The procurement process is a set of actions that a business determines and implements to source and receive products and services. For some firms, procurement refers to the purchasing process, while for others, procurement refers to all of the stages that lead to a purchase. In the procurement process, the buyer and the vendor are the two key stakeholders.
It is critical to simplify the procurement process since it has a direct influence on business expenditures. The procurement function not only helps the companies save the business, but it also helps it enhance supplier performance, contract utilization, sourcing cycle time, and compliance and risk management.
The following elements influence the steps in a business’s procurement process:
- Business operating model
- Company size
- Company location
- Organizational structure
- Financial budget
- Compliance management
Types of Procurement Process
There are three types of procurement processes that function in a business. They are,
- Direct Procurement Process
The acquisition of the input (raw material) necessary to create the end product is called direct procurement. This sort of procurement’s cost and efficiency directly influence the company’s performance and profitability. Any form of hindrance in the immediate procurement process impacts the company’s capacity to create the final product. Through this, long-term collaborative supplier partnerships are established.
- Indirect Procurement Process
It is the act of purchasing the goods and services required to support the business. These inputs or services are not directly connected to the end product. Indirect procurement includes things like office supplies, equipment upkeep, and utilities. The indirect procurement process flow handles day-to-day operations and focuses on short-term vendor relationships.
- Services Procurement Process
Procuring and managing a temporary workforce and consulting services falls under this category of procurement. Purchases of professional services and software subscriptions are instances of service procurement. The service procurement process necessitates the maintenance of one-time contractual agreements with vendors.
Standard Steps to be taken in the Procurement Process
People, processes, and documentation make up the procurement lifecycle. The stakeholders and their roles in the procurement lifecycle are referred to as processes in the life cycle. The stakeholders are in charge of the whole procurement process, from start to finish.
The procurement process or system refers to the collection of rules or standards that must be adhered to throughout the procurement lifecycle. Finally, the procurement process documentation or paperwork is employed as a reference and audit tool.
- Identifying Needs
Requirement analysis is used to determine the necessity for purchasing a new item or reordering an item that has fallen below the inventory threshold. Before placing the request for input, all stakeholders must be consulted. When a requirement is recognized, the procurement process begins.
- Determining the Technical Requirements
Technical specifications for a newly acquired item are created after consultation with technical stakeholders. The procurement process will be error-free if the specs are accurately determined.
For repeat orders, the vendor list is already accessible. The procurement team can evaluate the pre-existing vendor list based on the quality of deliverables, timely delivery, and the vendor’s price and discount choices. Vendors must be identified and considered for new purchases based on their reputation, quality, delivery speed, cost, and reliability.
The Request For Proposal (RFP) is the following stage after a vendor has been chosen. For the procurement of an item, a minimum of three quotes is usually acquired. The quotes are then reviewed based on the previous variables, with the best one being sent to upper management for approval. Tenders are advertised in situations where bidding or tendering is involved.
- Negotiating and Completing Payment Conditions and Pricing
This process is an extension of sourcing, in which pricing discussions with the shortlisted vendors are done before the vendor is finalized. Organizations that use the tendering or bidding process must choose a vendor fairly and transparently. Transparency in the bidding process assures that the supply is of the highest quality and value. A decision must be made on whether an item should be sold by several merchants or a single vendor.
- Generating the Buy Request and Order
A ‘buy requisition’ for the vendor is generated and submitted for approval after the purchase order has been negotiated and finalized. Following approval by the proper authorities, a purchase order is created with all of the order’s specifics, including quantity, price, delivery time and date, and terms and conditions. The order requirements must match the buy request and supplier quotes to avoid any mistakes or oversights. This three-way match is a crucial part of the procurement process.
- Purchase Order delivery
The purchase order is then given to the vendor through fax, email, or in-person, depending on the vendor-buyer agreement.
- Purchasing the Item
It is necessary to monitor the timely delivery of items to avoid any unexpected delays—the drafting of a timetable that considers any unexpected delays guarantees that delivery deadlines are reached.
- Supply and inspection
Once the products or services are ready for delivery, the buyer must verify the things that have been delivered to confirm that they are by the purchase order. After inspecting the items, the buyer might accept or reject them according to the agreed-upon terms and conditions. When an order is received, the vendor payment process begins.
- Payment process
Payment is started when all purchase papers, such as the original purchase order, payment invoice, and order receipt, have been validated. Before the payment is processed, any inconsistencies are handled. Payment is made under the conditions of the contract.
- Documentation and review
For auditing and tax purposes, the entire procurement cycle must be recorded. Once the documentation is complete, the process must be reviewed to identify and address any potential conflicts. The evaluation also aids in improving the efficiency of the process.
It can be time-consuming and error-prone to follow manual procurement methods for products and services. The procurement life cycle may be streamlined by automating the procurement process. Businesses may save money and time by using an automated procurement process flow.
The 3 Ps of Procurement
To achieve efficient execution, the procurement method employs aspects known as the 3 P’s, from order requisition to final purchase. These three elements are as follows:
The procurement process might involve a large number of people. As a result, management must allocate a person to each phase. Human resources, financial advisors, legal departments, and operations managers should all be involved in assessing risk factors.
