Procurement - Overview

Overview

Almost all purchasing decisions include factors such as delivery and handling, marginal benefit, and price fluctuations. Procurement generally involves making buying decisions under conditions of scarcity. 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 made between analyses without risk and those with risk. Where risk is involved, either in the costs or the benefits, the concept of expected value may be employed.

Direct procurement and indirect procurement
TYPES
Direct procurement Indirect procurement
Raw material and production goods Maintenance, repair, and operating supplies Capital goods and services

F E A T U R E S

Quantity Large Low Low
Frequency High Relatively high Low
Value Industry specific Low High
Nature Operational Tactical Strategic
Examples Crude oil in petroleum industry Lubricants, spare parts Crude oil storage facilities

Based on the consumption purposes of the acquired goods and services, procurement activities are often split into two distinct categories. The first category being direct, production-related procurement and the second being indirect, non-production-related procurement.

Direct procurement occurs in manufacturing settings only. It encompasses all items that are part of finished products, such as raw material, components and parts. Direct procurement, which is the focus in supply chain management, directly affects the production process of manufacturing firms. In contrast, Indirect procurement activities concern “operating resources” that a company purchases to enable its operations. It comprises a wide variety of goods and services, from standardized low value items like office supplies and machine lubricants to complex and costly products and services; like heavy equipment and consulting services.

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