A Comprehensive Guide to the Procurement Process.

The globalization of business operations has widened the scope of the procurement function beyond the mere purchase of goods and services. The procurement process now includes functions like gaining a deep understanding of business requirements, identifying quality and cost-effective vendors and distribution channels, maintaining vendor relationships, and many more business-critical functions. The procurement function in business is now part of the overall business strategy. What is procurement, types of procurement, what does procurement mean to a business, and other questions are answered in the subsequent sections.

procure process

Introduction to the Procurement Process

The general definition of the procurement process is a series of steps that the business identifies and follows to source and obtain goods or services. For some businesses, procurement includes the purchase process alone, while for others all the steps that lead to purchase are marked as the procurement function. The buyer and the vendor are the two main players in the procurement process. Since the procurement function has a direct impact on the business costs, it is important to streamline the process. Not only does the procurement function contribute to the cost-saving business objective, but also helps the business improve supplier performance, contract utilization, sourcing cycle time, and compliance and risk management. A 2018 annual survey of 400+ employees by Zycus revealed that cost savings were the key focus area of the procurement function in 54% of the organizations.

The steps in the procurement process in a business depend on the following factors:

  • Business operating model
  • Size of the business
  • Location of the business
  • Organizational structure
  • Financial budget
  • Compliance management

Evolution of the Procurement Process

The first-ever instance of procurement can be traced back to 3000 BC when Egyptians used scribes to manage the supply of materials for building pyramids. During the Industrial Revolution of the 1800s, the procurement function made significant contributions in acquiring goods for the railroad industry. From the 1960s to the 1980s, the focus of procurement shifted from material management to supplier competition. During the 1990s, the procurement function focused on strategic sourcing. Procurement managers started looking at building long-term vendor contracts and strengthening vendor relationships.

The 2000s saw the procurement function grow into an important business function impacting the bottom line of the business. Procurement heads are now contributing actively towards business growth. Modern purchasing procedures are predominantly e-procurement processes. The entire procurement cycle is done via the Internet. All the procurement steps are taken care of by the e-procurement software.

Procurement Models

A procurement model is made up of a series of steps that a business follows in order to procure goods or services. The levels of hierarchy, control, and decision-making are described in the procurement model. Factors like geographical boundaries and the number of departments and divisions in the organization influence the choice of procurement model. Depending on the control center in the procurement process, procurement models are of three types: local, centralized, and hybrid models.

Local Procurement Model:

In this procurement model, the decision-making is made at the local or department level. All procurement decisions are taken by the local department which has a better understanding of the department’s needs. Local procurement processes may often lead to uncontrolled spending which will be out of sync with the overall organizational budget.

Centralized Procurement Model:

As the name suggests, in a centralized procurement model, key decisions are taken by the central management. The approval process and the procurement rules are governed by the central leadership. The intent of the centralized procurement model is to align purchase decisions with the overall organizational budget and spend. Bulk purchases have a greater price negotiation advantage when done through the centralized model. However, increased bureaucracy and the risk of not meeting the unique requirements of individual departments are disadvantages of this procurement model.

Hybrid Model:

This is a combination of a centralized and local procurement model. Some purchases are localized while others are central. The advantages of local and centralized models are combined in the hybrid model.

Types of Procurement Process

The three categories of procurement are direct, indirect, and services procurement procedures.

Direct Procurement Process

Direct procurement deals with the purchase of the input (raw material) required for manufacturing the end product. The cost and efficiency in this type of procurement have a direct impact on the performance and profitability of the company. Any delay or block in the direct procurement process affects the business’s ability to manufacture the end product. Establishes long-term collaborative supplier relationships.

Indirect Procurement Process

Indirect procurement involves the purchase of input or services that are not directly related to the end product. Office supplies, maintenance service for equipment, utilities are examples of indirect procurement. Indirect procurement process flow takes care of day-to-day operations and focuses on short-term relationships with the vendor.

Services Procurement Process

This type of procurement deals with procuring and managing a contingent workforce and consulting services. Software subscriptions and professional service purchases are examples of service procurement. Maintaining one-time, contractual relationships with suppliers is characteristic of the service procurement process.

Steps in the Procurement Process

The procurement lifecycle is made up of people, processes, and documentation. Processes in the procurement lifecycle refer to the stakeholders and the role they play in the procurement lifecycle. The stakeholders run the entire procurement process: from initiation to approval. The procurement process or system is the set of rules or guidelines that need to be followed in the entire procurement lifecycle. Finally, the documentation or paperwork in the procurement process is used for reference and audit purposes.

A typical procurement process flow is represented in the flowchart below.

Purchasing process

Here is the list of steps in a procurement process flow

1. Identification of requirements:
Understanding the requirements of the business is the first step in the procurement process. Recognizing the need for buying a new item or reordering an item that falls below the inventory threshold is done based on requirement analysis. All the stakeholders need to be consulted before placing the requisition for the input. The procurement process begins when a requirement has been identified.

2. Determining the requirement specifications:
Once the requirement has been identified, technical specifications of the requirement need to be determined (for an item that has been previously purchased). For an item that is to be newly purchased, technical specifications are generated after consulting the technical stakeholders. Accurate determination of the specifications ensures no mistakes in the procurement process.

