At first glance, the procurement process can appear to be a simple procedure.
Locate goods. Purchase goods. Receive goods. Pay for goods. Done.
But like all critical business functions, procurement involves multiple stages – each of which – can be optimized within them.
In the past years, the procurement process has been going through digital transformation, which positively impacted costs, real-time data analysis, and business operations.
Deloitte’s 2021 Global Chief Procurement Officer Survey found that “driving operational efficiency” was the CPOs’ priority, followed by cost reduction and digital transformation (which has increased 20 percent since 2019).
In this guide, we’ll outline the stages in the procurement process and share how improving your procurement process flow can dramatically impact your company’s efficiency, output, and bottom line.
Table of contents
- Definition of a procurement process
- Why is the procurement process necessary?
- The 10 steps of an effective procurement process
- How to improve the procurement cycle
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.
Simply described, the procurement process begins with identifying a need, finding a reliable supplier for it, paying for the supplier’s goods or services, and finally accounting for it.
During the procurement process, procurement managers need to liaise with suppliers, negotiate terms and contracts, inspect received orders as necessary and keep records of all stages of the procurement process for auditing purposes.
Procurement’s end goal is to reduce overall costs by finding the best possible prices and ensuring that companies get what they need on time.
Although unique to each company, the procurement process usually has three essential components: process, people, and paperwork.
Every company has its own well-designed procurement cycle that helps them stay organized throughout the procurement process. This is essentially a guideline for every person involved in the process to know their tasks and deadlines and the paperwork needed.
To minimize any mistakes and avoid additional costs, each step in the procurement process must be well-defined and followed through.
These are the decision-makers responsible for placing orders or authorizing the steps in the procurement process.
Generally, a CPO can lead a team of procurement specialists and make final decisions. However, more stakeholders may be involved in specifying the requirements and authorizing payments depending on the size, quantity, or value of the goods and services required.
Paperwork or electronic records
Companies rely on the records of each stage of the procurement process for future reference and auditing purposes.
These records inform procurement teams about payment terms, supplier performance, general costs associated with specific orders, and contractual agreements. So even if the procurement staff changes, a company’s relationship with its vendors doesn’t.
There’s no “one size fits all” for the procurement process flow, and the steps in a company’s procurement process will depend on several factors like:
- Business model
- Company size
- Location of business
- Company structure
- How to handle budget and spending
- Human resources (e.g. does the company have a procurement manager or not?)
For example, a small company may have a single person placing purchase orders and liaising with vendors. Larger corporations have a procurement team that corresponds with different suppliers. At times, the procurement team may work with different departments to identify the company’s requirements.
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.
The procurement process is necessary to identify and meet the company’s needs by finding the right vendors that meet your company’s standards, delivery deadlines, and budget.
Without the procurement process, businesses can’t attain a competitive advantage in their industry or increase their profitability.
A well-established procurement cycle helps companies keep track of their spending, switch suppliers and providers when needed, and maintain their clients and customers by seamlessly supplying their products or services.
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 needs
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.
At this stage, it’s also important to establish the requirements that the product/item/service must fulfill and how many are needed and how often. Depending on the type of material, product or service, this may include technical specifications, features, and other information. To clarify future spending, specify how many orders you need and if it’s a one-time purchase or not.
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.
Depending on the order’s type, size, and price, the request may need input from other stakeholders in the company.
If the request is approved, it will be turned into a purchase order, and the purchasing process will begin. 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. At this stage of the procurement process, CPOs evaluate potential vendors and their offers by using metrics such as pricing, reputation in the industry, warranty options, quality of service etc.
Some companies have an approved vendor catalogue, a list of suppliers that have successfully made it through the purchaser’s selection criteria and contract negotiations, while others are still trying to determine who the best suppliers are.
If you are getting quotes from new vendors, the rule of thumb is to get at least three and to have options before you walk out from a deal. In addition, you can conduct a vendor risk assessment to reduce the risks working with a new vendor may present.
After you’ve chosen a supplier, develop that relationship over time to establish the best value, get the best price, and save time on future procurement activities. This is called supplier relationship management, which is a crucial part of an effective supply chain.
Step 4: negotiate price and terms
After choosing a supplier, the procurement team will negotiate the best price and specific terms (e.g. delivery times) for the purchase.
Then the purchasing process officially begins. Both parties need to sign a legally binding contract that includes details such as pricing, the scope of the work, delivery timelines, terms and conditions and more.
Step 5: create a purchase order
A purchase order is a formal contract used to buy the product. The purchase order outlines the price, any discounts, quantity, specifications and terms and conditions of the product or service and any other additional obligations.
When your PO is accepted in the purchasing process, the vendor will send you an order acknowledgment or an invoice according to your agreed payment terms.
Step 6: receive and inspect the delivered goods
Once delivered, the receiving company is responsible for inspecting the product and accepting the 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.
You can maintain detailed reports of the received order for future reference and communicate with the vendor if you have additional requirements regarding the delivery.
Step 7: conduct three-way matching
At this stage of the purchasing 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
Companies should always perform a thorough inspection of the above mentioned documents.
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
If the supplier has met all contractual agreements and the quality of product or services meet or exceed your standards, you can finish the purchasing process by approving their invoice and arranging payment.
It’s very important to make timely payments to your vendors to build a strong business relationship with them.
Step 9: record keeping
The receiving (buying) company must maintain proper records for bookkeeping and accounting purposes. This means saving all relevant documents for every completed purchase. If you skip this step, you could find hot water during an audit.
Step 10: analyze and optimize the procurement cycle
When you use the right automation tools, such as purchasing software, you can access valuable data analytics about your procurement process.
You can understand spending by user, department, project or view budget performance by department, location, project, and account code. You can view all orders made from specific vendors and easily evaluate and compare their performance using metrics such as speed, quality, accuracy, and price.
Using this information to optimize your procurement process and track your spending improves efficiency in the long term.
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 your procurement cycle in your organization.
Use procurement software
Automating your purchasing and procurement processes is necessary to streamline your purchasing and procurement process.
The right software will let you control your spending, eliminate paperwork, build a catalogue of preferred and approved vendors, and record every step of the procurement process for auditing purposes. In times of crisis, such as a pandemic, procurement software allows you to do it all remotely.
Hire the right talent
CPOs run the show in procurement, and their people skills are just as important as their technical skills. They build strong relationships with the right vendors. This ensures the on-time delivery of goods and services.
Hiring the right CPO not only saves on spending but also aligns your business with its goals and vision. Over the last few years, their role has become more strategic than operational. They understand the industry, consumer behaviour, seasonality and recognize trends.
Conduct periodic assessments
A periodical assessment of your procurement cycle and your suppliers ensures you’ve optimized your procurement process. 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.
You should also check in with suppliers periodically to hear their ideas for creating a win-win relationship, and understand their needs to strengthen your company’s relationships with its vendors.
Procurement optimization offers a net positive ROI, every time
From paper-based procurement systems to forever-loading Excel sheets, procurement has come a long way.
Understanding the coming challenges in the supply chain and knowing the procurement industry trends help companies get ready for the future. Along with circular supply chains and improved risk assessment, digital transformation is on the front lines of future trends in procurement.
The latter makes switching over to procurement and purchasing software more important. Though digital transition can be a daunting task at first, the return on investment for your company makes it a total no-brainer.