Procurement is the acquisition of goods and/or services at the best possible total cost of ownership (TCO), in the right quantity and quality, at the right time, in the right place and from the right source for the direct benefit or use of corporations, or individuals, generally via a contract. Simply in other words, the range of activities associated with the buying of goods and services to support business operations is called procurement.
Traditionally it was thought that competitive advantage was the result of marketing and advertisement expenses and purchasing was not given due importance. Even in the recent past, purchasing was regarded as being services to production and other functions of the company and thus it was given limited attention to issues concerned with the procurement. But in today’s competitive business world, these traditional approaches can no longer guarantee competitive advantage in all cases. Companies, therefore, have to find other means of succeeding. This is nothing but succeeding through effective utilization of procurement processes. Now managers have realized that purchasing should be considered as a key strategic business process rather than a narrow specialized supporting function to overall business strategy.
Typically, a company normally spends about 60-70% of revenues through procurement, and if this spending is managed efficiently and effectively, company can enhance its competitive advantage significantly. Any savings in procurement directly contribute to the company’s bottom line i.e. profit of the company. To achieve same amount of profit through marketing and sale, the company’s sale may have to be increased proportionately. In most cases this may become difficult task for many companies.
Savings thorough procurement can be achieved by ensuring continuity of supply at the best possible TCO, reducing overall lead-times, maintaining quality and durability of supply of inputs, promoting innovation in supply, improving supplier’s reliability and services, maintaining optimum inventory and applying many other ways related to supply and procurement.
To reap the benefits of all opportunities of effective procurement management as narrated above, companies have to have effective procurement organization in place. This procurement organization has to be run by trained personnel. Without trained personnel in the organization in general and for the procurement organization in particular, organization may fail to ensure uninterrupted flow of supply at lowest cost, improve quality and to achieve satisfaction of end customers. When talking about procurement, planning is the first and most important step in the whole process. Planning made by trained managers can bridge the gap from where we are to where we want to go. Trained executives can gain a broader understanding of the buyer's contribution to product and performance improvement, legal requirements within the purchasing environment, the importance of relationships with suppliers and how to use cost and price analysis models.
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