A Practical Guide on Procurement Process for Improving Performance.
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. A good procurement department will make sure that your company gets what it needs at the right price and on time. That’s why it’s important to have a solid understanding of how this works.
Introduction to the Procurement Process
The procurement process is the process by which a business acquires goods and services. The procurement process can be divided into two categories: in-house procurement, which occurs within an organization’s own boundaries, from its own vendors; and external procurement, which involves acquiring products or services from outside suppliers. The supplier and the buyer are the key players in the procurement process. Typically there are four basic steps involved in the procurement process:
The steps in the procurement process in a business depend on the following factors:
Step 1: Define the requirements of what you want to buy.
Step 2: Develop a request for proposal (RFP).
Step 3: Awarding contracts based on price and other factors.
Step 4: Management of contract performance by both parties (buyer & seller).
Since the procurement function has a direct impact on 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 2021 annual report by Zycus revealed that 85% of C-Suite view procurement as a critical enterprise strategy.
The procurement strategy is the integral part that decides the procurement steps suitable for the organization. A procurement strategy determines how a company will buy goods and services. It includes five steps: determining whether to use in-house or external sources; identifying potential suppliers; evaluating supplier capabilities; selecting suppliers on value criteria, and monitoring supplier performance.
This in turn is affected by the following factors:
- Business operating model
- Size of the business
- Location of the business
- Organizational structure
- Financial budget
- Compliance management
Categories of Procurement Process
The procurement process can be divided into two phases: the buyer phase, and the supplier phase. The buyer phase is the process of identifying potential suppliers and establishing a relationship with them. In this case, we are referring to a contract where you will buy certain products or services from one or more vendors on an ongoing basis. This is not necessarily the same as your “purchasing department” (if you have one).
You should know that there are many different types of procurement processes out there depending on how large your organization is and what type of goods or services you need to purchase. For example, some organizations will have multiple departments in charge of different aspects of their purchasing process. The three common categories of the procurement process are direct, indirect, and services procurement.
Choosing The Most Appropriate Procurement Method!
When choosing the most appropriate procurement method, you should consider the nature of the goods or services to be procured. This includes determining whether it is a one-off or repeatable requirement and whether it is bespoke or off-the-shelf. In addition, you should consider the complexity of your procurement process and its associated risks. For example, if you are purchasing a high-value item with a long lead time and complex specifications, then an open market approach may not be suitable as this could lead to a lengthy competitive process that could delay the delivery of your goods/services to your customers.
You should also consider urgency: if there is an urgent requirement for goods/services then this would influence your decision on which method was most appropriate. An example might be where there’s a surge in demand for an item after an unforeseen event; this would mean that using a negotiated procedure would be beneficial because it allows flexibility in terms of price negotiation within set deadlines (whereas issuing invitations to tender may not offer such flexibility).
Competitive process
- You will send out a request for proposal (RFP) to suppliers. This is a document that outlines what you want to buy, how much you want to spend, and when you need it.
- Each supplier who submits a proposal will be scored based on how well they meet your requirements. The highest-scoring supplier will get the contract.
- You can also choose multiple suppliers if none of them are perfect and negotiate with each one separately.
Negotiation process
- The negotiation process is the most expensive, time-consuming, complex, and least transparent. It’s also flexible and political.
- The negotiating process is generally formalized through an RFP (request for proposal) or RFQ (request for quotation). An RFP may be issued by your procurement department to solicit pricing from a supplier or vendors, who then respond with an RFQ that includes their proposed price as well as product specifications and other details.
The negotiation can be in the form of an open, sealed bid, negotiated, competitive dialogue, simplified, or competitive negotiation.
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.
Stages in a Procurement Lifecycle
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.
Steps in a Procurement Process Flow
1. Identification of requirements:
”Understanding the requirements of the business is the first step in the procurement process.”
Always start the planning by keeping the end in mind. Before you begin your procurement process, it’s important to have a plan in place. Your goal is to ensure that you’re making good decisions and spending money wisely. That’s why it’s so important for you to start out with the right mindset and understanding of how the procurement process works.