3. Sourcing:
Once the specs and the quantity of the requirement are finalized, various sourcing options for the item need to be researched upon. The vendor list is already available for repeat orders. The procurement team can assess the pre-existing vendor list based on the quality of deliverables, on-time delivery, and pricing and discount options provided by the vendor. For new purchases, vendors need to be identified and vetted based on their reputation, quality, delivery speed, pricing, and reliability. Once a vendor has been finalized, the next step is the request for proposal (RFP). Usually, a minimum of 3 quotations is obtained for the purchase of an item. The quotations are then scrutinized based on a host of factors mentioned above, the best quotation is then submitted to the top management for approval. Where bidding or tendering is involved, the respective tenders are published.

4. Negotiating and finalizing payment terms and price:
This step is an extension of sourcing, where price negotiations are conducted with the shortlisted vendors before finalizing the vendor. Organizations that follow the tendering or bidding process need to be fair and transparent in choosing the vendor. Transparency in the bidding process ensures the best quality and value of the supply. Choice also has to be made on having multiple vendors or a single vendor for an item.

5. Raising the purchase requisition and order:
Post negotiation and finalization of the purchase order, a purchase requisition for the vendor is raised and submitted for approval. Upon approval by an appropriate authority, a purchase order containing complete details of the order, including quantity, price, time and date of delivery, and terms and conditions is generated. The order specifications need to be compared against the purchase requisition and supplier quote in order to avoid any errors or overlooks. This 3-way match is an important step in the procurement process.

6. Delivery of purchase order:
The purchase order is then delivered to the vendor either through fax or email or in person, as per the agreement between the vendor and buyer.

7. Expediting the purchase:
Follow-up on the timely delivery of goods is required to avoid any unforeseen delays. Creating a timeline that factors in any unforeseen delays ensures that delivery schedules are met.

8. Supply and inspection:
Once the goods or services are ready for delivery, the buyer needs to inspect the supplied items to ensure that they are as per the purchase order. After inspection, the buyer may either accept or reject the supplied items as per the agreed terms and conditions. Acceptance of the order initiates the vendor payment process.

9. Payment process:
Initiation of the payment is done after validating all the documents related to the purchase, such as the original purchase order, payment invoice, and order receipt. Any discrepancies found are resolved before processing the payment. Payment is made as per agreed terms.

10. Documentation and review:
The entire procurement cycle needs to be documented for auditing and taxation purposes. Once documentation is complete, appropriate authorities must review the process to identify any disputes (if any) and resolve them. The review also helps improve process efficiency.

Following manual procedures for the procurement of goods and services can be cumbersome and error-prone. Automating the procurement process helps in streamlining the procurement life cycle. An automated procurement management process flow enables businesses to save on cost and time.

Principles of Procurement

The supply chain of a business starts with the procurement process. An effective procurement process sets the tone for the entire supply chain. The profit margins and quality of goods and services, both depend on the procurement process. A cost-effective and efficient procurement process is built on 5 principles.

Value addition:

The procurement process must be value driven. Procurement decisions must focus on deriving value for money, rather than low costs alone. Compromise on the quality of inputs (raw materials) has a cascading effect on the final output of the company.

Transparency:

The vendor selection process must be free from bias, which ensures a fair playing field for all the suppliers. Transparency in the vendor selection process ensures that the buyer gets maximum value for the investment.

Ethics:

Vendor selection in the procurement process may be done through bidding or tenders or direct purchase. The buyer must ensure high ethical standards and follow a transparent vendor selection process so that the quality and value of the purchase are maintained.

Accountability and Documentation:

All the stakeholders in the procurement process must be accountable for their actions. Clear documentation of each procurement stage helps in the review and refinement of the procurement lifecycle.

Uniformity and standardization:

Uniformity and consistency must be ensured at every stage of the procurement process. Following the standard procurement guidelines provide all players equal opportunities to grow.

Procurement and Supply Chain Management

Generally, the terms supply chain management, purchase, and procurement are used interchangeably. The meaning and scope of these processes are quite different. Supply chain management is the largest process of the three. The procurement cycle is the first step in the supply chain, while a purchase is a step in the procurement process.

The terms procurement and purchase are often thought to mean the same. Although both these functions are related to sourcing and obtaining goods or services, there is a difference in their meaning and scope. The purchase procedure comprises functions like acquiring goods and services required by the organization. Activities within the purchase process are ordering, following up, receiving, and fulfilling payments for goods or services. The procurement process has a broader scope compared to the purchase process. Procurement activities include identifying, shortlisting, selecting, and acquiring goods and services, negotiating contracts, maintaining vendor relationships, contract management, compliance and risk management, and analysis of KPIs and margins.

Procurement and supply chain are different meaning terms that are used interchangeably. Procurement is the first step in the supply chain. Identifying the requirement, finalizing the vendor, purchasing the item, taking delivery of goods, and vendor payment are the key steps in the procurement process. The supply chain on the other hand covers the entire manufacturing cycle till the sale of goods and services. Stock procurement (raw material), manufacturing steps, transport of finished goods to wholesalers, warehouse management, retail distribution, and sale to the end-user, are the steps in the supply chain.

