Procurement has been an important transactional part of coordinating business for almost as early as the existence of commerce.
Although the days of scribes tracking purchases on papyrus scrolls are long past, the process of carefully selecting and purchasing the goods and services needed for day-to-day business operations remains as important as ever.
By enabling the company to reliably get the supplies it needs at the lowest cost, procurement can directly impact the bottom line by enhancing operational efficiency and optimising resources.
What Is Procurement?
Procurement comprises a range of activities involved in the acquisition of goods or services. Generally, procurement teams work to acquire competitively priced resources that give maximum value.
However, not all companies identify procurement in the same vein.
To many, procurement involves all stages; from accumulating business needs and sourcing vendors to tracking the receipt of goods and services, and updating payment terms. In contrast, to other companies, procurement is a streamlined range of operations, such as issuing purchase commands and making payments.
People often use the words “purchasing” and “procurement” interchangeably, but the words are not quite synonymous. Purchasing is a vital transactional step in the procurement cycle. It incorporates other elements like vendor relationships and sourcing the best prices.
Simply put, the difference between purchasing and procurement is that purchasing constitutes one link in the greater procurement chain.
Procurement involves all activities involved in acquiring the goods and services a firm needs to sustain its daily operations. This includes sourcing, negotiating, acquiring items, receiving and inspecting necessary goods and services as well as keeping records of all the stages involved in the process.
Although they are centred around the same things, there are different types of procurement.
Types of Procurement
Procurement can be classified in several ways. It can be grouped as either direct or indirect procurement, based on how the firm considers the use of the items being procured. It can also be categorized as goods or services procurement depending on the items that are being procured.
Direct Procurement: This refers to acquiring anything that’s needed to produce a finished product. For a manufacturing firm or industry, this includes raw materials and their components. For a retailer, it may include any item bought from a wholesaler for resale to customers.
Indirect Procurement: Indirect procurement involves the acquisition of items that are fundamental for everyday operational processes but do not directly contribute to the firm’s bottom line. This may cover anything from office furniture and supplies to consulting services and equipment sustenance, and advertising campaigns.
Goods Procurement: This refers to the purchase of physical items, but it may also include items like software program subscriptions. The procurement of effective goods generally relies on a good supply chain management practice. This may include both direct and indirect procurement.
Services Procurement: Services procurement centers on procuring people-oriented services. Depending on the firm, this may include employing individual freelancers, labour, on-site security services, or law firms. It may also include both direct and indirect procurement.
It is important to note that procurement is not a series of isolated acts but an ongoing process. Businesses aspire to establish relationships with key vendors to get the best goods and services at the lowest possible costs, which in the long run translates into a higher rate of return. Firms may also conduct constant quality control checks and performance analyses to ensure that vendors consistently meet expectations.
9 Steps in the Procurement Process
Procurement processes vary abundantly depending on each firm’s needs and structure, but generally include the following nine fundamental steps:
Identify which goods and services the company needs
A business must, first of all, identify its requirements for a certain item or a service. This may be a new item, a restock of existing goods or services, or a subscription renewal. This step involves delving into the core details of what the business needs, such as the exact technical stipulations, materials, part numbers, or service characteristics. At this point, it is necessary to consult all business departments involved in the purchasing decision of a business to ensure the purchased items accurately reflect the needs of each department and the business as a whole.
Purchase Request Submission
When an employee or firm needs to procure a significant quantity of new goods or services, they tender a formal purchase request. A purchase request notifies the firm of existing needs. It is usually collated through heads of department, purchasing staff or the financial team of a firm. Specifications such as price, time frame, quantity and other important things for the purchasing team to note are included in the purchase request. The department in charge of the purchase may then approve or deny the purchase request. If approved, the purchasing team can proceed with selecting a vendor and making the purchase.
Assess and select vendors
After a clear list of requirements and an approved purchase request, the next step is to find the best vendor and submit a request for a quote. The purchasing team contacts potential vendors in order to receive a quote. Vendor assessment should not only focus on cost but also on reputation, reliability, quality and speed. Many firms also consider ethics and social responsibility, since procurement is often intertwined with corporate identity.
A common practice is to get at least three quotes from different vendors before making a decision. Examine each of the quotes carefully and negotiate where possible. If there is a need to walk away from a deal, ensure that there are other concrete alternative options. Once you’ve agreed on the final terms, make sure to get them in writing.
Create a purchase order
It is essential to fill out a purchase order and send it to the vendor. The purchase order should be adequately detailed to point out the exact goods or services needed and to enable the vendor to fill the order.
Receive and inspect the delivered goods/services
Be careful to examine deliveries for errors or damages. You must ensure that everything is delivered as specified in the purchase order and that the quality meets or exceeds your expectations.
Carry out three-way matching
Payable accounts should carry out three-way matching by comparing the purchase order, order receipt, and invoice. The aim is to ensure that the goods or services received are in sync with the purchase order and also to prevent payment for unsanctioned or incorrect invoices. Point out any disparities between the three documents and resolve issues before authorizing payment.
Approve the invoice and authorise payment
If the three-way match is confirmed correct, approve and pay the invoice. Businesses should endeavour to have a uniform invoice payment process through payable accounts that ensures that payments correspond with the invoice amount and due date. A standard process helps make sure that invoices are paid on time, which helps prevent late fees and build good bonds with vendors.
Records for the entire procurement process, from purchase requests to price negotiations, invoices, and receipts must be maintained. These records may prove useful for various reasons. They help the firm or business with future reorders at the right price. They also ensure a seamless auditing process and accurate tax calculation. Keeping accurate records also helps resolve any potential disputes.
Why Is Procurement Important in Business?
Procurement is key to understanding production and distribution chains as it helps a firm find trustworthy vendors that can provide economically priced goods and services that fit the firm’s needs. In whichever case, whether the firm is seeking raw materials for manufacturing, a marketing services provider, or new office provisions.
For example, if a firm needs a new vendor for an ongoing service for an indefinite period such as a social media marketing service, the procurement process enables the firm to pick the vendor that best suit’s all of the business’s demands at an affordable price. It helps the firm to evade wasting time, money, and valuable resources dealing with an inadequate vendor.
Reducing costs is a vital aspect of improving your procurement processes. But it is also important to pinpoint vendors that provide the needed quality of goods and services by the firm and have the ability to deliver reliably and have a good track record of doing so.
Finally, there’s a more important step that’s missing in the above-listed steps.
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What is intelligent procurement?
It is the process by which companies manage all aspects of their vendor-related spend in one central digital place so they can gain a holistic view of that spend. Companies that implement intelligent procurement with us gain better insight into and control over their spend.
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