The first step in this process is planning and identifying the requirements: figuring out what needs to be done, who will do it, and when those people need to complete their tasks (in order). All the stakeholders need to be consulted before placing the requisition for input. Next comes sourcing—finding suppliers who can offer goods or services at competitive prices; negotiating contracts with them; managing those relationships over time; and evaluating performance on an ongoing basis. Once all these things are taken care of, there’ll be plenty left over for logistics (shipping/delivery) and payment processing—which means that once all four stages are complete again we’re back where we started!
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).”
The procurement process begins with the identification and analysis of the need for the product or service. The need for your product or service may be identified by another department within your agency, an external stakeholder such as a community organization or government agency, or a vision statement. If it is decided that your agency requires this type of product or service then you can proceed to determine whether it should be procured through a competitive process, negotiated process, or some combination of both.
3. Sourcing:
”For new purchases, vendors need to be identified and vetted based on their reputation, quality, delivery speed, pricing, and reliability. Now, gather information on potential suppliers.”
Once the specs and the quantity of the requirement are finalized, various sourcing options for the item need to be researched. 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.
Use market research to identify potential suppliers. Market research is the process of gathering information about a specific product, service, or industry. It includes surveying competitors and customers and finding out what they like, dislike, and need in order to make informed purchasing decisions.
Use supplier databases to find potential suppliers. A supplier database is a collection of businesses that might be interested in selling products or services to your company if they were asked. Supplier databases are often compiled by professional organizations such as chambers of commerce or trade associations (like NAICS). They can also include individual companies searching for new business opportunities outside their region or state borders — so even if you’re not from another country, don’t let this stop you from using international sources!
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:
”Finally, they must be written in a way that makes it easy to compare with other specifications.”
The entire procurement cycle needs to be documented for auditing and taxation purposes. The specifications for the procurement should be clear, complete, and unambiguous. They should also be written in a way that is easy to understand.
For instance, you can write “there is a need for a laptop with an i5 Intel Core processor and 8GB RAM” instead of “we want a super fast computer” or else you can even write “we require a 3rd Generation Core i5 processor with 4GB RAM or better”. By adding this extra bit of information you will not only make it easier for yourself but also give your suppliers more details about what exactly you need from them.
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.
Supply Chain Procurement
Supply chain procurement is the process of finding, selecting, and contracting with suppliers to obtain products or services at a cost that meets the organization’s expectations. It should take place every time an organization wants to buy something. The better you’re able to price your procurements, the more money you can save on each one.
Define procurement objectives.
It’s important to define your procurement objectives before you start the procurement process. The main aim of this is to:
• Define the problem(s) that you’re trying to solve and what you want from a solution.
• Identify how much money and time will be required to fill those needs, as well as where that money and time should come from (e.g., internal funds, external grants).
• Set goals for yourself about how far along you’d like to get by a certain date—for example, three months or six months down the line—and then work backwards from there on how much effort will be required during each stage of the process in order for those goals to be met successfully
Create a sourcing plan.
As you start to research your sourcing options, it’s important to keep in mind that before you can begin looking for a solution to a problem, you need to define the problem itself. If your goal is “obtain new business”, then ask yourself: why do you want new business? What will this mean for your company? How much revenue might it bring in? How much will it cost if you don’t get any new clients? Once the answers are clear and quantified, then it’s time to form an idea of what success looks like and how long it’ll take (and what resources will be required) for achieving that goal. This can help determine how many people need to be involved in this project and also help set realistic expectations about what kind of progress can be made within a given timeframe.
For example, let’s say one of your goals is increasing revenue by 10% over the next year through acquiring more clients through various channels such as social media ads or cold calling prospects online using tools like LinkedIn Sales Navigator or Gmail Extension Chrome Extension with Email Tracking & Reports to stay in touch with the prospects without being annoying!
Prepare the request for proposal (RFP) or invitation to tender (ITT).
The RFP or ITT is the first document that you will create, which will introduce the procurement process to potential suppliers. It should clearly define the requirements and expectations of your company, so it’s important to be specific in how you describe what your company needs. The document should be clear and concise while also being easy to read, understand and follow. It should contain as few errors as possible so that any potential supplier can quickly complete it without having much difficulty understanding what they need to do.
