Buying goods and services for your business might sound simple, but it’s not. Procurement is a critical business function that must be taken seriously and performed correctly. Only by fully grasping each step in the procurement process can a business expect to buy the right goods from the right supplier at the right price. With this article, you will be able to understand the procurement process and get tips on creating an effective one for your company.
But first, a quick recap. What is the meaning of procurement? If you’ve read our first blog on the subject, ‘Procurement 101’, you’ll know that procurement is a business function that governs an organisation’s purchasing decisions. It includes various activities such as supplier evaluation and selection, contract negotiation, and purchasing. It is evident from this procurement definition that procurement is made up of a series of steps. Hence, the term procurement process.
Efficiency is of vital importance in procurement. Organisations can reap enormous benefits from a competent and streamlined process of procurement, primary among them being cost savings and high profitability, which directly aid business expansion and growth. To improve efficiency and effectively deal with the turbulences in global trade today, a strategic approach to procurement is better than a traditional one. Strategic procurement relies on the use of data and analytics to improve decision-making and maximise savings without compromising on cost.
To know about procurement and its types, principles, and objectives, read our ‘Procurement 101’ article.
An efficient procurement process does more than serve a short-term need. It takes the best approach to serving that need and gets the best result. To pass the efficiency test, your procurement process must:
The many procedures of procurement must have a formal and streamlined structure. Each task or activity must move smoothly and efficiently following standardised steps. All the departments involved – purchasing, finance, procurement, legal, etc – must work in collaboration and cooperation to avoid confusion, errors, and worse. It is this need for a structured system that has given rise to the term ‘procurement process flow’ and also why the procurement process is also called a procurement lifecycle.
Global supply chains have recently gone through major upheavals such as labour and raw material shortages, extreme weather, and political tensions (the war in Ukraine, for instance). As many of these problems will continue to persist, businesses cannot afford to mess up on an extremely important front – managing their suppliers. Good supplier management is intrinsic to effective procurement. A trustworthy and dependable supplier base is only possible if the selection of vendors is based on sharp evaluation and verification, communication is prompt and seamless, contract negotiations are thorough, and rapport-building is a part of the process.
Delays are inevitable in procurement, especially when caused by unavoidable factors (such as a workers’ strike at the supplier’s factory or a sudden storm at sea while your shipment is in transit). But if you suffer losses from frequent delays and missed deadlines that are largely avoidable, there’s something wrong with your procurement procedure. Procurement hold-ups can boil down to any number of reasons – delays in submitting purchase requisitions or purchase orders, provision of incorrect or incomplete specifications of goods, prolonged contract negotiations, and late approvals, to name a few. A single hold-up can cause a chain reaction of delays, which not only affects a company’s finances but also its reputation. Efficient procurement processes demand proper planning. Work must be delegated efficiently and responsibility assigned, people must be held accountable for their actions, and departments must be taught to collaborate and cooperate with each other to keep delays to a minimum.
Compliance is non-negotiable in procurement as it not only improves efficiency but, perhaps more importantly, prevents fraud, legal trouble, and financial loss. Procurement managers must be strict with suppliers to make sure they meet safety and quality standards. They must also confirm that the procurement process complies with the laws and rules of the countries of origin and destination, which might be different. Thoroughly vetting potential suppliers before signing contracts with them, holding periodic reviews of their performance, and conducting audits in the procurement department to identify and fix areas of weakness are some ways in which the procurement process can strengthen compliance.
Apart from improving operational efficiency and productivity, an effective procurement procedure comes with significant financial benefits:
This is the main focus area of procurement. An effective procurement procedure reduces the cost of purchasing goods and services by holding price negotiations. Another cost-saving move is to invite bids from multiple suppliers to get the most competitive rates. This is called tendering. There are different types of tenders. An open tender allows any interested supplier to make a bid. A selective tender is open to shortlisted suppliers and is usually used when the goods to be procured have complex requirements. A limited tender, on the other hand, is by invitation only and is mainly issued by governments for projects related to national security. Other ways to reduce procurement cost include buying in large volumes or offering suppliers a bundled contract for more than one product. An often overlooked way by which businesses can make significant savings is to review each purchase to check if it is absolutely necessary or if it can be tweaked.
When businesses spend less, they save more naturally, which means they have the funds they need to grow their business. Saving on costs is the most effective way of maximising profitability.
As we mentioned earlier, a procurement process is a series of steps involved in purchasing goods and services for a business’ needs. It is also called a procurement lifecycle as the steps are interconnected and must flow smoothly to get the best result. Procurement processes are ruled by the three Ps:
The procurement lifecycle can be effectively broken down into five broad stages:
This stage involves a) identifying what you need to buy, b) developing an effective procurement strategy, c) identifying and researching suppliers to source the goods from, and d) setting a timeframe for delivery. Important decisions that set the tone for all the procedures of procurement are taken at this stage and team members are assigned. A solid plan is the foundation of an effective procurement process.