KPIs in Procurement

The procurement process, like any other business process, needs to be evaluated for performance and efficiency. Procurement key performance indicators (KPIs) help in evaluating the efficiency, effectiveness, and performance standards of the procurement strategy and process. KPIs may be classified as quantitative and qualitative KPIs. The former type can be represented as a number, while the latter cannot be represented numerically. The following KPIs help assess the performance standard and efficiency of the procurement process:

Supplier KPIs

Supplier availability: The measure of the responsiveness and availability of the supplier for urgent and emergency orders.

Quality, accuracy, and compliance: Verify whether the vendor is maintaining quality and compliance with the requirements. Increased errors and defects would result in increased costs and wastage of time.

Number of suppliers: Clarifies whether you are over-dependent on a small group of suppliers.

Supplier Capacity: Helps evaluate the capability of suppliers in catering to bulk orders.

Purchase Order KPIs

Order Cycle Time: This is a measure of how long procurement takes or the turnaround time for one order cycle. This KPI helps in evaluating suppliers that are suited for urgent supplies.

Cost of purchase: The cost incurred to process each purchase helps track the internal costs.

Lead time: The time taken from when the purchase order is placed to the delivery of items.

Return on Investment (ROI) KPIs

Savings On Cost: Measures the savings made by the company through the procurement process.

Total ROI: Measures the ROI of the entire procurement process.

Procurement KPIs help to evaluate all the key procurement activities within an organization and streamline the overall procurement process.

Procurement Best Practices

Effective and streamlined procurement management enables better business outcomes. Eliminating the redundant and repetitive steps in the procurement process cycle can be effectively done through automation. The best practices in procurement management are listed below:

  • Establish a clear hierarchy for approvals and key decision making.
  • Gather feedback from all stakeholders for continuous improvement of the process.
  • Choose automation software that improves the speed and efficiency of procurement.
  • Focus on establishing a long-term relationship with vendors.
  • Focus on the human resources driving supply chain strategies.
  • Make value-driven buying decisions.
  • Frame terms and conditions of contracts carefully. Resolving disputes depends on the terms and conditions mentioned in the contract.
  • Proactive inventory management is key to managing costs.
  • Review and optimize the procurement process on a continuous basis.
  • Maintain high standards of ethics and social responsibility.

Gaining an in-depth understanding of the procurement process is key to establishing a fair, transparent, and efficient procurement workflow. Continuous evaluation of the procurement process helps identify the process bottlenecks and streamline process workflow. Key elements of the procurement plan must focus on quality and value addition rather than cost-cutting.

4 Procurement Processes for Automation

According to Gartner Procurement and Operations Leadership Council, Chief Procurement Officers (CPO) are underutilizing advanced technologies for better analysis of spend data. The report also highlights the need to upgrade the conventional 7 step sourcing process to cater to evolving business needs. Nearly 50% of the CPOs have reported underutilization of automation technologies for improving the procurement function.

The decision to automate the procurement function must be taken based on an in-depth understanding of the existing procurement workflow. The automation potential of procurement tasks can be determined based on the following points:

  • Tasks with high potential for cost savings.
  • Tasks where the benefits can outweigh the costs.
  • Complex processes that prove to be costly and cumbersome to automate should not be chosen.
  • Simple, repetitive tasks can be automated easily.

Based on the above points, we have identified the following 4 procurement processes that can be automated effectively.

Purchase Requisitions:
Purchase requisitions are raised internally by employees requesting approval for a purchase. Purchase requisitions typically go through several levels of approval, which may lead to delays and bottlenecks when done manually. Automating the approval of purchase requisitions helps accelerate the requisition approval process.

Purchase Order Processing:
Processing purchase orders is a repetitive and relatively simple process that can be automated effectively. This process is executed frequently by organizations.

Invoice Approvals:
Vendor invoices go through internal approval before the finance department credits the payment to the supplier. Automating the invoice approval process enables faster and easy approval of invoices. Automation also enables anytime, anywhere payment of invoices.

Vendor Management:
Identifying and vetting prospective vendors before they are included in an approved vendors list happens through a sequence of approvals. This process can be automated for efficient vendor management.

The choice of workflow automation software is critical for successful automation. Cflow is a powerful cloud BPM software that can automate key business workflows within minutes. It is a no-code workflow solution that even a non-technical person can use to build forms and configure workflows. The easy-to-use visual workflow builder helps build procurement workflows quickly and effortlessly.

Conclusion

According to a report titled Procurement Priorities in 2019 by Gartner Procurement and Operations Leadership Council, underutilization of advanced analytics and automation technologies are among the most critical issues that the Procurement team needs to address. Going with manual automation technologies can cripple business growth. Workflow automation enables businesses to stay on top of the changes in the supply markets and market intelligence data. Cflow enables end-to-end procurement process automation through a powerful cloud-based BPM platform. Try Cflow today to experience the benefits of procurement process automation.

Pre-built apps waiting for you!

Start your 14-day free trial! No credit card required.

Try Cflow free