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 – through 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.
Meaning of an Effective Procurement Process
An effective procurement process is a series of procurement process steps that an organization identifies and implements in order to obtain goods or services for their goals and objectives.
How does an effective procurement process works?
Procurement is the process of acquiring goods or services from an external source. It includes everything from identifying a need and finding potential suppliers to negotiating contracts and managing relationships with vendors.
There are four main steps in the procurement process:
- Planning: This is when you identify what you need to purchase, research potential suppliers, and develop a procurement strategy.
- Request for proposal (RFP): Once you’ve identified potential suppliers, you’ll send out an RFP that outlines your requirements and solicits bids from the vendors.
- Evaluation and selection: This is when you review the bids from vendors and select the supplier that best meets your needs.
- Contract management: Once you’ve selected a supplier, you’ll work with them to finalize the details of the contract. This includes defining the scope of work, setting timelines, and agreed-upon prices.
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Types of Procurement
There are several kinds of procurement – Direct Procurement, Indirect Procurement, Goods Procurement, and Services Procurement.
- Direct Procurement – Direct procurement procures 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. - Indirect Procurement – Indirect procurement procures 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.
- 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.
- Services Procurement – The procurement procedure for procuring services, virtual or otherwise, is typically carried out in the context of indirect procurement. The procurement process 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.
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
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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 the Effective 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.
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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
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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.
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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.
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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.
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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.
Optimizing the Procurement Process?
The procurement process is a critical part of any organization. It is the process of acquiring goods and services from external sources. The goal of procurement is to obtain the best possible value for the organization. To optimize the procurement process, there are a few things that you can do. First, you should develop clear and concise specifications for the goods or services that you need. This will help to ensure that you get exactly what you want. Second, you should solicit bids from multiple vendors. This will allow you to compare prices and choose the option that is best for your organization. Finally, you should have a good contract in place with the vendor. This will protect your organization in case there are any problems with the goods or services that are provided.
The procurement process can be optimized by using a variety of tools. The most important tool is procurement management software. This software can help organizations keep track of their procurement processes and ensure that they are efficient. Other tools that can be used to optimize the procurement process include e-procurement platforms and sourcing management systems
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Traditional vs. Strategic Procurement
There are two schools of thought when it comes to procurement: traditional and strategic. Traditional procurement focuses on cost savings and efficiency while strategic procurement focuses on achieving organizational goals. Here, we’ll take a look at both approaches and the pros and cons of each.
Traditional Procurement
Traditional procurement is all about cost savings and efficiency. The goal is to get the best price for goods and services while minimizing waste. To do this, procurement departments use a variety of tools, including competitive bidding, cost analysis, and supplier performance evaluations.
Pros:
Cost savings: Traditional procurement is focused on getting the best price for goods and services, which can lead to significant cost savings for the organization.
Efficiency: Traditional procurement methods are designed to be as efficient as possible, which can save time and resources.
Cons:
Risk Aversion: Because traditional procurement is focused on minimizing risk, it can sometimes lead to decisions that are made purely based on cost without considering other factors that could be important to the organization’s success.
Missed Opportunities: Traditional procurement can sometimes result in missed opportunities to achieve organizational goals because it is focused primarily on cost savings.
Strategic Procurement
Strategic procurement is focused on achieving organizational goals. The goal is to get the best value for the organization, not just the best price. To do this, procurement departments work closely with other departments and stakeholders to understand their needs and objectives. They then use this information to develop procurement strategies that are aligned with the organization’s goals.
Pros:
Achieve Organizational Goals: By aligning procurement strategies with organizational goals, strategic procurement can help organizations achieve their objectives.
Flexibility: Strategic procurement is flexible and can be adapted to changing needs and circumstances.
Risk management: Strategic procurement can help organizations manage risk by considering all factors that could impact the success of a project or initiative.
Cons:
Complexity: Strategic procurement can be complex and time-consuming.
Requires buy-in from stakeholders: Strategic procurement requires buy-in from all stakeholders in order to be successful.