At this stage, you shortlist the best potential suppliers and decide how you want to source your goods. There are many ways of doing this. We’ve already explained the tendering process. You can also invite suppliers to submit a quotation. A quotation is a fixed price bid that cannot be modified once accepted whereas a tender provides the estimated cost of supplying the goods. Tenders and quotations are both part of competitive bidding, which is useful when businesses require large volumes of goods, have a competitive supplier market to pick from, do not have a preferred supplier, and have the time to request and evaluate quotations and tenders.
Bids are reviewed and the best one is chosen on the basis of price, quality, delivery time, and other such criteria. Most businesses have an ad-hoc team handling bid evaluation. To avoid delays, companies must take care to set up the team in advance and ensure that it completes the evaluation in a timely manner. An inexperienced team might fall into the trap of picking the lowest bid, which is not necessarily the best. Their job is in fact to look for the bid that offers the best value in terms of total procurement cost, quality, time, compliance, and reliability.
The chosen bid is then sent to the approval team, which finalises or rejects it after conducting its own assessment. Once the bid has been approved, the supplier is informed of the decision.
At this stage, contract terms – such as price, timeline, etc – are finalised. Potential problem areas should be identified to avoid complications down the line. A watertight contract is a must if you don’t want to face quality, time, and compliance issues later on when it is too late to make course corrections.
The five stages of procurement can be split further into nine distinct steps:
After discussions with departments across the board, the procurement team identifies what needs to be bought for each department. This includes previously bought goods as well as new goods. Based on its findings, the team prepares a forecast of goods to be procured for a given period. This is called a procurement plan. A well-defined plan helps identify areas where savings can be made, provides complete visibility into spend areas, and aids budgeting. The plan must be flexible enough to account for on-the-spot purchases, which while not advisable cannot be avoided at times. This first step in the procurement process requires strategic planning at an organisational level, including the study of the company’s historical data, latest market trends, and risk assessment.
Next, potential suppliers are identified and assessed on the basis of pricing, quality, supplier reputation and location, provision of customer service, warranties and guarantees, and so on. There are many ways to look for suppliers. Some surf the net or go by word of mouth. More structured processes include sending requests for quotation (RFQs) or requests for tender (RFTs) to shortlisted suppliers. Based on their response, the best supplier is picked. This step is fairly straightforward if the supplier already has a contract with your business. More due diligence and verification is required if you have never done business with the supplier.
This all-important step determines price, delivery time, compliances (safety, quality, legal, etc) and other terms and conditions. Contract negotiators work with the aim of minimising risk, maximising value, and setting the stage for a mutually beneficial relationship with the supplier. They must look into discount opportunities and review old agreements to ensure unrealistic and disadvantageous terms don’t make it into the contract. Competitive bidding can narrow the scope of negotiations to an extent because supplier quotations are predetermined and non-negotiable. But in the absence of competitive bidding, negotiations can get fierce. Negotiations are common when a) the buyer and supplier need agreement on multiple factors such as price, quality, time, risk-sharing, and so on, b) the buyer needs a supplier quickly and doesn’t have the time to invite bids, c) the supplier cannot determine the final price and risks in advance, and d) the supplier needs time to produce and deliver the goods. The contract is a legally binding document and comes into force after the supplier accepts the purchase order (see below).
After supplier selection and contract negotiation, the procurement team raises a purchase requisition (PR). This is an internal document describing the goods or services required, their quantity and price, the requesting department, and details of the supplier. It is merely used to get permission to procure the goods and is not a legal document. However, a PR is still important because it helps the accounts department plan future spend. If not approved, the purchase requisition is sent back to the concerned department with the reason for its rejection.
Once the purchase requisition has been approved, the accounts department submits a formal purchase order (PO) to the supplier. The PO is more detailed than the PR with a description of the goods, their quantity, price, and delivery time along with quality requirements, material specifications, method of delivery, order due date, payment terms, shipping address, and a unique PO number. Purchase orders are important documents as they confirm the supplier and also help during the checking of the delivered goods. For goods that are required frequently and routinely, you may choose to submit a blanket purchase order with your supplier. A blanket PO is valid for a longer period of time (usually a year) than a regular PO and does away with the requirement for separate purchase orders each time the need for goods arises.
On receiving the purchase order, the supplier sends the buyer an invoice with the price of the goods. The invoice needs to be approved by the buyer before they release payment.
Once the goods have been delivered, they are checked for quality issues and other discrepancies, if any. A three-way checking where the goods are inspected against the invoice and purchase order is recommended.
If the goods pass the inspection, the invoice is approved and payment released to the supplier. In some cases, the buyer might make the payment immediately after receiving the invoice, if this is a condition in the contract. However, payment after the receipt and inspection of goods is advisable. It is also fairly common practice to make a partial payment at the time the purchase order is submitted and pay the remaining amount after the delivery of goods as this helps the supplier fund their production process. Extra diligence is necessary during invoice approval so that you don’t end up paying for sub-standard goods. Approval hold-ups must also be averted as these can cause delivery delays and financial loss and harm relationships with suppliers.
