Are you someone who has been struggling with understanding the idea and the concept of the procurement process?
If yes, then you have landed in the right place. This article is going to be your savior. Drop all your distractions and read this complete end-to-end guide to the procurement process right away.
A business is a venture that is based on periodic investments to keep it functional. This investment is made for inventory as well as other assets required by the company for a smooth run.
These assets can be a light bulb, stationery items, chairs, etc. These assets and investments can be more specific as well like machinery, raw material, services, maintenance, and more.
In today's article, we'll learn thoroughly about procurement and related concepts. Let's take a look at the table of content before diving in:
- What is Procurement?
- Why is Procurement Important for Business?
- What is the difference between Direct, Indirect, and Service Procurement?
- What is a Procurement Process?
- How Procurement Works?
- Five Pillars of Procurement
- Lifecycle of Procurement
- How To Improve Your Procurement Systems?
- Frequently Asked Questions Associated with Procurement
- How Can Deskera Help in the Procurement Process?
Let's get started!
What is Procurement?
Procurement refers to a broad range of activities carried out by businesses to acquire products and services. Even while the final stage of purchase is often referred to as procurement, the entire procurement process can also be included.
Although organizations can operate as both buyers and sellers, the emphasis is often on the company performing the soliciting.
Procurement can be summed up as getting "the five rights": getting the right product in the right quantity, at the right time, for the right price, and from the right source.
Due to the plethora of top-tier competitors on both the domestic and international markets, the business environment of today is getting more competitive. This has forced businesses to improve their internal processes in order to maintain their competitiveness.
Customers have been conditioned to accept lower total costs for products and services that are better in every way. It includes:
- Better quality,
- Quicker delivery, and
- Customization to meet their individual demands.
Procurement is an essential part of any business. Procurement ensures the production of the final goods and services by a business. These goods and services are the ultimate product of the business, hence making profits.
Why is Procurement Important for Business?
Every business need supplies, products, and services to accomplish its objectives. Whether it includes investing in communication equipment, supplies for producing items, or labor to maintain structures, running a business is a time-consuming and expensive task.
Procurement is an important process for businesses because it helps them to streamline costs, ensure quality, and reduce risk. It also helps them to monitor and manage the entire purchasing process from start to finish, and to clarify their objectives when negotiating with suppliers.
Procurement helps businesses to maintain their competitive edge and increase their profits, as well as to control their cash flow and increase their efficiency. A procurement department's primary objective is to find the best price on the things you need.
The skills of procurement specialist include developing strong working relationships with suppliers, negotiating advantageous terms, and accelerating the procurement process from the identification of a need for products or services through invoice payment.
By streamlining their procurement procedures, organizations can maximize cost savings, cut back on wasteful spending, and evaluate how and where expenditures are used most efficiently. Sound procurement practices enable expansion and shield the business from economic downturns by saving money.
What is the difference between Direct, Indirect, and Service Procurement?
Procurement can be divided into three different categories. These categories are based on nature and the requirements the process aims to fulfill.
On the terms, the three different procurement categories are direct procurement, indirect procurement, service Procurement.
All the categories of the procurement process are conducted with the aim to meet organizational goals. All these processes directly or indirectly help the business make money. However, making money can and cannot be the aim of interest for the process.
Direct Procurement
Direct procurement is aimed and conducted to meet the requirement of the raw material. Direct procurement helps a business obtain raw materials in order to produce final goods.
These goods are the money-making factors for the business through sales and profits. Thus, direct procurement is directly involved in the system of sales and products for a business and organization.
Indirect Procurement
Indirect procurement aims to meet the requirements of internal staff and units for facilitating the working process. Indirect procurement helps in procuring the goods and services required for day-to-day operations.
Thus, this process is indirectly involved in business and meeting organizational goals.
Service procurement
Service procurement is procuring service-based requirements that are required for once. These could be subscriptions, paying for software, or any other professional service acquired. Service procurement works for the short term on a one-time contract basis.
Here is a detailed set of difference in the three kinds of procurement processes.
In addition to the ones listed above, there is another form of procurement. Let's check:
Goods Procurement
Any non-tangible purchase refers to as good. The acquisition of raw materials, office supplies, desks, and other objects is included in the procurement of physical products.
What is a Procurement Process?
A procurement process is a set of steps that an organization follows when it needs to purchase goods or services from external vendors.
The process typically starts with an internal need, such as a need for new technology, and then progresses through the steps of identifying suppliers, negotiating pricing, and ultimately awarding the contract.
Procurement methods work best when they adhere to a repeatable, efficient approach.
The following steps make up the traditional procurement cycle, while each team builds its own unique process for discovering, obtaining, and paying for goods and services:
1. Identification of Requirement
A stakeholder may recognize the requirement for a product, material, software, or service in order to make goods or conduct daily operations. This need is stated on an intake form or request form.
2. Submit a Purchase Order
Purchase requests are made by the interested party. This form must include all relevant information needed to process and approve the purchase. Additionally, recommendations for vendors of goods or services may be included in the request.
3. Analyze Prospective Vendors
In accordance with the method and kind of purchase requested, procurement evaluates available options and selects the best vendor to fulfil the request. A Request for Proposal (RFP), Request for Quote (RFQ), or "three bids and a buy" approach might occasionally be used in place of this.
4. Discuss and Negotiate the Terms and Conditions
When the best supplier has been picked, the negotiation process begins. The procurement team will work with the sales representative to evaluate the acquisition's cost and terms. Negotiations shouldn't be finished until all departmental requirements have been met.
