A well-designed procurement process is vital for any business looking to stay competitive in today’s market. It can help reduce costs, improve efficiency, and enhance supplier relationships. But where do you start?
This guide explores the key components of building an effective procurement process, including defining procurement objectives, identifying the right suppliers, establishing clear communication channels, and measuring performance.
So, let’s dive in and learn what it takes to build an effective procurement process.
What is procurement?
Procurement is the process of acquiring goods and services from external sources. It’s a critical function that helps organizations obtain the necessary resources to operate effectively and efficiently. A procurement plan involves everything from identifying new suppliers and negotiating contracts to managing relationships and tracking performance.
The procurement function can vary depending on the organization and industry, but it generally involves several key steps. A dedicated procurement team or department often carries out procurement, but it can also involve cross-functional collaboration with other teams, such as finance, legal, and operations.
Also, Read: What Is Strategic Procurement?
What are the types of procurement?
There are two main types of procurement:
1. Direct procurement
Direct procurement is purchasing goods or services directly related to an organization’s core business activities. For example, a manufacturing company might engage in direct procurement to purchase raw materials or equipment.
2. Indirect procurement
Indirect procurement is purchasing goods or services unrelated to an organization’s core business activities. Some common examples of indirect procurements are office supplies, IT equipment, and consulting services.
Within these two main types of procurement, there are also different categories of goods and services that an organization may procure. These include:
1. Goods procurement
Goods procurement involves the purchase of physical products like raw materials, finished goods, or machinery.
2. Services procurement
Services procurement involves intangible services like consulting, marketing, or IT services.
Quick Read: What is Spend Management?
What is the procurement process?
The procurement process is a series of steps an organization follows to acquire the goods and services it needs from external sources. While the exact steps of the procurement function may vary depending on the organization and industry, here are some common stages in the procurement lifecycle:
1. Identify requirements
The first step involves determining the quantity, quality, and specifications required.
2. Identify potential suppliers
Identifying potential suppliers involves conducting research, soliciting bids, or leveraging existing relationships.
3. Evaluate proposals
This step involves evaluating proposals and selecting the best supplier(s) that best meet the requirements.
4. Negotiate contracts
Once a supplier has been selected, the organization can negotiate a contract outlining the agreement’s terms and conditions.
5. Manage supplier relationships
After the contract is in place, the organization must manage and form long-term relationships with the supplier to ensure they meet their obligations and deliver the goods or services as agreed upon.
6. Measure and track performance
Finally, the organization will measure and track supplier performance to ensure that they meet the agreed-upon standards and that the procurement function delivers the desired outcomes.
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Understanding the procurement process
Here’s a step-by-step example of how the procurement function might work in practice for a company that needs to purchase a new software system to improve its operations.
- The first step would be to identify the need for the software system. This might involve consulting with various departments to determine their needs, reviewing budgets and forecasts, and assessing existing systems or processes.
- Once the need has been identified, the company would create a request for proposal (RFP) or quotation (RFQ) to solicit bids from potential software vendors. The RFP or RFQ would include details about the software system requirements, such as functionality, compatibility, security features, and other relevant information.
- Once the RFP or RFQ has been sent out to potential vendors, the company will evaluate the bids received based on various criteria. This might include essential factors like the vendor’s track record and the price.
- After evaluating the bids, the company would select the software vendor that best meets its needs and negotiate a contract. The contract would specify the terms and conditions of the software purchase.
- Once the contract is finalized, the company monitors the vendor’s performance to ensure they meet their obligations.
Also, Read: Sourcing vs Procurement
Components of the procurement process
The procurement function comprises three main components: people, process, and paperwork. Let’s break them down one by one.
First, there are the people involved in the process. This includes everyone from the procurement team responsible for managing the process to the stakeholders identifying the need for goods or services to the suppliers providing those goods or services. Everyone involved must understand their roles and communicate effectively to ensure the process runs smoothly.
The procurement function typically consists of several steps, including identifying the need for goods or services and evaluating supplier bids. The general idea is to follow a structured and systematic approach to ensure the organization gets the best value for its money.
While it might not be the most exciting part of the process, paperwork is crucial. It includes everything from creating the initial RFP or RFQ to reviewing and evaluating bids from suppliers and negotiating and finalizing contracts.
Proper documentation is essential for tracking the procurement function, ensuring compliance with applicable regulations, and minimizing the risk of supplier disputes.
Quick Read: 10 Best Purchasing Software for Organizations
Steps in the procurement process
Here are the nine steps that make up the procurement function:
- Step 1: Identify goods and services requirements
The first step is to identify the goods or services that the company needs.
- Step 2: Submit a purchase request
Once the need has been identified, the company will create a purchase request to initiate the process.
- Step 3: Choose vendor
After the purchase request has been submitted, the procurement team will evaluate potential vendors based on price, quality, delivery times, and the supplier’s track record.
- Step 4: Negotiate the deal
Once a vendor has been selected, the procurement team will negotiate a contract outlining the purchase terms and conditions.
- Step 5: Create a purchase order
The procurement team will create a purchase order (PO) that outlines the purchase details once the contract has been finalized.
