You Didn’t Know these 7 Steps of an Effective Procurement Process
Procurement, as a function, is an inevitable aspect of all business organizations. To operate and aid the expansion and optimization of performance, businesses obtain various goods and services from external suppliers. If organizations aim to harness the power of globalization, they need to work with the best local suppliers at the best possible price. When procurement can help an organization achieve its tactical as well as strategic goals, it is doing it right!
Definition of a Procurement Process
A procurement process is a series of steps that an organization identifies and follows in order to obtain goods or services for their goals and objectives.
Why is the Procurement Process Necessary?
Procurement accounts for spending an organization’s revenue on acquiring goods and services. It has a direct impact on cost savings objective. Zycus’ annual survey of 400+ global procurement leaders, Pulse of Procurement 2018, revealed that 54% of the surveyed professionals recognized cost savings as procurement’s key focus area. Furthermore, 65% of large organizations, 66% of mid-sized organizations, and 55% of small organizations were mandated to manage to spend from an enterprise-level and for that, an effective procurement system was the only solution to reap higher profits.
Apart from achieving cost savings objectives, an effective procurement process helps an organization enhancing supplier performance, compliance, risk management, contract utilization, and sourcing cycle time.
Why is a Periodic Assessment of Procurement Process Necessary?
By periodically assessing supplier performance with regards to fulfilling an organization’s sourcing requirements, a procurement process helps identify the strengths and weaknesses of the suppliers onboard and further ideates and innovates strategies for performance improvement. An effective procurement process also enables organizations to build long-term relationships with their suppliers. Hence, by focusing on supplier relationship management, the synergies created between the two parties resulting in high propositions that provide maximum value for both the supplier and the buyer.
A well-implemented procurement process enables an organization higher visibility into stakeholder performance. Greater transparency helps organizations enforce higher compliance in terms of costs, quality of goods/services, etc.
How can Procurement Process Help?
Given today’s scenario of global political and economic instability, changing trade laws, etc., enforcing a well-defined procurement system can help organizations manage their supply chain and associated risks. By managing risks such as financial risk, operational risk, contract risks, etc., a procurement process prevents supply chain disruptions that concern profitability.
An effective procurement process ensures higher process efficiency at every stage of a procurement cycle in an organization, which in turn shortens sourcing cycle times.
Procurement is more than just purchasing goods and services for an organization. An effective procurement process involves in-depth understanding of requirements by all business units, identifying the right supplier for meeting those requirements, periodically evaluating supplier performance, and negotiating contracts that can provide the highest value at minimum cost.
7 Steps of an Effective Procurement Process
After establishing the importance of the procurement process, the next step is to design the process. Here are the seven steps to effective procurement process-
Step 1: Identify the requirement for goods and services from all business units
The procurement cycle starts when any of the business units in an organization needs obtaining goods/services from an external supplier. Hence, the first step of the procurement process entails identifying and consolidating the requirements of all business units in an organization. This provides visibility into the spend areas and categories to identify areas for cost savings through spend analysis.
Step 2: Identify and evaluate a list of suppliers
Once the business units identify their requirements, the next step is to identify a list of potential vendors who may supply the goods/services. This process involves a simple web search or through more structured measures like RFPs, RFQs, and RFIs.
The objective of this process is to evaluate relevant suppliers. Evaluation metrics include pricing, quality of service, industrial reputation and recognitions, warranty and guarantee provisions, and customer service. After the assessment is complete, the supplier who offers maximum value and the best market pricing earns the deal.
Step 3: Negotiate the contracts with the selected supplier
After selecting a supplier to fulfill the requirements of an organization, the contract process begins. Contracting is a crucial step for any organization for maximum value creation and stimulating buyer-supplier collaboration. This process involves assessing critical factors like pricing structure, the scope of work, terms and conditions, timelines of delivery, etc. Detailed analysis and negotiation of contracts give insights into more cost savings opportunities, including dynamic discounting.
Step 4: Raise a purchase requisition and release the purchase order
After an organization finalizes its contract with a supplier, the next step is to raise a purchase requisition (PR). A PR includes a description of the good/service, pricing and quantity, supplier information, and the approval workflow.
Once a PR is approved, the finance team releases the purchase order (P)O to the supplier that documents information like the PO number, payment terms, supplier information, etc.
Step 5: Complete the payment process upon receiving an invoice
Once the supplier receives a PO, he sends an invoice mentioning the price for requested goods/services. Once the organization gets the PO, and they invoice, the procurement team matches them to ensure quality and quantity.
Depending on the payment terms established between the organization and its suppliers, the payment is released pre- or post-delivery.
Step 6: Receive and audit delivery of requested goods/services
Based on payment and contractual terms, the supplier delivers the goods/services. On receipt, companies should audit to ensure the suppliers have met quality expectations.
Step 7: Maintain proper records of invoices
After receiving the delivery, as a best practice, it is important to effectively store all invoices to track spend and the various expenditure categories within the organization.
Procurement has started its journey towards becoming a long-term strategic function of an organization in contrast to its tactical past. Hence, the objective of this article has been to help organizations design a well-structured and effective procurement process.
While organizations have diverse procurement needs and various procurement processes in place, the steps highlighted in this article can be customized to an organization’s specific requirements.