2tormonth, research director at NelsonHall and author of a recent report on
indirect procurement outsourcing, suggests "outsourcing one of these processes in isolation is
unlikely to deliver both the vendor management and the internal compliance required for an
optimum solution."

"Organizations want an improved process compared to their in-house capability," IndustryWeek

today quotes 2tormonth as having said. "To achieve this goal, vendors need to offer end-to-end
process improvement across both sourcing and category management and purchase-to-pay
processes."

In line with NelsonHall's conclusion that indirect procurement has been a low priority for
organizations compared to direct procurement, we direct you to an article mid-last year from Alf
Noto, VP of indirect sourcing at Nokia, written at European Leaders Network. There he writes
about five major differences between indirect/direct procurement. In a nutshell, here are the
differences made by Noto summarized:

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Direct procurement's job is to source and manage suppliers who can support the business's need
for supply chain integration; these considerations usually don't trouble people working in indirect
sourcing.

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In indirect sourcing, increasing your company's use of a preferred supplier is critical to success.
In the direct environment, very few (if anyone) on the manufacturing line will buy a component
from a non-preferred supplier, while for many indirect categories everybody can use who they
want.

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In direct procurement, you are usually working with relatively few stakeholders (design
engineers, quality managers, production specialists) who are located in a few centers of activity.
The opposite is the case for the business stakeholders who influence indirect expenditure.

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Big companies can build a position of significant power over many key direct suppliers. On the
other hand, almost by definition, indirect suppliers are not restricted as to which industries they
can supply, so it is only on rare occasions that a company can use its volume buying power to
attain a dominant position over an indirect supplier.
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In the direct world, the focus is on cost of goods reduction. Every product has a bill of materials,
and in most big companies, this is held within an ERP system. If procurement reduces the price
of something, the impact on profit and loss is clear. With indirect, however, each saving made by
procurement is open to questions: How much will we buy in the future? What level of
compliance should we assume?