5. Set up a PO
Procurement produces a buy order to order the provider's goods or services. In order to make sure that all transactions meet expectations and to check for any potential issues or anomalies, the PO often goes through a distinct approval process. Procurement then sends the purchase order to the supplier for fulfilment.
6. Get and Evaluate the Products
The supplier completes the order exactly as requested. After delivery, the procurement team gets the goods and examines them to verify their quality and accuracy. If the order is not as expected, the receiver may ask the supplier to make changes or return the delivery.
7. Reconcile and Match
Once the goods have been fully received, a three-way match is conducted to ensure that the shipment, invoice, and PO are in sync. In order to ensure that all specifications and terms of the contract are met during the delivery process, the procurement team also assesses vendors.
8. Payment of Invoices and Settlement
Following the conclusion of the three-way matching, the supplier invoice is sent for processing. The bill has been coded, batch-processed, and scheduled for payment.
9. After-closing Activities
The procurement team is in charge of operations after a close and purchase analysis. This may entail maintaining records, reporting, analysing spending, assessing vendors, managing contracts, and bringing on new suppliers (in cases where contracts are completed or terminated).
How Procurement Works?
Following, we've discussed steps that defines the working of procurement. Let's learn:
Step 1: You Must Be Recognized
In order to be recognized in procurement, you must meet the qualifications listed by the company or organization for which you are seeking procurement recognition.
These qualifications may include a degree in business, finance, engineering, or a related field; experience in the procurement field; a certification from a recognized professional organization; or a demonstrated knowledge in a specific area of procurement.
Additionally, you may need to meet specific requirements set by the company or organization, such as a minimum number of years or types of experience, or a certain level of expertise.
Step 2: Create a Purchase Requisition
Creating a Purchase Requisition in procurement
1. Log in to your procurement system and navigate to the "Purchase Requisition" page.
2. Enter the necessary information such as the supplier's name, contact information, and delivery date.
3. Select the items you wish to purchase from the supplier.
4. Enter the quantity, unit price, and subtotal for each item.
5. Review the total cost of the purchase requisition.
6. Submit the purchase requisition for approval.
7. Once approved, the requisition will be sent to the supplier for processing.
8. Follow up with the supplier to ensure timely delivery.
Step 3: Review the Requisition
When reviewing a requisition in procurement, there are several key steps to consider. Let's learn:
1. Review the product or service requested. Check that the requisition accurately describes the item or service requested and that the quantity, specifications, and pricing are all correct.
2. Compare the requisition to existing contracts. If the item or service is already covered by an existing contract, the requisition should be updated to reflect the terms of the contract.
3. Review the budget. Check that the amount requested does not exceed the budgeted amount for the item or service.
4. Verify the requisitioner. Make sure that the person requesting the item or service has the authority to do so and that the person is an authorized requisition.
5. Review the procurement process. Ensure that the requisition follows the appropriate procurement process and that all steps of the process have been completed.
6. Confirm supplier information. Make sure that the supplier information is complete and accurate, and that the supplier is an approved vendor.
7. Review the timeline. Ensure that the timeline for delivery is reasonable and that it will not conflict with other projects.
8. Ensure compliance. Check that the requisition is compliant with applicable laws
Step 4: Solicitation
Solicitation is an essential part of the procurement process. It involves the development and issuance of a formal invitation to potential suppliers to submit offers or bids for goods or services.
The solicitation process is designed to ensure that the goods and services obtained are of the highest quality and at the best possible price. It also allows suppliers to submit their offers or bids to compete for the business.
The process of solicitation may include the use of a Request for Proposal (RFP), Request for Quotation (RFQ), and/or Invitation for Bid (IFB) depending on the goods or services being procured.
Step 5: Assessing and Choosing
Assessing and choosing in procurement involves evaluating the bids, quotes, and proposals that have been submitted by prospective suppliers in order to determine the best option for the organization.
This process typically involves reviewing a range of factors including price, quality, delivery times, service, and other criteria. The evaluation process should be documented and must be conducted in a fair and impartial manner.
Organizations should also ensure that the process is compliant with relevant laws and regulations. Once a supplier has been chosen, a contract should then be negotiated and agreed upon.
Step 6: Finalize the Price and Terms of the Contract by Negotiating it
This step in the procurement process is to negotiate the price and terms of the contract. This involves discussing the details of the contract with the supplier, including any potential changes or amendments that need to be made.
The goal is to reach an agreement that meets the needs of both parties and is in line with the organization's budget and goals. It is important to ensure that both parties are in agreement and that any changes or amendments to the contract are clearly outlined. This process can take time and should be done in a professional, respectful manner.
Step 7: Managing Orders
Managing orders in procurement involves the identification and selection of vendors, the creation of purchase orders, and the management of the ordering process. The ordering process begins with the identification of a vendor that can provide the necessary goods or services.
Once a vendor is identified, a purchase order is created and sent to the vendor. The vendor then reviews the order and either accepts or rejects it. If accepted, the vendor typically ships the goods or services to the buyer and invoices the buyer for payment.
The buyer then reviews the invoice, pays the vendor, and tracks the order until it is received. If any issues arise during the ordering process, they are typically handled through communication between the buyer and the vendor.
Step 8: Approval of Invoices and Disputes
The approval of invoices and disputes in procurement depends on the organization’s policy regarding how it handles such matters.
Generally, invoices are approved by the purchasing department after all specifications, quantities, pricing, and other necessary information have been verified.
Disputes may be handled by the procurement department or by a designated dispute resolution team, depending on the organization’s policies. In some cases, invoices and disputes may be referred to a higher authority for resolution.
