What is Procurement? The Procurement Process Explained
No company is entirely self-sustaining at the start. There is a need for materials, equipment, and labor. How can a business acquire these? Through a process known as procurement.
Procurement Definition
The simplest definition of procurement is the act of acquiring goods or services in a business setting. Sometimes known as sourcing or a section of supply chain management, procurement is the process of finding the best raw materials or parts to use in manufacturing your own products. In service-oriented industries, this might refer to finding the best talent in the labor pool. Whatever resources your organization needs, procurement finds and obtains it.
What sets procurement management apart from simply purchasing goods is the relationship established with suppliers. Ideally, procurement will look for the best sources for high-quality materials available at the best prices.
Types of Procurement
There are three key types of procurement processes:
| Direct Procurement | Indirect Procurement | Services Procurement |
|---|---|---|
| Obtaining any materials for use in manufacturing and production | Obtaining goods and services for company use separate from production | Seeking third-party labor or consulting services |
| Example: Buying raw materials or equipment | Example: Buying office supplies | Example: Building relationships with reliable suppliers and vendors |
Each procurement type requires mostly the same processes to complete, particularly direct and indirect. Services procurement has the most differences, especially since that may be used to address one-time service needs, such as software implementation, rather than recurring purchases common when dealing with raw materials and consumables. As such, direct and indirect procurement are sometimes called goods procurement or purchasing.
4 Stages of the Procurement Process
Depending on your exact business, the procurement process from start to finish can range from as few as 5 to as many as 9 steps. Regardless of the total, several of these steps can overlap, which is why they can be organized into 4 main stages:
- Identify what is needed
- Research vendors, goods, and services
- Create purchase orders and quotes, proposals, or bids
- Receive and pay for goods
The modern procurement process begins with taking stock of what you have and what you need. Known as “needs recognition”, this is the act of figuring out what is necessary for delivering your goods and services. Based on your industry, this can range from raw materials to heavy machinery and equipment. Some items, like consumables, will need to be regularly reordered while others will be a one-time purchase.
Next, you must order the necessary materials from suppliers. If you don’t already have a list of trusted vendors, you’ll have to start building relationships to get the best deals on their wares. At this stage, you’ll need to work out how you will receive the goods and services, along with when and how payment will be made.
Before any order can be completed, you’ll need to consult any authorizing managers or stakeholders to approve purchasing decisions. This might be an office manager approving a bulk order of staples or a CEO confirming purchasing of new industrial-grade equipment. In some companies a chief procurement officer (CPO) will be the one overseeing all company purchases. This is where the KPI data gathered during needs recognition comes into play, as it can prove to whoever is in charge of approval the necessity of the purchase and how it fits into the current budget. And in some sales, competitive bidding is necessary, further requiring clear authorization of what is and isn’t within the budget.
Finally, you need to document the purchase, both for potential audits and ease of access for future or recurring procurement. You can use a detailed purchase order software to record data on what has been purchased, how much it cost, and where it was sourced from, creating a clear record for future purchases. Invoices are kept as part of the official records as well, checked against accounts payable with three-way matching in case of disputes or refunds. And you can record details on supplier performance, allowing you to know when it’s time to move on to new vendors for better deals or short-term savings.
Modern vs Traditional Procurement Processes
The traditional procurement process used to involve a lot of paper, from spreadsheets to scheduling calendars. Physical requests for quotes (RFQ) and proposals (RFP) would be passed around from CPOs to procurement teams, leading to potential delays from lost or misplaced paperwork. And it was easy for human error to create inaccurate records like purchase orders and invoices when calculating purchase costs.
With traditional, paper-bound methods, procurement could take weeks or months to complete. Any project involving competitive bidding would get bogged down by repeated back and forth between procurement teams and whoever was authorizing the budget, leading to a long paper trail and higher bids which might eat into the bottom line.
Now, the majority of the work can be automated through procurement software which streamlines the entire process into real-time with digital accessibility. A floor manager can instantly mark they are out of supplies from the comfort of their office, automatically informing the CPO and instantly starting the procurement process without the need to generate new purchase orders. And if bidding is necessary, approval can be sent directly to procurement departments without endless back-and-forth paperwork.
What Does Procurement Software Do?
Procurement software streamlines the traditional purchase processes by tracking all key order info in real-time including: the vendor, purchase quantities, item or service purchased, delivery timeframes, payment terms, and costs. Once implemented, procurement software ensures you are making profitable choices in your procurement practices through faster delivery times, economies of scale, better supply chain efficiency, and lower overall costs.
Another major benefit of subscription-based procurement software is the ability to set automatic or recurring purchase orders. Support for recurring purchases enables the creation of procurement orders in the future whenever particular conditions have been met, significantly decreasing the labor associated with needs recognition and authorization.
The procurement strategy of each company will depend on a wide variety of factors. Fortunately, software automation can make it easier to meet your business needs at the best price. Perfect your procurement process with a new system made possible by software.
