Finding a great EPC firm is an integral part of completing a wide range of different industrial projects including new facilities construction, renovations, and routine maintenance. However, it is common for companies to get so fixated on an EPC firm’s experience and capabilities with regard to engineering and construction that they overlook or downplay the importance of the third piece of the EPC triad: procurement. In this article we’ll take a look at what procurement is, how it works, and what the benefits of great procurement services are.
What Is Procurement?
Procurement refers to the acquisition of goods and services from sources external to the company in question. Thus a few examples would be purchasing the chemical feedstock for a petrochemical plant so that the feedstock can be turned into a product fit for sell, or acquiring the lumber, machinery, and equipment needed for a new construction or renovation project, or engaging the services of an independent contractor or other service company. In simplest terms procurement is the process of acquiring whatever resources are needed to allow a company to function.
Types of Procurement
There are two main types of procurement: direct procurement and indirect procurement.
- Direct Procurement – Direct procurement refers to the acquisition of parts and components that are directly used in the manufacturing of a product. To go back to our above example it would include the chemical feedstock used by a petrochemical plant. Direct procurement also encompasses sophisticated parts and materials if these too are used in an end product. For example, a company selling computers might need to procure circuit boards or other electronic components for use in their end product. Direct procurement is closely related to supply chain management.
- Indirect Procurement – Indirect procurement refers to the acquisition of parts and components that are not directly involved in the company’s end product, but which are nevertheless necessary to facilitate or improve operations. A simple example would be office supplies or office furniture. A more complex example would be consulting services, heavy equipment, or independent contractors.
Steps Involved in Procurement
Though the basic concept of procurement is straightforward and easy to understand, there are nevertheless several distinct steps that are involved in nearly every procurement undertaking. Following these steps ensures that the company ends up with quality, affordable goods and services that are delivered or rendered in a timely, reliable fashion.
- Identification of Need – The first step is identifying the need for a particular set of goods or services. This may seem obvious, such as recognizing the need for raw materials or for an outside company to build a facility, but it also encompasses an analysis of what types of products and services will be necessary to fill this need, basically all of the given requirements and specifications. Identifying a need may also be more challenging if it is undertaken before the company is faced with the given problem, situation, or circumstance since it would then involve often complex predictions of the future.
- Supplier Identification – Once the need has been identified it is time to identify who can fulfill this need. This will generally involve determining if it is something the company can and should fill internally, or if it is something that should be procured from outside sources, in which case the procurement process continues. Supplier identification will also involve making decisions about whether or not to use a single supplier or multiple suppliers, and of course the preliminary researching of those suppliers.
- Supplier Communication – After the potential supplier(s) has been identified it is time to gather more comprehensive information. During this phase requests for price quotes, proposals, and references are made. It is also common to investigate supplier policies regarding returns, exchanges, installation, warranties, and maintenance etc.
- Negotiation – During the negotiation phase: price, delivery times, and customization possibilities are negotiated and established.
- Supplier Liaison – During the supplier liaison phase the supplier is evaluated based on performance, support, quality, and service. It is typical to keep a file or scorecard to help the company decide in future whether to continue with the current supplier or considering finding a new supplier.
- Logistics Management – Logistics management involves handling all of the logistical aspects of the process such as expediting shipments, delivery, payment, installation, or training.
- Tender Notification – Though not present during all procurement undertakings, some companies attempt to encourage competition and reap rewards such as lower prices, faster service, etc., by using tender notification. Tender notification is normally done online through email or software to alert other potential suppliers of an opportunity.
The Benefits of Procurement Services
Because procurement plays such a fundamental part in the supply process as well as in supporting company projects and development, finding an EPC company, or establishing an internal procurement department, that delivers outstanding procurement services is a major pathway to success. Some of the many benefits of procurement services include:
- Lower Costs – Good procurement services can help your company get the best value for its money. That is because the procurement process involves comprehensive research about cost and value. A strong procurement company may also be able to negotiate better prices and value with suppliers and independent contractors because these companies will be eager for continued business.
- Streamlined Inventory – For most companies warehouse and floor space is at a premium. Keeping extra inventory can get expensive while not having enough can lead to serious shortages and unexpected crises. A good procurement division will keep inventory streamlined, ensuring that parts, materials, and equipment are on hand when they are needed, but not taking up valuable space while they are not.
- Thorough Research – Researching lower costs and better value is only part of a procurement company’s research responsibilities. Good procurement will also ensure that the materials and services being used are in line with all local, state, or federal regulations and that products and services will continue to be available.
- Better Quality – Procurement services also ensure that the quality level of the goods or work being procured is up to the standards of your company. Good procurement services help protect a company against contractors and service companies that provide shoddy workmanship and against parts and equipment that are prone to frequent breaking or shortened lifespans.
- Smoother Logistics – Communicating and conferring with suppliers, vendors, and contractors can literally be a full time job depending on the size of the company and the scope of the project. Tasking regular employees with this challenge, on top of their day-to-day responsibilities can be a recipe for disaster. A dedicated procurement department or procurement company can take the headache out of complicated logistics.
Good procurement is the foundation upon which a company’s success is built. Polaris is proud to offer state-of-the-art, industry-leading procurement services. We are committed to helping our clients reap the benefits of outstanding procurement services while buffering them from the problems that can arise through poor planning and ineffectual procurement management.