How A Professional Procurement Process & Procedure Should Look
Important Steps To Optimize Your Procurement Process
Procurement is a great deal more than a back-office function that merely negotiates pricing for needed raw materials, goods, and services that the business requires. In an environment where the supply chain has gone global, procurement should be viewed as a strategic asset for supply chain management; one that can reduce costs, advance innovation, and help achieve the business’s wider goals.
The procurement cycle involves a number of steps that must be followed to ensure price, terms, and compliance are followed at every point from sourcing (and its ancillary functions) all the way through to invoice receipt.
What is procurement?
Basically, and in its simplest definition, the procurement function is a business process whereby goods and services are purchased, making it an integral player in the B2B supply chain. People often view procurement and purchasing as synonymous; But the procurement lifecycle is much more than simply purchasing.
The overall process is complex and includes identifying needs, reducing costs and time, increasing efficiency and compliance, and maintaining good supplier relationships.
What does the procurement process look like?
Every function within an enterprise should have a strategy, an efficient and effective way to fulfill the company’s needs and achieve its goals. The procurement strategy should be focused on ways to streamline all the steps within the procurement process. Procurement management will make that happen.
As noted above, the procurement process is complex. If your organization is still using legacy manual and paper-based processes, your ability to streamline, increase efficiency and compliance, and reduce costs will be unnecessarily hampered.
To achieve their goals, many procurement departments are turning to automation, including the implementation of electronic procurement (e-procurement) software. This software-as-a-solution SaaS platform enables an organization to automate its entire purchasing processes, from catalog management to requisitions, purchase orders (PO), invoicing, invoice approval, payments and more.
Procurement process steps
There is no single model of what constitutes the procurement process; the steps may differ slightly company to company. However, a good working model of the procurement lifecycle starts with catalog management and continues on to requisitions, contracts, request for quotes (RFQ)/request for proposal (RFP), direct purchases and /or auctions, purchase orders (PO), and receipt of goods.
But to make the procurement process truly efficient, effective, and complete, the steps should involve collaboration with accounts payable (AP) and include e-invoicing, three-way matching, and payments.
Here are the essential steps in the procurement process flow:
1. Implement Automation Workflow
Although each of the steps following this may occur with or without automation, the fact is that procurement software automates the workflow, eliminating most manual errors. It also streamlines the purchasing function, helps to control spend and increase savings, reduces risk, shortens the purchasing cycle, and mitigates the chance of maverick (off-contract) spend.
Rather than dealing with paper and manual processes, e-procurement enables buyers and suppliers to transact over the internet. Unlike e-commerce, these systems are usually only available to registered users, not the general public. By creating a direct link between buyers and their suppliers, and by using electronic data interchange (EDI), transaction steps are streamlined, and stakeholders can view all actions in real time.
2. Oversee Catalog Management
Before the first requisition is submitted; before the first PO is issued; it is essential to know what suppliers/vendors have been selected and approved for future business. This will save enormous amounts of time when searching for suppliers when the requests come in.
Procurement managers are responsible for maintaining, managing, and updating that catalog. You can see how time and labor intensive this could be if you are still relying on legacy processes. Procurement software should include a Catalog Management component that will be user-friendly and replicate the online shopping experience that most people already enjoy. A robust Procurement solution will generally enable suppliers to maintain and update their catalogs directly in the system, thereby saving even more time and ensuring accuracy.
3. Perform a Needs Assessment
Whether it’s recurring orders of goods or services, new product that needs to be purchased, or one-offs, it is necessary to know what needs to be ordered.
Procurement and functional managers, as well as department heads usually have the authority to make that assessment.
4. Submit a Purchase Requisition
Once a need is identified, the requestor (which may be a person within the company with limited authority, but recognition of need) will submit a purchase request, known as a purchase requisition. These can be handled manually, through writing, or electronically through the company’s e-procurement software. The requisition should contain as much information as possible to ensure the right product is ordered at the right quantity.
Depending on the company’s processes, that requisition will be reviewed by department heads and/or procurement managers and, if approved, a purchase order (PO) will be created.
5. Create a Purchase Order (PO)
The actual issuing of a purchase order takes place once the requisition is approved. The purchase order number must be unique and, as with other functions, handling this task using paper and manual processes can lead to unintentional errors. Procurement could key in incorrect information which will end up creating problems once an invoice is received that will not match the PO.
