The Importance of Procurement

Profitability thanks to procurement

Procurement officers play crucial roles in supply chain management and business process management as procurement directly impacts a company's profit and therefore success.

For organisations to be profitable, the cost of the goods they require needs to be less than the cost of the goods sold (taking into account any additional costs associated with the processing and selling of them). This balance of input versus output is refined and improved by individuals working in procurement roles, who work towards the best procedures to ensure that the organisation is acquiring all the goods and services it needs at an ideal price at all times.

By securing a great price, organisations are able to reduce their expenditure and increase their budgets and profit margins. Procurement's primary goal is to maximise the efficiency of transaction flow. Procurement is often responsible for up to 70% of an organisation's revenue, with small reductions in costs having enormous impacts on profits.

The $40,000 olive

A humorous and well-known example of sizable profit increases from seemingly insignificant cost cuts comes from American Airlines. In the 1980s American Airlines made headlines for saving a reported $40,000 by simply eliminating one olive from each passenger's salad. Such a small adjustment resulting in such significant savings as an excellent reminder of how important procurement is to an organisation's profits and success. 

The importance of Standards in procurement

Procurement and supply management involves buying the goods and services that enable an organisation to operate in a profitable and ethical manner. A large part of ethical procurement pertains to sustainability.

ISO 20400:2017 simplifies and streamlines the process and complex relationship between supply and demand when it comes to procurement. This Standard provides guidance to organisations on integrating sustainability within procurement (as described in ISO 26000). It is intended for stakeholders involved in, or impacted by, procurement decisions and processes.

This Standard encourages sustainable procurement, which is defined as making purchasing decisions that benefit the organisation, society, and the environment. This process of sustainable procurement involves ensuring that an organisation's suppliers are also behaving ethically and that the products and services purchased are sustainable, with purchasing decisions helping to address social, economic and environmental issues. ISO 20400:2017 provides guidelines for integrating sustainability into an organisation's procurement policy strategy and process and is the world's first international Standard to do so. 

Business optimisation at every level

Procurement is a strategic management partner in challenging times. With impacts on profitability, there is a need for a sustainable cost-reduction framework in order to optimise business operations. Procurement impacts almost every level of an organisation. It plays a crucial role in an organisation's profit margin and it is highly recommended that a well-thought and well-regulated procurement process and strategy be implemented in all organisations.