Procurement, also known as sourcing, is the selection of suppliers, the conclusion of a framework agreement and the transaction of the delivery of production material and merchandise. It serves as a link between the procurement markets and the companies.
The procurement of goods represents an important operational function for companies. In general, the procurement market can be divided into four areas:
- the goods and services markets in own country and abroad
- the acquisition markets
- the financial markets
- the information, data and developments
Because the procurement market consists of four sub-areas, the term procurement could be broadly defined, including capital goods, raw materials, auxiliary materials and supplies, work in progress, merchandise, services, work, and funds required for the entire process and understanding rights. From a practical point of view, however, this should be rejected. Since the objects to be procured are different and complex, the procurement measures are each incorporated into other areas of the company.
The basic function of procurement includes making the components that go into the production process available on time, in perfect condition, in the right quantity and at the agreed place. The goods to be procured can include raw materials, auxiliary materials or machines. Except for the operative functions of “procurement” the planning, scheduling and controlling tasks are not to be ignored.
The savings potential of the costs that arise during the supply of goods to the company is high through the use of electronic procurement. While large companies are already using this technology successfully, small and medium-sized companies hardly use it.
E-procurement is the electronic support for the procurement of goods and services in a company using various information and communication systems. It enables the integration of information and communication technologies to optimize operational and strategic activities.
By networking and automating the procurement processes, transaction costs that arise from manual processes can be saved. Electronic procurement consists of several processes that are necessary for the procurement activity. This includes the determination of needs, availability of inventory, price comparison and determination of sources of supply. First, the requirement is identified, which is converted into a purchase requisition after the check.
Digitization can be divided into two areas. The first area explains the conversion of an analogue medium into digital source material. The second perspective is the change that is initiated with the implementation of digital technologies. Digitization is the conversion of analogue signals into digital information. The analogue starting material is digitized by “sampling”. The quality of the result increases with the increasing density of the sampling points.
The concept of digital technologies goes beyond this basic context of digitization and includes the entirety of all technologies for the creation, processing, transmission and use of digital goods. According to this perspective, digitization can be structured according to a person, an organization or a society. From the individual perspective, the activity and process phases change due to the high influence of application systems. In the past, organizations invested a significant amount in the application of information technology. The goal is networking between the actors. Digitization is having an increasing impact on our business life, among other things. Business processes are accelerated using modern technologies.
SMEs can benefit from digitization. The processing of large amounts of data and the specific maintenance of customer contact using CRM systems reveal the growth potential. Both the processes inside and outside the company are subject to this rapid change.
Traditional Procurement Process
The procurement process begins with the need, which is triggered by an employee of a company in the form of a requirement notification. To comply with the quantity and budget planning, appropriate information is required when entering such reports.
Before the requirement is communicated to the supplier, information about the requested good is necessary to avoid misunderstandings. The information can be specified by quantity, quality, delivery time, etc. If the information is insufficient, historical values can serve as a basis.
The sources of supply on the markets are determined based on the procurement strategies defined in advance. The suppliers are then evaluated according to qualitative and quantitative criteria. The qualitative aspects include adherence to schedules, quality, service and environmental friendliness. Monetary characteristics are taken into account for the quantitative factors. After the company has decided on an optimal supplier, the data of the required notification is forwarded to it.
In the next procurement phase, the requesting company receives offers from the sources of supply, which it uses as a basis for the purchase of goods and services. The price factor plays an important role here. The company tries to keep procurement costs low. The analysis of the offers can serve as a basis for the negotiations. This process involves, among other things, negotiating optimal prices and favourable conditions for future purchases.
Finally, with the order, the supplier is requested to deliver his goods and services under the negotiated conditions. If the conditions set by the buyer are accepted by the supplying company, it may, for legal reasons, send a confirmation of the order.
In recent years, companies aimed to use as many sources of supply as possible at the same time, this applied at least to goods with a high-value share of the total inventory (A and B goods). The “multiple sourcing” approach attempts to boost competition among suitable suppliers to increase potential about quantitative and qualitative criteria. This strategy can only be implemented if there are a sufficient number of supply sources on the market. If the objects to be procured are individually adapted to the procuring company, changing the supplier involves a great deal of effort.
Global sourcing consists of the organization of procurement on the international procurement markets and the strategic objective. Global procurement creates new opportunities to procure goods at low cost. This approach is associated with both opportunities and risks. To avoid complications, the market must be carefully analyzed in advance. One of the challenges can be the handling of logistics since the procuring company is not close to the supplier.
In contrast to global sourcing, a special focus is placed on the local procurement markets. The term local procurement has the great advantage that the business partners are based nationally or regionally. This saves transport costs and, if necessary, quality requirements can be better realized.