Business Procurement Definition
Issues, Trends, and Challenges
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 you reach the purchasing stage. These steps include:
- Identification of requirement
- Authorization of purchase request
- Identification of suppliers
- Negotiation and selection of the vendor
Shaping Procurement Policies
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 toward brands that they feel share their values, businesses are also interested in making sure that their procurement policies display 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 issues and trends such as ethical investment and protecting the environment.
For example, 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 less 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 ort because it contains recycled material while another doesn't.
Ethical sourcing is another 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 damaged the reputations of corporations such as Nike and Walmart.
In response, Walmart has adopted an ethical sourcing policy for its supply chains, and, in 1999, Nike helped to establish the Fair Labor Association (FLA), a nonprofit group that 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. More and more companies are following suit.
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 and have health benefits
- employees work reasonable hours
- no child labor is used
Ethical sourcing policies typically encompass both green procurement practices and fair labor policies.
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 and Fraud Survey 2018, procurement fraud is one of the most commonly reported economic crimes 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
These issues and more will continue to shape procurement policies in businesses in the coming decades. If your business doesn't have a policy of its own, start writing one with these factors in mind.
PwC. "Pulling fraud out of the shadows: Global Economic Crime and Fraud Survey 2018," Accessed Jan. 6, 2019.