Step 9: Keeping and Reviewing Records
When procuring goods and services, it is important to keep accurate and comprehensive records of the process. This includes any bids, invoices, contracts, and other documents associated with the procurement.
Keeping accurate records helps ensure transparency and accountability of the process and can be used to verify compliance with the organization’s policies and procedures. When reviewing procurement records, it is important to assess the accuracy and completeness of the information contained in the documents.
This includes ensuring that all information is accurate, up to date, and relevant to the procurement. Additionally, it is important to review the accuracy of the pricing information included in the documents.
Finally, it is important to ensure that all documents are signed and that all relevant parties have received copies of the documents.
Five Pillars of Procurement
Following, we've discussed important five pillars of procurement. Let's learn:
#Pillar 1: Value
Value in procurement refers to the ability to secure the best combination of quality, cost and performance when acquiring goods or services. It involves assessing the total cost of ownership of a product or service, considering such factors as purchase price, usage and maintenance costs, and the overall value of the product or service to the organization.
#Pillar 2: Competition with no entry fees
Competition with no entry fees in procurement Many government contracts and procurements do not require an entry fee for companies to participate.
This is beneficial for businesses, as it creates a level playing field and allows them to compete without having to pay an up-front fee to be considered.
Furthermore, this can also help encourage competition by allowing more businesses to participate and potentially increase the quality of services or products offered. The lack of an entry fee can also reduce administrative costs, as companies do not have to pay to submit their bids.
#Pillar 3: Transparency & Ethics
Transparency and ethics in procurement are essential components of good governance.
Transparency means providing open access to information and processes related to procurement, such as contracts, procurement decisions, and supplier information.
Ethics refers to the values and principles governing how decisions are made and how businesses interact with each other.
Good procurement practices should always be transparent and ethical. This involves setting clear expectations for suppliers and providing them with a level playing field. It also includes making sure that the procurement process is fair, open, and competitive. This helps to ensure that the procurement decisions are based on quality, value for money, and sustainability.
Additionally, it is important to ensure that there are no conflicts of interest between the procuring entity and the supplier. To do this, procuring entities should use an independent third party to evaluate bids and ensure that the selection process is objective and free from bias.
Furthermore, there should be appropriate record-keeping to ensure that the process is auditable and that any irregularities are flagged and addressed.
Finally, it is important to ensure that all stakeholders are aware of the procurement process and that any changes to the process are made in a transparent and ethical manner. This helps to ensure that the procurement process is fair and that all stakeholders are treated fairly
#Pillar 4: Record-keeping and Accountability
The record-keeping and accountability of procurement are essential for an effective procurement process. It is important for organizations to maintain records of their procurement activities to ensure that all procedures are followed correctly, and that the organization is compliant with relevant laws and regulations.
Record-keeping should include information such as the supplier or vendors contacted, the products or services purchased, the price paid, the payment method and terms, and any other relevant details.
The records should also include information on the evaluation process used to select the suppliers or vendors and any additional information that may be relevant. Note that records should be kept up-to-date and securely stored. They should also be easily accessible in case of an audit or investigation.
Organizations should also ensure that they are held accountable for their procurement activities. This can be accomplished by having proper internal controls and processes in place, such as performance reviews, regular audits, and checks and balances.
Furthermore, this will help ensure that the organization is operating within the law and regulations and that any potential issues or irregularities are addressed quickly.
#Pillar 5: Equity
Equity in procurement refers to the practices and strategies that public organizations can use to ensure that their purchasing activities are equitable and socially responsible.
This may include taking into account economic, environmental, and social impacts, such as encouraging small businesses, minority-owned businesses, and businesses owned by women.
Additionally, equity in procurement may involve promoting fair wages, safe working conditions, and the use of sustainable materials.
Lifecycle of Procurement
Following, we've discussed lifecycle of procurement. Let's learn:
1. Define the Business Needs
Business need in procurement is the requirement to purchase goods or services in order to fulfill a business goal. It involves the identification of needs, finding potential suppliers, evaluating them, and negotiating the best deal.
Moreover, it also involves managing the entire process of ordering, receiving, and paying for the goods or services. The goal of procurement is to ensure that the organization is getting the best value for its money and that the goods or services meet the organization's needs.
2. Conduct Analysis of Market
Analysis of the market in procurement is an important step in the procurement process. It involves gathering data on suppliers and the market in general to gain an understanding of the competitive landscape and the available resources. This analysis helps procurement professionals assess the best options for their organization's needs and identify areas for improvement.
Analysis of the market also helps procurement professionals understand and take advantage of current trends in the industry. The analysis consists of several steps, including analysis of the supply base, market trends, and pricing.
By analyzing the supply base, procurement professionals can gain insight into the types of suppliers available, the availability and quality of products, and the cost of doing business.
Market trends analysis allows procurement professionals to identify the current dynamics in the industry and the potential opportunities and risks. Finally, pricing analysis is used to determine the cost of goods or services and compare it to competitors.
Analysis of the market in procurement is an important step in the procurement process. It helps procurement professionals gain a better understanding of the competitive landscape, identify areas for improvement, and take advantage of current trends in the industry.
3. Create Procurement Strategy
Build procurement strategy in order to stay on the right track. Developing procurement strategy is a plan for obtaining goods and services at the best possible cost and in the most efficient manner. It is a comprehensive approach to the acquisition of goods and services, including how to identify needs, select vendors, negotiate contracts, and monitor supplier performance.