Electronic POs eliminate this concern. A cloud-based e-procurement system will provide an automated requisition-to-PO-to-supplier submission workflow that will be automatically audited, validated, and error-free.
6. Send out RFQs
If you use a supplier catalog, you should be able to identify those suppliers best suited to fulfill the order. You may also want to find potential alternative suppliers in the event your vendor has fulfillment issues.
Once a requisition is approved, procurement may send out RFQs (request for quotation) or when procuring a service, RFPs (request for proposal). The number of suppliers contacted should be enough to run a competitive bid assessment, but not so many that time is wasted.
Procurement should be looking at more than just price when assessing awarding a contract to a specific supplier. Risk assessment must be part of the calculation, ensuring that suppliers can fulfill in a timely manner and a good record of compliance.
7. Negotiate Contract and Forward PO
Once procurement selects the supplier, negotiations are undertaken that involve price, terms, delivery date, and compliance issues. When all of this has been agreed upon, a contract is signed, and a PO is forwarded.
There are instances involving blanket contracts which cover a wide range of products and services identified in a contract. With permission from senior staff, procurement can bypass the approval workflow for requisition and POs. This is much easier with an e-procurement solution.
8. Receive Goods
Once a shipment is received, it needs to be examined to see if the order matches the PO, within contracted tolerances. Contracts often include quantity-ordered tolerances which stipulates a percentage, above or below the quantity ordered, which is accepted.
If the shipment does match, then all line-item information needs to be entered into the system so AP can match the supplier invoice to both the PO and Receipt of Goods. If product is damaged or does not match the PO (wrong items, items missing), then the shipment can be rejected.
For companies that may not have full Receiving departments, this task will usually fall to someone in Procurement. It is vital that shipments be entered into the system as quickly as possible since AP often will receive the supplier’s invoice before the shipment is even received.
The process for the procurement of services is generally the same, though the exact steps for verifying the quality of service delivery can vary between companies.
Understanding procurement life cycle
Earlier in this blog, I noted that procurement processes are not monolithic; that companies may have alternate steps within the procurement lifecycle; there could be different stakeholders that have the authority to approve and create requisitions.
There are also different types of procurement that have their own issues: Direct procurement, indirect procurement, and maverick spend (a troubling subset of indirect procurement), and the aforementioned services procurement.
Direct Procurement – This refers to materials needed to build the actual product or service being offered; for example, chips and processors needed by smartphone and device manufacturers, or building supplies like plywood, trucks, and tools needed by construction companies.
Because these products/materials are always needed for business continuity, there is usually a list of suppliers with long-term relationships that procurement can rely on to provide the needed materials. That means less time needs to be spent on sourcing and contract negotiations. Plus, direct procurement is almost always centralized, enabling control over spend.
Indirect Procurement – There are numerous services or supplies that are essential for keeping the business running, day to day, including items like office supplies and furniture, IT hardware and software, cleaning supplies, janitorial, telecom services, and more.
Although necessary, these expenses are not directly included in the cost of goods sold of a product or service and thus do not add to the company’s bottom line. For that reason, indirect procurement often experiences less oversight and, unfortunately, less control over cash flow. That is dangerous since these goods and services can comprise anywhere from 15 to 30 percent of a company’s annual spend.
Even with less oversight, indirect procurement should take place with contracted suppliers at agreed upon pricing and terms. Procedures should also be in place to ensure that AP and finance team, as well as Procurement, has visibility into cash flow. But issues like decentralization and a potentially long list of suppliers can reduce control.
Maverick Spend – This is a subset of indirect procurement and is also known as rogue spend, tail spend, and dark purchasing. This is a situation where an employee goes outside of the normal process to purchase needed items. This often occurs with companies that have multiple locations and a lack of process protocols. Here are some of the issues that enable maverick spend
- Decentralization – When it comes to items like office supplies and maintenance services, the location needs what it needs when it needs it. This ends up putting purchasing in the hands of multiple stakeholders who may or may not have ongoing communications with Corporate Procurement. And these purchases are often one-offs and off-contract.
- Lack of Visibility – Items may be ordered without Corporate having visibility into that order. The shipment arrives at the ordering location and, if that order is never entered as received, AP will get an invoice that they will not be able to verify easily and quickly. No visibility makes it extremely difficult, if not impossible, to control spend and cash flow.
