What is 'Procurement'

Procurement is the act of obtaining or buying goods and services, especially for business purposes. The process includes the preparation and processing of a demand as well as the end receipt and approval of payment. It often involves purchase planning, standards and specifications determination, supplier research and selection, financing, price negotiation, and inventory control. The process of procurement is often a key part of a company's strategy because the ability to purchase certain materials will determine if operations will be profitable.

BREAKING DOWN 'Procurement'

Procurement is essentially the acquisition of products and services. Both individuals and corporations have certain items which they must acquire; procurement is the name for the process by which they do so, and that takes into account budgeting, supply chain and payment, as well as other factors. 

The procurement process is often divided into two different categories, direct and indirect spend. Direct spend refers to anything related to production, including all items that are part of finished products, from raw materials to components and parts. It directly affects the production process of manufacturing firms and is the focus in supply chain management.

In contrast, indirect procurement involves non-production-related acquisitions. These involve resources which a company uses to facilitate its operations. Indirect procurement comprises goods and services, from standardized items such as office supplies and machine lubricants, to complex and nigh cost products and services such as capital equipment, consulting services, and other services.

Procurement Considerations

Procurement decisions involve many additional factors, including shipping and delivery, the marginal benefit of the good compared to the cost of procuring it, and the fluctuating prices of many goods and services. With good information, a consumer can analyze the costs and benefits of their acquisition and make the best decision. The expected benefits of procurement vary widely depending on the purchase; the value a household will receive from a package of dish soap is very predictable compared to most large-scale investments. For a wholesaler, procuring products for retail entails the risk that the market value will drop before they can be sold.

Major corporate procurements can be a complex and lengthy process. Most companies employ a Chief Procurement Officer, or CPO, to handle major acquisitions for the company. Typically, in business, procurement involves identifying company needs, identifying and evaluating potential suppliers, and negotiating with them over price and quantity to find the best fit for the company.

Procurement is also the term used for purchasing goods and services on behalf of the government.  Government procurement accounts for more than 10% of the global GDP, though the proportion varies by country. Most countries have strong government procurement laws to protect against fraud or local protectionism.

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