1. Understand Your Needs: Begin by understanding the scope of your project or need. What are the requirements, specifications, and timelines?
2. Analyze Your Suppliers: Research potential suppliers and determine which are best suited to meet your needs.
3. Evaluate Suppliers: Evaluate suppliers’ pricing, quality, and reliability.
4. Develop Contracts: Negotiate contracts with suppliers, including terms, conditions, and payment schedules.
5. Monitor Supplier Performance: Monitor supplier performance and address any issues that arise.
6. Review and Adjust: Regularly review your strategy and adjust as necessary.
4. Perform Market Testing & Review
Market testing and review is a process of testing the market to determine the best solution for a procurement project. It involves researching the market to identify potential suppliers, evaluating the bids received, and selecting the most suitable supplier.
Market testing and review can also involve evaluating the customer needs, developing an appropriate selection criterion, and identifying potential value-adds or cost savings.
Furthermore, it is an important step in any procurement process and should be conducted in a systematic manner to ensure the best outcome.
5. Develop Documentation & Specifications
1.Requirement Specifications – This document outlines the requirements of the procurement process, including the project scope, objectives, timeline, deliverables, and any other specifications pertinent to the project.
2. Vendor Selection Criteria – This document outlines the criteria that will be used to evaluate potential vendors, including experience, price, delivery time, and any other applicable criteria.
3. Request for Proposal (RFP) – This document is sent to potential vendors to allow them to submit proposals for the procurement project.
4. Contract – This document outlines the agreement between the buyer and seller, including all terms and conditions.
5. Quality Assurance Plan – This document outlines the procedures for ensuring that the final product meets the requirements of the procurement project.
6. Test Plan – This document outlines the tests that will be conducted to verify that the final product meets the requirements of the procurement project.
7. Procurement Schedule – This document outlines the timeline for the procurement process, including milestones and deadlines.
8. Communication Plan – This document outlines the procedures for communication between the buyer and seller, including the process for resolving disputes.
6. Identify Supplier Selection Process
1. Define the Requirements: Identify the goods or services needed, the quantity, and when they are needed.
2. Develop a Supplier List: Identify potential suppliers that can meet the requirements.
3. Evaluate Suppliers: Analyze each supplier’s ability to meet the requirements, based on factors such as quality, cost, customer service, and past performance.
4. Assess Suppliers: Assess the supplier’s financial stability and risk factors, such as compliance and customer feedback.
5. Negotiate Terms: Negotiate the terms and conditions of the contract, including payment, delivery, and quality requirements.
6. Finalize Selection: Finalize the selection of the supplier and award the contract.
7. Monitor Supplier Performance: Monitor the supplier’s performance to ensure that they are meeting the requirements.
7. Issue Tender Documentation
Tender documentations are documents that define the scope of work and requirements of a procurement process. It is usually issued to potential suppliers and contractors who are interested in entering into a contract with the organization to provide goods or services.
Furthermore, the documents outline the terms and conditions of the procurement process, the evaluation criteria, and the selection process.
It also provides the potential suppliers and contractors with the necessary information that they need to submit a bid. The tender documentations also provide information on the timelines and the payment terms.
8. Tender Evaluation Process
The tender evaluation process is the process used to evaluate and compare bids from potential suppliers in order to determine which one is the most suitable for a particular procurement initiative.
It typically involves a series of steps, such as:
1. Establishing the evaluation criteria: This involves identifying the criteria that will be used to assess each bid. Common criteria might include price, quality, delivery times, customer service and experience.
2. Receiving and reviewing bids: The purchasing organization will receive bids from prospective suppliers and review them to ensure they meet the requirements of the tender.
3. Assessing the bids: The bids are then assessed against the established criteria in order to determine which one is the most suitable.
4. Awarding the contract: The successful bid is then awarded the contract and the supplier is informed. By following this process, organizations can ensure that they are selecting the most suitable supplier for their procurement initiatives.
9. Award Contract & Implementation
Award Contract: Awarding a contract is the process of selecting a vendor to provide goods and/or services in exchange for payment.
The process typically involves a request for proposals, in which vendors submit detailed proposals outlining their qualifications and pricing structure. After evaluating the proposals, the buyer selects the vendor that meets their needs at the best price.
Implementation: Implementation is the process of taking action to put a plan into effect. In the procurement process, implementation typically involves the signing of contracts and the delivery of goods or services.
It also involves the necessary steps to ensure that the terms and conditions of the contract are followed and that payments are made according to the specified terms.
10. Finalize Logistics & Contract
Finalizing logistics and contracts in procurement involves making sure that the vendor’s services or goods meet all of the requirements of the organization.
This includes verifying that the vendor can deliver on time and within budget, ensuring that the goods or services are of the highest quality and at a competitive price, and that the vendor is compliant with all applicable laws and regulations.
In addition, the organization should review the terms and conditions of the contract to make sure that it is fair, clear, and legally binding.
Once the logistics and contracts have been finalized, the organization should then sign off on the agreement and begin the process of implementation.
11. Supplier Relationship Management
Supplier Relationship Management (SRM) is a process of managing interactions between a company and its suppliers.
It is a systematic approach to maintaining and improving the communication, collaboration, and trust between a company and its suppliers in order to maximize the value provided by the supplier.
The goal of SRM is to develop and maintain strong, long-term relationships with the best suppliers that provide the most value. SRM strategies focus on enhancing the efficiency, effectiveness, and performance of procurement activities.
SRM includes activities such as identifying and evaluating potential suppliers, negotiating contracts, monitoring and managing supplier performance, and managing supplier relationships.
