Estimated reading time: 5 minutes
• The step of the procurement process is the sum of the activities an organization takes to ensure goods and services necessary for operation are available on time and in the right quantity and other specifications.
• Procurement affects the supply chain, quality of final goods, prices, and profitability of a company. Therefore, in many organizations, procurement is seen as a strategic function that directly impacts the long-term prospects of a company.
Direct procurement in a company involves purchasing items that go into the final product. Raw materials take up the most significant chunk of the procurement budget for a manufacturing organization. With direct procurement, conversations with suppliers will normally be about quantity and consistency in quality. Prices aren’t too flexible. Indirect procurement, on the other hand, involves the acquisition of goods and services that are not exactly visible in the final product. This may include IT services, office furniture, and office supplies. organizations must follow steps of procurement processes to give assurance about prices charged and the quality of indirect goods and services procured.
Importance of the Procurement Process
Understanding and streamlining the procurement process is extremely important. The company can identify opportunities to create synergies with suppliers and develop strategic partnerships with them. They can also identify bottlenecks that could be leading to unnecessary costs or delays in the supply chain. For instance, automation of the process of creating requests for quotes could help quicken the process. Automation of invoice matching could help pay suppliers faster.
Let’s breakdown the 7 steps involved in the procurement process
Step 1: Identifying the Requirements of all Business Units
Procurement always begins when a need for goods and services arises in a certain business unit. However, the right thing should be a careful assessment of needs for a particular period, often a year. This happens to allow an organization not only to budget but also to classify needs by categories. Category management is a big topic but the major premise is that organizations can have varying strategies for different goods and services they procure. This may involve consolidating spending power to make bargains or shipping to save on logistical expenses. Category management also allows for better analysis of procurement spending.
Step 2: Identity and Evaluation of Suppliers
The next step in procurement is the identification of potential suppliers to work with. By now, there should be a sourcing strategy to be used in evaluating the various proposals that will come in from suppliers. For instance, working with a few suppliers could help reduce the cost of procurement. The use of structured RFPs and RFQs will help evaluate suppliers more quickly and objectively. RFPs and RFQs request very specific information from suppliers.
Step 3: Negotiation of Contracts with Chosen Suppliers
Once the company identifies a supplier they want to work with, the next step is to enter contract negotiations. Both parties need to be clear about the scope of work to be done or items to be delivered and the criteria for performance evaluation. Such things as terms and methods of payment are discussed at this stage. There might be some back and forth as each party redlines clauses that they are not comfortable with. Contracts can be quite complex and there may be opportunities for the company to make savings depending on the various procurement strategies chosen. For instance, order quantity discounts may be available in the contract, but that might require additional investment in working capital. It may also require coordination with other departments, such as production and warehousing.
Step 4: Purchase Requisition and Purchase Orders
Now with the suppliers in place, departments can raise purchase requisition according to their needs. The requisition goes through the necessary approval workflow and the order gets sent to the supplier. This is more of an administrative step rather than a strategic one because of all the prior preparatory work.
Step 5: Invoicing Processing
Invoicing is another step of the procurement process. Once a purchase order gets to the supplier, they will send an invoice for the items specified in the order. The receiving organization will take the invoice through the internal process specific to the organization. Invoices need to be checked to ensure the organization only pays for items that it has requested. Invoices can be processed automatically through procure-to-pay software, which speeds up the process but also increases accuracy. Fast invoice processing helps to ease relationships with suppliers.
Step 6: Audit Deliveries
Once items get delivered, they need to be checked against the corresponding purchase order. Delivery notes and purchase orders then need to be properly preserved for audit purposes. Besides checking quantities, items need to be evaluated against the quality specifications in the contract documents. If these are not met, the contract needs to have stated the necessary action. Regular quality checks are important to ensure consistency in supplier performance throughout the life of their contract.
Step 7: Tracking Spending and Relationship Management
Over the life of contracts, the company must keep track of spending. As earlier stated, by putting goods and services into categories, it becomes possible to compare spending from one period to the next. It is also possible to ask questions such as why the spending category is increasing and whether adjustments are necessary.
Use Technology to Streamline the Procurement Process
Technology supports your procurement strategy and process massively. ProcurePort’s procure-to-pay software solutions can aid in the creation of templates for RFPs and RFQs. The software is customizable to suit internal workflow in the approval of requisitions and preparation of purchase orders as well as invoice processing.
If your company is shopping for the right e-procurement solutions, schedule a consultation session with ProcurePort here.