By Haytham Etemad
EPC Academy Managing director
The primary objective of procurement department is to obtain the 'inputs' required for the operation of a company, these inputs vary according to the type of the organisation. For example, a manufacturer will need raw materials to make its products; a retailer will need finished goods to sell; while a service company will require office equipment and people to provide services to customers, whatever the industry is the principle is the same in each case.
The main objective of a procurement function is to provide (inputs of the ‘right quality’; delivered in the ‘right quantity’ to the ‘right place’ at the ‘right time’ for the ‘right price’. These are called procurement 5 rights. These are often called the 'five rights of procurement'.Meanwhile, we can identify other general objectives of procurement operations or other primary task of procurement. They are Internal customer service, risk management, Cost control and reduction and Relationship and reputation management.
The question now is how can procurement function add value to the organisation?
Procurement can add value either by reducing costs without any compromise in quality or product features. or by assuring operational efficiency to enable better quality at no additional cost.
Ideally, we might aim to achieve both of these objectives (improved output at reduced cost). by means such as the following.
1.Efficient management of procurement activities to reduce transaction cost that will enable cost reduction
2.Effective inventory management, to minimise acquiring and holding costs this also will help in cost reduction
3.Effective contracts negotiation and management in order to reduce the cost of inputs
4.Effective communication with user departments to enhance specifications, so that business needs are fulfilled more efficiently and at lower cost
5.Selecting and managing suppliers, in order to improve the quality of inputs, with consequent improvement in the quality of outputs
6.Working with key supply chain partners to eliminate wastes (non-value adding activities) wherever they are found in the supply process: an approach sometimes referred to as 'lean' supply.
This just a brief about how to add value to the organisation but we will discuss in future articles procurement contribution to add value in the 5 right, procurement process and other procurement objectives to understand the importance of procurement role in organisation’s competitive advantage.
FAQs
8 ways procurement adds value
- Cost savings and reduction. With the best visibility into spend data, procurement knows more than anyone about savings opportunities. ...
- Strategic sourcing. ...
- Process improvement. ...
- Risk management. ...
- Compliance. ...
- Innovation and supplier development. ...
- Sustainability. ...
- Contribution to growth.
Step 6: Invoice approvals and disputes
Once three-way matching is complete, the invoice is approved and forwarded to process the payment.
What are the five factors in value procurement? ›
Conclusion. Procurement plays a pivotal role in the success of organizations. By adhering to the five essential "rights" of procurement – right product, right quantity, right time, right source – organizations can optimize costs, manage risks, and enhance operational efficiency.
What are the different types of value in procurement? ›
A useful way to understand procurement value creation is to use a framework that categorizes the different types of value that procurement can generate. One such framework is the Procurement Value Proposition (PVP), which divides value into four dimensions: cost, quality, service, and innovation.
What is adding value in procurement? ›
Procurement can add value either by reducing costs without any compromise in quality or product features. or by assuring operational efficiency to enable better quality at no additional cost.
What is the best value procurement process? ›
Best Value Procurement
Generally achieved through the Request for Proposals (RFP) method. cost-benefit analysis to define the best combinations of quality, services, time, and cost considerations over the useful life of the acquired item.”
What are the six fundamentals of procurement? ›
Jerry Sherman
- 6 Main Purchasing Principles or the 6 R's of Purchasing. ...
- Right Quality: ...
- Right Quantity: ...
- Economic Order Quantity (EOQ) helps in determining the right quantity of materials to be ordered. ...
- Right Time: ...
- Right Source: ...
- Right Price: ...
- Right Place:
What are the steps in the purchasing process?
- Recognizing a need.
- Researching suppliers and comparing prices.
- Submitting a purchase request.
- Sending the supplier a purchase order.
- Receiving goods or services.
- Issuing payment.
7. Principles of Procurement
- Accountability. ...
- Competitive Supply. ...
- Consistency. ...
- Effectiveness. ...
- Value for Money. ...
- Fair-dealing. ...
- Integration. ...
- Integrity.
The three C's in procurement and savings tracking are Control, Consolidation, and Cost Savings. These elements are essential for optimizing procurement processes, managing resources efficiently, and achieving cost savings.
The following are seven ways the value of procurement can be defined and measured:
- Efficiency. From a software purchase to vendor outsourcing, the efficiency gained through procurement can be demonstrated in many ways. ...
- Time Savings. ...
- Innovation. ...
- Retention. ...
- Risk Management. ...
- Security. ...
- Social Impact.
Procurement levers are the set of actions that enable the procurement function to balance multiple, seemingly contradictory targets. These levers can be based on price, total cost, demand and supply. Organizations must invest in technology and automation to optimally leverage these value levers.
What are the value chain procurement activities? ›
Procurement drives business from the source to the end customer. Literally, procurement has a hand every element of the value chain: sourcing of a commodity, purchasing of the commodity, production and quality control, product-market fit, go-to-market, and after-market.
How and why does procurement contribute to the success of an organization? ›
Procurement reduces risks and helps you grow
Procurement helps reduce that risk by carefully examining and vetting any potential suppliers. They look into their history to ensure that the supplier can handle your requests, and that should an issue arise they'll be able to navigate it.
How effective procurement improves organizational performance? ›
In addition, effective procurement practices have a profound impact on organizational performance. Organizations can enhance their financial performance, customer satisfaction, and overall competitiveness by optimizing costs, improving operational efficiency, and ensuring product quality.
Why is procurement important in the value chain? ›
It helps organizations enhance their competitive position, meet customer expectations, improve profits, and add value by finding suppliers who meet the organization's strategy. Managing risks and value on behalf of the company is the role of procurement.
What is the role of procurement in the value chain? ›
Procurement drives business from the source to the end customer. Literally, procurement has a hand every element of the value chain: sourcing of a commodity, purchasing of the commodity, production and quality control, product-market fit, go-to-market, and after-market.
