Procurement Process Explained
Procurement Process Automation Delivers Critical Business Advantages
Procurement Process Definition
The procurement process describes the way a company goes about making necessary purchases of materials and services to facilitate its continued operation. It involves the specific identification of those needs, a detailed examination of options, and all successive steps necessary to find and obtain required goods and services. For more on the definition of procurement, visit Investopedia.
Because Procurement Is a Process
Although the words are sometimes used interchangeably, procurement is the preferred umbrella term that also involves sourcing and acquisition, or purchasing. Viewing the process as an integrated and elemental function of a company's decision-making structure offers a sense of its importance and relevance in any corporate hierarchy. The procurement management process refers not only to needs identification but also to the methods used for needs fulfillment as well as the tracking and documentation of required purchases.
To best manage and integrate the procurement process, smart finance professionals are turning to process automation.
Ideally, the procurement management process identifies the products, services, personnel, raw materials, software, hardware and finished "widgets" that secure a company's position in the market and allow it to achieve desirable goals.
Strategic Procurement: A Multi-faceted Effort
Procurement often involves competitive bidding, but not always. The procurement process is influenced and sometimes complicated by other business procedures, and varied means might be employed to source and secure differing products or services. If a company employs purchase orders or requisition forms, the process can be relatively routine, but purchase decisions also must account for cost variations and scarcity.
Effective procurement requires strategic planning, careful monitoring, and thorough follow-up. Procurement is the basic building block that determines a company's ability to secure necessary assets on time and for the right price. The actual act of purchasing is just one factor. In addition, procurement typically involves the negotiation necessary to draft contract terms, including quality specifications, pricing, and delivery, that are acceptable to all parties involved.
In modern business, procurement efforts focus on achieving tactical goals at the lowest possible price. It's an important focus and one that requires a comprehensive approach and multi-faceted expertise.
Procurement Process Steps
By understanding the basic steps required for an effective procurement workflow, and by identifying key considerations, a business is able to implement strategic steps to achieve maximum cost savings. The goal should be to ensure that the total design of the process—from the initial identification of needs to final record-keeping—is seamlessly implemented.
Think of the procurement cycle as a sort of ladder: Climbing that ladder requires these 7 steps:
- Recognizing a Need/Defining Need Specifics
- Identifying Sources
- Researching Pricing and Terms
- Specifying Orders
- Arranging Delivery/Assuring Timeliness
- Confirming Orders and Receiving Purchases
- Approving and Arranging Payment
Procurement can be simple or complex, depending on the type of business, and the procurement team may comprise only one or two individuals or a large and specialized department. However, the steps involved in the procurement cycle are essentially the same, whether for a Mom and Pop organization or a multi-million-dollar enterprise.
Skipping a single step can endanger the entire process. The process, of course, is ongoing and must be managed appropriately. Adequate checks and balances must be implemented to control costs and cash flow, regulate orders and stock, catalog inventory, and account for proper utilization of the goods and services that are secured. However, these concerns do not necessarily fall under the jurisdiction of the procurement team.
Potential Risks
As with any business endeavor, there are certain risks inherent in the supply chain. Among the most serious are corruption and fraud. By maintaining competitive practices when identifying sources and securing bids and contracts, it is possible to minimize any risks associated with unregulated sourcing. Transparency throughout the successive steps of the procurement cycle should alleviate major risk. Periodic audits are of benefit, and semi-annual or annual reviews of procedures are recommended.
Financial discrepancies will, of course, affect a company's bottom line, but with proper oversight and control, any procurement issues can be identified and remedied before they become major problems. Specialty software programs are invaluable for tracking and minimizing potential abuse in the process.
Maximizing Procurement Process Benefits
Within a compartmentalized organization, procurement workflow is a key component of business success and must be integrated with other departments, specifically production and sales efforts. Optimal efficiency is only possible if procurement efforts are intertwined with overall goals and objectives.
In today's fast-paced business environment, that is only possible with some degree of workflow automation. For most business firms, the days are long-gone when decision-making can evolve without the help of technology.
In an effort to improve and perhaps broaden your firm's procurement practices, there are several key elements of the process to explore.
Strengthen Vendor Relationships
A procurement team must necessarily look both inward and outward in order to function successfully. Building strong relationships vendors and better vendor management will not only make the sourcing and purchasing tasks easier but will ultimately also favorably impact the bottom line. Team-building efforts promote loyalty and are always beneficial.
Institute Contract Management and Order Renewal Systems
Simplify and automate wherever possible, particularly when repeat orders for goods and services are involved. Explore the benefits and possibilities of automated processes, and expedite the process with specially-designed workflow software that supports your organization's unique needs.
Build Analytical and Negotiating Skills
Equip your team with the skills-training tools that will allow them to develop competency, gain expertise and confidently pursue your company's procurement goals. The time, effort and money will be well spent; consider such programs an investment in your company's future.
Focus on Internal Communications
Although interdepartmental cooperation is sometimes considered a given, it can be instructive for other departments to understand and support the company's procurement team. Integrating procurement efforts with other objectives will help build a more cohesive business environment and produce a better return on investment, in both human and financial terms.
Other Procurement Resources
- 6 Essential Steps in the Procurement Process Flow
- Procurement Business Essentials
- Procurement Software Directory
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