The RFP or ITT should also be easy for suppliers to fill out because this step is crucial in determining who qualifies for further consideration within the tender process. If a supplier finds the form too difficult or confusing to fill out correctly, they may feel discouraged from participating in future stages of your project management cycle (which could lead them away from being considered as potential partners).
Receive supplier bids and proposals.
• Use a system to track bids and proposals.
• If you use an electronic bidding system (e-bidding), make sure that you can save, retrieve and print out all documents submitted by suppliers. This will be necessary for evaluation purposes.
• Have a process for evaluating bids and proposals.
• Decide how much time should be allowed for each vendor’s response to your request for information (RFI). Also, decide if any further questions need to be asked of the vendors after the submission of their RFI responses or not.
• Determine whether a formal evaluation committee is needed or not. The decision may depend on such factors as the size of the procurement; the complexity of procurement items; the number of vendors involved; the urgency of the requirement; etc.
Evaluate bids and proposals.
Evaluating bids and proposals is a crucial step in the procurement process. You must ensure that there is a process for evaluating bids and proposals and that your team is trained on how to evaluate them. This can be done by using a checklist that contains all of the important factors for evaluating bids and proposals. For example, if you are looking for an IT service provider, you should include questions such as:
• Does the provider have experience with our industry?
• What percentage of their work will be dedicated to our project?
• How responsive was their customer service when we had questions during our initial contact?
Select supplier(s) and negotiate contract.
You’ve chosen suppliers, so now it’s time to negotiate the terms and conditions of their contracts. The most important part of this step is to review every line of the document with care, making sure that it’s accurate and complete. Also, make sure that your company has been positioned as clearly as possible in the contract (e.g., “ABC Company is a supplier” or “ABC Company is not a supplier”). In addition, it should be clear how much time will pass between each stage (e.g., when does one day begin?), who must approve each stage (e.g., does someone have final approval power?), what level of confidentiality must be maintained during each stage (e.g., can anyone look at my submission), how much control I have over how much information I want to be disclosed on a given topic at any point in time?
After reviewing these aspects of your agreement closely, sign off on its terms by initialing each page and having those initials witnessed by someone else involved in the procurement process; then submit this agreement for review by others before executing it formally.
Award the contract.
• Award the contract.
• Sign the contract.
• Post a notice of award in your local newspaper, if required.
• Submit a copy of the contract to the buyer, as per your state and local requirements..
We should use a proven process.
In order to drive consistency, quality, compliance, and efficiency in procurement processes, you need to have a defined process. You should use a proven process that other organizations have tried and tested. This will make your procurement simpler, and more efficient and reduce the risk of mistakes being made due to human error or simple lack of knowledge.
Using a proven process will ensure that you can get your procurement done quickly while still maintaining high standards.
You can use this detailed description of the supply chain procurement process, o create an RFP or ITT, evaluate supplier bids and proposals and select a winning bidder. This information will help you in your work as a procurement professional.
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.
- A 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.
- 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.
Challenges Faced in the Procurement Process
Improving internal processes enable you to move beyond obstacles and deliver value. The following are some of the typical challenges faced in the procurement process.
Selecting the right sourcing strategy.
Selecting the right sourcing strategy will require you to consider your business needs and the type of procurement. Here are some general guidelines for choosing a sourcing strategy:
The first step in finding a suitable sourcing strategy is to determine whether you need suppliers for all or part of your product or service needs. This is important because it can help you narrow down your options when deciding how to procure your goods and services.
In most cases, organizations prefer to source their products exclusively from suppliers they already have relationships with. However, there are several reasons why an organization may want to purchase items from different suppliers:
• To ensure that they get competitive prices for high-quality products and services
• To ensure that they meet regulatory requirements related to fair trade practices (for example, by using multiple suppliers for similar products)
Timely contract and vendor risk management.
Contract management is a crucial part of the procurement process. It enables you to manage risk associated with contracts and vendors, as well as ensure compliance with your organization’s internal policies and regulations.
Effective contract management.
Contract management is a key part of the procurement process. A contract management plan should be developed to ensure that all contracts are effectively managed and controlled. The contract management plan should include:
• Terms and conditions
• Contract administration services
Contract administration should include:
• Reporting and monitoring compliance with the terms of the contract through regular reporting by the supplier, including financial reports as required under Financial Administration Act 2004;
• Ensuring that all suppliers comply with their obligations under their respective supply contracts;
• Resolving disputes between parties in accordance with dispute resolution processes in place;
Proper communication with all stakeholders.
