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The strategic sourcing process is a cycle, so it cannot be done once and forgotten about. A cycle approach to […]
Procurement 101
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5 minute read
Written by
Logan Price
The Procurement Process is the backbone of 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.
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 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 process as a whole, but operations can be streamlined with reliable e-procurement software. Digitizing 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 procurement cycle and split them into three stages to make the process easier for you to understand and implement in your business. We will also discuss what features to look for when you are looking for an e-procurement solution for your business.
1. Identify Your Business Needs - The first step is knowing your business requirements for profitability. 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. 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. Procurement software can assist with creating item master lists, categorizing your needs, and managing what your business needs to function.
2. Create and Submit Purchase Requests - Formal purchase requests (purchase requisitions). Keep in mind, this is not a purchase order. In this step, 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. Purchase requests that include product descriptions, quantities, vendor information, and price, will be sent to the department manager or chief procurement officer for approval before you can move to the next step. You can improve transparency and spend visibility by using e-procurement software with user-permission features that allow you to assign specific employees specific tasks. Spend caps can also be implemented to 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 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 compare selection criteria such as costs, reputation, consistency, speed, reliability, and quality to determine which vendor you should use.
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. 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.
5. Create Purchase Orders - You can now 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. Online tools can streamline this process with approval capabilities that lay out specific criteria.
6. Receive and Inspect Goods and Services - When receiving any ordered goods, you need to inspect for damage, errors, quantity, and product quality. Specific e-procurement tools can help you evaluate the performance of your suppliers to ensure you only give repeat business to your top-rated vendors. 2-way matching capabilities are a good feature to look for because they make it easier to match stock with purchase orders.
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 to ensure that all products ordered were received and that money is not being spent on unauthorized or inaccurate purchases. Any issues 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 with 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 - Record keeping is essential for several reasons, from assisting with audits and tax calculations to covering your company in any potential disputes. Keep all records including negotiations, invoices, receipts, proof of payments, and any other documentation involved in the procurement process. To help ensure that you don’t lose any documents and that your record-keeping is neat and organized, consider an e-procurement tool with record-keeping features.
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