Furthermore, SRM also involves managing the entire procurement process, including selecting the right suppliers, ensuring quality and delivery, and managing the payment process. SRM helps companies develop a comprehensive approach to procurement that reduces costs, increases value, and builds strong relationships with suppliers.
By leveraging SRM, companies can gain better visibility into their supply chain, improve their supplier relationships, and increase their overall procurement efficiency.
How To Improve Your Procurement Systems?
Following, we've discussed some important tips to improve the procurement systems. Let's learn:
1. Make Procurement Processes More Automated
1. Institute cloud-based procurement technology to streamline the process.
2. Automate workflows to speed up the process.
3. Use AI-driven analytics to help identify potential risks and areas for improvement.
4. Utilize e-procurement platforms for easier management of vendor data.
5. Leverage robotic process automation (RPA) to automate manual tasks.
6. Implement automated purchase order (PO) systems to reduce paperwork.
7. Utilize virtual cards to make faster, more secure payments.
8. Implement supplier management systems to keep track of vendors and contracts.
9. Use automated spend analysis tools to identify areas of improvement.
10. Implement RFQs/RFPs to streamline vendor selection.
2. Have Well-Defined Processes
Having well-defined processes in procurement is essential for any business. It ensures that all purchases are made in accordance with company policies and procedures, and that the quality and cost of materials and services are kept within the bounds of what is acceptable.
Processes should include procedures for vendor selection and evaluation, procurement planning, contract management, and compliance with applicable laws and regulations.
Additionally, having processes in place can help create a culture of efficiency and quality in the organization, leading to improved customer satisfaction and cost savings.
3. Implement A Finance Stack
1. Budgeting and Forecasting: Software that helps organizations track and plan their overall financial strategy.
2. Procurement Software: Software that helps organizations manage the purchasing and sourcing process.
3. Accounting Software: Software that helps organizations track and record finances, including accounts payable, accounts receivable, payroll, and more.
4. Invoice Processing Software: Software that helps organizations automate the invoicing process.
5. Payment Processing Software: Software that helps organizations process payments from customers and vendors.
6. Business Intelligence Software: Software that helps organizations analyze financial data to gain insights into the performance of their business.
7. Tax Management Software: Software that helps organizations manage their taxes and ensure compliance with tax regulations.
8. Audit Software: Software that helps organizations verify their financial data and ensure accuracy.
4. Embrace A Centralized System for Documentation
Embrace A Centralized System for Documentation in procurement A centralized system for documentation in procurement can provide many advantages. The most significant benefit is that it can reduce procurement costs by streamlining processes and eliminating redundant paperwork.
Additionally, it can help improve communication between buyers and vendors, as well as provide an audit trail for all procurement activities.
Finally, it can help to ensure compliance with regulations and industry standards, as well as provide greater transparency in the procurement process.
5. Develop A Data Driven Process
Developing a data driven process in procurement is an imporant aspect. Let's take a look at the following points:
1. Gather data: Collect data from all relevant sources, including supplier records, customer feedback, internal reports, financial statements, industry trends, and market research.
2. Analyze data: Use data analysis tools such as data mining, predictive analytics, and machine learning algorithms to identify patterns and correlations between suppliers, products, and customer behavior.
3. Assess options: Evaluate the data to identify the best procurement options for the organization.
4. Negotiate: Utilize data-driven insights to negotiate more favorable terms with suppliers.
5. Monitor and review: Track the performance of suppliers and products to ensure that the organization is getting the best value for its money.
6. Adjust: Use data to adjust the procurement process as needed to meet changing customer needs.
6. Create Multi-Sourcing Strategies
Create Multi Sourcing Strategies in procurement is another crucial aspect. Let's take a look at the following points:
1. Contract Aggregation: This strategy involves consolidating purchases from multiple suppliers into a single contract, which can help reduce costs and improve collaboration.
2. Reverse Auctions: Reverse auctions are a great way to source goods and services from multiple suppliers in a competitive environment.
3. Strategic Sourcing: By strategically selecting multiple suppliers and comparing the cost, quality, and delivery of goods and services, businesses can reduce costs and lead times.
4. Supplier Relationship Management (SRM): This strategy involves establishing relationships with multiple suppliers and managing them to ensure that goods and services are delivered on time and meet quality standards.
5. Just-in-Time Sourcing: This strategy involves purchasing goods and services on an as-needed basis, which can help reduce costs and lead times.
6. Global Sourcing: By sourcing goods and services from multiple global suppliers, businesses can reduce costs, increase quality, and gain access to new markets.
7. Build Long Term Relationships
It's crucial to establish lasting partnerships in the procurement industry. Let's look at few points that could help you with that:
1. Establish clear communication: Make sure all parties have a clear understanding of expectations and timelines.
2. Provide clear feedback: Provide timely and honest feedback to ensure that all parties understand the expectations and how they can adjust their process to meet them.
3. Develop trust: Developing trust among all parties is essential to ensuring that the relationship is strong over the long-term.
4. Foster collaboration: Developing a collaborative environment will help ensure that all parties are working together to find the best solutions.
5. Show respect: Respect the opinions and interests of all parties in the procurement process.
6. Be flexible: Be willing to adjust timelines or processes as needed to ensure a successful long-term relationship.
7. Show appreciation: Show appreciation for the work of all parties involved in the procurement process.
8. Maintain visibility: Keep all parties aware of the progress of the procurement process.
9. Hold regular meetings: Hold regular meetings to discuss the status of the procurement process and to resolve any issues.
