What is Procurement, really?
About a month ago a group of friends and I decided to have an adventurous outing, and get away from the city life of Stockholm, Sweden.
After compiling a list of things we could do, we decided to go horseback riding.
We found a lovely woman named Lulu that lived in Fagersta, Sweden who owns about 20 Icelandic horses, and takes tourist groups on day-trips to ride. Being that I was a newcomer to the world of horseback riding, and am a generally interested person, I asked Lulu a lot of questions about Icelandic horses.
Because Icelandic horses are known to be a rather unique species of horse, I had lot of questions. Lulu explained to me her love for Icelandic horses, and how their physical build, performance, personality, trot-style and mentality differed from other species of horses. I thought to myself, ‘I will never put a horse into a generic box of ‘horse’ ever again.’
Being that I was new to the life of being a Swedish cowboy, I accepted my limited knowledge of horses, moved on with newly-gained insights, and came back to work at Kodiak Rating’s offices in Stockholm the next day.
That Monday, I walked in the front door and wrote a note in my phone immediately. It read:
What is procurement, really?
I’m just now revisiting this concept, and I guess the thought originally sprouted from my ignorance regarding types of horses, which may seem a bit odd. With all oddities aside, I work with procurement professionals, work in an organization that services procurement professionals, market a digital procurement platform, but had I ever really challenged my knowledge of procurement?
No is the answer, but I hope to do so now.
What is Procurement — The Definition
Perusing the definition glossary of CIPS (Chartered Institute of Procurement and Supply) one can locate various definitions of ‘procurement’. Also highlighted in the glossary is the importance in differentiating the meaning, and roles, between the procurement and the purchasing functions.
“Procurement describes all those processes concerned with developing and implementing strategies to manage an organisation’s spend portfolio in such a way as to contribute to the organisation’s overall goals to maximise the value released and/or minimise the total cost of ownership. Procurement can be a department, a role and/or a process” (CIPS).
The last line of the definition speaks volumes to the incredible utility the procurement function can serve within an organization. Building an understanding for the intricacies within these three functionalities of procurement is important for creating concrete examples in theory and practice.
· Procurement as a Process: Procurement as a process can be recognized as a location of opportunities and the development of a spend portfolio. The process flow of procurement is rather multi-faceted, and leaves room for creativity. There is no one-size-fits-all definition or practice. However, the tradition guidelines of the process are as follows: defining categories, identifying & engaging stakeholders, developing a business case, reviewing the market, locating business need, sourcing strategically, engaging the market (RFI, RFP), and development of tendering/contracting (CIPS).
· Procurement as a Role: Procurement professionals typically hold a very particular skill set, developed from years of hands-on practice. As a role, a procurement professional must possess analytical thinking abilities, communication and negotiation skills and the ability to think critically beyond the traditional purchasing lifecycle. Procurement as a role isn’t just a job focused on locating the right suppliers in the right market fit in order to enhance their business value. Procurement professionals operate at their best when they possess characteristics of critical, life-cycle, thinking focused on adding value to the overall business goals. (Read more about the People of Procurement here!)
· Procurement as an Organization: The structure of a procurement organization will vary from company to company, but at its core it consists of procurement analysts, category managers, sourcing managers, and procurement managers. There are, of course, other positions that could be present within a procurement org, but these are the usual suspects; taking the procurement process life cycle from start to finish.
What is Procurement — It’s Not Purchasing
In Europe and Asia, procurement differs from the often-used ‘blanket’ term known as purchasing.
For this reason, the distinction in the terminology is rather important when exploring the question: what is procurement?
The main difference in the two often-interchanged terms is within ‘the buy’.
“Procurement deals with the sourcing activities, negotiation and strategic selection of goods and services that are usually of importance to an organization. Purchasing is the process of how goods and services are ordered. Purchasing can usually be described as the transactional function of procurement for goods or services” (Lim 2017).
Transactions are rarely present in the procurement process, where as purchasing is contingent upon transactional activities occurring. Procurement offers a strategic and methodical planning before the hands on purchasing. One could define procurement as a bit more ‘heady’ business function, because of the analytical preparation necessary to procure in a value-adding manner.
What is Procurement — The Value
Procurement in any context (process, organization and/or role) is a silently impactful function for the overall success of a business’ value chain.
The main areas of impact are:
· Ability to reach CSR goals
· Creating opportunities for Cost Reduction
· Increasing Supply Chain Transparency through strengthened supplier relationships
· Managing business critical relationships and goals (partners, stakeholders and customers) (chiefprocurement.com)
Procurement’s strategic roots make the function incredibly flexible and customizable to ensure value-adding opportunities, regardless of the application within an organization.
Sourcing more strategically ensures better visibility, strengthening relationships with suppliers increases compliance and governance, focusing on partner performance and quality increases the ability to find cost-reduction opportunities, building collaboration networks offers stakeholder-enabled innovation, and this is all possible because the procurement function exists.
‘What is procurement?’ is a question I’ve now posed, and attempted to answer. But, the more I’ve tried to work out the definition of procurement throughout this article, I’ve realized that I’ve come all this way, but maybe I’ve posed the wrong question.
I shouldn’t be asking, ‘what is procurement?’ but rather ‘what does procurement mean to you?’
I’ll leave that question there, and feel free to leave a comment below/start a discussion. Understanding, defining and maximizing the management of a procurement strategy is an activity, unique to every organization. After you know where procurement can be best applied in your organization, then you’ll be able to revisit the question: what procurement is, really?
Until next week.