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 procurement process is often a vital part of a company s strategy because the ability to purchase specific 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 ap division of accounting the procurement process includes the preparation and processing of a demand and 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 there are several steps involved in the procurement process procurement can involve support from several areas of a company competitive bidding and procurementcompetitive 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 may involve individuals 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 responsible for accounting for expenses depending on the goods or services involved government agencies and large companies may choose to solicit procurement proposals on an annual or scheduled basis to ensure that they maintain the best relationships for their business types of procurementthere are a few different kinds of procurement that businesses can undertake these include procurement vs purchasingprocurement and purchasing are both processes that involve the exchange of goods and services so it isn t uncommon for people to confuse the two but there are certain distinctions between the two for instance procurement is more of a strategic process involving acquiring goods and services it emphasizes the value of products and uses a series of steps as outlined above to complete the acquisition businesses generally take a proactive approach when they submit procurement orders doing so allows them to identify and fill future deficiencies before they are needed purchasing on the other hand is a transactional process as such it involves buying goods and services when an entity purchases goods and services it places greater importance on price rather than value purchasing is usually a reactive process that satisfies a more immediate need the table below highlights the comparison between these two processes accounting for procurementprocurement costs are generally integrated into the financial accounting of a business as procurement involves acquiring goods and or services for the revenue goals of the business as such some companies may hire a chief procurement officer cpo for short to lead these efforts the cpo procurement processing can be divided and analyzed from several angles companies and industries 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 spending 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 of purchasing merchandise 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 compared to indirect costs 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 must deal with procuring those goods as inventory these companies place a lot of importance 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 