What is Procurement Planning?

Procurement planning is the process used by companies or institutions to plan purchasing activity for a specific period of time. This is commonly completed during the budgeting process. Each year, departments are required to request budget for staff, expenses, and purchases. This is the first step in the procurement planning process.

The budgets for all the departments are then reviewed, and in an organization that is committed to procurement planning, the accountants spend the time to find common purchasing requirements. Based on the budgets submitted, they may direct departments to work with central purchasing to combine their planned spending for specific commodities. This process works best in an organization that is committed to reducing costs. Issues surrounding delivery dates, contract compliance, and customer service issues must be resolved internally before going out to contract.

The primary concept of procurement is that advanced planning, scheduling, and group buying will result in cost savings, more efficient business operation, and therefore increased profitability. There are four steps that form the basis of procurement planning: group buying, just in time delivery, negotiated bulk pricing, and reduced administrative overhead.

Group buying is the process of combining the total resource requirements for different departments and creating one purchase order. The departments can be physically located in a range of buildings, with the delivery dates, quantities, and conditions listed in the purchase order. This practice is increasingly common in government and public sector firms, where the same item can be purchased for a range of different institutions.

Just in time delivery is a central component of procurement planning. Under this model, the cost of storage is carried by the supplier. They are responsible for ensuring the purchased quantities of materials are ready and available for delivery at the specified dates and times. This type of delivery requirement is typically combined with group buying, keeping storage costs down.

Bulk pricing and negotiating is very important when completing procurement planning. Organizations that combine the total quantity required for a specific period of time are able to get lower pricing, based on a specific level of ordering. Negotiations are typically completed by the procurement director or senior buying agent.

Administrative overhead is the cost to the organization for the entire procurement to pay cycle. This includes the salaries and support costs for procurement staff, invoice processing, check production, and resolving of vendor inquiries. An organized, managed process eliminates a significant amount of these costs, as they are incurred only once for every commodity.