Procurement, Bill of Materials (BOM), and payments are vital parts of conducting business in the modern world. Still, many small businesses or people just launching their careers might be unfamiliar with these terms. If you fall into this category, then you're in the right place.

What is Procurement?

At its core, procurement is the act of obtaining goods or services that enable the business to operate profitably. Or, to put it another way, the goal of procurement is to get competitively priced items that deliver the most value.

However, different companies have different definitions of procurement. For example, some companies consider procurement to be all and every activity involved in this process - for example, gathering business requirements, sourcing suppliers, tracking the receipt of goods, and updating payment terms. In contrast, some businesses have a narrower definition of procurement that only involves specific activities like issuing purchase orders and making payments.

It's important to note that while procurement involves two companies (the buyer and the seller), only the activities involved in the buying process can be labeled as procurement. The activities of the seller are not classed as procurement.

What activities are involved in procurement?

  • Needs negotiation - Defining the requirements for procuring goods and services, including timescales and cost.

  • Vendor selection - Selection criteria vary between businesses and industries. However, most companies will be looking for delivery (whether the company can deliver on time), quality, cost, and past performance.

  • Payment negotiation, final selection, and contract negotiation.

  • Order management - Once you enter into a contract and begin procuring goods/services, you must examine any goods you receive and notify the seller of any issues.

  • Invoice approvals and disputes - Checking orders for discrepancies, typically using advanced invoice tools.

  • Recordkeeping - You will need to keep all documentation for bookkeeping and auditing. Ideally, all documentation will be stored in a central electronic location.

What is the Bill of Materials?

Put simply, a bill of materials is a comprehensive and complete list of all items needed to build a product. It includes raw materials, how much of each are needed, where to buy them, and how to assemble the product. You can think of a BOM as a shopping list and recipe for a specific product.

Many different types of BOMs exist, but the two most commonly used are the Engineering Bill of Materials (EBOM) and the Manufacturing Bill of Materials (MBOM). The EBOM outlines all the raw materials and components required to build a product, as well as the assembly process and any technical details and mechanical sketches of the product. The MBOM is a complete list of all parts needed to create the end product and their respective quantities. The procurement team depends on the MBOM to procure new stock and update the materials requirement planning (MRP) and enterprise resource planning (ERP) systems.

Payments

Of course, you need to pay to procure any goods and services. Today, much of this process has been digitized and automated with leading tools. For example, Procure-to-Pay (P2P) tools are becoming increasingly common in modern businesses due to their ability to improve efficiencies and streamline the procurement process. P2P systems integrate procurement processes with accounts payable to ensure timely procurement of goods and payment of suppliers.

The P2P process:

  • Purchase requisition - A team will outline the need for a new product or service and send a request to the procurement team. This activity needs to happen to kickstart the P2P process.

  • Purchase order - The procurement team goes through the list of approved suppliers to find a match based on the requisition data. Once they select the best supplier, they will create an electronic purchase order. This electronic PO is sent to the appropriate team for approval and, once approved, automatically transmitted to the supplier.

  • Receipt of goods or services - Once the goods are shipped, or the service has been completed, the supplier sends an invoice. Once your company receives the products, shipment information is added to the system.

  • Invoicing and invoice matching - Companies that use P2P systems will receive an e-invoice, often through the P2P supplier portal. The system then matches the invoice against the PO and the receipt of goods. If everything fits and meets requirements, the invoice is automatically entered into the approval process.

  • Approval - All invoices that pass the P2P matching process are sent to the company's ERP system, where a dedicated staff member will sign them off.

  • Payment - Payment is triggered and the supplier receives their funds. Payment methods differ from company to company, but electronic payments are preferred over checks and cash in the modern world.