Business Procurement Definition

Issues, Trends & the Problem of Procurement Fraud

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Procurement Definition:

Procurement is the sourcing and purchasing of goods and services for business use from an external source.

Individual businesses set procurement policies that govern their choice of suppliers, products and the methods and procedures that are going to be used to communicate with their suppliers. For example, businesses often have set procedures for calling for and evaluating proposals.

The procurement process involves:

  • Identifying the needs of customers and suppliers
  • Choosing and preparing tools and processes to communicate with suppliers
  • Preparing requests for proposals and requests for quotations
  • Setting policies for evaluating proposals, quotes, and suppliers

These policies aren't just about fairness; they also address issues such as how the procurement process relates to a company's identity and brand. If, for instance, a company has positioned itself as a company that cares about the environment its procurement policies have to support this stance. 

Procurement vs Purchasing

While many people use the two terms interchangeably, purchasing is just one aspect of procurement. Put another way, a lot of the procurement process has to have already happened before the purchasing stage is reached. The Identification of Requirement, Authorization of Purchase Request, Identification of Suppliers, Negotiation and Selection of the Vendor all have to happen before the steps of purchasing take place. Procurify lays out the typical Procure to Pay Cycle in detail.

Issues & Trends in Procurement

Businesses, of course, are most interested in getting the best quality goods and services they can procure at the best price in the most suitable time frame. However, that's not their only interest. Because people gravitate towards brands that they feel share their values, businesses are also interested in making sure that their procurement policies espouse the values prospective customers will find attractive. So, for instance, companies have a vested interest in procurement policies that are viewed as fair, promoting competition and conducted with business integrity.

But many also go beyond these basics to ensure that their procurement policies align with the public's growing interest in ideas such as ethical investment and protecting the environment.

For instance, an increasing number of businesses are practicing green procurement (also known as eco-procurement or sustainable purchasing), creating policies that emphasize sourcing and purchasing goods and services that are less environmentally damaging than comparable alternatives.

Green procurement policies include sourcing goods or services that have a lesser impact on the environment by:

  • Reducing waste
  • Lowering greenhouse gas emissions
  • Conserving energy, water, and soil
  • Using renewable energy sources
  • Not containing toxic substances or emitting pollution

A business may choose to purchase a product from a supplier because it has less packaging than a comparable product, for instance, or choose a product because it contains recycled material while another doesn't.

Public Works and Procurement Canada has information on green procurement to help businesses identify available green products and services or define a business's requirements in terms of environmental considerations.

Ethical sourcing is a similar trend in procurement that has gained much attention in recent years as more products are produced or manufactured in third world countries that do not necessarily enforce ethical labor standards. Exposed by activists, abusive labor practices in the garment industry in countries such as Bangladesh, Indonesia, China, and Vietnam have been very damaging to the image of corporations such as Nike and Walmart.

In response, Walmart has adopted an ethical sourcing policy for their supply chains, and in 1999 Nike established the Fair Labor Association (FLA), a non-profit group which is committed to improving the standards of employment for workers across the world by ensuring fair labor practices and safe working conditions.  

Participating companies can get listed with the FLA by enforcing compliance with the FLA labor standards and practices. Nike now conducts audits of factories and publishes a corporate social responsibility report containing information about its commitments to sustainability and fair labor practices.

As applied to ethical sourcing, fair labor involves the acquisition of goods and services that are created in an environment where:

  • worker safety is respected;
  • workers are paid a fair wage for their work;
  • employees work reasonable hours, and have health benefits;
  • no child labor is used.

Ethical sourcing policies typically encompass both green procurement practices and fair labor policies.

Procurement Fraud

By its nature, the procurement process lends itself to white collar crime and the rise in outsourcing has exacerbated the issue. In fact, according to the PwC Global Economic Crime Survey 2018 procurement fraud is one of the most commonly reported economic crime globally. The report states that 28% of organizations supplying professional services, 23% of technology businesses and 29% of businesses producing industrial products have experienced procurement fraud.

The survey also reveals a significant increase in the share of economic crime committed by internal actors (from 46% in 2016 to 52% in 2018) and a dramatic increase in the proportion of those crimes attributed to senior management (from 16% in 2016 to 24% in 2018). All told, internal actors were a third more likely than external actors to be the perpetrators of the most disruptive frauds.

Bribery and bid-rigging are common forms of procurement fraud in the acquisition of goods and services, as are outsider procurement scams. One of the most common is for a business to receive a phony look-alike invoice for products that were never delivered. The perpetrator hopes that the business will automatically pay the invoice. 

Businesses can protect themselves from procurement fraud by:

  • Allowing only designated, trusted personnel to place orders for goods and services
  • Not accepting offers from unknown suppliers 
  • Refusing items not ordered
  • Monitoring excessive or repeat purchases of defective or low-quality supplies or services

Also Known As: Procurement management.