Which approach is best for your organization will depend on your specific needs and objectives. If cost savings is your primary concern, traditional procurement may be the best option. However, if you’re looking to achieve specific organizational goals, strategic procurement may be the better choice.
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Procurement Models
There are many different procurement models that organizations can use to acquire goods and services. The most common procurement models are sealed bidding, competitive negotiation, and sole source.
Sealed bidding is the most straightforward of the procurement models. In sealed bidding, the organization solicits bids from multiple vendors and then awards the contract to the vendor with the lowest bid. Sealed bidding is typically used for contracts that are well-defined and for which there is a large pool of potential vendors.
Competitive negotiation is a more flexible procurement model than sealed bidding. In competitive negotiation, the organization solicits proposals from multiple vendors and then selects the vendor that it feels will be able to best meet its needs. This model is often used when the requirements of the contract are not well-defined or when there is a limited pool of potential vendors.
Sole source procurement is used when there is only one vendor that can meet the organization’s needs. This model is typically used when the goods or services being procured are unique or when there is a long-standing relationship between the organization and the vendor.
Organizations can also use a combination of these procurement models. For example, an organization may use sealed bidding to select a vendor and then use competitive negotiation to negotiate the terms of the contract.
The Importance of Data in the Procurement Process
Data is becoming increasingly important in the procurement process, as it can provide valuable insights into spending patterns, trends, and supplier performance. This data can then be used to improve the procurement process, ensuring that organizations are getting the best value for their money. Additionally, data can help to identify areas where cost savings can be made. There are a number of different sources of data that can be used in procurement, including financial data, supplier performance data, and spend analysis. By harnessing the power of data, organizations can ensure that their procurement processes are as efficient and effective as possible.
Financial Data
Financial data is one of the most important sources of data in procurement. This data can be used to understand spending patterns and trends, which can then be used to improve the procurement process. Additionally, financial data can be used to identify areas where cost savings can be made.
Supplier Performance Data
Supplier performance data is another important source of data in procurement. This data can be used to understand the quality of products and services that suppliers are providing, as well as the delivery times and costs associated with those products and services. This information can then be used to improve the procurement process, ensuring that only the best suppliers are selected.
Spend Analysis
Spend analysis is another important source of data in procurement. This type of analysis helps organizations understand where their money is being spent, and on what. This information can then be used to improve the procurement process, ensuring that money is being spent in the most efficient way possible.
Role of Procurement in Supplier Management
The role of procurement in supplier management is to ensure that the organization procures the right products or services from the right supplier at the right price. The goal is to create a mutually beneficial relationship between the organization and its suppliers, where both parties are able to achieve their objectives.
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There are four key steps in procurement:
1. understand what the organization needs
2. identify potential suppliers
3. select the best supplier
4. manage the relationship with the supplier
Organizations need to have a clear understanding of their own needs before they can identify potential suppliers who can meet those needs. Once potential suppliers have been identified, organizations need to evaluate them in order to select the best one. Once a supplier has been selected, it is important to manage the relationship effectively in order to get the most value from it.
The role of procurement in supplier management is to ensure that the organization procures the right products or services from the right supplier at the right price. The goal is to create a mutually beneficial relationship between the organization and its suppliers, where both parties are able to achieve their objectives.
Key benefits of Working with Suppliers
There are many benefits to working with suppliers, including:
Increased efficiency: When you have a good relationship with your suppliers, they are more likely to be responsive to your needs and deliver goods and services on time. This can help increase your company’s efficiency and productivity.
Cost savings: Good supplier relationships can lead to cost savings. For example, you may be able to negotiate better prices or terms, such as longer payment terms.
Quality products and services: Working with suppliers who offer quality products and services can help ensure that your customers are satisfied with what you’re offering.
Reduced risk: By establishing good supplier relationships, you can reduce the risk of disruptions in your supply chain. For example, if one of your suppliers is having financial difficulties, you may be able to find another supplier who can provide the same products or services.
Improved reputation: Offering quality products and services that meet or exceed customer expectations can help improve your company’s reputation. This, in turn, can lead to more business.
Access to new markets: Working with suppliers can give you access to new markets. For example, if you’re a small business, working with a larger supplier can help you reach new customers.