Ordering new computers, for example, would require less approval and assistance than upgrading a business’s premises.
The ordering process should include quality assurance checkpoints at each stage. Stages such as product review, ordering, delivery, and payment must be completed precisely and on time. Any faults in the process can cause vendor payments to be delayed, impacting the supplier-distributor relationship.
Even though many businesses utilize procurement software to optimize their procedures, paperwork encompasses all process documents. For auditing purposes, businesses must prepare accurate reports and paperwork at each level.
Types of Models in Procurement Process
A procurement model is a set of procedures that a company uses to get goods or services. It describes the degrees of hierarchy, control, and decision-making. The procurement model chosen is influenced by geographic boundaries and the organization’s number of departments and divisions. These models differ depending on the control center in the procurement process.
- Local Procurement Model
Decisions are taken at the local or department level in this procurement model. The local department, which has a greater understanding of the department’s requirements, makes all procurement decisions. Local procurement practices can sometimes result in uncontrolled spending that is out of sync with the organization’s overall budget.
Local procurement practices can sometimes result in uncontrolled spending that is out of sync with the organization’s overall budget.
- Centralized Procurement Model
In a centralized procurement model, essential choices are made by central management, as the name suggests. Central leadership is in charge of the approval procedure and procurement guidelines. The goal of the centralized procurement model is to match purchasing decisions to the overall budget and spending of the organization.
When buying in bulk, using the centralized model gives you a better bargaining position. However, this procurement model has drawbacks such as more incredible bureaucracy and the danger of failing to meet the specific needs of individual departments.
- Hybrid Model
It combines centralized and local procurement. Some purchases are made at a specific location, while others are made in a central location. The hybrid model combines the advantages of both local and centralized methods.
- Ad Hoc Model
Ad hoc procurement means that it is done on the spur of the moment, without much thought or forethought. The procurement policies, procedures, and processes of an organization that operates in this manner will be undefined.
Several people from various departments will handle the agency’s “purchasing” activity, and it will almost certainly be coordinated exclusively through the accounting system. Suppliers will be allowed to propose their terms and conditions because the agency’s procurement requirements would not be anticipated. Procurement’s terminology and philosophy will be missing. Purchasing will be seen as a straightforward operation and, at most, a secretarial duty.
- Process Model
Procurement is seen as a series of acts that lead to a series of outcomes by organizations that follow the Process model. An organization that handles procurement in this manner will still lack defined policies but will have a set of formal “purchasing” procedures. In the lack of a defined procurement framework, procurement choices will be made ad hoc.
- Policy Model
Procurement will be considered a controlled activity in a policy-driven organization. With established procurement strategies and regulations, the agency will realize the importance of procurement as a task. There will be signs of a procurement department managing procurement activities, but coordination will be weak and inconsistent. As formal procurement processes exist, procurement terminology and philosophy will be acknowledged. Formal procurement staff training, on the other hand, isn’t prioritized.
- Tactical Model
Procurement will be viewed as a unique function in a Tactical model organization that recognizes its relevance. There will be established methods of mandating authorized procurement techniques that limit “maverick” spending and other anomalous buying behavior and reliable procurement systems to ensure that procurement activity is carried out in compliance with standard procedures across the agency.
All main components of procurement will have policies created. Procurement processes are now advancing, with procurement being recognized as a value-adding function with a Chief Procurement Officer representing it at the top (or similar title).
- Strategic Model
A well-designed and established procurement function will be found in an organization functioning at a Strategic level. The organization will view procurement as a strategic activity that aligns with the agency’s strategic goals and long-term plans. Supplier selection procedures, supplier relationship management, and contract management processes will have been designed to guarantee that the outcomes of purchasing decisions are consistent with the strategic goal of the initial purchase.
Staff with recognized training and education and relevant experience shall be hired for all roles within the procurement team. Cross-disciplinary and cross-functional interactions between staff and end-users will be remembered as the norm, with continuous professional growth supported within the group. The agency’s procurement vocabulary and philosophy will be mature, and a set of overarching procurement policies will guide procurement decisions.
- Professional Model
When an organization achieves professional procurement maturity, it recognizes the strategic value of procurement and the necessity for a professionalized approach to managing and performing procurement across the agency. The organization’s executive will instinctively recognize procurement’s contribution to the agency’s commercial decisions. This knowledge will be backed up by the hiring of adequately skilled and educated personnel at all levels of procurement, who will be required to keep up to date through mandatory CPD.
Supply market information, expenditure analysis, performance measurement evaluation, and dynamic supply chain performance and risk assessment will be demonstrated.
Procurement terminology and philosophy will be integrated entirely into agency management procedures, and personnel will use them consistently when interacting with end-users and suppliers. This means that procurement executives and senior management follow procurement rules, philosophies, and practices.
The organization will usually have a Chief Procurement Officer who will have significant connections into the procurement knowledge community, professional bodies, learning centers, and senior members of the procurement team. At this level, procurement employees in an agency will constantly look for new ways to start and manage procurement choices and suppliers.
