What is the procurement process?

The inherent nature of running a business demands you turn even the most banal, everyday actions into process- or systems-based frameworks to manage compliance, prevent fraud, and keep your ship running smoothly. To that end, though you’re used to swiping a card or handing over cash when you need to buy goods or services at home, obtaining the same as part of a corporate structure turns a simple transaction into the procurement process.

But, though procurement is lengthier and demands more time and attention than mindlessly swiping a card, it doesn’t have to be difficult or unpleasant. If you’re experienced in similar roles, particularly adept at managing bureaucratic functions, or leverage many of today’s automated procurement platforms, you’re well on your way to becoming a procurement pro.

But you must first have a solid understanding of what the procurement process entails, procurement procedures, procurement process steps, and common pitfalls associated with procurement – as well as techniques for navigating through them.

What is Procurement?

Procurement is the formalized, codified, and process-based technique to order materials, goods, or services on behalf of your business. Procurement is often the phrase associated with a deeper vendor connection, too, so managing your vendor procurement process by engaging with your suppliers is paramount.

In the past, procurement was a manual process that demanded reams of paperwork and the most precious workplace commodity of all – time. Even recent developments, like digital spreadsheets and email, are too slow to match the corporate pace today and can have a material effect on your bottom line if procurement isn’t optimized.   

Ultimately, a quality procurement strategy matches your needs (material, good, service, etc) with an optimized series of workflows that cut costs, execute quickly, and keep your company on great terms with your vendor teams.

Types of Procurement

While procurement specifics range widely, your company’s procurement will likely fall under one of three primary umbrellas:

Direct procurement

This is effectively what your income statement’s cost of goods reflects. Direct procurement encompasses any material object purchases that directly contribute to your top-line revenue and sales. Depending on your industry, this could be raw materials like lumber for manufacturing or wholesale inventory for resale.

Indirect Procurement 

These items would fall under SG&A expenses on your income statement. They include anything bought, purchased, and procured for firm-internal use. Items might include airfare to a conference, new office furniture, or day-to-day utilities like water and electricity. While necessary to business, indirect procurement items don’t directly impact your revenue. 

Services Procurement

The final procurement type includes anything that improves your employee or company output, efficiency, or work quality. These include software subscriptions, one-off consulting services, or even temporary contractors to cover busy business cycles.

Procurement vs Purchasing

Procurement encompasses a broader spectrum of activities aimed at strategic, long-term goals, while purchasing is more transactional and immediate in nature.

In essence, procurement is about strategically managing the entire process, from recognizing the need for a product or service to maintaining relationships with suppliers even after the transaction. On the other hand, purchasing is about executing the transaction itself, often focused on securing the best price for a specific need.

What is Procurement Cycle?

The procurement process cycle, also known as the purchasing cycle or sourcing cycle, comprises several key stages. These include identification of needs, vendor selection, negotiation and contracting, purchase order placement, goods or services receipt and inspection, invoice approval and payment, and vendor performance evaluation. Each stage is vital for efficient procurement management, ensuring seamless acquisition of goods and services while maintaining vendor relationships.

What is the Procurement Process?

The procurement process describes your firm’s specific standard operating procedure (SOP) for executing vendor procurement. Codifying a formal procurement process, compared to throwing cash around or giving every employee a charge card, has a few specific and quantifiable benefits:

1. It prevents fraud, waste, and abuse.
2. It helps maintain a paper trail for regulatory compliance.
3. Over time, watching procurement processes closely uncovers inefficiencies or organizational waste to trim, ultimately improving your bottom line.

Again, your specific vendor procurement process will vary according to SOP, your role, and your company’s industry. If you’re successful, though, a great procurement process: 

1. Creates a shared understanding between your company and suppliers, where each party follows the mutually agreed-upon rules and systems.
2. Has just enough touchpoints with employees and management to ensure quality purchasing without waste, while keeping the workflow lean enough to be efficient and quick.
3. Has filing and storage parameters that effectively organize and maintain documentation from the steps within the process.

Common Principles of Procurement

In both public and private sectors, procurement is guided by principles aimed at ensuring ethical conduct and responsible use of resources. While specific practices may vary, these principles serve as a universal framework for procurement professionals.

Economic Efficiency:

Prioritize the economical and efficient use of resources in procurement decisions, considering factors like cost-effectiveness, risk management, and long-term value.

Equity:

Ensure fairness and impartiality in all procurement processes, treating all parties equally and evaluating bids based solely on their merits.

Competitive Sourcing:

Promote competition among suppliers to obtain the best terms and value for goods and services, except in cases where sole-source providers are justified.

Operational Efficiency:

Streamline procurement processes to maximize efficiency and minimize delays, enhancing overall effectiveness and resource utilization.

Transparency:

Maintain transparency by providing accessible information to stakeholders, including the public and suppliers, while respecting confidentiality where necessary.

Integrity:

Uphold the highest standards of integrity, honesty, and responsibility in procurement activities, ensuring funds are used ethically and in the public interest.

Accountability:

Hold individuals involved in procurement accountable for their actions and decisions, fostering a culture of accountability and trustworthiness.

Adherence to these principles not only ensures compliance with regulatory requirements but also cultivates a culture of ethical conduct and responsible stewardship of resources in both public and private procurement contexts.

Stages of Procurement

In the procurement journey, three key stages define the process: sourcing, purchasing, and payment.

Sourcing Stage:

This initiates with identifying needs, creating purchase requests, and assessing vendors. Establishing strong supplier relationships is pivotal, fostering collaboration and trust.

Purchasing Stage:

Negotiations, order creation, and meticulous receipt and inspection of goods and services characterize this phase, ensuring alignment with expectations.