8. Strive for Constant Learning & Improvement
Check the following points that would help you to strive for constant learning & improvement in procurement:
1. Utilize technology: Leverage the latest technology to automate processes, streamline communication, and capture data more efficiently.
2. Develop relationships: Foster relationships with suppliers and vendors to ensure long-term success and cost efficiency.
3. Educate yourself: Take courses and attend seminars to stay up to date on best practices and industry trends.
4. Seek feedback: Ask colleagues, peers, and customers for feedback on processes and procedures to identify areas for improvement.
5. Monitor performance: Implement performance metrics to measure success and identify areas of improvement.
6. Leverage data: Utilize data to inform decisions and identify areas of opportunity.
7. Utilize resources: Take advantage of resources such as trade publications, industry websites, and online forums to stay informed.
8. Network: Seek out networking opportunities to build relationships with other procurement professionals.
9. Collaborate: Work closely with internal stakeholders to ensure alignment and effective communication.
10. Develop best practices: Create and implement best practices for procurement that can be shared across the organization.
Frequently Asked Questions Associated with Procurement
Following, we've discussed some important frequently asked questions associated with procurement. Let's learn:
Que 1: What are the 3 Components of Procurement?
Procurement has 3 components. Check the following:
Human Resource
Human resource is the primary component of any procurement process. To make the process successful each time, the human resource on higher as well as a lower level in the organization should be involved. The amount of human resources required in a procurement process depends on a few aspects. These aspects are
- The size of the organization
- The nature of the process
- The goal of the process
- The size/ requirement of the process
Step Flow
A well-working process is based on a step flow structure. The steps included in the process should be well researched. These steps should be interconnected. Overlapping of the steps should not happen. With the correct formations of detailed steps, the process obtained with highly efficient, goal-oriented, and easy to observe and work with. A detailed step flow also eliminates the opportunity of corruption and fraud for the business, employees, and suppliers.
Record Making
The procurement process can be a one-time process or a long-term process. To analyze the process for understanding its improvements, efficiency, and effectiveness, making a record is vital. The process of record making should be included in each unique procurement process. It acts as an essential component when analyzing the KPIs of a procurement process.
Que 2: What is Business Procurement?
Businesses run on strategies and policies. Business procurement is procurement policies set by an individual business entity. The procurement is developed with a consideration of the nature of business. The main aim of these policies is to provide a compatible channel for communication with suppliers and goods. The policies are vital for keeping track of proposals, quality checks, budgets, etc.
The business procurement process may seem simple. However, it involves multiple folds of tasks, making it a complete process.
The task procurement involves are –
- Identifying the need for assets
- Finding the suppliers
- Setting and sticking to a budget
- Vetting with strategy and compliance
- Analysis of proposal by suppliers
- Final Purchasing of the goods
Business procurement is not just about ensuring a smooth assets on-boarding process. It is also about carrying out a procurement process that defines the culture, and motives of the company. For instance, if a company’s motive and USP is to support small scale laborers and artisans, they will not go for a high-end bulk raw material producing supplier.
Que 3: Types of Business Procurement
Business procurements are tailored as per the ethics of the businesses. Business procurement formulations thus can be divided into three major types.
Sustainable Procurement
As the name suggests – sustainable procurement – this procurement consists of strategies and policies to conduct a process to gain sustainability. This is an environment-friendly procurement process. A large number of businesses are changing their terms and moving to conduct environment-friendly procurement to get their inventory. This means businesses are sourcing assets through sustainable sources.
Sustainable procurement policies include –
- Minimizing waste production
- Reducing and treating greenhouse gas releasing
- Producing without polluting and toxic material
- Conserving energy resources
- Avoiding the usage of nonrenewable resources
- Reduction in packaging material for raw material
These are some of the policies enlisted in and worked within sustainable procurement.
Avoiding White Collar Crimes Procurement
The nature of business procurement naturally accommodates the scope of white-collar frauds. The Economic Crime and Fraud Survey’s reports mention procurement fraud to be the highest committed economic fraud.
The multiple tires of management in a company including subordinates, ordinates, and superiors make the process complicated. The channel is hampered with solid communication which creates a space for fraud.
Most recurring white-collar frauds in a company are bribery, fake biddings, fake asset purchasing invoice, etc. A lot of these frauds take place while outsourcing. But 37% of white-collar procurement frauds take place because of internal factors.
These are some ways in which companies protect themselves from these frauds –
- Order placement should only be authorized by one position in power
- Only dealing with reliable suppliers
- Scanning purchases to find the odd patterns
- Keeping a thorough record of ordered inventory
Fair Labor Procurement
A lot of multimillion companies have been recognizing their role in fair labor practices. Companies have started to prepare their policies considering the fair labor practices that follow. In several countries like Vietnam, China, Nigeria, Bhutan, etc. laborers are forced to work at low prices. They are forced to work in unsanitary conditions. At times, labors have been a victim to human trafficking as well.
Several businesses have established policies to ensure these practices are not followed by them.
Que 4: Focusing on Effective Procurement Management
Effective procurement management is one of the most crucial factors in a company's ability to maintain its financial stability.
Furthermore, pay close attention to every level of spending because one of the biggest revenue expenditures can occasionally be procurement.
Such spending optimization demands a cross-departmental strategy. It further involves input from stakeholders in finance, supply chain management, law, and IT.
There are various phases to the procurement process. Most procurement and purchase actions fall into one of a few broad categories, such as:
1. Identifying the need: Knowing what goods, services, or works are needed and why they are needed.
2. Planning: Deciding on the best approach to obtain the goods, services, or works. Developing team or departmental budgets. The finance department staff participates in this planning process along with departmental stakeholders.
