Fundamentals of Business

3.3.1 Procurement

Procurement is the acquisition of goods and/or services at the best possible total cost of ownership, in the right quantity and quality, at the right time, in the right place for the direct benefit or use of governments, corporations, or individuals generally via, a contract.

The key activity in procurement is Sourcing, that is identifying and selecting suppliers. Simple procurement may involve nothing more than repeat purchasing. Complex procurement could involve finding long term partners - or even 'co-destiny' suppliers that might fundamentally commit one organisation to another.

Even simple purchasing can involve trade offs.
√ What is the quality required?

√ Are there advantages buying fewer or more items?

√ The timing can be critical.

√ Each supplier may have different attributes, capabilities and values.

√ The total cost of acquisition should be considered alongside the total lifetime cost, not just the purchase price.

√ The physical handling of any products should be considered, with links to methods of transport, logistics and warehousing.

A key question in procurement is what to buy, given a limited budget. If good data is available it is good practice to make use of economic analysis methods such as cost benefit analysis or cost utility analysis.

An important distinction is between analyses made without risk and those with risk. Where risk is involved, either in the costs or the benefits, the concept of expected value should be employed.