What is the procurement process?

The procurement process is a series of steps organizations follow to acquire goods and services. It starts with identifying needs, creating a procurement plan, sourcing suppliers, negotiating terms and conditions, placing orders, arranging delivery, settling invoices, and evaluating supplier performance. It helps businesses get the best value for their expenditures.

The operation of any business hinges on the procurement of essential goods and services from third party vendors. While there are two participants in a procurement process – the buyer and the seller, it is the act of procurement by the buyer that is referred to as the procurement process. Procurement is critical to the buyer’s business because it decides the quality of the goods or services to be used by the business, and the cost benefits associated with it.

Let us see what the procurement process is, the different procurement strategies, and why digitizing the process offers advantages.

What is the procurement process?

The procurement process, also known as procurement management, is the umbrella term for the steps by which an organization acquires goods and services or office supplies required for its operation. It is a subset of the larger source to pay process. Procurement management differs across businesses according to the needs, scale, and operations of the organization.

The procurement process could include purchase planning, purchase request placement, determination of standards, research into vendors, selection of vendors, price negotiation, financing, ordering, receipt, and inventory control. The process may involve the purchasing department, the finance team, etc. Large businesses often have a centralized procurement department with its own employees and procedures.

A well-laid and managed procurement process saves costs, aids compliance, and avoids delays and errors that could be detrimental to the company’s bottom line in the long term. In recent times, procurement process flows have also been used by businesses to achieve non-financial goals such as sustainability and environmental compliance.

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The difference between procurement and purchase

While procurement appears to be the same as purchasing, they are different in the business context.

• Purchasing is a transactional function that involves sourcing and acquiring products and services.
• Procurement is a strategic process that involves researching the needs of the company, scouting for vendors/sources, negotiating, and planning the purchase and follow-up processes.

In other words, purchasing is the straightforward process of buying the goods or services from vendors, while procurement involves steps taken before, during, and after the purchase process and handles all steps in the Procure-to-Pay cycle. Thus, purchasing may be considered a subset of the procurement process.

Types of procurement

There are three types of procurement for any business:

1. Direct procurement: This is the acquisition of goods, materials, office supplies, and/or services for manufacturing purposes. Examples are machinery, raw materials, chemicals, etc. These are usually stock materials that are used to drive the output of the business.
2. Indirect procurement: This involves acquisition of products and services that are used internally by the company. Examples are utilities, stationery, travel and such other consumables and perishables. These are things that the company needs for its daily operations.
3. Services procurement: As the name suggests, this involves procuring workforce, services and consultancies. This may also include professional services, outsourcing, software subscriptions, etc.

Steps in the procurement process

The procurement process depends on factors such as company size, business model, location, structure of the business, budget, human resources, etc. Despite differences between the actual steps, all procurement processes are made of three essential units – rules, participants, and record-keeping.

Rules are the conditions that are unique to the company that must be followed when ordering, obtaining, and paying for goods/services needed. The more the rules, the more complex the procurement process.

Participants are the personnel from the company that have a stake in the procurement of the product or service and have a specific responsibility in the process of procurement. The higher the value of the product/service to be procured, the larger is the circle of stakeholders in the procurement cycle.

Record-keeping: Meticulous and accurate record-keeping is essential for a smooth procurement process. Record-keeping is also essential for reference, auditing, and budgeting purposes.

Some typical steps that are seen in a procure-to-pay cycle are as follows:

1. Identification of the internal need: When a department or business unit requires some product or service for its functioning, the procurement department is brought into the loop. If the same product/service is required by another business unit, the requirements of both departments are consolidated for better costing and management.
2. Identification and evaluation of the vendor: Depending on the scale of operations and the value of the product/service required, the vendor may be chosen by a simple web-search or through complicated RFP/RFI/Tender processes. Once a set of vendors has been identified, they are compared for quality, price, reliability, customer service and other criteria that the company deems important. The procurement department selects the best vendor or vendors after this comparison.
3. Vendor negotiations: The contracting process may be said to commence at this point. The contract may simply be a call for quotation, issuing purchase orders and getting the item. On the other hand, it may also involve back-and-forth negotiations to fix the quality, quantity and timelines for the purchase.
4. Generation and approval of purchase requisition: This step is taken in large companies, wherein, the department or unit that requires the product/service, draws up the purchase requisition. This is an inter- or intra- departmental document/form that defines the need, the cost associated with that need, and other pertinent information. The requisition is reviewed and approved by the department head or the entity responsible for paying for the product/service.
5. Generation and issue of the purchase order: Once a purchase requisition for goods/services has been approved by the appropriate department(s), the order must be placed with the vendor. A purchase order specifies the quality and quantity of the goods/service needed, the time frame of the order and the price/costs involved. The purchase order is a legally binding document between the company and the vendor.
6. Receiving the invoice: In response to the PO raised by the business, the vendor raises an invoice with a list of the ordered items along with prices and payment due dates. In accordance with the negotiated terms, the payment is made by the business before or after the delivery of the product.
7. Product receipt: The product/service is supplied by the vendor to the business. The business performs a three-way-matching of the PO, invoice and the receipt, to ensure that the right product/service has been delivered at the stipulated time, and at the right price. The vendor is notified in case of any discrepancies for further action.

