Important Functions ofthe Procurement Department
In the complex ecosystem of a modern organization, few departments hold as much influence over a company’s operational efficiency and financial health as the procurement department.
A well-functioning procurement department is not just about purchasing but about optimizing costs, ensuring quality, and fostering strategic relationships with suppliers.
1. Sourcing
Sourcing is the number one most important function of a procurement department. Why? Because the procurement department is responsible for purchasing goods or services that the company needs to operate.
It requires the procurement department to create a strategic plan to acquire the goods or services at the best possible price. Thus, it plays a huge part in the growth of the organization.
Of course, this starts by looking for potential suppliers. Selecting the best and most reliable supplier can have a huge impact on controlling costs.
2. Compliance with business policies
The procurement department must ensure that all its purchases are in compliance with the organization’s policies. Before purchasing,
It needs to look into the organization’s protocol to ensure that it complies with the budget approval. This will effectively help the organization to stay efficient with its costs.
3. Negotiation
The procurement department must have great negotiation skills to acquire the best materials at the lowest price.
This is vital to the profitability of the organization as high costs of materials can impact their revenue. If this happens, the growth of the organization will be slowed and will greatly affect its bottom line.
4. Contracting
The procurement department offers the contract award to the best supplier. That is why the procurement department needs to scrutinize the supplier.
Furthermore, the procurement department must know and abide by all the agreements as it is vital to the success of the relationship between the organization and the supplier.
5. Monitors supplier’s performance
The procurement department’s important functions are sourcing, complying with policies, negotiation, contracting, and monitoring suppliers’ performance.
If it fails to monitor the supplier, it can be detrimental to the complete product and supply chain.
The following are the components of procurement:
1. People
This is the heart of procurement. They are the ones who are responsible for initiating and authorizing each step of the procurement process.
Without the people, nothing can be done in the procurement. There may be automation but there will be no one to maintain it without people in the procurement.
2. Process
The process is the key to keeping the costs down and ensuring that the supplies are available when needed. It helps improve and promote accuracy and timeliness in the procurement process.
3. Paperwork
Keeping records is important to make sure that every document is accessible when needed. Records act as a database of knowledge concerning payment terms and the supplier’s performance.
1st Procurement Expert’s Advice on Procurement Department
For this article, we asked a seasoned procurement professional to share his insights regarding procurement department.
Sjoerd Goedhart
Owner, Goedhart Interim Management & Consultancy
LinkedIn Profile: https://www.linkedin.com/in/sjoerdgoedhart/
1. What should readers know about the procurement department?
“Readers should be aware that the procurement department should be overseen by a Procurement Director/CPO, who must be a part of the company’s management team. This individual mustn’t report to a member of the management team such as Finance, Operations, or Sales.“
Follow-up Question: You mentioned that it doesn’t work for the procurement director/CPO to report to a member like Finance, Operations, or Sales. Can you explain why this reporting structure is less effective and how it may impact the effectiveness of the procurement function?
“The reporting structure where the procurement director reports to a department like Finance, Operations, or Sales is less effective because it hinders the independence of the procurement function. When procurement is part of another discipline, conflicts may arise, and decisions might be biased toward the host department’s priorities. This lack of balance can impede the procurement officer’s ability to advocate for essential considerations like risk management, sustainability, and compliance with regulations. For optimal functionality, the procurement department should operate independently within the company.”
2. What is the biggest misconception about the procurement department? What do most people get wrong about this topic?
“The role of a Procurement department is not just purchasing at the lowest cost. The department has a critical role in the entire company. A simple example; if the production department does not do its job properly, the company cannot produce. Sales cannot close profitable deals if there is no certainty and/or stability in the cost prices of products. These two examples show that the performance of a procurement department can have a huge impact on the performance of a company as a whole and on the profitability of the company.“
3. What are the critical functions of a modern procurement department in large organizations?
“The critical functions of a modern procurement department in large organizations include negotiating and purchasing, monitoring KPIs, ensuring compliance, and reporting on social and sustainable sourcing.“
4. How can procurement departments effectively collaborate with other departments to optimize organizational performance?
“By building relationships with key stakeholders, open communication channels, leveraging real-time data sharing, and involving departments in analytics-driven decision-making processes.
Integrating procurement with other business functions can improve efficiency, quality, innovation, and collaboration. By aligning procurement goals and strategies with the overall objectives and vision of the organization, you can reduce costs, waste, and risks, and increase value and performance.“
5. Are there any differences between the procurement and purchasing departments?
“Purchasing is short-term focused, while procurement has a long-term perspective. Short-term purchases should align with the overall long-term procurement strategy.“
6. What steps can procurement departments take to stay competitive in the modern procurement landscape?
“Procurement departments should embrace new technologies, particularly AI, to stay competitive in the modern landscape.“
2nd Procurement Expert’s Advice on Procurement Department
For this article, we asked another experienced procurement expert to share his insights to help answer common questions about the procurement department.
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Conclusion
The procurement department plays a crucial role in the success of an organization. It is not just limited to purchasing; instead, it encompasses strategic planning, negotiation, compliance, and relationship management.
The department requires a diverse skill set to perform its specified roles effectively. Monitoring supplier performance is also essential to maintain quality throughout the supply chain.
Therefore, organizations must prioritize the development and maintenance of a well-functioning procurement department. By doing so, they can ensure that they have a robust supply chain that supports their business goals, enhances their reputation, and drives their overall success.
