Procurement
Procurement is the process of locating and agreeing to terms and purchasing goods, services, or other works from an external source, often with the use of a tendering or competitive bidding process.[1] The term may also refer to a contractual obligation to "procure", i.e. to "ensure" that something is done. When a government agency buys goods or services through this practice, it is referred to as government procurement or public procurement.[2]
For other uses, see Procurement (disambiguation).
Procurement as an organizational process is intended to ensure that the buyer receives goods, services, or works at the best possible price when aspects such as quality, quantity, time, and location are compared.[3] Corporations and public bodies often define processes intended to promote fair and open competition for their business while minimizing risks such as exposure to fraud and collusion.
Almost all purchasing decisions include factors such as delivery and handling, marginal benefit, and fluctuations in the prices of goods. Organisations which have adopted a corporate social responsibility perspective are also likely to require their purchasing activity to take wider societal and ethical considerations into account.[4] On the other hand, the introduction of external regulations concerning accounting practices can affect ongoing buyer-supplier relations in unforeseen manners.[5]
The Chartered Institute of Procurement & Supply (CIPS) promotes a model of "five rights", which it suggests are "a traditional formula expressing the basic objectives of procurement and the general criteria by which procurement performance is measured", namely that goods and services purchased should be of the 'right quality', in the 'right quantity', delivered to the 'right place' at the 'right time' and obtained at the 'right price'.[39] CIPS has in the past also offered an alternative listing of the five rights as "buy[ing] goods or services of the right quality, in the right quantity, from the right source, at the right time and at the right price.[40] 'Right source' is added as a sixth right in CIPS' 2018 publication, Contract Administration.[41]
Delivery on savings goals is an important part of the procurement function, but this objective is generally seen as value generation rather than cost reduction.[42] CIPS also notes that securing savings is "one measure of purchasing performance", but argues that savings should only be used as a measure of performance where they are "a reflection of the [organisation]'s ... expectations of the purchasing and supply management function". CIPS distinguishes between "savings", which can reduce budgets, and "cost avoidance", which "attempts to thwart price increases and to keep within budget".[43] Examples of savings as a beneficial outcome include:
Ardent Partners published a report in 2011 which presented a comprehensive, industry-wide view into what was happening in the world of procurement at that time by drawing on the experience, performance, and perspective of nearly 250 chief procurement officers (CPOs) and other procurement executives. The report included the main procurement performance and operational benchmarks that procurement leaders use to gauge the success of their organizations. This report found that the average procurement department manages 60.6% of total enterprise spend. This measure, commonly called "spend under management" or "managed spend", refers to the percentage of total enterprise spend (which includes all direct and indirect spend) that a procurement organization manages or influences. Alternatively, the term may refer to the percentage of addressable spend which is influenced by procurement, "addressable spend" being the expenditure which could potentially be influenced.[44] The average procurement department also achieved an annual saving of 6.7% in the last reporting cycle, sourced 52.6% of its addressable spend, and has a contract compliance rate of 62.6%.[45] A more restrictive definition of "spend under management" includes only expenditure which makes use of preferred supplier contracts and negotiated payment rates and terms.[46]
Consultants A.T. Kearney have developed a model for assessing the performance of a procurement organisation or the procurement function within a wider organisation, known as ROSMASM (Return on Supply Management Assets).[47] According to the 2016 ROSMA Performance Check Report, What Good Looks Like,
CIPS promotes organisational self-assessment using the ROSMA Performance Check, arguing that it enables a procurement department to "measure and explain procurement and supply's value in terms your CFO and CEO will understand, using a common financial standard".[48] Findings in 2020 suggested that "top quartile procurement performers have ROSMA scores two to three times higher than those in the middle two quartiles".[50] A.T. Kearney's report suggests a close match between the self-reported performance of CPOs in the best performing departments and the view of procurement held by the CFO and the organisation more widely, and also notes that weaker performers or "inconsequentials" share a distinct profile marked by lack of "identifiable leadership accountable for procurement's performance.[49]: page 5
Spend under management also contributes to an additional measure of procurement performance or procurement efficiency: procurement operating expense as a percentage of managed spend.[51]
Legal aspects[edit]
A contractual obligation to procure refers to an absolute obligation to ensure that the action is done or the condition is met,[68] for example a contract with a principal supplier may include a clause requiring the company to "procure" that its subsidiaries, holding companies and other associated businesses undertake the same commitments as those contractually imposed on the principal.[69]
The use of the word "procure" in a joint venture agreement between Nearfield Ltd., Lincoln Nominees Ltd., and other partners, in relation to the utilisation of a bank loan, gave rise to a dispute between the parties regarding the meaning of the word "procure", which was resolved in 2006 by the judge, Peter Smith, confirming that the "normal meaning of the word" is clear and well understood:"I do not see that procure means anything other than as Nearfield [the claimant] puts it 'see to it'".[70] In this case, the obligation to "procure the payment" of the loan amounted to a guarantee of that loan.[71]
Future scenarios[edit]
Various commentators have made projections regarding the future of procurement.[72] Charlotte Payne, general manager of CIPS in Australia and New Zealand, suggests that "procurement's role in sustainability is going to be massive", while a CIPS general overview anticipates that "there is little chance that procurement and supply will enter a period of calm any time soon".[72]