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Challenges in the procurement management process

The procurement process deals with a number of steps as listed above, and with increasing scale of operations, the process could get even more complex and fragmented. Some specific challenges that would then arise in the procurement management process are:

• Breakdown of strategy: Without cohesion among the various steps and stakeholders, what is supposed to be a strategic process can become a patchwork activity, which can have serious outcomes on the operations of the company and eventually the bottom-line.
• Vendor management issues: Fragmented procurement management would make it difficult to rope in and retain reliable vendors that deliver quality goods and services on time. Poor procurement management results in poor vendor management, which in turn results in the procurement team wasting valuable time firefighting vendor problems.
• Delays: Mismanagement or poor management of the procurement process can result in delays in acquiring products and services that are important for the functioning of the company. Inefficiencies in the procurement processes can result in slowdowns, missed project deadlines and losses to the company.
• Inventory problems: Poor procurement management can create over- or under-supply of inventory and may even result in commitments not being met on time.
• Data insecurity: A poor procurement process can result in poor record keeping and unreliable data, which can translate to bad decisions in future operations. Some procurement risks that can result from data insecurity are overstatement or understatement of the need, unrealistic timelines and schedules, and poor budgeting.
• Maverick purchasing: A fragmented and mismanaged procurement process can result in employees bypassing set procedures while making purchases. This may result in budgeting issues and deviation from compliance standards.
• Human resource management: Poor procurement management could result in extra work for employees in chasing down paperwork and organizing inventory/budget. This results in loss of time and human effort that could be spent on more profitable pursuits.

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Best practices for optimizing procurement workflow

Here are eight ways to optimize your procurement process:

1. Adopt a centralized procurement system: Centralizing procurement can help you consolidate all purchasing data in one place, enabling better analysis, reporting, and decision-making. You can use tools like SAP Ariba or Nanonets to achieve this.
2. Standardize procurement processes: Standardizing procurement processes can help reduce complexity, improve efficiency, and ensure compliance with company policies. For example, you could standardize the process for requesting quotes from suppliers or approving purchase orders.
3. Train your team: Continuous training and development can help your procurement team stay up-to-date with the latest trends, techniques, and best practices in procurement. Regular training sessions can improve team morale and productivity. Consider using training platforms like LinkedIn Learning or Coursera for procurement-specific courses.
4. Leverage technology: Advanced procurement software can streamline processes, improve visibility, and enhance decision-making. You can adopt tools like Coupa or Procurify to help with this.
5. Establish clear metrics and KPIs: Defining and tracking key performance indicators (KPIs) can help measure the success of your procurement strategies. These could include cost savings, supplier performance, cycle time, and customer satisfaction.
6. Proactively manage supplier relationships: Regular communication, feedback, and appreciation can enhance your supplier relationship. You can use tools like Convictional to manage these relationships effectively.
7. Implement a continuous improvement strategy: Regularly reviewing and assessing your procedures can help you identify areas for improvement. Use the data and feedback gathered to implement changes that enhance efficiency and cost-effectiveness. Tools like Notion or Trello can assist in managing these continuous improvement projects.
8. Foster cross-functional collaboration: Encouraging your procurement team to work closely with other departments, such as Finance and Operations, can lead to better procurement decisions. By understanding each other's needs better, you can align procurement objectives and optimize the entire process.

Automation of procurement management

As a company grows in size and operations, manual procurement processes are not capable of meeting the growing demands. Digitization and automation of the procurement process flow can help overcome many of the challenges described above.

