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Table of Contents
More Inventory Content
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Get the latest e-commerce industry news, best practices, and product updates!
Table of Contents
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More Inventory Content
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An individual or business may engage in inventory procurement either as a short-term strategy or as part of an ongoing commitment to improving efficiency and controlling costs. Regardless of the reason for engaging in inventory procurement, it is vital to remember that certain best practices must be followed to ensure the process runs smoothly.
Inventory procurement involves the acquisition of a company’s entire inventory.
Let us learn more about inventory procurement and how it affects the entire supply chain process for a business.
What Is Inventory Procurement?
The process of acquiring materials, equipment, or services for use in a business is inventory procurement. It encompasses all activities related to purchasing materials, including establishing appropriate policies and procedures for purchasing, negotiating contracts, and managing materials during the procurement process. Inventory procurement also includes the management of any assets associated with a completed transaction, such as inventory items received from suppliers. As part of this management task, inventory managers must determine the value of these assets and ensure they are accounted for correctly.
Finally, an essential part of inventory procurement involves ensuring that financial records are accurate and up-to-date. Because many transactions involve large sums of money, all related accounting records must be accurate and current.
However, it is essential to remember that inventory procurement is not the same as outsourcing. While outsourcing involves transferring core business processes from one company to another, inventory procurement consists of acquiring a company’s entire inventory.
Inventory Procurement’s Role in the Supply Chain
Inventory procurement is essential in understanding the supply chain in a business. Inventory procurement allows the company to find reliable and sustainable suppliers who can provide accurate goods and services within the competitive market to match the company’s requirements. The procurement process also aids the company in avoiding unnecessary wastage related to time, money, and valuable resources.
Inadequate and inefficient suppliers may result in unwanted situations leading to degrading supply chain management. Therefore it is important for the company to identify valuable suppliers who can provide quality goods and services per the business requirement and add value to the company.
How Inventory Procurement Works
Generally, an average inventory procurement cycle follows the following elements to carry out the inventory operation:
Determining the procurement requirements
The primary step of acquiring goods is establishing the business’s specific needs. A company needs to firmly establish what the business needs. A healthy procurement cycle only occurs when prudent purchase decisions align carefully with the mission statement and values of the company.
Setting up a procurement strategy
A company can employ a manual intervention to develop a structured procurement strategy for improved inventory procurement performance.
Improving relationships with existing and potential suppliers
The vendor-supplier relationship significantly impacts a company’s procurement performance. Thus, the procurement teams must maintain strong supplier relationships with the current supplier base while looking for new potential suppliers.
Negotiate for the best price
A company needs to directly negotiate for the best quality of products at the best possible price while engaging in a direct procurement process with the supplier. Any intervention of third-party vendors often leads to a competitive market with higher prices.
Approve purchase requests
Many companies with inventories also act as a warehouse for various departments of the company or other companies. It is one of the roles of the procurement team to determine the objectives of the incoming requests and find a way to fulfill the requested goods or services.
Maintain procurement software
Although cloud-based applications and software have taken over the procurement streamlining, a company needs to employ professionals to oversee the automation process.
Purchase of goods and services
After the due work of efficient planning and sourcing, the procurement team is responsible for the inventory’s purchasing activities, including purchasing orders and making the payment on time.
Adhere to company morals
Some companies add social responsibility to their values to prevent purchasing products or services linked to unethical situations like child labor, animal cruelty, or environmental destruction. The company’s procurement team prioritizing social responsibility needs to align the procurement process with the required company values and standards for social responsibility.
Steps Involved in Inventory Procurement Process
Procurement processes tend to vary according to a company’s structure and needs. However, the general procurement process includes the following steps :
Identification of goods and services needed by the company
First and foremost, the procurement team needs to identify the requirements of the procurement cycle. It can be a new product or a restocking of an old product. This step usually involves the nitty-gritty of the company’s needs, including basic technical specifications, materials, characterization, etc.
Submit a purchase request
The procurement team needs to make a formal purchase request notifying the existence of the need. The purchase requisitions are usually submitted via departmental managers or someone of higher authority for visible transactions. The procurement team can only proceed with the request once the higher power approves it.
Assess and select sustainable suppliers
With a transparent list of requirements and needs along with the approved purchase requisition, the procurement team sends a request for a quote (RFQ) to potential vendors. The inventory procurement process can proceed by adhering to company values and retailer sustainability.
Negotiate terms and price
The best practice before purchasing is to scrutinize the supplier quotes and come to a negotiation. Once both parties agree on the talks, the inventory procurement team can advance with the proposition.
Generate a purchase order
The inventory procurement team needs to generate a purchase order(PO) that is sufficiently detailed to determine the exact goods or services required for the supplier.
Receive and inspect deliverables
After the goods or services have been delivered, the inventory procurement team must carefully examine the delivery for any discrepancies and immediately take action for the same.
Conduct three-way matching
This is a crucial step of the procurement process often neglected by most companies. Accounts payable require three-way matching by examining and comparing the purchase orders, order receipt, and the final invoice. This step is critical to ensure that the goods or services delivered match the purchase order to prevent unauthorized or inaccurate payment and invoices.
Approve the invoice and arrange for the payment
Once the three-way match is successful, the procurement team can carry on with the payment approval and invoice generation.
