Procurement is a vital business process that is crucial to the financial success of your business. While it may seem like a straightforward process, the complexities behind successful procurement management involve a lot of planning and work.
The term procurement refers to the process of purchasing goods or services that your business needs to function. The procurement process is just one step in your company’s overall supply chain management process. It is vital in your company’s operation strategy, and typically requires a substantial amount of your business’ resources to manage. The goal of any effective procurement process is to find competitively priced goods and services from reliable vendors that you can build lasting business relationships with.
Having a competent procurement team in place is essential to the success of the entire procurement lifecycle, but operations can be streamlined with reliable e-procurement software. Digitizing every stage of the procurement process has been shown to have several benefits that make the procurement life cycle a lot easier to carry out.
In this blog, we break down the 9 steps of the purchasing process and split them into three stages to make the process easier for you to understand and implement in your business. We will also discuss how a digital procurement solution can help with each step of the procurement process and what features to look for when you are looking for an e-procurement solution to optimize your procurement.
What is Procurement?
Procurement is the process of acquiring goods, services, or works from external sources, typically through a competitive bidding process. It involves identifying needs, specifying requirements, sourcing suppliers, negotiating contracts, and managing the purchase and delivery of items. The goal of procurement is to obtain the best value for money while ensuring quality, efficiency, and compliance with organizational policies and regulations. Effective procurement is essential for optimizing resources, reducing costs, and maintaining smooth operational workflows within an organization.
Stage 1: The Sourcing Stage of the Procurement Process
1. Identify Your Business Needs - The first stage of the procurement cycle begins with identifying the procurement needs of your business for profitability. This is the first step in the procurement process flow. What are the stock items you need? Do you require any outsourced services or manufacturers? Identifying your business needs can include new stock items, restocking your inventory, or renewing contracts with service providers. As soon as the procurement process begins, it is a good idea to have an open channel of communication with all departments in your business to see who needs what, in order to complete their job functions within the overall process. Modern procurement software can assist with creating item master lists, categorizing your needs, and managing what your business needs to function. The procurement team will develop a list of your business needs based on their evaluation.
2. Create and Submit Purchase Requests - Formal purchase requests (purchase requisitions). Keep in mind, this is not a purchase order. At this stage of the procurement lifecycle, you are simply starting the process of procuring items and services for your business by asking for internal permission. You aren’t buying anything yet. For this step, the procurement team forwards purchase requests which include product descriptions, quantities, vendor information, and price to the procurement managers or chief procurement officer for approval before you can move to the next step. Regardless of the procurement methods you're opting for later, getting internal approval first is vital. The final decision for this part of procurement depends on how your procurement department is structured and the individuals involved in the procurement process of your business. You can improve transparency and spend visibility in your goods and services procurement by using e-procurement software with user-permission features. This helps to streamline the process by allowing you to assign specific employees specific tasks throughout the entire procurement cycle. Spend caps can also be implemented to guide steps in the procurement process and ensure you do not go over budget.
3. Assess Vendors - After your purchase request has been approved, you can move on to finding the best vendor through an evaluation process. This public procurement step involves submitting an RFQ (Request for Quotation) which is usually sent by the purchasing team to potential suppliers to determine how much they will charge you. It is best to send RFQs out to at least 3 suppliers. You can then develop a procurement system to compare the suppliers based on various selection criteria such as costs, reputation, consistency, speed, reliability, and quality to determine which vendor you should use. An e-procurement system with a bidding process or corresponding solicitation process like this can help optimize your procurement process with features that help manage the RFQ and evaluation stage of the procurement process more effectively.
DOWNLOAD THE PERFECT PURCHASING PROCESS WORKFLOW
Stage 2: The Purchasing Stage of Goods and Services Procurement
4. Negotiate with Suppliers for Mutually Beneficial Terms and Prices- Building on the vendor assessment stage, negotiating terms is crucial in saving your business time and money while navigating procurement hurdles within the overall procurement process. With RFQs that are as detailed as possible, you can be sure you have a fair comparison between suppliers, making it easier to negotiate where possible. Make sure you have any agreed-upon terms in writing before moving forward and keep them documented in your procurement software.
5. Create Purchase Orders - The next phase of the procurement plan is to fill out a purchase order (PO) that clearly details the specifics of the goods or services you need. POs are then sent to your chosen supplier, who will fill the order for goods or services procurement as it applies. Online tools can streamline this process with approval capabilities that lay out specific criteria that ensure vendor compliance with best procurement practices when the supply process starts.
6. Receive and Inspect Goods and Services - When receiving any ordered goods, the best practice is to inspect for damage, errors, quantity, and product quality. Specific e-procurement tools can help you evaluate the performance of your suppliers as part of your strategic procurement plan. This will ensure that you only give repeat business to your top-rated vendors that performed their procurement function effectively. 2-way matching capabilities are good the procurement staff should look for in procurement software because they make it easier to match stock with purchase orders. This way you can streamline all the procurement process steps while also monitoring vendor performance with procurement tools.
Stage 3: The Payment Stage - Final Stage of the Procurement Life Cycle
7. Conduct three-way matching - Your accounts payable department needs to conduct a three-way matching process to compare the purchase order, order receipt, and invoice. Doing this will ensure that all products ordered were received and that money is not being spent on unauthorized or inaccurate purchases. Any issues in this 3-way matching system need to be resolved before payment is made, so an efficient three-way matching tool is extremely beneficial in saving you time, ensuring compliance and transparency, and avoiding discrepancies. Ensure only specific employees have the ability to approve invoices, RFQs, and purchase orders by using approval workflow systems designed around hierarchy levels and specific employee permissions.
8. Approve invoice and arrange payment - Once you have determined the fulfillment accuracy, your accounts department can approve and pay the vendor's invoice. Having an efficient and consistent payment process is vital. You need to be sure that all payments match the relevant invoices and that payments are made on time to prevent any late fees or penalties from accruing, and to ensure good supplier relationship management. Streamline your accounts payable process by using digital procurement solutions.
9. Keep records - Although it is the final step of your procurement strategy, record keeping is essential for several reasons, from assisting with audits and tax calculations to covering your company in any potential disputes and monitoring procurement efficiency in the future. Keep records for procurement of all goods and services including negotiations, invoices, receipts, proof of payments, and any other documentation involved in your organization's procurement process. The goal of procurement record-keeping is to ensure that you don’t lose any relevant procurement paperwork and that your record-keeping is neat and organized. To achieve this sort of streamlined procurement process, consider an e-procurement tool with record-keeping features.
An efficient procurement process helps organizations save costs and grow their business. The steps in the procurement process highlighted above are some of the key steps of a modern procurement system. Managing the entire procurement process with a cloud-based procurement platform like Tradogram can help streamline procurement and help organizations achieve optimum efficiency for both their direct and indirect procurement activities. The selection process to choose the procurement solution to adopt should also consider these steps of the purchasing process and how the features offered by the platform can help achieve them.
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