What is the Procurement Process? Definition, Types, and Steps
Are you tired of the complex and time-consuming process of procurement? Do you find yourself overwhelmed with endless paperwork, negotiations, and supplier management? If so, you’re not alone.
Many businesses face the challenges of navigating procurement processes. But with the right processes and automation, you’ll find it doesn’t have to be overwhelming.
In this article, we’ll go over its steps and give insights on how to optimize the process. Let’s start with a definition of procurement. Then we’ll get into why procurement processes are important. And why automation is the way to go.
Definition Of Procurement Process
The procurement process is about locating, agreeing to terms, and purchasing goods or services from an external source. It often involves tendering or a competitive bidding process. Think of it as a carefully orchestrated dance that businesses do to get the goods and services they need. If done correctly, It’s like a well-choreographed routine. One that allows everything to run smoothly from start to finish.
An effective procurement process involves the following steps:
- Identify needs for goods and services
- Identify and evaluate providers
- Negotiate contracts with suppliers
- Submit requisition, issue purchase order
- Complete payment
- Audit the goods/services received
- Maintain records of invoices
The procurement process starts with finding out what items a business needs and extends all the way to records management.
Procurement strategy is the roadmap, the game plan. It outlines how a business will go about getting the required goods and services. It includes budget, quality requirements, timeframes, and supplier relationships.
Goods and services are the foundation of any procurement process. Goods can be raw materials or finished products. While services are anything from consulting and maintenance to outsourcing email marketing.
Procurement vs Purchasing: They’re not the same
You may have heard the words “procurement” and “purchasing” used interchangeably. But they’re not the same thing. Let’s clarify the difference between the two.
Purchasing is a subset of procurement. It’s the act of buying goods or services, the transactional part of getting the required items. Placing orders, negotiating prices, and coordinating delivery. Purchasing is focused on the tactical execution of buying goods and services.
Procurement covers the entire process involved in sourcing and managing goods and services. It goes beyond making a purchase. Procurement includes planning, supplier evaluation, contract negotiation, and relationship management. It takes a more holistic approach to make sure that the organization’s needs are met.
To better understand the difference, let’s look at a real-world scenario. Imagine a company needs to refill its office supplies. The first step in the procurement process would be to create a purchase requisition. This document covers the specific items needed, quantities, and any special requirements. The procurement team then evaluates different suppliers and negotiates contracts. Then they choose the best option based on quality, cost, and reliability.
Purchasing focuses on the transaction of getting office supplies. While procurement takes a more strategic approach. Considering the entire supply chain and the long-term goals of the organization.
What are the 4 Types of Procurement?
There are 4 main types of procurement:
- Direct Procurement involves getting goods and services used in the manufacturing process. These are the raw materials and equipment required to create new products.
- Indirect Procurement refers to buying goods and services for internal use. These can include travel expenses, office supplies, and janitorial services.
- Services Procurement is the acquisition of services rather than physical goods. This could include fees paid to consultants, contractors, or software subscriptions.
- Goods Procurement focuses on the acquisition of physical goods. These tangible items are used in manufacturing, daily operations, or resale purposes. Goods procurement can include raw materials needed in production or even office furniture.
Knowing the difference between the types makes it easy to create procurement process flows. This is because you’ll know the necessary steps for each category. For example, for direct procurement, the process flow starts with a purchase requisition. Followed by supplier evaluation and selection, contract negotiation, and order placement.
Is Having a Procurement Process Necessary
You might be wondering if having a procurement process is really that important. It definitely is. Having a well-defined procurement process is key to keeping things running smoothly. So, what’s the big deal about the procurement process? Let’s break it down.
Having a good procurement process helps you identify any bottlenecks in your operations. You know those pesky delays and inefficiencies that slow everything down? Yeah, the procurement process helps you spot them and find ways to make things more efficient. That means shorter lead times, less headaches, and more productivity.
With a procurement process, you can take a good look at your strengths and weaknesses. Looking at each step in the process, you can figure out where you’re doing great and where you need to step up your game. This gives you the power to make smart decisions and improve performance.
