Procurement – Definition and Process

A closer examination of the exact content reveals that procurement describes the entire planning, management and control processes for material supply. According to Melzer-Ridinger, procurement is a business discipline that aims to make production materials, fixed assets and services available to those who need them. It includes instruments and design options for analysing and specifying requirements as well as searching for potential suppliers and evaluating suppliers. The operational tasks of procurement include the scheduling and quantity planning of material requirements, material inventory management and material planning.

Differentiation between procurement and purchasing

In the literature, the term purchasing is used to describe the operational activities of procurement. Purchasing is therefore part of procurement. Purchasing is often also used to describe the corresponding functional area in the company. Due to increasing complexity and growing strategic importance, the term strategic purchasing is often used, which makes it difficult to differentiate it from procurement. Due to the unclear definition of terms in practice, the term purchasing will be used in the thesis as a synonym for procurement and the functional area in companies.

Delimitation of strategic procurement

Strategic procurement is a company-wide process. It requires input from all departments and functional areas of a company. Procurement projects are usually handled by interdisciplinary teams. These procurement teams consist of representatives from the most important core processes. These teams determine the overall direction for purchasing, aligned with the business strategy. The aim of the teams is to develop and implement a strategic procurement concept.

How do you create a strategic procurement concept?

A strategic procurement concept is created in several steps.

Step 1: Make-or-buy decision

Firstly, the current procurement performance is analysed for potential and weak points are identified. In principle, a decision must be made between the two alternatives of in-house production and external production, which is why assemblies and raw materials are subjected to a benchmark. The benchmark is intended to confirm the purchase or production of goods or to identify potential savings. This make-or-buy decision must be constantly scrutinised and product groups constantly re-evaluated. Changes in the company’s own cost structure or changes in sales can lead to products increasing in manufacturing costs and being able to be purchased more cheaply on the market.

Step 2: Competence assessment

In addition to the purchase price, the company’s expertise must also be considered when making strategic sourcing decisions. For example, a company may not want to outsource parts due to security aspects or the loss of expertise. Other reasons that speak against outsourcing are unique selling points or company policy decisions. All other parts should always be considered in order to maximise profitability.

Step 3: Supplier screening

In the third step, potential new suppliers are researched by the strategic procurement teams. For example, potential countries that are viable sources for the required raw materials, components, finished goods or services are scrutinised. If there are specific requirements, this can limit the number of suitable countries.

Resilient supply chains for an uninterrupted supply

It is important for a company to select its suppliers carefully. The inability of a supplier can lead to significant losses for the company. The supplier’s business reputation and performance must be evaluated, and financial statements, credit reports and references must be carefully checked. If possible, the company should arrange to visit the supplier’s site and speak with other customers about their experiences with the supplier. The use of agents who are familiar with the markets and stakeholders can also be beneficial to this process. Companies can select more than one supplier to avoid potential supply disruptions and create a competitive environment. This strategy is also effective for large multinationals and allows for centralised control but more regional delivery.