- Step 6: Receive the delivered goods
After the vendor has delivered the goods or services, the company will verify that they have received everything as specified in the purchase order.
- Step 7: Match records to process payments
Once the goods or services have been received and verified, the company will match the records to the purchase order and invoice to ensure everything matches up.
- Step 8: Make payments to vendors
After verifying everything and using a three-way matching function, the company will process payment to the vendor according to the agreed-upon terms and conditions.
- Step 9: Recordkeeping
Finally, the procurement team will maintain records of all the procurement activities, including purchase requests, vendor evaluations, contracts, purchase orders, and payment records.
Suggested Read: Purchase Requisition and Purchase Order
Procurement process flowchart
Start of the procurement process
Stages in the procurement process
The procurement process can typically be divided into three stages- sourcing, purchasing, and receiving. Here’s a breakdown of each stage of the procurement process:
1. Sourcing stage
In the sourcing stage, the company identifies potential suppliers and evaluates them on quality, price, delivery time, and past performance. This stage is critical because it ensures that the company selects the best supplier for their needs.
2. Purchasing stage
This stage involves creating purchase orders, negotiating contracts, and processing supplier payments. The purchasing process is where the procurement team will be most involved in the transactional aspects of the process.
3. Receiving stage
In the receiving stage, the company receives the goods or services they have procured from its suppliers.
During this stage, the procurement team will verify that the goods or services have been delivered as specified in the purchase order. They will also inspect the goods or services to meet the company’s quality standards.
Also, Read: What is Strategic Sourcing?
Procurement vs. purchasing vs. supply chain
Here’s a breakdown of the differences between these three concepts:
The process of identifying the need for goods or services and selecting a supplier to provide them.
Sourcing, vendor selection, contract negotiation, purchasing, supplier relationship management, and recordkeeping.
Focuses on selecting the best supplier based on quality, price, delivery times, and past performance.
Cost savings, supplier performance, risk management, and compliance.
The process of buying goods or services from a supplier.
Creating purchase orders, processing payments, managing contracts, and ensuring compliance with regulations.
Focuses on the transactional aspects of buying goods and services from a supplier.
Purchase price variance, purchase order accuracy, on-time delivery, and supplier performance.
The process of managing the flow of goods and services from the point of origin to the point of consumption.
Planning, sourcing, manufacturing, delivering, and returning products.
Encompasses the entire process of bringing goods and services from the point of origin to the point of consumption, including procurement and purchasing activities.
Supply chain costs, order fulfillment time, inventory management, and customer satisfaction.
Importance of an efficient procurement process
An efficient procurement function is essential for the success of any organization. It can bring the following benefits to an organization:
1. Cost savings
An effective procurement function can ensure organizations get the best value for their money. It includes negotiating better prices with suppliers, identifying cost-saving opportunities, and reducing wastage.
2. Improved supplier relationships
Organizations can build strong and long-lasting relationships with their suppliers by working closely with them and maintaining clear communication lines. Goods and services will be delivered on time and to a high standard, which can lead to improved customer satisfaction.
3. Reduced risk
Thorough supplier evaluations and implementing robust contract management processes help organizations in many ways. They mitigate the risk of supplier failure and fraud that can impact their operations.
4. Improved operational efficiency
Organizations can free up resources to focus on other business areas by streamlining the processes and reducing the resources required to acquire goods and services. It can include research and development, marketing and sales, or other areas critical to the organization’s success.
Quick Read: What is P2P Cycle: Procure-to-Pay Process
Best practices to ensure an efficient procurement process
Here are some best practices that your organization must follow to make their procurement process efficient:
1. Develop a clear strategy
You should create a well-defined procurement strategy that outlines your goals, objectives, and priorities to ensure procurement activities are aligned with business objectives. This strategy should consider market trends, supplier capabilities, and risk management.
2. Standardize the process
It helps increase efficiency and reduce errors. You should develop standard processes for tasks such as creating purchase orders, managing contracts, and processing payments.
3. Use technology to automate processes
Technology can automate many functions, reducing the time and effort required for manual tasks. For example, e-procurement systems can help with the automation of supplier selection and purchase order creation tasks.
4. Establish clear communication channels
Effective communication ensures the process runs smoothly. Establish clear communication channels between procurement teams, suppliers, and other stakeholders to ensure everyone is on the same page.
5. Monitor supplier performance
Monitoring supplier performance ensures suppliers meet their obligations and deliver high-quality goods and services. List key performance indicators (KPIs) to measure supplier performance and regularly review supplier performance against these metrics.
6. Conduct regular supplier assessments
It is essential to conduct regular supplier assessments to ensure that suppliers continue to meet organizational needs. These assessments can include evaluating suppliers’ financial stability, ability to deliver goods and services on time, and compliance with regulatory requirements.
7. Foster strong supplier relationships
Building strong relationships with suppliers will ensure your organization can get the goods and services it needs at a fair price. Also, focus on communicating regularly, providing feedback, and collaborating on joint initiatives.
