At first glance, the procurement process can appear to be a simple, basic procedure.
Locate the needed goods. Receive purchased goods. Pay for goods. Done.
But like all critical business functions, procurement is a layered, fluid business process with multiple stages.
In this guide, we’ll outline the stages in the procurement process and share how improving the procurement process can have a dramatic impact on your company’s efficiency, output, and bottom line.
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Procurement is the process of finding and acquiring all of the goods, services, and works an organization needs to operate and fulfill its business model.
Procurement’s end goal is to reduce overall costs by finding the best possible prices and ensure that companies get what they need in a timely manner.
The procurement process is the name for all of the steps a company must take to acquire the products and services it needs to do business.
Typically a procurement process will start from the minute a purchase request is placed, and involve steps like identifying suppliers, negotiating price, invoice approval, right through to receiving the goods.
It’s important to note that there’s no “one size fits all” format for the procurement process. The steps in a company’s procurement process will depend on several factors like:
- Business model
- Company size
- Company location
- Company structure
- How budget and spending are handled
- Human resources (e.g. does the company have a procurement manager or not?)
To make things even more complex, some companies (e.g. those in government and education) are often subject to stringent laws and strict industry-specific guidelines which can also affect the steps involved in the procurement process.
Although it’s true that every company’s procurement process is slightly different, there are several key steps that are used as building blocks to create and refine a company’s procurement strategy over time.
Here are the key steps in the procurement process:
Step 1: Identify What’s Needed
Before you can have something procured, there has to be a need for it. Hence, the first stage in the procurement process is recognizing the need for a product (a brand new item, or something the company is re-ordering) or a service. Business owners, executives, department heads, employees, and procurement managers can all handle this step.
Step 2: Submit a Purchase Request
The individual needing the purchase submits a purchase request to the company, usually via the company’s e-procurement software. Purchase requests are typically reviewed by the procurement team or a financial controller. If the request is approved, it will be turned into a purchase order. If the request is denied, it gets returned to the employee along with the reason why the request was rejected.
Step 3: Assess and Select Vendors
Every business needs to determine where to get their goods. Some companies have an approved vendor catalog, which is a list of suppliers that have successfully made it through the purchaser’s selection criteria and contract negotiations, while other companies are still trying to determine who the best suppliers are. Once a supplier is chosen, companies should develop that relationship over time to establish the best value, get the best price, and save time on their future procurement activities.
Step 4: Negotiate Price and Terms
Once a supplier has been chosen, the procurement team will negotiate the best price and specific terms (e.g. delivery times) for the purchase.
Step 5: Create a Purchase Order
A purchase order is a formal contract used to buy the product. The purchase order outlines the price, specifications and terms and conditions of the product or service and any other additional obligations.
Once the contract has been negotiated and signed, the purchase order is forwarded to the vendor. A legally binding contract activates right after a vendor accepts and acknowledges a purchase order.
Step 6: Receive and Inspect the Delivered Goods
Once delivered, the receiving company is responsible for inspecting the product and accepting receipt. The company can reject the receipt of the delivery if the product is not up to standard (e.g. damaged or missing product). Rejection is almost always due to a damaged product.
Step 7: Conduct Three-Way Matching
At this stage of the procurement process, the procurement team will use three way matching to reconcile three key documents and ensure that the transaction is accurate:
- Purchase orders
- Packaging slips (these will arrive with the order)
- Vendor invoices
Three-way matching can identify and prevent discrepancies that result in huge losses of income, so if a discrepancy is found it should be investigated and resolved immediately.
Step 8: Approve the Invoice and Arrange Payment
Provided everything looks good once three-way matching is complete, the invoice is approved and payment is arranged.
Step 9: Recordkeeping
The receiving (buying) company must maintain proper records for bookkeeping and accounting purposes. This means saving all relevant documents for every completed purchase. Companies that skip this step may find themselves in hot water if they’re ever subjected to a tax audit.
Sometimes it helps to see the procurement process as a flow chart, especially if you’re a visual learner.
Here are some of the ways you can improve the procurement process in your organization.
Use E-Procurement Software
- Streamline your purchasing and procurement processes
- Maintain a centralized catalogue of preferred and approved vendors (which includes a list of the items or services each vendor offers)
- Raise, send, and track purchase orders electronically
- Quickly perform 3-way matching (because your purchase orders and invoices are stored in the same place and easy to access)
- Avoid exceeding spending budgets
- Introduce effective, transparent procurement and purchasing protocols
- Eliminate annoying paperwork
- Catalogue every transaction and maintain records
- Keep an electronic record of every step in the procurement process (helpful if your company ever gets audited)
- Manage suppliers effectively
- Make it easier for employees to submit purchase requests with mobile and desktop app functionality
If you’re running a paper-based procurement system, switching over to procurement and purchasing software can be a daunting transition at first, but the return on investment for your company makes it a total no-brainer.
Conduct Periodic Assessments
Conducting a periodical assessment of your procurement process and your suppliers can ensure your procurement process is fully optimized. Assessing things like supplier performance, supplier quality, and sourcing requirements will show you where there’s room for improvement and help you identify red flags before they turn into major problems.
The hidden benefit of these assessments is that checking in with suppliers, hearing their ideas for creating a win-win relationship, and listening to their needs can also help to strengthen your company’s relationships with its vendors.