For the final step, the purchase requisition, purchase order, and invoice must be recorded and a proper file of the entire procurement process maintained for future reference and audit. The data can be used for future analysis, which improves decision-making and helps in budgeting. Records are also necessary in the event of a dispute with a supplier. Digital records are preferred as they require no physical space, are secure and easy to access, and not easily lost or misplaced.
Optimised procurement processes are your business’ best defence against supply chain uncertainties. Adopt these best practices for a smooth and successful procurement experience for your business:
This allows you to compare prices and pick the deal that gives you the best value for your money.
Inform them about responsibilities, expectations, and risk-sharing. An open line of communication improves collaboration, responsiveness, transparency, and trust, and helps avoid confusion and misunderstanding. Your efforts will also encourage your suppliers to be honest and transparent about any problems that might affect delivery timelines, thus allowing you to make contingency plans.
By investing in procurement software and solutions, automate routine and repetitive tasks such as data entry, reorders, invoices, and approvals. This saves time, increases efficiency, and does away with human error. Digitisation improves the quality of your data and, by extension, your decisions. It opens the door to data analytics, which you can use to identify cost-saving opportunities, plan your spend, and manage risks efficiently. Digital procurement processes also allow your staff to focus on tasks that cannot be handled by machines (innovation, decision-making, etc).
Have well-defined and actionable steps for each stage of the procurement lifecycle. While cost reduction is the primary objective of a procurement strategy, make sure to include comprehensive sections on supplier management, risk management, compliance procedures, quality monitoring, and so on.
Procurement enablers are the pillars on which your procurement procedures stand. They are assets your business already has. Using them in the right way can make the difference between success and failure:
In other words, the people – one of the three Ps – in charge of your procurement processes. In today’s highly competitive and challenging business environment, you need people with the right skills and abilities. At the very least, they must excel in:
Despite human resources being an important pillar of procurement, 39% of procurement leaders in the Asia Pacific region (50% globally) say their teams don’t have the capability to deliver their procurement strategy, according to a Deloitte survey. This underlines the importance of investing in procurement training for your staff.
Modern procedures of procurement owe their efficiency to technology. We’ve already mentioned the importance of digitising and automating procurement activities to increase efficiency, refine decision-making, and enable research and analysis. While digitisation improves data collection, cloud-based systems provide a place where you can store this data securely. In the age of globalisation, you might be located worlds apart from your suppliers and customers. But with the existence of online meeting apps, you can erase the physical distances easily and meet conveniently. Similarly, shared software platforms ensure visibility between supply chain partners, GPS systems help you track your goods in real time while in transit, and payables management solutions make invoicing and payments convenient, prompt, and safe. Technology greatly increases scheduling and planning efficiency – via automatic invoicing and scheduling of orders, for example. All in all, technology improves collaboration, cooperation, and communication in procurement.
A strong structure that effortlessly brings together all the different procedures of procurement is indispensable. This structure must include a formal and standardised communication system. It must assign clear responsibilities and name relevant authorities at each step of the procurement process (authorities for approvals or evaluations, for example). It must also put the right controls in place to ensure procurement process flow is maintained. The allocation of authority and control depends on the type of procurement model a business follows. Some companies prefer a central-led model where there might be more than one point of authority along the procurement chain but a single central authority stands above them all. The strength of a central-led procurement model is that it is built on cross-functional teams (people from multiple departments working towards a common goal). This ensures coordination and flexibility in processes and even distribution of work. At the same time, strategic decisions go through the central authority to ensure there are no deviations. An important cross-functional team to have in your procurement model is one that is responsible for coordinating with and managing your suppliers.
You can read more about procurement models in our Procurement 101 article.
An optimal procurement process is born of regular reviews and improvements based on the findings. To evaluate your procurement process, you need to have an assessment system in place with relevant key performance indicators (KPIs) – such as supplier defect rate, supplier compliance rate, etc. – that measure whether your initiatives are succeeding or failing. This is just one benefit of having such an assessment system. Another advantage is that it improves the quality of your decisions, basing them on facts and research rather than on instinct. Yet another benefit is that a strong assessment system fosters continuous improvement. When your suppliers are aware that their performance is being evaluated and a wrong move could get them replaced, they will respond with better service. An effective assessment system relies on current and relevant data to identify problem areas or even areas of excellence that can be replicated elsewhere. The assessment system must quantify what creates value so that it can clearly establish if an initiative or process is successful or problematic. What’s more, it must link to organisational goals to ensure an initiative doesn’t just service a short-term need but creates long-term value for the entire business.
Streamlining procurement is a business necessity. It’s easier said than done because it demands artful management of a massive supply chain with multiple moving parts and challenges along every corner. However, it can be done. Here are some simple digital solutions that are easy to adopt and can make all the difference to your procurement processes:
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