Procurement is the process of sourcing and obtaining the goods and services a business needs to fulfill its objectives. Procurement is most generally associated with businesses because companies need to solicit services or purchase goods, usually on a relatively large scale. An efficient procurement strategy can do many things; for example, it can save companies money by negotiating favorable terms and pricing. It can also ensure supplier quality, efficiency, and timeliness.
Usually, procurement refers to the final act of purchasing. Still, it can also include the procurement process, which can be critically important for companies leading up to their final purchasing decisions. Organizations can be on both sides of the procurement process as buyers and sellers, even though we tend to focus on the side of the soliciting company.
Whether your organization wants to hit precise goals and needs specialized workers to join them, or you want to market yourself as an employee-friendly company, your procurement team must find the right talent or products to make this happen.
The process of procurement may seem simple, but it is highly competitive with great interest and attention paid to each step. The activities that procurement entails include:
- Vendor Selection
- Payment Negotiation
- Strategic Vetting
- Final Selection
- Contract Negotiation & Validation
- Final Purchase
- Managing Compliance
What is the Procurement Process Flow?
The procurement process flow is the strategic method of sourcing a product or service. This involves identifying a specific product or service requirement and is how a business finds new or existing suppliers, strengthens supplier relationships, estimates cost savings, and minimizes risk, and mainly focuses on value and Return on Investment (ROI).
A typical procurement process can involve the list of the following steps:
- Identify a need
- Research and source suitable supplier(s)
- Create preferred vendor list
- Supply Request for quotation (RFQ)
- Evaluate supplied quotes and suppliers
- Negotiate terms and contract with the supplier(s)
- Arrange and receive product/service
- Perform quality check
- Analyze results, KPIs, and margins
- Develop and maintain a relationship with the supplier(s)
How Procurement Works
Procurement and procurement processes may require a large portion of a company’s resources to manage. Procurement budgets typically give managers a specific value to procure the goods and services they need. The procurement process is often a crucial part of a company’s strategy, because purchasing certain materials or services can determine if operations will be profitable.
The procurement process follows 10 high level steps:
- Requirement Identification. Prior to purchasing something, a company needs to recognize that there is a need for buying a new item or reordering an existing item that is running low on stock.
- Outlining the Specifics of a Requirement. After identifying the need, the exact specifics of the product or service need to be decided upon such as technical specifications or part numbers.
- Sourcing. Once the requirements have been determined, there is research needed to determine which supplier is available to supply the item. As part of the process, reputation, cost, speed of service, and dependability need to be evaluated across at least three quotes.
- Negotiation and Finalization of Terms and Price. Typically requests for quotes will be sent to shortlisted vendors. A general rule is that companies should get at least three quotes to ensure they are getting the best price, but also should balance the company’s promptness, reliability, and quality.
- Purchase Order. A purchase order with the specifics of the order as well as terms and conditions need to be generated so that both parties agree to the terms.
- Delivery of Purchase Order. The shipment notice from the supplier is then sent to the buyer.
- Expediting of Order. This is the process of creating a timeline for the delivery of the goods or services to factor in for any unforeseen delays.
- Product / Service Supply and Inspection. Once the product has been shipped, the buyer needs to inspect the items / services to confirm that they matched the agreed upon purchase order.
- Payment Process. Once the payment has been made, the specifics of the original order, items, and payment request are compared. If anything is mismatched, they are resolved before payment.
- Record Keeping and Review. Both companies should maintain records for auditing, taxation purposes, and to settle any disputes that may arise.
What Is Business Procurement?
Individual businesses introduce procurement policies that govern their choice of suppliers, products, and methods to communicate with their suppliers. For example, companies often have set guidelines calling for and evaluating vendor proposals.
The procurement process includes:
- Knowing the needs of customers and suppliers
- Choosing and preparing tools and strategies to communicate with vendors
- Preparing requests for proposals & requests for quotes
- Setting policies for evaluating the proposals, quotes, and suppliers
How Business Procurement Works
While few people may think of procurement as anything more than purchasing goods and services, several procurement processes have already happened before you enter the purchasing stage. These include:
- Identification of the requirements
- Authorize purchase requests
- Identification of suppliers
- Negotiation and selection of the vendors
Companies are deeply interested in getting the most reliable quality goods and services they can obtain at the best price in the preferable time frame. However, that’s not their only type of interest.
Because people support brands that they feel share their values, companies must ensure their procurement policies show their value. For example, companies have a fixed interest in procurement policies that are viewed as fair, promoting competition, and conducting business with integrity.
Types of Business Procurement Trends
Many companies strive to have their procurement policies match the public’s growing interest in issues and trends such as the green procurement and ethical sourcing.
Many businesses are practicing green procurement (also known as eco-procurement or sustainable purchasing), creating policies that feature sourcing and purchasing goods and services that are less environmentally damaging than similar alternatives.
Green procurement policies incorporate sourcing goods or services that have minimal impact on the environment by:
- Reducing waste
- Reducing greenhouse gas emissions
- Preserving energy, water, and soil
- Utilizing renewable energy sources
- Not containing toxic substances or emitting pollution
A company may choose to purchase a product from a supplier because it has less packaging than a similar product or because it contains recycled material.
Ethical sourcing is another procurement trend that has earned much attention in recent years. Some products are manufactured in developing countries that may not enforce ethical labor standards. Revealed by activists, abusive labor practices in the garment industry in countries such as Bangladesh, Indonesia, China, and Vietnam have damaged corporations’ reputations such as Nike and Walmart.
In response, Walmart has embraced an ethical sourcing policy for its supply chains.
- In 1999, Nike helped establish the Fair Labor Association (FLA). This nonprofit group is committed to improving employment standards for workers worldwide by ensuring fair labor practices and safe working conditions.
- Participating companies can get listed with the Fair Labor Association (FLA) by enforcing compliance with the FLA labor standards and practices. Presently, Nike conducts audits of factories and incorporates information about its commitments to sustainability and ethical labor practices in its annual reports.
As practiced with ethical sourcing, fair labor involves the procurement of goods and services that are created in an environment where:
- Worker safety is valued
- Workers are paid a decent wage for their work and have health benefits
- Employees work for reasonable hours
- No child labor is in place
Ethical sourcing policies typically include both green procurement practices and fair labor policies.
Can Procurement Benefit You by Saving Money?
Researchers have found that procurement is often up to 70 percent of a company’s cost, so small reductions in costs can have a massive impact on profits.
By minimizing purchasing costs on both products and services, your company can gain continuous profits. On the other hand, the lack of a procurement team and no strategic planning can make your organization pay above market rates for even subpar goods and services.