History of Procurement Process
The history of challenges in procurement dates back to 3000 BC, where the Egyptians used scribes to handle the material procurement and supply. From then to now, the procurement process has undergone a massive transformation. The procurement process started off as a small part of the business operations and is now regarded as a strategic function that enables business excellence.
According to a Markets and Markets report, the Retail Sourcing and Procurement Market is poised to grow to 4.83 billion by 2021 at a CAGR of 13.4% during the forecast period of 2016 to 2021.
Evolution of the Procurement Process
The need for procuring goods and services has been there as long as humanity existed. The very first instance of procurement was when Egyptians used scribes to record the material and manpower requirements of any project on papyrus.
The procurement function gained organizational level importance in the 1800s when Charles Babbage recognized the need for “materials man” in his book “On the Economy of Machinery and Manufacturers”. The procurement function gained importance during the Industrial Revolution when its strategic contribution to the railroad industry was recognized. During the World Wars, the importance of procurement was diminished to a clerical role.
During the 1960s, the procurement function regained its prominence as a strategic business function. Material management, competitive bidding, and the need for trained procurement professionals were the key trends that emerged during this period.
Supplier competition and management were the key focus during the 1980s.
The modern-day evolution of procurement began in the 1990s when procurement officers looked at long-term business relationships and contracts with vendors.
The modern procurement process is a key contributor to business excellence. Procurement managers perform a wide range of functions from developing solicitations to working with vendors. The role of the Chief Procurement Officer (CPO) is as important as that of the CEO of the CFO. The integration of modern technology with the procurement function equips businesses to keep pace with increasing global competition and changing consumer needs.
Steps in the Procurement Process
Procurement management focuses on managing and optimizing organizational spending. The procurement function encompasses the following steps:
- Identifying organizational need: The organizational needs are usually submitted by various departments as requests to the procurement department. Once submitted the consolidation of requests is done by the procurement department.
- Review and vendor selection: Based on the review of various requests, appropriate vendors are chosen. Price quotes are requested from the chosen vendors. Vendors are reviewed based on their track record, cost, quality and speed of service, and reliability.
- Purchase requisition: Once the vendor has been identified, a purchase requisition is submitted for approval with details on the vendor information, price, quantity, and description of items required.
- Generating purchase order: Once the purchase request has been approved, a formal purchase order is submitted to the vendor. Establishing long-term vendor relationships is done through a supplier onboarding process.
- Order processing: Once the goods are delivered, the vendor submits an invoice which is to be approved within a stipulated time.
- Payment: The final step is the payout of the invoice.
- Documentation: The entire procurement process must be documented with appropriate receipts and invoice copies.
Challenges in the Procurement Process
The evolution of the procurement function opens up a myriad of responsibilities for the procurement officer. From a straightforward identify-negotiate-purchase process to a strategic business function, the procurement function ridden by numerous challenges.
The common challenges in procurement are:
- Risk management: The procurement function is riddled by risks such as non-compliance, invoice frauds, and sourcing risks. Legal and internal compliance issues are a risk to the procurement function. A centralized and transparent supply chain management can mitigate such risks.
- Process inefficiencies: Following obsolete, conventional manual procurement processes affects the efficiency of the procurement function. Manual processes lead to errors, bias, and delays.
- Lack of information: Access to updated information helps procurement officers make informed business decisions. Lack of access to centralized data can affect the analytics, planning, and execution of procurement decisions.
- Vendor management: Vendors play a key role in the procurement function. Managing vendor relationships efficiently helps in meeting critical quality and price demands of the organization. The absence of a system to take care of vendor evaluation, onboarding, monitoring, and optimization leads to chaos and failed procurement.
- Invisible spend: Indirect or invisible spending outside the established procurement processes need to be identified and addressed in order to curb organizational spending. A procurement process that has visibility into these indirect spending is a must for all organizations.
Overcoming the Challenges
The challenges in procurement listed in the above section point out to the need for doing away with outdated, manual processes in the procurement function. Modern procurement functions require the speed and accuracy of automation. Automating the procurement process not only brings speed and efficiency into the process but also enables centralized cloud-based workflow management.
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