According to the Deloitte Global CPO survey 2019, 61% of chief procurement officers (CPOs) agree that procurement-related risks have been on the rise over the past year. Some of the top risks highlighted in the report include economic downturn, internal complexity (at product and organization levels), and managing risk with suppliers. Additionally, there is a chance of potential supply chain disruption.
To minimize these risks, organizations need a procurement process that functions effectively even in difficult scenarios to help them keep their supply chain flowing and ensure that sourcing efforts are not disrupted. In this article, we’ll help you improve your current procurement processes by looking at
What is procurement?
Procurement is the process by which organizations source (or obtain) goods and services from external suppliers to achieve their objectives and meet their business needs.
For example, manufacturing companies procure their raw materials, parts, and equipment from external vendors, while IT firms may source software licenses or additional labor from third parties. Many companies today procure services such as facilities management from external contractors.
In each of these examples, a procurement process is necessary because the company cannot produce the items needed on their own, or because it is more cost-effective to outsource them. As a result, most companies depend on a network of partners and vendors to provide the goods, utilities, and services they need to sustain their businesses.
Procurement vs purchasing: What’s the difference?
Although the terms procurement and purchasing are often used interchangeably, they are not the same. Purchasing is the act of buying goods and services from a vendor. Procurement is a more complicated process.
Purchasing — the actual buying part — is a sub-function of the larger procurement umbrella. It includes functions such as raising a purchase order, generating receipts and invoices, and remitting payments. There are certain parts of purchasing that fit into the procurement process flow and are part of your procurement activities, but the actual purchasing is truly just a segment of your overall procurement strategy.
What is a procurement process?
The procurement process refers to the series of steps or activities performed by an organization as part of its procure-to-pay cycle — from identifying the procurement needs, running RFPs or RFQS, all the way to the point of invoicing and payment.
Although most companies have similar steps as part of their procurement process, their level of engagement at each step could be different. For instance, companies that work on infrastructure projects may spend months at the vendor selection and negotiation stages due to the long-term nature of their work. For others, investing in digital systems to expedite invoicing and payments may be a key priority, and some organizations are even finding ways to introduce automation into their business processes to accelerate their procurement activities.
For a procurement process to be termed effective, it needs to provide efficiency, control, and optimized workflows. It also needs to respond well to changing industry dynamics and enable faster decision-making. For example, new government regulations may warrant additional quality checks. The procurement process should be seamless enough to evaluate if existing vendors can meet these regulations and onboard a new vendor if necessary.
Processes, People, & Paper
The best way to implement an effective procurement process is to focus on the three important elements, also called the 3 P’s: Process, People, and Paper.
Process: This refers to the core workflows and set of activities done to procure goods and services. There is huge scope to streamline the workflows to achieve maximum output and many procurement engineers spend hours tweaking variables to understand how to improve their fundamental processes.
People: The number of stakeholders involved in a typical procurement process is often too many to count. This includes the key decision-makers, the people who actually execute projects, and the ones that are impacted due to the decisions and processes. Ensuring good communication between all the stakeholders -- from procurement managers to CPOs -- and aligning their expectations are important for the successful execution of projects. Plus the people involved aren't just on your side of the organization but you must also consider your supplier management strategies for how you will handle your supplier relationships.
The big-picture benefit, however, is that it becomes possible for businesses to trade in a truly open and globalized manner, leveraging other businesses to facilitate their goals. And a seamless procurement process simplifies all the moving parts in this lofty objective.
10 steps of a successful procurement process
The procurement needs of each organization are unique. They will vary based on size, industry, products, customer sensibilities, risks, digital presence, priorities, etc. Some organizations may even choose to use different processes for specific products or customers.
But there is a basic blueprint for the procurement process that can be adapted to your particular circumstances and needs.
Step 1: Identify the company needs
At a fundamental level, before researching and engaging in talks with vendors, a company needs to identify requirements and evaluate their validity. Asking questions such as — is this a genuine need? By when does the product/service need to be sourced? What criteria should it meet or what kind of features does it need to have? — helps the company gain clarity and prevent possible roadblocks at a later stage.
Step 2: Review and authorize purchase requisition
After the strategic analysis of the need for the procurement service, the next step is to kick off the operational aspect. The requesting team within a company sends its requirements to the procurement team, which then does a thorough review of the request. Approved requests are signed off and pushed down the workflow.
