The procurement function of an organization operates within a specific, focused area of the supply chain. It encompasses every activity involved in obtaining the goods and services a company needs to support its daily operations. Here, we’ll explore the details of the procurement process and take you through the different steps required to execute the various stages of procurement within your company effectively.
According to the ASCM Supply Chain Dictionary, the business functions of procurement include planning, purchasing, inventory control, traffic, receiving, incoming inspection and salvage operation. In many organizations, this often extends to sourcing, negotiating terms and keeping records of all the steps in the process.
Procurement plays a crucial role within the supply chain because it ensures your company receives the best value for the price of goods, maintains strong supplier relationships and aligns all purchases with appropriate business objectives to achieve the following goals:
Ensuring goods and services are sourced at the best possible price without sacrificing quality.
Building and maintaining strong relationships with suppliers to secure timely deliveries and favorable terms.
Ensuring the products meet quality standards impacts the overall value chain.
Mitigating risks related to supply shortages, market price volatility, or supplier reliability.
There is much more to procurement than meets the eye. It’s not just about purchasing goods and services –– it goes beyond this function to involve careful research, planning and management. The procurement process starts with determining the need and evaluating available options, which involves conducting market research, analyzing demand patterns and assessing suppliers.
Once a supplier is selected, the terms must be decided upon and agreed to, and a contract must be finalized. There may be some back-and-forth negotiating to ensure the supplier provides a competitive price and meets your needs.
When the ink is signed and the process begins it’s time to implement a project management strategy to monitor progress and implement transparent communication channels to ensure a smooth collaboration. Regular performance evaluations, feedback sessions, and contract renewals are all a part of this.
There are several different types of procurement, as we will discuss below. Here is an example of a simple goods procurement process:
A manufacturing company needs to produce a new line of products. After assessing the requirements for accomplish this, they determine they must purchase raw materials, such as steel, plastic and electronic components. They will also need to buy materials to ship the new products. The procurement process begins with the needs determination and follows through to the project management stage to ensure a successful procurement cycle.
A successful procurement process will allow you to optimize your business potential and connect with the best suppliers at competitive prices. These seven stages outline the steps you need to take to execute your procurement activities effectively:
This first stage is entirely internal. Your stakeholders need to identify the business requirement, whether it is a specific good or service. This decision may be based on your business objectives, budget limitations, technical requirements or customer feedback.
Before you begin planning your purchase, you will need to achieve agreement on the approved budget for your purchase. To do this, you’ll need to clearly outline your purchase request and submit it through the appropriate channels within your company. Factors like the strategic value of the purchase, potential risks involved and expense caps will be considered during the review process.
Once your purchase request is approved, you can present potential suppliers with an estimate request. It’s a good idea to request estimates from multiple suppliers so you can benchmark the best pricing. Once the estimates are received, it’s time to review your options and select the one that best meets your needs and budget.
Next, it’s time to return to the chosen supplier and negotiate the contract to meet your needs. Key points to consider during a negotiation include pricing and payment terms, service level agreements, data security and confidentiality, a termination clause, escalation procedures and a renewal or exit strategy should the vendor fail to meet your expectations.
Once all the negotiations are complete, it’s important to finalize the contract. This entails a final review where all parties reach an agreement on terms, sign the contract and collect copies for their records.
Implementing the contract has several steps, which start with onboarding your new supplier. This involves providing them with the details of your process and providing access to any software they will need. You will want to create a sales pipeline to migrate any essential data or software from your CRM system. This may require setting up integrations between your tech stacks and possibly training your new supplier on any unfamiliar systems.
Once the procurement process begins, it’s important to monitor the progress, conduct regular supplier reviews to measure their performance and clearly communicate any adjustments that need to be made. Properly monitoring and managing your supplier is essential to maintaining a competitive advantage and building successful relationships.
Procurement specialists often refer to “the five Ps.” It’s a clever way to remember the key essentials imperative to successful procurement management:
You and your vendor need to be in agreement on the scope and parameters of the work to be done, as well as the expectations for the relationship. Securing a detailed proposal is an essential initial step.
Proper planning is crucial to the success of any endeavor, and procurement is no different. It’s important to do your vendor research and map out a process plan to ensure all needs are met.
Securing competitive pricing early on will help you stay on budget and keep costs from escalating. If the relationship continues over time or the level of business you conduct with your supplier increases, it’s a good idea to renegotiate pricing to maintain your advantage. Conversely, if your supplier raises costs, it’s time to shop around for a better price.
Behind every successful project are well-trained professionals who keep things running smoothly. You need dependable staff who are up to date on all processes and procedures and who will be proactive should an issue arise.
Overseeing all phases of the procurement process will help keep things on track and reduce the chance of project failure. You’ll be able to get ahead of any potential problems and address them promptly. It also helps support good communication among all parties for a smooth process and an overall positive experience.
There are four main types of procurement in business:
Although often used interchangeably, procurement and purchasing provide different functions within the supply chain process. Generally speaking, procurement entails creating a strategy for acquiring goods and services that meet your company’s long-term needs, while purchasing is about executing that strategy through specific transactions.
Key activities of procurement:
Key activities of purchasing:
The five rights (or five Rs) of procurement are a traditional formula that expresses the primary objectives of successful procurement. They include:
Ensuring the goods and services you purchase meet your required specifications and standards is essential for maintaining product performance, safety and ultimately, customer satisfaction. Poor quality can result in production issues, returns or reputational damage.
Purchasing the right number of materials or goods to meet demand ensures smooth operations without excess inventory or shortages. Overstocking can lead to increased storage costs and waste while understocking can disrupt production and sales.
A general rule of thumb in all good business practices –– try to secure the most competitive price possible without sacrificing quality or value. Securing the right price helps maintain cost efficiency and profitability.
It’s important to make sure your goods or services are procured and delivered at the right time to avoid delays or disruptions in operations. Timely procurement keeps your supply chain running smoothly to promptly meet customer demand and reinforce customer satisfaction.
Whether it’s a warehouse, manufacturing facility or retail store, it’s imperative that your goods are delivered to the right location. This prevents delays, reduces additional shipping costs and protects operations within your supply chain.
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