- Supplier Relationships – Considering the number of items and services that fall under day-to-day operations, suppliers of indirect goods are the inverse of the 80/20 rule, where 80 percent of goods come from 20 percent of suppliers. With maverick spend, 20 percent of goods come from 80 percent of suppliers. Keeping relationships with this many vendors is challenging to say the least.
Services Procurement – The biggest difference between product and services procurement is that it’s very difficult to put services procurement in a box. It requires a whole new set of criteria in terms of project parameters, quality measurement, qualifications, contracts, delivery, and the like. When you talk about services procurement, it is much more complex because the process is completely different, and there is a much wider range of capabilities and outcomes associated with service providers.
Top tips for improving your procurement process
Once you realize how complex the procurement process can be, it becomes essential to find ways to optimize your procurement strategy and processes. Here are a few tips:
1. Automate, automate, automate – I’ve discussed how automating your processes by implementing an e-procurement solution can streamline your processes, and gain greater control over each step in the transaction process. Your procurement team will enjoy full visibility into the status of every order, reducing the amount of time spent in phone and email communications with suppliers.
2. Centralize data – To ensure accuracy and control over all B2B transactions, Procurement, Contract Management, and AP teams must have visibility into all relevant data, from supplier information to invoice status. That can be nearly impossible when relying on paper documents that may exist in a variety of locations. Digitizing all information and giving access to all relevant stakeholders eliminates potential errors and reduces the likelihood of late payments.
3. Standardize processes – As I said earlier, procurement processes are not monolithic. But whatever your processes may be, it is essential that they, along with policies, be standardized across the entire organization, especially when an organization has multiple locations. Ensure that these processes are communicated to all managers and employees who may have the authority to make purchases. Management should also establish benchmarks to test how processes are working and adjust as needed.
4. Don’t get caught short on inventory – In recent years, there has been a tendency to keep just-in-time inventory so as not to incur costs for goods that will sit on shelves for too long. COVID-19 has changed that assessment; many companies have found themselves facing shortages of necessary materials and products. And what they can find has increased in cost.
5. Improve supplier relationships – Whether you are assessing goods procurement or services procurement, a good rule of thumb is to regard suppliers as strategic partners and treat them accordingly. Although you need to have enough suppliers to cover any situation (think COVID), you should keep the list controllable. Finding new suppliers, checking their ability to fulfill, and onboarding them takes time and can be costly. Price, though a vital component, shouldn’t be the only measurement of a good supplier. Bottom line, when you need a product or service, you want to work with the most reliable suppliers.
Dangers of bad processes
Companies that do not have an effective procurement process in place may not only reduce profitability but also impede the maximum value that the organization should be gaining from procurement activities.
I’ve noted numerous times how automating the procurement processes and using e-procurement software can eliminate many of the problems inherent in paper and manual processes, but there are additional actions that procurement managers that can end up costing the organization. Issues include: mis-keyed POs that can’t be matched to invoices; paying too much for goods due to lack of standard procedures; late payments that result in upset suppliers who may no longer consider you a “preferred” customer; loss of potential discounts for purchases made; etc.
How Corcentric can help streamline procurement
An effective procurement process encompasses a number of functions; finding the solution that covers all of those functions is essential to answer all of procurement needs. Streamlining the procurement process through automation and e-procurement software can lead to significant cost savings.
Corcentric’s industry-leading Procurement Software Solution (or Procure-to-Pay/P2P) gives businesses total visibility into all purchasing and simplifies the entire requisition-to-PO-to-payment processing stream. An easy, intuitive purchasing experience encourages user adoption to gain greater control over spend, risk, and compliance, ultimately capturing realized savings to lower the cost of doing business. Our solution puts an emphasis on supplier management, including catalog management and receipt and dispute management.
But to really see the savings in cost, time, and accuracy, you need a solution that goes beyond the procurement function. Every aspect of the transaction, from sourcing to procurement to AP to payment should be connected through a single solution to get the best result possible.
Corcentric’s Source-to-Pay platform provides the analytics necessary for strategic purchasing decisions; a sourcing component which will expedite time-to-market; contract lifecycle management to help monetize contract assets; financial management to ensure spend compliance, collaboration and control; in addition to the procure-to-payment functions covered above.
For more information about how to improve your company’s working capital and procurement strategies, please contact Corcentric.