Step 3: Approve budget
Approved purchase requisitions are forwarded to the accounting team for vetting against the budget. Based on past engagements with vendors, industry data, etc. a certain cost estimate is generated and that budget is approved and allocated for this specific purchase. By this stage, the company has confirmed the need for the product as well as earmarked a certain amount to procure it. You'll like to work closely with your finance team during this step. Keep in mind that sometimes the best price isn't the lowest price, but the best combination of what you pay and what you'll receive.
Step 4: Review vendors
Most companies have an approved list of vendors with whom they have prior relationships. Procurement systems carry this data making it easier to select a vendor for this transaction. However, in the event of ambiguity with the vendor list (for example, this particular product has never been sourced before or past engagements have not been too successful to continue), exhaustive research is required to identify choices.
Step 5: Select vendor
Usually, companies shortlist two or three vendors before selecting one. They then reach out to each of them to express their interest and also ask for quotes and other details such as the warranty expiration period and the level of support provided in the event of issues. These details help the company finalize a vendor to proceed with.
Step 6: Negotiate and contract vendor
By now, the company is clear about its vendor of choice. This could be because they are happy with the pricing point, service levels are good, or that they have a depth of experience. The company then begins to negotiate the actual price and terms of the contract with the vendor. After a few back-and-forth discussions, the terms are agreed upon and both parties sign the contract and purchase order (PO) is raised. For pre-approved vendors, this may be a straightforward process where a price has already been agreed upon and hence, it’s only a matter of rolling out a contract and initiating a PO. By practicing good contract management it can make future engagements with vendors more streamlined.
Step 7: Receive goods and services
At this stage, the vendor dispatches the goods or provides the services they are hired for. On receipt of a shipment, the company ensures that the quality and quantity meet expectations and communicates in case of any concern. In cases where a service is procured (for example, a food stall service in your company cafeteria), it’s likely to be an ongoing transaction and continuous assessment is done to ensure that the company’s needs are met.
Step 8: Three-way matching
Three-way matching is a match between the purchase order, vendor invoice, and the product delivery confirmation report (also referred to as packing slip or receiving document). This is an accounting process that is done totally by the products ordered, dispatched, and received. This helps to avoid errors such as early or late payments, unauthorized payments, and quantity mismatches.
Step 9: Approve supplier invoice payment
After a successful three-way match, it’s time to release the payment to the vendor. This is a straightforward step in which the accounting team approves the payment as per the conditions of the contract (for example, within 30 days of receipt of shipment).
Maintaining document repositories is an important step in procurement. Although we discuss this as a final step, it’s an ongoing part of the entire process where every financial and business transaction needs to be traceable. This is not only essential from an audit perspective but also useful to conduct postmortems that help understand the efficacy of the procurement process or decide whether to continue engagement with a vendor or not.
Procurement process management best practices
If most organizations are following similar steps in their procurement process, why are the results different for each organization? Why are some organizations able to leverage their procurement function best while others struggle with their complexities?
• Are your processes transparent? As the workflows encompass multiple departments such as procurement, accounting, project, and operations along with those of the vendors, it’s important for everyone to be on the same page at all times. This can only happen when there is enough transparency.
• Are you conducting periodic assessments? You may have a ten-year-old relationship with a vendor but is that partnership still relevant and giving you expected results? Regular reviews give you a sense of what needs to continue and what needs to be changed for ongoing success.
• Are your partnerships win-win? The idea is to respect your partners, establish collaborative relationships, and look out for mutual wins rather than one-sided engagements. This serves as the recipe for long-term associations with like-minded vendors.
• How long is your procure-to-pay cycle? Right from when you start vetting vendors until you remit payments, your objective should be to get things done faster and cheaper and yet not compromise on quality. The best way to achieve this is to replace your manual work with automated processes.
Build an effective, efficient procurement process
The most effective, efficient procurement processes are built with control and visibility in mind. Repetitive tasks are automated, accountability is established at every touchpoint in the workflow, and relevant information is available to all stakeholders. You don't necessarily have to have a specific procurement department to streamline your procurement management process.
Pipefy helps you build the ideal procurement management process for your business. Reduce waste, improve communications, and make life easier for your team. Your end-to-end procurement workflow can help you manage suppliers, negotiations and contracting, purchases, even supply chain management, and any other elements of procurement you want to master.
This relationship between a company and its partners has many benefits, but it also introduces some risks.