If you hope to grow your business and improve your day-to-day operations, your procurement process is the foundation on which you should build your strategy. It is an essential operational component for all businesses, no matter what industry.
This blog covers important aspects of the procurement management process, including critical points you need to know, the stages and steps of procurement, and how to implement and improve your procurement strategy.
What is the Procurement Process, and Why is it Important?
The procurement process is essential for every company that hopes to expand and optimize its performance and operations. It is the acquisition of goods or services needed for the company to operate daily. This, however, goes far beyond just purchasing; procurement is a process that requires constant admin, monitoring, and assessment.
Procurement makes up a large portion of your company’s overall supply chain process. The procurement teams, headed by Chief Procurement Officers (CPOs), work to ensure that the entire process of acquiring goods and services for the company runs smoothly. This includes identifying reliable suppliers, vendors, or manufacturers, negotiating the most affordable price possible, negotiating mutually beneficial terms, making purchases, tracking orders, contract management, and maintaining records (and that is just scratching the surface). This process plays a significant role in the company’s profitability and cost-savings capabilities, which can directly impact your bottom line.
The Types of Procurement
The types of procurement can be sorted into several categories, with even more subcategories beyond that. But, the two main niches it is usually divided into are direct procurement and indirect procurement. The most distinctive difference between these two categories is the function they address.
Direct Procurement focuses on securing the core supplies needed to produce an end-product that will be sold to your customers. This usually includes raw materials,
Indirect Procurement refers to expenditure on services and goods that drive profitability. These purchases support day-to-day operations but have no effect on your company’s bottom line. Expenses falling under this category include subscriptions, maintenance, office supplies, and travel expenses.
Furthermore, direct and indirect procurement can also be split into goods and services procurement. Goods procurement refers to the acquisition of physical items like your inventory and software subscriptions, while services procurement refers to all people-based services. This includes services such as law firms, contractors, temporary laborers, and on-site security personnel.Exploring the Difference Between Procurement, Purchasing, and Supply Chain Management
As mentioned above, procurement is much more than just purchasing, but what is the difference between supply chain, procurement, and purchasing?
- Supply Chain Management covers the logistics involved in obtaining goods. It involves managing a coordinated network of companies, facilities, and business activities involved in sourcing, developing, manufacturing, and delivering products. Supply chain management focuses on providing goods and services to your customers as quickly and accurately as possible without sacrificing quality.
- Procurement is only one part of the overall supply chain process. It refers to the sourcing, negotiation, payments, receiving, and record-keeping involved in obtaining goods and services needed to support your business operations.
- The term “Purchasing” may be used interchangeably with procurement, but it is only one step in the procurement process. Purchasing refers to the transactional parts of the procurement process (buying the goods).
Stages of the Procurement Cycle
The Procurement Process can be split into three stages: the sourcing, purchasing, and payment stages. These stages are sometimes referred to as the procurement life cycle and encompass the procurement steps from beginning to end. If you are looking for a bit more information, keep an eye on our page for an in-depth explanation of the steps and stages of the procurement process. The Sourcing Stage:
- Step 1: Identifying your business needs.
- Step 2: Creating a Purchase Request (Purchase Requisition).
- Step 3: Assessing the vendor and sending RFQs (Requests for Quotation).
The Purchasing Stage
- Step 4: Negotiate with suppliers for mutually beneficial terms and prices
- Step 5: Create purchase orders (POs).
- Step 6: Receive and inspect goods and services.
The Payment Stage
- Step 7: Conduct three-way matching
- Step 8: Approve supplier’s invoice and arrange payment
- Step 9: Keep and organize records
Keep in mind, not all companies use all nine of these steps; they can vary depending on several factors. Some businesses only need a simple purchase process, while others will need to utilize all three stages of the procurement process. The steps your company will use depend on the following factors:
- Your company’s operating model,
- The size of your company,
- Where your business is located,
- Your Financial Budget
- Your compliance management
- How your organization is structured
The effectiveness and efficiency of the procurement process determine your company’s profit margins and quality of services and goods. To begin the procurement process, the need must be identified. The next step is to find the right vendor. Following the identification of a vendor, the purchase order is prepared, including all the specifications and terms and conditions. The vendor then begins processing the purchase order. Following an inspection of the goods and services, the procurement team accepts or rejects the order. After the order is accepted by the team, the next step would be to pay the invoice. For auditing and compliance purposes, all procurement steps must be documented. Be sure to keep track of the purchase requisition, purchase order, and vendor invoice especially.
How to Improve Your Procurement Process
Everything evolves and changes, and you can either adapt or fall behind. Despite how many years of experience you may have as a procurement specialist if you are not constantly learning, you are going to fall behind when it comes to newer, simpler, more efficient ways to do your job. This means that your business will ultimately suffer due to the fact that its procurement methods are out of date.