Let’s not forget about the importance of building strong supplier relationships. With the procurement process in place, you can create trust and collaborate with your suppliers. This means better quality products or services and deliveries that are on time. And we all know that happy suppliers lead to happy customers.
There’s another big advantage: cost savings. Having a procurement process can save you some serious cash. When you test suppliers, negotiate contracts, and use your purchasing power, you can get the best prices and terms. And who doesn’t love saving money?
The 7 Steps of the Procurement Process
This is the step-by-step guide to getting the goods and services your business needs. Think of it as your roadmap to supply chain success.
Step 1: Identify Needs for Goods and Services
The procurement process flow starts with finding out what your business needs. Maybe it’s office supplies, raw materials for production, or consulting services. Whatever it is, identify those needs and get them down on paper. This helps you understand what you’re looking for and why.
Step 2: Identify and Evaluate Suppliers
Once you know what you need, it’s time to find the right suppliers. Your procurement teams should look for companies that can meet your needs and give quality products or services. Take a good look at their track record, reputation, and pricing.
Step 3: Negotiate Contracts with Suppliers
This is where you flex your negotiation skills and try to get the best deal possible. Hammer out the details, such as pricing, delivery schedules, and any special requirements. It’s all about finding that sweet spot.
Step 4: Submit Requisition, Issue Purchase Order
Once you’ve settled on a supplier and agreed on the terms, it’s time to make it official. Submit a purchase request or issue a purchase order to the supplier. This document outlines what you want to buy, in what quantity, and at what price.
Step 5: Complete Payment
Once you’ve received the invoice from the supplier, it’s time to whip out that checkbook (or more likely, fire up your online payment system). Make sure you pay on time and keep those financial wheels turning smoothly.
Step 6: Audit the Goods/Services Received
It’s important to audit what you received. Check that everything matches what you ordered and meets your quality standards. This step makes sure that you’re getting what you paid for. And helps you maintain control over supply chain management.
Step 7: Maintain Records of Invoices
Keep a copy of all invoices related to the procurement process. This helps with tracking expenses, financial reporting, and making sure everything is in order. Plus, it’s always handy to have a paper trail if any questions or issues come up later.
And there you have it, the procurement process simplified. With strategic procurement and the right team in place, you’ll have a well-designed procurement process.
Why Should You Automate Procurement Processes?
Effective procurement processes are necessary to easily get goods and services. Manual processes come with challenges that can be costly and time-consuming. That’s where automation can be a game-changer. Let’s look at some common procurement challenges, and how automation can tackle them.
Challenges in Procurement Processes
- Fragmented Supplier Base. Dealing with multiple suppliers can be complex and time-consuming. The procurement cycle becomes costly and inefficient. A fragmented supplier base can lead to confusing contracts and difficulties in negotiations.
- Maverick Spending. If there are many people responsible for procurement, it may lead to maverick spending. This will result in uncontrolled spending and a lack of transparency. It may also become more difficult to track expenses.
- Manual Processes. Manual tasks such as paperwork and data entry can cause errors, delays, and miscommunication. It slows down the entire procurement process, affecting productivity and accuracy.
- Difficulty in Tracking. Manually tracking purchase orders and delivery schedules can lead to confusion. It can create inefficiencies, and missed opportunities for savings.
Automation as the Solution:
Automation addresses challenges in procurement processes, like a fragmented supplier base. With procurement software, businesses can manage relationships, negotiate contracts, and coordinate deliveries.
Automation also tackles maverick spending. In software, you can create approval workflows that improve transparency and expense tracking. You can also decide which procurement team has permission. Not to forget that automation cuts down the errors and delays that come with manual processes.
You get a digital platform for tracking purchase orders, delivery schedules, and payments. This gets rid of confusion and helps identify savings opportunities.
Here are some key features to consider when choosing procurement software:
- Supplier Management. Look for software that lets you easily manage and maintain supplier information. You should be able to track performance and collaborate within a single portal.
