Effectively navigating the procurement landscape requires a recognition and understanding of the various procurement method categorizations. Two such methods are operational procurement and project based procurement.
Operational Procurement Explained
Operational procurement, a term often used interchangeably with indirect procurement, centers around the routine acquisition of goods and services crucial for day-to-day business operations. The primary focus lies in securing items at optimal prices, with the right lead times, while ensuring quality and quantity standards. This procurement method frequently involves repetitive processes, emphasizing the importance of re-ordering and maintaining consistency.
Operational Procurement Examples
- Office Supplies: A small business engages in operational procurement by acquiring office supplies, such as stationery, printer cartridges, and office furniture, to support the administrative functions of the business.
- IT Services: A healthcare facility engages in operational procurement by acquiring IT services, such as software licenses, cybersecurity solutions, and IT consulting services, to support the management and security of patient data and healthcare information systems.
- Facility Maintenance Services: A university engages in operational procurement by acquiring facility maintenance services, including janitorial services, landscaping, and building repairs, to ensure the campus infrastructure is well-maintained and conducive to learning.
Project Based Procurement Explained
Project based procurement concentrates on procuring goods and services tailored to a specific project or initiative. This method involves recognizing the distinct requirements of each project and collaborating with new or unique suppliers.
Project based procurement is similar to direct procurement, but whereas direct procurement specifically relates to an organization’s purchase of goods or materials directly related to the creation of a manufactured good, project based procurement extends to the purchase of goods or materials often by a third party on behalf of a client directly related to the construction of a project.
Project based procurement finds application in diverse industries such as engineering, construction, manufacturing, energy, utilities, and information technology.
Project Based Procurement Examples
- Historical Building Restoration: A property owner hires a specialized construction company experienced in historical preservation to undertake the restoration project while adhering to preservation guidelines. The construction company engages in project based procurement to acquire the necessary materials and services to restore the unique building.
- Design and Implementation of a Water Treatment Plant: A municipality hires an EPC firm to enhance its water infrastructure. The EPC firm engages in project based procurement to acquire the necessary materials and services to construct the new water treatment plant, adhering to the project’s specifications and timelines.
- Construction of a Solar Power Plant: An energy company plans to build a solar power plant and engages in project based procurement for the necessary components. This includes soliciting bids from solar panel manufacturers, selecting a supplier based on technical specifications and cost considerations, and entering into contracts for the procurement of solar panels, inverters, and related equipment for the project
Operational vs Project Based Procurement: 5 Key Differences
To explain further, here are five key differences between operational and project based procurement:
1. Scope and Complexity
Project based procurement inherently presents more complexity, involving intricate schedules, changing scope, and numerous external stakeholders. Meticulous attention is required to manage these complexities, as missteps can lead to miscommunications and delays. On the other hand, operational procurement follows a more straightforward process with simple requisitions and purchase orders.
2. Risk
Project based procurement carries higher inherent risks due to the involvement of multiple stakeholders. It requires careful planning, communication, and coordination to ensure that all suppliers are delivering what is needed, when it is needed. In contrast, operational procurement benefits from repeatable goals and far less stakeholders, minimizing inherent risks.
3. Relationship with Vendors
In project based procurement, supplier relationships are often more complex and require greater coordination and collaboration. Success hinges on the quality of these relationships, necessitating coordination among multiple suppliers responsible for specific goods or services. Operational procurement, focusing on routine goods and services, requires less hands-on involvement from the procurement team.
4. Focus on Outcomes
Project based procurement involves dynamic and challenging outcomes that vary from project to project. Collaboration between the procurement and project teams is crucial for success. Operational procurement, however, centers on repeatable and clearly defined outcomes, challenging the procurement team to stay attuned to market changes and long-term agreements.
5. Changing Scope
When a project is initiated, the project scope is defined as the specific goals, objectives, deliverables, and timeline that must be achieved. However, as the project progresses, the scope can change due to a variety of factors, such as new requirements, changing business needs, and unexpected challenges. These changes can impact the procurement process, requiring project based procurement to be more dynamic and flexible. In contrast, operational procurement typically has a static scope, as the goods and services needed are predictable and repetitive. This allows for a more straightforward procurement process, with well-defined specifications and requirements that do not change significantly over time.
In Summary
Operational and project based procurement are two distinct methods of acquiring goods and services. While all organizations likely engage in operational procurement, not all organizations engage in project based procurement. Recognizing the nuances between operational and project based procurement is critical when formulating and adapting procurement strategies.
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