There are so many ways to improve your procurement process, increase your profitability, and save money and time for your business. The three simplest ways are improving your procurement efficiency, implementing e-procurement software, and using KPIs for an evaluation of your current strategy so you know which target areas require improvement.
Using KPIs to Improve Your Procurement Process
The first step in improving any aspect of your work or home life is to identify problem areas. The easiest way to do this in procurement is to evaluate your current procurement strategy while keeping in mind the relevant Key Performance Indicators (KPIs). KPIs are vital metrics used to measure performance, monitor progress, and share progress information in an objective way. Procurement managers can use KPIs to make data-driven process improvement decisions and organize, optimize and regulate their purchase expenses, quality, cost, and time.
Here are some KPIs you can use to evaluate and improve your procurement function:
- Compliance Rate - This KPI is vital in ensuring your legal security. If there is a decrease in the compliance rate of the policies laid out in your purchasing contract, this can spike indirect and maverick spending in your business. You should take note of the number of disputed invoices in comparison to the total number of invoices from a specific supplier and the difference between the total price you paid and the price you were quoted.
- Supplier Defect Rate - This is a very important metric used to identify the individual quality of your selected supplier. It refers to the number of defective parts in the items you receive in comparison to the total number of items you ordered.
- PO and Invoice Accuracy - If the accuracy of your purchase orders and invoices is not up to par, it will negatively affect your cash flow by increasing your operating costs.
- Supplier Availability - This represents your vendor’s ability and capacity to respond to last-minute or emergency demands.
- Supplier Delivery Time - Also known as supplier lead time, this KPI refers to the average time it takes for your suppliers to fulfill your purchase order after they have received it.
- Purchase Order Cycle Time - The period of time for the entire purchase order cycle to be completed: From the point that a request for purchase is submitted up until the point that it is transferred to the supplier or contractor.
Cost Savings KPIs
- Cost Per Invoice and Purchase Order - It should always be the goal to spend as little as possible without compromising on quality. The amount spent per invoice and PO can vary depending on various factors. For example, procurement teams using traditional procurement methods will have higher processing costs than procurement teams using automated processes provided by e-procurement software.
- Spend Under Management - This is the percentage of procurement expenditures that are controlled or regulated by management. An organization's ability to optimize costs and forecast expenses increases with its spend under management.
- Price Competitiveness - This KPI is used to shortlist vendors that offer competitive prices while still delivering quality products and services. To determine price competitiveness, you can compare the price you paid with the published market prices listed on reliable procurement market intelligent websites.
- Procurement ROI - The profit and cost-effectiveness of procurement investments are determined using this KPI, which is best suited to internal analysis.
Additional KPIs to take note of:
- The Number of Suppliers - A company with more suppliers has more options, but also more administrative work. Procurement departments monitor the number of vendors in their supplier networks and periodically eliminate vendors that aren’t used as frequently to improve efficiency.
- Vendor Rejection Rate and Costs: For this KPI, you evaluate and take note of how often you reject supplies delivered by your vendor and the costs to your company for the return of the products.
Implementing e-Procurement in Your Business
Analog procurement methods are quickly becoming obsolete. To stay relevant and competitive in today’s marketplace, irrespective of industry, an organization needs to stay ahead of the trends and adapt to technological advances. e-Procurement is the use of cloud-based procurement software, and the benefits it can have on your procurement process are almost incomparable.
When looking for procurement software, there are a few features to keep in mind for the most comprehensive solution to any challenges in your current strategy:
- Procure to Pay Features help businesses improve their purchase order management. Employees or purchasing managers can track the entire purchasing process from requisition forms and purchase order creations to payment and record keeping. By recording each step of the P2P process, you can be sure you only pay for what you have received.
- Strategic Sourcing tools help businesses identify the best suppliers and negotiate mutually beneficial deals and fair prices with them.
- Supplier Management tools can greatly improve your supplier relationships. Businesses can organize all of their suppliers using a set of categorized vendor lists in various formats.
- Report Builder - You can create your own reports by utilizing data generated by various criteria with intuitive, user-friendly interfaces. This will allow you to gain real-time insight into your purchasing patterns, analyze your spending, share reports, and compile data on one platform, ensuring that you make strategic decisions to help you reach your goals.
- User Permissions - You can customize who in your business sees what. By assigning each user a role, employees will only be able to see what is enabled on their account, safeguarding your data.
- Items Catalog - This easy-to-manage feature allows procurement teams to create, categorize, organize, and manage item master catalogs and inventories.
- Budgeting tools allow you to improve your purchase transparency by tracking and organizing your budget to eliminate unnecessary spending and ensure you are getting the most out of your money.
Be sure to keep an eye on the Tradogram blogs page for more information about how you can improve your procurement activities, effectively manage your risks, and implement changes that will improve your procurement strategy in the long term.