3. Source selection: Comparing potential suppliers to select the best supplier for the goods, services, or works needed. Utilizing competitive analysis and current strategic sourcing alliances to select the best suppliers to meet corporate objectives. Participants in this review process include department heads and purchasing approvers.
4. Contract negotiation: Establishing the terms and conditions of the contract with the chosen supplier. This particular focus on pricing and terms ensures the purchase of the highest-quality goods at reasonable prices and under the most advantageous terms. Additionally, it aids in meeting organizational needs while limiting spending.
5. Procurement: Purchasing the goods, services, or works from the supplier.
6. Delivery: Ensuring that the goods, services, or works are received as specified in the contract.
7. Evaluation: Using historical performance and current data to prepare for future spending, understand and develop supplier relationships, and analyze the data at hand to find more cost reductions and boost the bottom line.
Que 5: Procurement Process Flow
Every business runs with a unique procurement process. This means every business procurement process flow is unique as well. But the basic process remains the same for the most part. The procurement process flow begins with the inventory team identifying the requirement.
After identifying the requirement, the team prepares a quotation of the requirements. This requirement draft then reaches the finance team for budget and procurement team for approval.
• When the company already has suppliers -
Once the draft is approved, it is forwarded to the supplier. If the draft is rejected, it is sent back to the inventory team with a specified reason.
• When the company does not have predetermined supplier -
The process flow moves in a different direction when there are no predetermined suppliers. When the order draft is approved, the procurement team gets to work. this motivates leader and the employees with a structured work process. They prepare the list of requirements and a list of potential suppliers.
The procurement team sends the requirement to different suppliers and asks for quotations. The team then verifies and analyzes the quotation. The most suitable supplier is then contacted for delivery.
The process of payment and invoicing begins once the assets are delivered. The procurement team takes a thorough check of the assets delivered. The invoice is sent to the finance team. The inventory team checks if the requirements are met or not. Once all the departments have performed their roles, the finance department passes the payment of the supplier. This is the end step of the process flow.
Que 6: What is Procurement KPI?
Every company carries out its procurement process with pre-determined aims. KPIs are the tools to assess if the procurement process is helping in achieving the aims. These KPIs give a solid ground to the company to experiment.
With the help of the results obtained, the company can impose changes in the process to derive better results. The KPIs answer some of the most important questions related to procurement like –
- Is the organization saving enough costs?
- Are organization goals being met?
- Is the process efficient?
- Is the process helping the procurement improve?
- What are the required improvements?
Essential KPIs
The procurement process aims to save costs and add value to the company. To derive these aims more efficiently out of the process, companies keep improving the procurement process. Procurement KPIs are then used to check whether the process is delivering the desired results or not.
Here is a list of some of the most essential KPIs a business will need to assess its procurement process.
1. Adequate Specified Orders
This KPI helps the business in ensuring the orders. This policy incorporates the process of drafting an order. The procurement team should take a thorough check of the inventory.
Furthermore, the requirements should then be noted in accordance with the accurate required quantity. This way the business can keep track of the amount of inventory being ordered and being used in a cycle.
2. Supply Defect Rate
This KPI makes a business keep record of the amount or number of defective pieces arriving in each order. Through this, the company can establish an analyzed conclusion on the effectiveness of the supplier. This helps the business in drawing a calculative decision to work or not with the supplier in the future.
3. Accurate Order Supply Rate
Keeping track of the order supply is essential. A lot of suppliers commit fraud. A lot of suppliers charge the businesses for the supplies they did not order and they did not receive. A lot of time to charge more money on the invoice, suppliers add unordered items in the order. Suppliers at times also charge for the items they have not delivered.
With this KPI, a business saves money, saves itself from being a victim to fraud, and dealing with the wrong suppliers.
4. Time Span Churn by Supplier
Time is money. The more time the process takes the more opportunity business losses. To analyze the supplier‘s efficiency, it is wise to keep a record of time span churn by a supplier. This way, if the supplier is constantly working with delayed timelines or a longer expected span, the business will know. The business then will be able to take an analyzed and calculated action to improve efficiency.
5. Time Span Churn by Complete Process
The more time spent in the process of procurement, the more money a business loses. This KPI helps in estimating the time the entire procurement process takes. With the analysis, the business will be able to make the required improvements to make the process more efficient.
6. Budget Percentage Acquired by Supply
This KPI is used by the finance team. This KPI helps a business understand the percentage of the budget being spent on the supply. This also helps in understanding the profits being derived out of the investment being made in the supply.
7. ROI of Procurement
This KPI is an internal analysis tool for the procurement team. It assists in determining the ROI, profitability, and cost-effectiveness of the process.
Que 7: Stages of Procurement
Procurement is a long process. This process involves multiple folds of tasks and steps. All these steps have a great impact on the entire procurement process. To make it simpler to understand and conduct, we have divided the process into stages. Essentially, the procurement process is divided into three stages. Each of these stages involves steps of the process with the aim to successfully conduct through the stage.
Acquiring Stage
This stage includes 4 steps precisely
- Creating a purchase order
- Analyzing the requirement
- Finalizing the supplier
- Placing the order request
This stage involves all the steps that are required to place an order. Beginning with identifying the requirement to place the final order, every step falls in this stage. The business gets in touch with the supplier at this stage. It is beneficial for the long term to maintain a healthy relationship with the supplier.
