Everything you Should Know about The Procurement Process

Is procurement popular? Like that exciting thing, you can’t stop talking about?

Perhaps no

Is procurement a necessity for businesses? 

You can answer that with a sound yes 

True be told, procurement might be one of the few processes, that in spite of all the changes and arrival of more modern days, it still remains as the core of every single company, it doesn’t matter what your industry is, where are you located or if you manage +1000 employees or just yourself. You’ll keep finding that a huge part of your operations is tied to procurement. 

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But do you really know everything about it? 

Let’s put it to a test 

What’s Procurement?

Businesses require a lot of things to function, products to carry out their daily operations, and materials to create what they sell are at the top of the list. That’s what exactly procurement does. Finding and getting the right goods and services for your company but not just any product, procurement departments work to acquire the best quality from the most competitive suppliers. 

Procurement vs Purchasing

Yes, purchasing is focused on buying products but opposite to what procurement does, is more oriented towards short-term goals, like literally placing an order for what your company does, procurement while it has an operative nature, it is more about strategies to search the best offer in terms of quality, price, delivery terms, and general performance. 

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Types of Procurement

Direct

We speak about direct procurement when discussing sourcing the materials your company needs to create your final product. It could be that you must buy raw materials or acquire products from a wholesale so you can sell them under your brand. It falls under direct procurement if it’s needed to put your goods out on the market.

Indirect

Here, you are still buying products for your business but with another purpose; to keep your daily operations running. Think in office suppliers, consulting services, or maintenance of your office.

Goods and services procurement

While indirect and direct procurement are the most common procurement categories,  you can also find a division between goods procurement and services procurement.  The difference between is that goods procurement deals with the purchase of products, service procurement, on the other hand deals with hiring services offered by people, like a consultant. 

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How Procurement Works Step by Step

Identify needs

The best way to know if you need something? Begin by defining your needs. Start by clearly defining what you need to procure. The more specific you are, the simpler will be to find the right vendor. 

Research suppliers

If you already know what are you looking for, the next logical step is to look into potential suppliers who can meet your needs. Check their reputation, reliability, and past performance. Make a list of candidates that meet your criteria and don’t forget to consider factors beyond the price, i.e.: quality and delivery times. 

Request quotes

Reach out to the suppliers on your list and request quotes with an RFQ. Be specific about your requirements otherwise, you could end up choosing the wrong supplier. 

Evaluate proposals

Once you receive the quotes, take your time to evaluate each proposal. Consider factors like cost, quality, delivery time, and support. 

Negotiate 

After selecting a supplier, don’t hesitate to negotiate the terms of the agreement. Discuss pricing, delivery schedules, and any other important details, it’s the only way to move forward and reduce the possibility of future misunderstandings. 

Order management

With a supplier chosen and a contract signed, it’s time to make your order, ideally, you’d receive the goods from the supplier and that’s it. However, it’s good to always remember that if you receive something you didn’t order, it’s your responsibility to let the seller know immediately. 

3-way match

This method is the most effective when it comes to checking if what you ordered meets what has been delivered. A 3-way match compares the purchase order with the invoice and the actual goods in your hands. 

Payment

When you’re satisfied with the goods or services received, process the payment according to the agreed terms. Time is a critical factor at this point, the last thing any business wants is to have a delay with its payments. 

Record-keeping

Yes, payment is one of the most important aspects of procurement, but the story doesn’t end there, once a transaction is made, procurement departments need to record it in a centralized location, so it can be later referred to for auditing and planning purposes. 

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3 P’s of Procurement 

Process 

The backbone of a good procurement flow. Processes are necessary because they set a clear route for every activity, like sourcing, purchasing, and payment. 

People

Could you have procurement without people? No, at least not for the moment. Everyone who needs to be involved in the procurement process is a stakeholder. 

Paper

Even with automation, procurement relies on a large number of documents to function, so it’s no wonder the fundamental role it plays in every operation. 

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Challenges in Procurement

Poor visibility into spending 

Procurement might be important but it can quickly become a problem if you don’t have a clue regarding how much is your business spending in purchasing. How could you develop the right budget then? 

Implementing a digital procurement software it’s the most direct solution to gain real-time data from your procurement activities.

Manual processes 

Remember all of those steps we listed in the section on how procurement works? Now, imagine the burden of doing every single thing manually. And hey, if you have a large team you might be able to pull it off but that won’t guarantee you a free of error result. The main difficulty manual processes face is that besides being time-consuming it can be an incredible source of inaccuracies. 

Maverick spending 

If your business doesn’t have a clear structure of approval for purchases, then you could quickly be involved in a cycle of rogue spending. With the consequences of not only spending more money than necessary but also facing quality issues and poor budget management. 

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Best Practices to Optimize Procurement

Make it easier with automation

Working with a source-to-pay procurement system can help you manage your supplier relationships, oversee purchases and spending, set approval workflows, and handle invoices with few to no mistakes. 

Perform spend analysis

Going over data and numbers might not sound fun, but it’s quite effective if you are looking to gain clear insight into your spending habits, find new ways to save money, and develop accurate strategies for sourcing. 

Establish internal policies 

Having clear intenral policies is as important as having clear standards for your suppliers. This way your team knows exactly what a good purchase cycle looks like. 

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