Keep records
Lastly, it is essential to maintain due records for the entire inventory procurement cycle for future reference. Clear records also help in ruling out unwanted discrepancies and solving potential disputes.
Types of Inventory Procurement
Inventory procurement is primarily categorized into four categories, mainly:
- Direct procurement – involves inventory purchases of goods required to manufacture an end product. Direct procurement includes raw materials and other relevant components.
- Indirect procurement – refers to purchasing essential items for day-to-day operations. Goods procured via indirect procurement don’t contribute directly to the company’s bottom line. Indirect procurement items include office supplies, furniture, equipment, etc.
- Goods procurement – generally refers to the procurement of physical goods, including direct and indirect procurement. Goods procurement largely relies on best supply chain management practices.
- Services procurement – involves procuring people-based services like contractors, contingent labors, consultants, law firms, etc.
Basic Principles of Inventory Procurement
Though the principles vary depending on the type of business, important inventory procurement principles include:
- Value for money
- Fair treatment
- Competition
- Efficiency
- Visibility
- Integrity
- Accountability
Financial Accounting
Financial accounting involves recording information about a business’s financial situation. This is done through the use of several different types of accounts. These include assets, liabilities, equity, and net income. Financial accounting helps businesses understand their overall financial situation and prepare accurate financial reports at the end of each fiscal year.
Inventory procurement can be analyzed from various viewpoints. The different inventory procurement costs are recorded as :
Direct vs. Indirect Procurement Costs
Direct costs are those incurred by the procurement agency or vendor. These include the purchase of goods and services, as well as staffing costs. They’re one-time expenses that represent the actual cost of items purchased. Indirect charges are incurred by the procurement agency or vendor’s client. These include overhead expenses such as rent, utility, etc.
By nature, indirect procurement costs are more expensive than direct procurement costs. Indirect procurement costs include travel, accommodations, and other expenses incurred as an indirect result of the procurement process. These types of costs can be significant. For example, airport and hotel fees can add up quickly when travel is involved in the procurement process.
More importantly, indirect procurement costs can also affect the project success rate. For example, if a supplier’s travel expenses exceed the amount budgeted for, then it may put the project at risk of failure.
In addition to indirect procurement costs, direct procurement costs also need to be considered when attempting to compare direct and indirect procurement cost differences. Direct procurement can incur both direct and indirect costs depending on the environment where it takes place. As a result, it is vital to ensure all costs are accounted for when comparing these types of costs.
Goods vs. Services Procurement Accounting
Goods vs. services procurement accounting encompasses many different topics, including how to account for goods and services received, inventory accounting and purchasing, invoice costing, and accounts payable. Goods are tangible items that can be purchased and physically delivered to customers, such as raw materials and finished products.
Services are intangible items a company provides that do not result in a product being produced, such as consulting services or software licensing. When goods are received, the receiving party must record the transaction as an asset on its books. When services are received, the expenses will be recorded as an expense on the service provider’s books.
Inventory accounting is used when you possess physical goods for sale. Inventory is recorded when it is acquired and then expensed over time as it is sold or consumed. Purchase invoices include a complete description of the product and should consist of itemized list prices for all transactions.
Invoice costing records expenses incurred in connection with a specific purchase order. Invoice costing also requires understanding key terms such as gross profit margin and net profit margin related to goods or service procurement.
Procurement vs. Purchasing
Procurement is taking an organization’s internal resources and making them available to external suppliers to buy goods and services. This includes purchasing raw materials, equipment, supplies, services, and other items an organization needs to run its business.
Purchasing is the process of purchasing goods and services from external vendors. It involves opening a line of credit, taking out a loan to buy items, and negotiating terms with vendors.
The distinction between procurement and purchasing is essential because it determines which department takes responsibility for managing purchases. In some cases, procurement may be considered “procuring,” while in others, it may be “purchasing” depending on whether the department that makes the purchases is located within the organization.
Conclusion
Inventory procurement is when a company purchases items for its inventory. This can include everything from buying new things to replenishing supplies. A company’s inventory consists of all the physical materials and products it owns, including raw materials, components, finished products, and finished-goods inventory.
Inventory procurement can be challenging because it involves a large amount of capital and many decisions, such as how much to order and when. Because of these factors, carefully planning your inventory procurement strategy is essential.
By definition, any business that purchases materials or equipment must be involved in inventory procurement at some level. So, whether your business is small or large, you are almost certainly involved in some aspect of inventory procurement.
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FAQs
Inventory procurement involves the activities involved in obtaining goods and services in a company.
The procurement lifecycle recognizes the integration between the process with the company. The procurement lifecycle is a non-linear and dynamic supply chain process accounting for various inventory operations.
Inventory procurement consists of three distinct stages mainly :
- Sourcing stage
- Purchasing stage
- Payment stage
EOQ (Economic order quantity) is used in cost accounting to measure the number of optimum product inventory levels that must be retained to avoid understocking and overstocking. This quantity is also recognized as the optimum lot size. It is a tool that computes the precise stock levels.
Primarily, procurement is a single aspect of a whole supply chain management. Procurement includes sourcing and obtaining goods and services, whereas supply chain management transforms the procured goods into finished products and distributes them to the final destination.