Buying Stage
This stage includes all the steps required for buying the order. The 4 steps involved in the stage are
- Acceptance of the order
- Negotiation of the terms and conditions
- Receiving the order
- Inspecting the supply
It is vital to keep a check on the supply process before it begins. This stage includes the entire process of arrival of the supply. It is important to conduct a thorough inspection once the supply arrives.
Paying Stage
This is the third and final stage of the procurement process. Here the supplier is granted his payment to complete the process.
- Analyze accuracy of invoice
- Approve delivery
- Initiate payment
- Keep record
Payment is the end of the procurement process. Before initiating the payment, there are some steps to follow. Analyzing the invoice and approving the delivery is a must. This saves the business from being a victim of fraud.
Que 8: How are Procurement, Sourcing, and Supply Chain different?
Procurement, Sourcing, and Supply Chain are all major processes. Every organization uses these processes to target the retention of its goals. The processes are similar in their nature, but widely apart from the orientation of conduction towards the goals.
Supply Chain is the process with the greatest potential and magnitude in conduction. Procurement is a process that ensures the requirements of goods and services required to run a business and to make it profitable. The sourcing process is part of the procurement process.
Procurement Vs Purchasing
Procurement and purchasing are two processes that often land people in confusion. The two processes are similar in context but are different as well.
Procurement is a long-term process. It includes identification of the requirements, fulfilling the requirement, and saving the cost for the business. The process also targets maintaining healthy relationships with suppliers.
Purchasing is a sub-process of the procurement process. Purchasing involves preparing the order draft, placing the order, receiving the order, and initiating the payment.
The procurement process is a process with a high magnitude and higher number of components involved. The aim of the procurement process is to benefit the business in several ways. Purchasing on the other hand is a sublet process that makes the procurement process a whole. The aim of the purchasing process is to complete the requirement.
Procurement Vs Sourcing
The procurement process begins by identifying the resources required by the business. It then developed to fulfill those requirements. The next step forward is establishing relationships with the suppliers. After which the process requires a thorough inspection of the supply and the invoice. In the end, the invoice is paid and a record is maintained to end the process.
Sourcing again is a sublet process. It is a part of the procurement process. Precisely, sourcing is the process of understanding where and how to find the source business’s requirements. The process includes the understanding of the requirement in detail. It also includes apt research on suppliers and the quality of the supply they may obtain. The process ends with finalizing the supplier or the sources of resources.
Procurement Vs Supply Chain
Procurement is a complete process. It starts with identifying the requirements of a business. The end goal of the procurement process is to obtain the requirements at a saved cost and maintain a relationship with suppliers.
Supply Chain is a mega process. The procurement process is a subpart of the supply chain process. This process begins with the procurement process and ends up at production and supply of the final goods. The process ends when the final consumers of the final goods meet.
Here are the steps involved in the supply chain
How Can Deskera Help in the Procurement Process?
A business has to keep track and record of accounting books, inventory, and overall management of procurement. This can become difficult when done manually. This is why it is wise and vital to invest in software to make journal entries, maintain inventory records, and generally carrying out the procurement process smoothly.
In other benefits, Deskera also provides software solutions for HR, attendance, payroll management, inventory management, and customer relationship management. Deskera People lets your employees mark and see their attendance, apply for a day off, and also claim expenses with just one click online among a lot of features.
Deskera ERP is a comprehensive system that allows you to maintain inventory, manage suppliers, and track supply chain activity in real-time, as well as streamline a variety of other corporate operations.
Deskera ERP and MRP system can help you:
- Manage production plans
- Maintain Bill of Materials
- Generate detailed reports
- Create a custom dashboard
Deskera Books enables you to manage your accounts and finances more effectively. Maintain sound accounting practices by automating accounting operations such as billing, invoicing, and payment processing.
Deskera CRM is a strong solution that manages your sales and assists you in closing agreements quickly. It not only allows you to do critical duties such as lead generation via email, but it also provides you with a comprehensive view of your sales funnel.
Deskera People is a simple tool for taking control of your human resource management functions. The technology not only speeds up payroll processing but also allows you to manage all other activities such as overtime, benefits, bonuses, training programs, and much more. This is your chance to grow your business, increase earnings, and improve the efficiency of the entire production process.
Key Takeaways
We've arrived at the last section of this guide. Let's have a look at some of the most important points to remember:
- Procurement refers to a broad range of activities carried out by businesses to acquire products and services. Even while the final stage of purchase is often referred to as procurement, the entire procurement process can also be included.
- Procurement is an important process for businesses because it helps them to streamline costs, ensure quality, and reduce risk. It also helps them to monitor and manage the entire purchasing process from start to finish, and to clarify their objectives when negotiating with suppliers.
- Service procurement is procuring service-based requirements that are required for once. These could be subscriptions, paying for software, or any other professional service acquired. Service procurement works for the short term on a one-time contract basis.
- In accordance with the method and kind of purchase requested, procurement evaluates available options and selects the best vendor to fulfil the request. A Request for Proposal (RFP), Request for Quote (RFQ), or "three bids and a buy" approach might occasionally be used in place of this.
- Solicitation is an essential part of the procurement process. It involves the development and issuance of a formal invitation to potential suppliers to submit offers or bids for goods or services.
- Managing orders in procurement involves the identification and selection of vendors, the creation of purchase orders, and the management of the ordering process. The ordering process begins with the identification of a vendor that can provide the necessary goods or services.
- Keeping accurate records helps ensure transparency and accountability of the process and can be used to verify compliance with the organization’s policies and procedures.
- When reviewing procurement records, it is important to assess the accuracy and completeness of the information contained in the documents.
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