Innovation: Suppliers can help you innovate and bring new products and services to market. They can also help you improve your existing offerings.
Flexibility: Working with suppliers can give you more flexibility in how you operate your business. For example, you may be able to source different products or services from different suppliers depending on your needs.
Increased sales: Good supplier relationships can lead to increased sales. For example, if your customers are happy with your products and services, they’re more likely to buy from you again in the future.
Improved customer retention: When you have good supplier relationships, your customers are more likely to be loyal to your company. This can help improve customer retention rates.
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How to Negotiate with Suppliers?
The first step in any good negotiation is to understand the other party’s position. In the case of a supplier, this means understanding their costs, their margins, and their incentives. Once you have a good understanding of where they are coming from, you can start to negotiate from a position of strength.
One of the most important things to remember in any negotiation is that you are not just negotiating for the price. You are also negotiating for terms, conditions, delivery dates, quality levels, and any other number of factors. The price is just one piece of the puzzle.
When it comes to negotiation, there are two schools of thought: hard bargaining and soft bargaining. Hard bargaining is when you come in with a low offer and try to get the supplier to budge. Soft bargaining is when you come in with a fair offer and try to find common ground.
Which approach is best will depend on the situation. If you are buying something that is very important to your company and there are few suppliers who can provide it, then you will probably have to take a hard bargaining approach. On the other hand, if you are buying something that is not as critical and there are many suppliers who can provide it, then you might be able to take a softer approach.
In general, the best approach is to start in the middle and then move towards whichever side has the most leverage.
The key is to find the balance between being too aggressive and too passive. If you are too aggressive, then the supplier will walk away from the negotiation and you will not get what you want. If you are too passive, then the supplier will take advantage of you and you will end up paying more than you should.
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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.’
How to Choose the Right Procurement Solution for Your Business
There are many factors to consider when choosing the right procurement solution for your business. The first step is to understand your needs and what you want to achieve with procurement. Once you know this, you can start researching and comparing different solutions.
When looking at procurement solutions, there are a few key features to keep in mind:
Ease of use: The solution should be easy to use so that your team can be up and running quickly.
Flexibility: The solution should be flexible so that it can grow with your business.
Integration: The solution should integrate with your existing systems so that you don’t have to start from scratch.
Cost: The solution should be cost-effective so that it doesn’t eat into your profits.
Once you’ve considered these factors, you can start narrowing down your options and selecting the right procurement solution for your business.
Future of Procurement
The future of procurement is looking very bright. With the advent of new technology, there are many new opportunities for procurement professionals to streamline their work and save their organization’s money. Here are some of the most exciting trends in procurement that you should be aware of:
1. Automation
One of the biggest trends in procurement is the automation of various tasks. This can be anything from automating the request for quotes (RFQ) process to using artificial intelligence (AI) to help with contract management. By automating repetitive tasks, procurement professionals can free up their time to focus on more
2. Big data and analytics
Another trend that is transforming procurement is the use of big data and analytics. With the vast amounts of data that are now available, organizations can gain insights into their spending patterns and supplier performance that were previously impossible to obtain. By leveraging this data, procurement professionals can make more informed decisions that can save their organizations millions of dollars.
3. Strategic sourcing
Strategic sourcing is another trend that is gaining popularity in procurement. This approach goes beyond simply finding the lowest price for a product or service. Instead, it takes into account all of the factors that impact cost, including quality, delivery, and risk. By taking a strategic approach to sourcing, procurement professionals can ensure that their organizations are getting the best possible value for their money.
4. Sustainability
As organizations become more aware of the need to be socially responsible, sustainability is becoming an important factor in procurement. This includes considering the environmental impact of the products and services that are being procured. By incorporating sustainability into the procurement process, organizations can save money while also doing their part to protect the environment.
5. Emerging markets
As the global economy continues to expand, organizations are looking beyond their traditional suppliers to find new sources of products and services. This is especially true in emerging markets, where there is often a greater willingness to negotiate on price. By tapping into these new markets, organizations can save money while also gaining access to innovative products and services.
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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?
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