- Purchase Requisition and Order Processing. Good software will let you automate purchase orders, taking away the strain of manual paperwork.
- Contract Management. Manage contract tracking, automated renewals, and alerts for expiration dates. Good procurement software should help you rest easy with better compliance and fewer risks.
- Automated Approval Workflow. The software should provide customizable workflows that send requests to the proper stakeholders.
- Spend Analytics. You need software to understand spending patterns and highlight cost-saving opportunities.
Examples of Procurement Software:
- SAP Ariba. Procurement software that includes strategic sourcing contract management, supplier collaboration, and spend analysis.
- Coupa: A cloud-based procurement software with tools for procurement automation. It has expense management, invoicing, and supplier management.
- Oracle Procurement Cloud: A service that integrates procurement processes with financial management. Handy features include procurement-to-pay cycles, supplier collaboration, and analytics.
Procurement Process Conclusion
Now you have a roadmap to efficient operations, cost savings, and strong supplier relationships. It’s about knowing your needs, picking the right suppliers, negotiating well, and tracking every step.
With the right software, you can manage suppliers, track expenses, and automate approval workflows. You don’t need to juggle many systems or drown in paperwork. If you’re ready to take your procurement processes to the next level, consider procurement software.
FAQs
What is procurement and its process?
- identifying needs
- selecting suppliers
- negotiating contracts
- issuing purchase orders
- receiving goods/services
- making payments
- maintaining records
What is the procurement lifecycle?
- planning
- supplier selection,
- contract negotiation
- order fulfillment
- performance evaluation
What are the types of procurement?
- Direct Procurement. Purchase of goods or services directly related to a company’s core operations.
- Indirect Procurement. Purchase of goods or services that are not directly tied to a company’s core operations. These can include office supplies or maintenance services.
- Strategic Procurement. Focuses on long-term partnerships with suppliers to improve efficiency. The goal is to reduce costs, and drive innovation.
- Tactical Procurement. Involves day-to-day purchasing activities to meet immediate needs.
- Centralized Procurement. An approach where a single department handles procurement for the entire organization.
- Decentralized Procurement: Involves many procurement departments or locations handling their own needs.
What are the documents used in procurement?
- Purchase Requisition: A document used to initiate a request for goods or services.
- Request for Information (RFI): Asks specific questions about the product or service. It’s often used to determine which vendors will get an RFP or RFQ.
- Request for Proposal (RFP): Used to solicit proposals from potential suppliers.
- Request for Quotation (RFQ): Used to request price quotations from suppliers.
- Purchase Order: A formal document issued to a supplier, outlining the details of a purchase.
- Invoice: Provided by the supplier to request payment for goods or services delivered.
- Contract: A legally binding agreement between the buyer and supplier, specifying terms and conditions.
What are the 5 R’s in procurement?
- Right Quantity: Makes sure the correct quantity of goods or services is procured.
- Right Quality: Procuring goods or services that meet the required quality standards.
- Right Time: Secures the timely delivery of goods or completion of services per the agreed-upon schedule.
- Right Place. Delivering goods or services to the correct location or point of use.
- Right Price. Getting goods at a fair price that aligns with the organization’s budget.
What are the 3 types of contracts?
- Fixed-Price Contract. Involves a predefined price for goods or services, regardless of the actual costs incurred by the supplier.
- Cost-Reimbursement Contract. Allows for reimbursement of the supplier’s actual costs incurred, along with extra agreed-upon fees.
- Time and Material (T&M) Contract. Combines elements of both fixed-price and cost-reimbursement contracts. Where the price is based on the time and materials used.
What are the 4 goals of purchasing?
- Cost Reduction. Procuring goods and services at the best possible price to cut expenses.
- Supplier Relationship Management. Building and maintaining positive relationships with suppliers to save costs and improve processes.
- Risk Management. Cutting risks associated with procurement, such as supply chain disruptions or contractual issues.
- Value Creation. Looking out for opportunities for innovation, and quality improvement through proper purchasing decisions.