Principles of Procurement Process
The procurement process is the beginning of a company’s supply chain. A successful procurement process sets the tone of the whole supply chain. The procurement process has an impact on profit margins as well as the quality of goods and services. Five elements underpin a cost-effective and efficient procurement process.
- Value addition
The procurement process should be based on value. Rather than focusing solely on low prices, procurement decisions should be made to maximize value for money. Compromise in input quality (raw materials) has a cascading effect on the company’s final output.
The vendor selection process must be free of bias, ensuring that all providers have a level playing field. Transparency in the vendor selection process guarantees that the buyer receives the most bang for his buck.
Vendor selection can be made by bidding, tenders, or direct purchase in the procurement process. To maintain the purchase’s quality and value, the buyer must maintain high ethical standards and follow a transparent vendor selection procedure.
- Accountability and Documentation
All parties involved in the procurement process must take responsibility for their activities. The assessment and refining of the procurement lifecycle are aided by clear documentation of each procurement stage.
- Uniformity and Standardization
At every level of the procurement process, consistency and uniformity must be achieved. Following the standard procurement guidelines ensure that all players have an equal chance to advance.
KPIs in Procurement Process
Procurement Key Performance Indicators (KPIs) aid in evaluating the procurement strategy’s efficiency, effectiveness, and performance criteria. The procurement process, as any business process, must be assessed for efficiency and performance. Quantitative and qualitative KPIs are two types of KPIs. The former type can be expressed quantitatively, whereas the latter cannot. The following KPIs can be used to evaluate the procurement process’s performance and efficiency:
1. Supplier KPIs
- Supplier responsiveness and availability: It is a measure of supplier responsiveness and availability for urgent and emergency requests.
- Quality, precision, and compliance: Check to see if the vendor adheres to quality and accuracy standards. Increased errors and faults would lead to higher expenses and time waste.
- The number of suppliers: Determines whether or not you are overly reliant on a limited number of vendors.
- Supplier Capacity: Assists in determining a supplier’s ability to cater to large requests.
2. Purchase Order KPIs
- Order Cycle Time: This is a measurement of how long it takes to procure something or how long it takes to complete an order cycle. This KPI aids in determining which vendors are most suited for urgent supplies.
- Purchase cost: The cost of processing each purchase aids in the tracking of internal costs.
- Lead Time: The time it takes for an item to be delivered from the moment the purchase order is placed to the time it is delivered.
3. Return on Investment (ROI) KPIs
- Cost Savings: This metric measures how much money the organization saves through the procurement process.
- Total Return on Investment (ROI)– Calculates the return on investment for the entire procurement process.
Procurement KPIs assist in evaluating all of an organization’s major procurement activities and streamlining the overall procurement process.
Automation Procurement Processes
The proposal to automate the procurement function should be made after a thorough examination of the current procurement procedure. The following factors can be used to estimate the automation potential of procurement tasks:
- Tasks with a strong cost-cutting potential.
- Tasks where the advantages may outweigh the disadvantages.
- Complex operations that are costly and time-consuming to automate should be avoided.
- Simple, repetitive chores are simple to automate.
Based on the criteria mentioned earlier, we’ve identified the following four procurement processes that can be effectively automated.
- Purchase Requisitions
Employees raise transaction requisitions internally to obtain approval for a purchase. When done manually, purchase requisitions often go through numerous levels of consent, which can cause delays and bottlenecks. The acceptance of purchase requisitions can be automated to help speed up the approval process.
- Processing Purchase Orders
Processing purchase orders is a repetitive and relatively easy activity that can be effectively automated. Organizations use this procedure regularly.
- Invoice Approvals
Vendor invoices must be approved internally before the finance department may credit the payment to the supplier. By automating the invoice approval process, bills may be approved more quickly and easily. Invoice payments can also be made at any time and from any location, thanks to automation.
- Vendor Management
A series of approvals is used to identify and vet prospective vendors before adding to a list of approved vendors. For more effective vendor management, this procedure can be automated.
10 Golden Rules of Procurement Process
Procurement management that is efficient and effective leads to improved company outcomes. Automation can be used to successfully eliminate unnecessary and repetitive phases in the procurement process cycle. The following are some of the best procurement management practices:
- Establish a comprehensive approval and critical decision-making hierarchy.
- Collect input from all stakeholders to enhance the process over time.
- Choose purchase automation software that boosts procurement speed and efficiency.
- Make it a priority to build long-term relationships with vendors.
- Put a premium on human resources as a driving force behind supply chain initiatives.
- Make purchasing selections based on value.
- Carefully draft contract terms and conditions. The contract’s terms and conditions determine how disputes are resolved.
- Inventory management that is proactive is essential for cost control.
- Continuously review and optimize the buying process.
- Maintain strong ethical and social responsibility standards.
Establishing a fair, transparent, and effective procurement requires a thorough grasp of the procurement process. Periodic procurement process evaluation aids in the identification of process bottlenecks and the streamlining of process workflow. The procurement strategy should prioritize quality and value addition over cost-cutting.