A critical component of any successful procurement department is a solid, well-designed and well-communicated procurement approval system.
Yes, an organization’s procurement function must ensure purchasing costs are kept low and all requisite goods/products are on hand at all times. But purchasing, particularly in large corporations, is a nuanced, layered process: staff members are located in far-flung locations and they all need their goods immediately.
Business depends on it.
But to keep such a situation operating smoothly (and, frankly, businesses with simple organizational structures), a procurement approval system is critical.
What is a procurement approval system? In simple terms, it is a system that governs the procurement/purchasing process – an outline of the steps from requisition to approval to purchase to receipt of goods (I’ve deliberately boiled down the process here to only four important steps…there can be more).
Here a shrewd definition of a procurement approval system from the Chartered Institute of Purchasing & Supply:
“Procurement governance (i.e. procurement approval system) encompasses control and direction for an organization’s procurement function via a framework of formal structures, mandates, policies, operating procedures, delegations and other decision rights. Procurement governance is essential in building procurement capability and ensuring the benefits from strategic procurement activities are maximized corporately, as well as keeping the auditors at a distance.”
So, what does a procurement approval system look like? Well, each organization will have a slightly different take, depending on the structure of that particular organization.
That said, there are some basic rules one should follow when designing a procurement approval system. The rules, again, come courtesy of the Chartered Institute of Purchasing & Supply.
- Procurement is responsible for all addressable external spend.
- Procurement policies that are simple, based on a compelling business case, and consistent with the corporate culture are operative.
- A clear, company-wide mandate to comply with procurement policies and business plan activities is operative.
- Effective change management has resulted in the corporate culture supporting the procurement governance framework.
- Corporate systems have appropriate controls embedded which support the procurement governance model throughout the organization.
- Procurement personnel are empowered to make decisions on behalf of the company in accordance with the policies.
- A formal approval framework specifies the authorization process for procurement spend.
- Procurement actions are based on ethical principles including probity, fairness, impartiality, accountability and transparency.
- Procurement processes, systems, tools and techniques are documented, referenced and maintained as operating procedures, consistent with the corporate standards.
- Procurement dealings are only conducted with approved suppliers.
- No goods or services are obtained without a valid purchase order.
- Market engagement processes promote effective competition between potential suppliers.
- Formal contracts are operative for high spend or high-risk categories.
- Formal authority levels are in place for procurement spend and system generated to optimize processing.
- Confidential procurement information and/or intellectual property are safeguarded.
- Conflicts of interest are minimized and effectively managed.
- Liabilities are provided for and procurement commitments reported.
- Ethical standards are promoted.
How can e-procurement help?
An e-procurement solution has a very large role to play in the design/creation/implementation of a procurement approval system. In fact, good e-procurement systems are designed with a procurement approval system in mind.
For example, an e-procurement solution will allow a user (typically a manager) to program which users will be approvers and which users will only be requesters. Such a scenario ensures all requisitions must pass by a manager before they become purchases.
Furthermore, e-procurement software will also allow a user (again, typically a manager) to program preferred vendors for all goods, ensuring that the company takes advantage of relationships/contracts procurement has established with specific vendors.
Finally, e-procurement software will electronically generate/send/catalog all purchase orders created, which allows an organization to review all purchases either yearly/quarterly/monthly. Being able to review all purchases is critical for financial forecasting.