Some specific advantages of automating the procurement management process for the procurement team are:

• Time savings: The use of digital tools to store, analyse and retrieve data helps in faster and error-free operations compared to manual processes. A 2018 survey of over 280 companies found that managers spend at least 8 hours a week on average in manual data tasks and 25 percent of all workers spend 20 hours a week on mundane data management tasks. With digitization, the stakeholders can receive their required product/services on time and need not waste time chasing orders through the process hierarchy. Digitization can also eliminate the practice of maverick purchasing.
• Cost savings: Automation of the procurement management process can help track the needs of various units of the company, follow up on the inventory, and optimize the PO-Invoice-Receipt process so that delays are avoided, which in turn can eliminate late payment charges and maintain better relationships with vendors. This can in turn translate to discounts and deals from the vendor.
• Analysis of data: The data that is stored in the digital domain can help optimize inventory levels and allow analytics, both of which can improve efficiency. For example, digitization and AI tools can help timely detection of demand for a product/service and induce proactive responses from the participants. Currently, 30% of retailers and manufacturers find forecasting future needs to be their biggest challenge.

• Transparency: Automation of the procurement process improves transparency in inventory levels, pricing, and supplier relationships. It can also enhance compliance to company/external policies and mitigate supply chain risks, corporate risks, and fraud.

How to digitize the procurement process

While digital tools are extensively available for transactional purchasing activity – the use of software across the entire procurement cycle is gradually gaining importance.

A comprehensive software that handles all aspects of the procurement strategy and process can accelerate savings from enterprise spend. It can also enable seamless collaboration with all stakeholders and provide a complete database of information for planning purposes.

The automation of the procurement process requires meticulous planning in order to derive maximum benefit from it. The planning could include some or all of the following activities:

• Mapping of the existing procurement workflow in order to understand the modus operandi of the organization and the needs of the stakeholders involved in the process. Processes such as Business Process Modeling Notation (BPMN) could be used to visually represent the steps of the workflow. Building a procurement workflow will help in seamless transition into automation and prevent loss of time in adjusting to the new workflow.

• A careful audit of the existing procurement process would help identify bottlenecks that exist. This is important to know in order to know the features required of the software.
• Choosing the procurement software that best fits the needs of the company. The data storage location could be on-prem, centralized or cloud-based, depending on the specific needs of the company.
• Continuous assessment: Even after installation and running procurement automation tools, constant appraisals of the software’s performance would help optimize the system and avoid errors.

The digitization of the procurement process could involve a simple software that automates the transactional process or may include high impact technologies like ML and AI for the entire strategic process. The choice of the digital tool for the procurement process must be made based on the following factors:

• Budget: The scale of the business, the bottom line and the investment potential of the company are major drivers of the kinds of digitization/automation tools to be employed for procurement management.
• Ease of use: It must be remembered that training and set-up expenses are the biggest blocks to implementing any kind of automation in a process workflow. The skill level of the employees using the software will decide how user-friendly the front end of the software should be, and the level of tech support that will be provided by the developer.
• Need-tool match: It is important to check for a match between the company’s procurement process needs and the features provided by the tool, such as digital form creation, complex routing, and online approvals.
• Collaborative operation: This again depends on the scale of the company. If multiple departments are involved in the procurement of products/services, all stakeholders must have access to the process flow. Such an operation also requires provision to include various levels of approvals in the procurement process.
• Integration with the other systems used in the company: The software must integrate with the other systems such as accounting management tools used already in the company. Standalone sourcing-procurement software that does not integrate with the digital tools used in accounting and marketing departments would lead to data mismanagement and time loss.

Final thoughts

Procurement is a strategic function of any organization and has wide-ranging business impacts. An efficient digital procurement process can seamlessly integrate the strategic process of procurement with the transactional purchase activity.

Automated procurement management is key to remaining competitive in the business world. Digital tools like Nanonets can help companies ease into automation, and thus enable them to focus on their core competencies and improve bottom lines.

FAQs

What are the 7 steps of the procurement process?

The 7 steps of the procurement process typically are:

Identify the need: The procurement process begins once a need for a product or service is identified.

Specify what is needed: The next step is to clearly define what is needed, including specifications and quantity.

Identify suppliers: This step involves sourcing potential suppliers who can provide the required product or service.

Price and terms negotiation: Once suppliers are identified, the next step involves negotiating prices and terms of the contract.

Purchase order issue: After agreement on price and terms, a purchase order is issued to the supplier.

Delivery and inspection: Upon delivery, the goods or services are inspected for quality and compliance. If they meet the requirements, the delivery is accepted.

Payment and record keeping: The final step involves making payment to the supplier and updating the procurement records.

What is a procurement process?

A procurement process is a series of steps an organization follows to acquire goods and services. It begins with identifying a need and ends with the payment and record-keeping. This process ensures the organization gets the right products or services at the best possible price within the specified time frame. It also involves maintaining relationships with suppliers, managing contracts, and ensuring compliance with company and industry standards.