What Is Procurement?

Procurement is the act of obtaining goods or services, typically for business purposes. Procurement is most commonly associated with businesses because companies need to solicit services or purchase goods, usually on a relatively large scale.

Procurement generally refers to the final act of purchasing but it can also include the procurement process overall which can be critically important for companies leading up to their final purchasing decision. Companies can be on both sides of the procurement process as buyers or sellers though here we mainly focus on the side of the soliciting company.

How Procurement Works

Procurement and procurement processes can require a substantial portion of a company’s resources to manage. Procurement budgets typically provide managers with a specific value they can spend to procure the goods or services they need. The process of procurement is often a key part of a company's strategy because the ability to purchase certain materials or services can determine if operations will be profitable.

In many cases, procurement processes will be dictated by company standards often centralized by controls from the accounts payable division of accounting. The procurement process includes the preparation and processing of a demand as well as the end receipt and approval of payment.

Comprehensively, this can involve purchase planning, standards, specifications determination, supplier research, selection, financing, price negotiation, and inventory control. As such, many large companies may require support from a few different areas of a company for successful procurement.

Chief Procurement Officers

Some companies may even choose to hire a chief procurement officer to lead these efforts. A chief procurement officer can oversee the establishment of procurement standards, work with accounts payable to ensure procurement standard integration and efficient payment, and serve on procurement teams making procurement decisions when there are multiple competitive bids.

Overall, procurement costs will be integrated into the financial accounting of a business as procurement involves acquiring goods and/or services for the revenue goals of the business.

Comprehensively, procurement can involve support from several areas of a company.

Financial Accounting

Procurement processing can be divided and analyzed from several angles. Companies and industries will have different ways of managing the procurement of direct and indirect costs. Goods companies, as compared with services companies, will also have different ways of managing costs.

Direct vs. Indirect Procurement Costs

Direct spend refers to anything related to the cost of goods sold and production, including all items that are part of finished products. For manufacturing companies, this can range from raw materials to components and parts. For merchandising companies, this will include the cost at which merchandise is purchased from a wholesaler for sales.

For service-based companies, direct costs will primarily be the hourly labor costs of employees performing services. Procurement for items pertaining to the cost of goods sold directly affects a company’s gross profit.

By contrast, indirect procurement involves non-production-related purchases. These are purchases a company uses to facilitate its operations. Indirect procurement can involve a broad range of purchases including office supplies, marketing materials, advertising campaigns, consulting services, and more. Companies will generally have different budgets and processes for managing direct costs as compared with indirect costs.

Goods vs. Services Procurement Accounting

Procurement is part of the expense process for all types of companies, but goods and services companies account for revenues and costs differently. As such, accounting for procured goods will also differ from accounting for procured services.

Companies focused on goods will need to deal with the procurement of those goods as inventory. These companies place a lot of importance in this area on supply chain management. Service-based companies provide services as their primary revenue generator so they do not necessarily rely as heavily on a supply chain for inventory although they may need to purchase goods for technology-based services.

In general, the cost of sales for many service companies is based on the hourly labor cost of employees providing the service so procurement as a direct expense is not a major factor. However, service-based companies will usually have higher relative indirect costs because they typically deal with their own procurement as an indirect expense through marketing.

Key Takeaways

  • Procurement is the act of obtaining goods or services.
  • Business procurement requires preparation, solicitation, and payment processing, which usually involves several areas of a company.
  • Procurement expenses can fall into several different categories, depending on the procurement demand.
  • Competitive bidding is usually a part of most large scale procurement processes involving multiple bidders.

Special Considerations: Competitive Bidding

Competitive bidding is a part of most business deals involving multiple bidders. The competitive bidding process for goods is usually more simplified than for services. Procurement is also the term used for purchasing goods and services on behalf of the government which has its own bidding processes and requirements.

Competitive bidding for all types of goods generally involves proposals that detail the per unit price, shipping, and delivery terms. Competitive bidding for the procurement of services can be more complex since it can involve a multitude of things including individuals involved, technology services, operational procedures, client servicing, training, service fees, and more.

In each case, the solicitor of bids chooses the supplier they want to work with based on both operational business aspects as well as costs. The solicitor is then responsible for accounting for expenses depending on the goods or services agreed to. Government agencies and large companies may choose to solicit procurement proposals on an annual or scheduled basis to ensure that they continue to maintain the best relationships for their business.