• Communication is an essential part of the procurement process, and it’s important to ensure that all stakeholders are able to communicate with each other throughout the process.
• Communication is a two-way street, so communication should always be in both directions. The buyer must always be receptive to changes that may come from the seller or supplier.
• It’s also important for buyers and suppliers to understand each other’s needs and requirements in order to develop a quality working relationship that will last through more than one project or transaction.
Managing and controlling the procurement process to get the most value from spend
• Management
• Control
• Process improvement
• Continuous improvement
The most effective way to overcome challenges is to improve internal processes. Improving internal processes enables you to move beyond obstacles, deliver value and enable more operations.
Optimizing Procurement process
The procurement process refers to the various stages and procedures involved in the procurement and purchase of goods, services, or works from suppliers. The procurement process is undertaken by public entities and private entities.
Tender documentation preparation
Tender documentation is the primary tool used to communicate information about a project to prospective suppliers. The tender documentation should be:
• Clear, concise, and complete;
• In a standard format; and
• In the form of a document or manual.
Screening and evaluation
Screening and evaluation is the process of screening applicants to eliminate those who do not meet the minimum requirements. Screening and evaluation is a process to determine if the applicant meets the minimum requirements needed for employment.
Approval of qualified bidders
The procurement process involves a number of steps, including:
• Approval of qualified bidders
• Finalization of a preferred bidder/vendor
• Signing of the contract
Submission of the bid to prospective bidders
The submission of bids to prospective bidders is the process by which a request for proposal (RFP) or invitation to bid (ITB) is sent out. The prospective bidders are then given an opportunity to submit their bids, with the purpose of choosing one preferred bidder.
This stage usually begins when you have completed your procurement planning and you have decided on the final specifications for your project. Based on these specifications and other requirements detailed in your RFP or ITB, you can then draft up a document that details how interested parties should submit their bids.
Receipt of bids from prospective bidders
You may receive bids from prospective bidders either in person or by post. If you receive a bid by post, it must be received by the closing date for receipt of bids. The only exception is if it is sent to an address different from your usual postal address (e.g., if a company sends its bid to another office).
If you receive more than one bid for each category, you should make copies and store them with their original envelopes until they are opened at the time of opening and assessing all valid bids or during the process known as “proving” that follows later on in this guide (see section 4). In either case, all packs should be kept separately so they can easily be identified when needed again later on down the line; use good quality cardboard boxes or other containers which will not tear easily or cause any damage to the material being stored inside them
Evaluation of bids submitted for the procurement process
Once you’ve selected the vendors and their proposals, you’re ready to evaluate those proposals. The evaluation process is one of the most important steps in the procurement process because it allows you to determine whether or not a vendor has met your requirements.
There are several factors you may want to consider when evaluating bids:
• The cost of labor and materials needed for completion of the project;
• Safety considerations;
• Quality assurance measures; and,
• Environmental impact (if applicable).
Approval of the preferred bidder
The preferred bidder is the one who has been selected as the most suitable in terms of quality, price and delivery time. The contract will be awarded to him or her.
The preferred bidder is normally determined by assessing bids submitted by different suppliers. Suppliers submit their bids at various points during the process, depending on what type of procurement method they are using. For example, if you’re using an open market method (where some or all bidders compete), then suppliers submit their bids at various stages throughout your selection process; if you’re using a restricted tendering method (where only certain pre-approved bidders may tender), then your preselected list of vendors will send their quotes in once they’ve been invited to do so by your team.
Procurement Processes for Automation
According to the annual Gartner survey of procurement priorities, 1 in every 4 procurement leaders focuses exclusively on category strategies and category management. Also, another 24% of the procurement leaders focus on identifying and eliminating potential supplier risk.
So, even if automating your procurement functions can be helpful, you need to have 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 four 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. With so many tools out there, Cflow is a smart choice. 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.
On a final note, Procurement is a strategic function of an organization and its objective is to provide value-added services to the organization. In order to achieve this objective, the procurement function and processes must be well structured and designed. Moreover, 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.