Payment Stage:

Accounts payable conducts thorough matching to ensure accuracy before approving invoices and arranging payments. Detailed record-keeping throughout maintains transparency and accountability.

Steps in the Procurement Process: How Does it Work?

Since we’re ensuring our procurement process maintains documentation of the steps involved, we’ll need to cover those as well. Remember – your specific procurement steps might vary, but will likely follow a very similar framework:

1. Identify the need: within the company, an employee or manager identifies a need and kicks off procurement with a requisition.
2. Purchase requisition: the initiating employee will complete the Purchase Requisition before sending it up the chain for review and approval.
3. Solicitation: Once approved by the approval authority, the company’s contracting team begins procurement solicitation. Depending on how complex the need is, you might end up with a Request for Quote (RFQ) in the case of very simple, straightforward procurement cases or a full Request for Proposal (RFP) if you’re procuring a larger system or complex service.
4. Evaluation and contract kickoff: Once your team evaluates all proposals and bids, you’ll select a vendor, notify all applicants, and begin onboarding the supplier. This is also when contracts and legal documentation are finished. The phase ends when the supplier receives and signs their Purchase Order (PO).
5. Order cycle: Then, depending on your company SOP, you’ll receive the item and invoice before routing invoice approval workflows and paying in full. This step varies in complexity based on items procured and how your company manages accounts payable transactions.
6. Documentation and record management: Then you’ll ensure all paperwork is completed correctly and in order before storing – we recommend finding a quality digital storage platform rather than keeping decades of old procurement data in banker boxes, though!

How to optimize the Procurement Process?: Key Strategies

1. Define Clear Strategy: Align procurement objectives with business goals for streamlined operations.
2. Invest in Training: Empower staff with skills to navigate complex processes effectively.
3. Budget Planning: Conduct thorough cost analysis and plan resources accordingly.
4. Invest in Procurement Software: Utilize advanced procurement software for automation and visibility.
5. Supplier Collaboration: Foster transparent communication to enhance relationships and performance.
6. API Integration: Seamlessly integrate procurement processes with other business systems.
7. Policy Compliance: Establish and enforce robust policies to ensure process integrity and regulatory compliance.

By implementing these strategies, businesses can optimize procurement operations, drive cost savings, and enhance overall efficiency.

Common Challenges Businesses Face During Procurement

 As with anything involving more than two people, procurement poses some unique challenges to your enterprise – especially if you aren’t mindful of potential pitfalls and don’t proactively plan to address them.

Unsynchronized Vendor and Supplier Relations

A hallmark of a well-oiled machine in the corporate world is comprehensive and fruitful relationships with your vendors. Every touchpoint your company has with a supplier - onboarding, invoice management, and more - is a chance to improve or degrade that relationship.

Ultimately, quality procurement management goes a long way toward keeping relationship quality high. After initial solicitation and onboarding, your procurement workflow might be the most frequent part of your operation the vendor sees. Do you want your supplier to be excited when they see a purchase order filter into their platform, or would you rather imagine them sighing in frustration as they face another needlessly complex and convoluted procurement cycle? 

While vendor management is just good business, keeping procurement quality high also induces discounts, a first chance at value sales, and a better negotiating position when contracts come up for renewal. 

Fraud, Waste, and Abuse

 Although a formal procurement process negates much of the blatant fraud within a workplace, human nature (and human error) sometimes creates waste or needless spending. This is also sometimes called maverick spending, which is prevalent when there are few checks on procurers and their ordered items.

Maverick spending is, by its nature, an outcome of poor procurement practices. When multiple employees have unchecked spending power and operate outside of a set of parameters, they can easily begin overspending or expensing items unrelated to delivering value to your enterprise - even with the best intentions. 

Visibility and Tracking

We can’t understand what we don’t measure, but companies using manual procurement processes risk losing out on opportunities to aggregate and assess data to improve efficiencies. Likewise, the less information executives and management have, the less able they are to steer the ship properly. 

At the same time, poorly tracked processes or limited-visibility procurement pose regulatory and compliance risks that can cause tons of headaches and hassle during audits.

KPIs & Metrics for Monitoring the Procurement Process

Purchase Order Cycle Time: Time to process requisitions and send purchase orders.

Purchase Order Cycle Time = Total time needed for sending the order / Total orders sent.

Supplier Lead Time: Time for suppliers to deliver after receiving a purchase order.

Supplier Lead Time = Total time to send items after they receive a purchase order / Total orders sent.

Number of Suppliers: Monitor supplier count for efficiency.

Supplier Defect Rate: Ratio of defective parts to total supplied.

Supplier Defect Rate = Defective parts / Total parts.

Supplier Availability: Measure responsiveness to orders.

Supplier Availability = Orders fulfilled / Orders sent.

Fulfillment Accuracy: Percentage of accurate orders.

Supplier Availability = Accurate orders / Total orders.

Total ROI of Procurement: Value compared to spending.

ROI of Procurement = Savings / Total spending.

Conclusion

 Though procurement can be tough, next-gen finance automation tech is rapidly streamlining even the most complex procurement workflows. If you’re sourcing procurement automation or want to see what opportunities are available, remember that great procurement platforms:

1. Centralize employees, vendors, stakeholders, and management into a single workflow for maximum visibility.
2. Allow data aggregation and AI-driven analysis to pin down waste, generate reports, and help guide strategic decision-making.
3. Are customizable enough to let you tailor the system to your specific industry or regulatory requirements while remaining user-friendly enough for all employees to learn easily.
4. Integrate within your ecosystem and, just as importantly, with your vendors’ stack while executing initial vendor onboarding.
5. Create iterative feedback loops to improve your procurement workflows and financial standing.

While, yes, you can keep procurement workflows running manually, you shouldn’t – especially in light of the risk involved and the ease of adopting new platforms that make the procurement process steps a breeze.