You Didn’t Know these 7 Steps of an Effective Procurement Process

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You Didn't Know these 7 Steps of an Effective Procurement Process

What is Procurement Process? Definition, Meaning, Steps and Functioning

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 – the procurement process. 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 and strategic goals, the only way to achieve perfection is by doing it right! Having the right goods and services from the right source and people makes a procurement process a successful one.

Definition of a Procurement Process

A procurement process is a series of steps that an organization identifies and implements 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. The procurement process has a direct impact on cost savings objectives. 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 their spends 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 in enhancing supplier performance, compliance, risk management, contract utilization, and sourcing cycle time

Learn More: Is Purchasing and Procurement the Same? The Name Game

Why is a Periodic Assessment of Procurement Process Necessary?

Any process needs to be scrutinized regularly to check if there are any bottlenecks or hurdles which need to be addressed to perfect the process. 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 on board. This procurement process assessment further helps us ideate and innovate 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 result in high propositions that provide maximum value for both the supplier and the buyer.

A well-implemented procurement process enables an organization to gain higher visibility into stakeholder performance. Greater transparency helps organizations enforce higher compliance in terms of costs, quality of goods/services, etc across procurement activities.

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 the risks associated with it. By managing risks such as financial risk, operational risk, contract risks, etc., the procurement process prevents supply chain disruptions that can directly or indirectly affect 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.The benefits of procurement process flow are being chased by every organization and you can achieve it by just perfecting your process using the steps mentioned later in this blog!

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.

Learn More: Procurement Software Suite

7 Steps of an Effective Procurement Process

After establishing the advantages of procurement planning and laying out a purchasing process, the next step is to design the procurement process. Now, it is pertinent to identify the correct steps to add to your procurement process. A good purchasing process is never “One Size, Fits All”. As a procurement professional, it is your duty to identify the steps that fit your organization based on your organization’s requirement and objectives so that your KPIs can paint the perfect picture for your success. There are many aspects of procurement that you need to consider and many-a-times, some of them may not be relevant for your organization or industry.

Here are the seven steps to create an effective procurement process flow:

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.

This also helps the organization in their budgeting activities and to forecast the spends for the future. You can always modify the requirements based on the actual unit requirement but the forecast helps your organization to arrive at a ball-park figure to achieve maximum utilization of resources and avoid wastage.

Step 2: Identify and evaluate a list of suppliers

Once the business units identify their requirements, the next step in the procurement cycle is to identify a list of potential vendors who may supply the goods and/or services. This process involves a simple web search or through more structured measures like RFPs, RFQs, and RFIs.

The objective of this step of the procurement process is to evaluate relevant suppliers. Evaluation metrics include pricing, quality of service, industrial reputation and recognition, 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 step of the procurement 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 (PO) 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 their invoice, the procurement team ensures that the invoice is up-to date with both quantity and quality before releasing payment.

When an organization sends out a purchase order, they also supply all necessary information about their requirements so as not to leave any gaps or confusion on what needs will be fulfilled by whom, once received at the supplier’s end – this way there can’t possibly ever happen another scenario where something goes wrong because both parties knew exactly how things should proceed from the start!

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

The supplier delivers the goods/services based on payment and contractual terms. On receipt, companies should audit to ensure the suppliers have met quality expectations. The audit process should include a review of the supplier’s documentation, as well as on-site inspections of the products or services delivered. The goal of the audit is to confirm that the supplier has met all contractual agreements and that the products or services meet the required quality standards. If the supplier is found to be in non-compliance, corrective action may be taken, up to and including termination of the contract. Therefore, it is essential for companies to perform audits to protect their interests and ensure they are receiving quality products or services from their suppliers.

Step 7: Maintain proper records of invoices

The final step in the procurement process – After receiving a delivery, it is important to store the invoices in an effective manner. This will help to track spending and expenditure categories within the organization. There are various ways to store invoices, such as digitally or in physical folders. Digitizing invoices can be helpful if space is limited, and it also allows for easier access and organization. If storing physically, it is important to create a system that works for the specific organization, such as alphabetically by vendor or date. Whichever method is chosen, it is crucial that all invoices are stored in a consistent manner. This will help to ensure that spending is tracked effectively and efficiently.

Types of Procurement

There are several kinds of procurement – Direct Procurement, Indirect Procurement, Goods Procurement, and Services Procurement.

  1. Direct Procurement – Direct procurement is the process of procuring any raw material, inputs or substances that contribute directly to the company’s end product. This part of the procurement process is often where the highest costs are incurred, and typically, where the organization can save least.
    Chief Procurement Officers and key suppliers are the major stakeholders in this process.
  2. Indirect Procurement – Indirect procurement is the process of procuring any goods, services, or entities needed for anything but the company’s end product. They don’t directly affect the company’s cost of goods or their bottom line, but they form a considerable chunk of the company’s spend. Examples of goods and services procured under indirect procurement are IT services, office supplies, etc.
  3. Goods Procurement – The procurement process for procuring physical goods differs a lot from the procurement process for services. Physical goods have a different set of costs as there is a necessity to travel through, what sometimes can be a long supply chain to get it to the organization that’s paying for it. Typically, the procurement procedure for purchasing goods involves a higher set of costs due to the material nature of the entities involved in the procurement cycle. In a direct procurement context, a majority of the procurement procedures are for goods procurement.
  4. Services Procurement – The procurement procedure for procuring services, virtual or otherwise, is typically carried out in the context of indirect procurement. The procurement steps for services would most likely be for a single period, if the organization is satisfied with the services. Services procurement could also be temporary – leasing services or contracting with a vendor for specific use-cases.

Chief Procurement Officers    

In every organization with complex procurement needs, a sizeable turnover, and a large global presence, one person is in charge of procurement activities – the Chief Procurement Officer. A CPO oversees all procurement procedures, procurement cycles, and procurement activities – in short, the procurement system.

A CPO’s role has been steadily evolving over the years and is now slowly turning into a strategic role, more than an operational one.

Chief Procurement Officers are responsible for the procurement, implementation and maintenance of the organization’s procurement system. They need to consider agility, security, resilience, and user-friendliness when they implement a procurement system.
Lately, a lot more CPOs are preferring AI-led procurement solutions over traditional legacy vendors, not because they think it is ‘nice to have AI,’ but because they ‘need to have AI.’

Conclusion

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.

The design of the procurement process is an important step in achieving successful outcomes. It is, therefore, necessary to take the time to properly identify and design the steps that fit your organization’s needs. Procurement professionals are responsible for ensuring their organizations’ success by tailoring their processes to meet their specific requirements. Have you tailored your procurement process to achieve success?

1 Comment

  1. Mark Watson says:

    Can MSPs give us advantage over procurement? I mean, their potential contacts with vendors!

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