Recommended Read: Centralized and Decentralized Purchasing
How to measure the success of your procurement process?
Here are some key indicators you can use to consider for your procurement process:
1. Cost savings
The primary objective of procurement is to secure goods and services at the best possible price. Cost savings should thus be the most crucial metric. You can calculate cost savings by comparing the prices of goods and services purchased through procurement with those of the same goods and services bought from other sources.
2. Supplier performance
Measure the supplier performance by assessing their adherence to contract terms, quality of goods and services, delivery times, and customer service.
3. Procurement cycle time
A shorter procurement cycle time means you can respond quickly to the changing needs of your organization.
Look at compliance adherence by assessing the percentage of procurement transactions that adhere to your policies and regulations.
5. Customer satisfaction
Understand customer satisfaction by conducting surveys or obtaining feedback from internal customers.
6. Risk management
Identify the effectiveness of your risk management by assessing the frequency and severity of procurement-related risks.
Also, Read: Purchase Order Automation Process
Enhancing your procurement process with technology
In today’s digital age, many tools and software are available to automate and streamline your procurement function. It can result in saving time, reducing errors, and increasing efficiency. Here are some ways you that will help enhance your procurement function with digital procurement tools:
1. Use a procurement management system
A procurement management system allows you to manage the entire process, from sourcing to payment. You can automate purchase order creation, supplier invoice processing, and supplier management, allowing your procurement team to focus on more strategic tasks.
2. Implement e-procurement
E-procurement is the process of purchasing goods and services online. You can streamline the process, reduce manual tasks, and ensure compliance with procurement policies and procedures.
3. Use spend analysis tools
Spend analysis tools allow you to analyze your spending patterns and identify areas for cost savings. You can track spending based on category, supplier, and department. Furthermore, this data will be helpful in negotiating better deals with suppliers and reduce unnecessary spending.
4. Adopt supplier management software
Supplier management software allows you to manage your relationships with suppliers more effectively. You can track supplier performance, manage contracts and agreements, and monitor compliance with procurement policies and regulations.
Also, Read: What is Expense Management?
Top 5 procurement software for your business need
Here are five procurement software options you can consider depending on your business needs:
1. SAP Ariba
It is a cloud-based procurement and supply chain automation solution. It links suppliers and buyers on a single platform. There are several features like supplier management, contract management, and e-procurement, which large enterprises widely use.
Oracle NetSuite WMS is a hybrid-deployment solution. Organizations can streamline their operations to reduce handling costs. It offers features such as order and inventory management and is best suited to warehouse management.
Procurify helps enhance the spend culture by tracking purchases and expenses. It offers features such as purchase order management, invoice management, and invoice approval workflows.
4. SAP SRM
It is an online supplier relationship management module. You can manage source-to-pay and purchase-to-pay operations with SAP SRM. It offers features such as supplier management, sourcing, and contract management and is widely used by large enterprises.
It focuses on making sourcing projects more efficient by shortening sourcing cycles. The software offers features like e-sourcing, contract management, and supplier management, designed for mid to large-sized businesses.
Streamlining your procurement process is critical in achieving operational efficiency and enhancing overall productivity. Your organization can identify potential bottlenecks and implement best practices to streamline its operations by understanding the various stages of the procurement cycle.
Measuring the success of the procurement function and enhancing it with technology can further improve the efficiency and effectiveness of the procurement process. With the right approach and tools, your organization can focus on its core competencies and achieve the desired procurement objectives.
The procurement process in business is the steps a company takes to acquire goods or services from external sources. It involves identifying the need, finding potential suppliers, negotiating contracts, and managing supplier relationships.
The procurement process cycle is a series of steps to acquire goods or services. It starts with identifying the need and ends with receiving and paying for the goods or services.
PMO in procurement refers to a Procurement Management Office, a centralized team that manages and oversees procurement activities across an organization. The PMO ensures that procurement policies and procedures are followed, and procurement activities are efficient and effective.
Procurement is typically the responsibility of a company’s purchasing or procurement department.
Procurement risk is the potential for a procurement process to fail or for an organization to experience negative outcomes related to procuring goods or services. These risks include supply chain disruptions, quality discrepancies, contract disputes, and legal or regulatory compliance issues.
Procurement documents are typically prepared by a company’s purchasing or procurement department. It includes input from project managers, legal advisors, and finance teams.
To optimize your procurement process, you can improve efficiency, reduce costs, increase transparency, and enhance supplier collaboration. You can achieve it by automating procurement tasks, consolidating suppliers, and implementing the best practices.
The five steps of the procurement process include identifying the need, planning, and budgeting, selecting suppliers, ensuring price negotiations, and managing supplier relationships.
The seven stages of procurement include identifying the need, conducting market research, developing a procurement strategy, soliciting bids, evaluating proposals, selecting suppliers, and negotiating contracts.
An example of procurement is a company purchasing raw materials from a supplier to manufacture its products or a government agency procuring goods or services from a vendor to support its operations.
The main challenges in procurement include supply chain disruptions, supplier management, compliance with legal and regulatory requirements, cost control, and stakeholder engagement.