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What is Procurement Process? Advantages and Steps

  • Harina Rastogi
  • May 26, 2022
What is Procurement Process? Advantages and Steps title banner

“ To deliver goods and services in the right quality from the right source, at the right price to the right destination at the right time in the quantity and in the right way is not purchasing. All that requires a broad range of strategies, which in one word means “procurement”!”

 

- Victor Manan Nyambala

 

 

What is Procurement Process?

 

The Procurement Process plays the biggest part in the supply chain management. It is related to the purchases that a company does. All purchase related elements are part of procurement. 

 

Be it plant, property, equipment or stock, procurement includes purchasing all of these in literal sense. Also, it includes strategic planning. 

 

Procurement is a key process for every business as it is important to know from where the raw materials are sourced, who is the supplier, whether purchase goals are or not. Most companies have a procurement officer who supervises all such things and actively participates in the procurement planning. 

 

There are 3 types of procurement:

 

  1. Direct

 

Just as the name means, direct procurement involves directly purchasing raw materials or machinery that are involved in the finished goods of the company. In direct procurement the main parties involved are - procurement suppliers and officers.

 

  1. Indirect

 

Indirect Procurement is purchasing supplies that do not directly contribute to the finished goods of the business. But instead, these supplies are needed in day to day management. Such types of purchases are the responsibility of the office managers.

 

  1. Service

 

Service procurement deals with hiring staff or any vendor for short term purposes. Either this temporary hiring is for a seminar or an event. Tangible assets purchased on lease can also be a part of service procurement.
 

Is there any difference between purchasing and procurement? While some people use the two terms interchangeably, there is a slight difference between both. In the procurement cycle, purchasing is usually the transactional step. In short, purchasing is a step in the procurement process.

 

Also Read | Introduction to Assets


 

Advantages of Procurement Process

 

In today’s time, businesses are becoming very complex and competitive. To survive, companies have to work on optimizing their internal processes. Procurement processes are becoming a necessity now. 

 

To achieve efficiency in cost, time, delivery and other variables, the procurement process needs to be done effectively. Here are some advantages of Procurement Process:

 

  1. Minimizes Cost

 

The main objective of the procurement process is to minimize the cost. For this, companies have to find out the best vendors that have the perfect quotations. Choosing the vendors with whom you have the best relations will guarantee you discounts as well as warranties. 

 

Companies must have a proper system of ordering so that restocking is done timely. It will reduce the delivery time as well and all costs associated with late deliveries.

 

  1. Proper Management of Stakeholders

 

In the procurement process, stakeholders play an important role. They can be external or internal. External stakeholders include- vendors, suppliers and any outside party from where something is procured. 

 

Internal stakeholders include the procurement department, finance as well as purchase department. Because of improvement in the procurement process, companies can better estimate their needs and demands and maintain better relationships with the stakeholders. 

 

No rush or confusion is there. Proper management of each component and timely communication with all the stakeholders is done through the procurement process.

 

  1. Innovation

 

If the procurement department of the enterprise is robust then a company can deal with the constant innovations. Managers can facilitate communication with innovative suppliers and dealers. 

 

Moreover, by a procurement process a linkage is created between internal and external stakeholders and it gives better strength to adapt with the latest innovations in the market.

 

  1. Improves Customer Value

 

If each step in the procurement process is done rightly, then the end deliveries to the customers will also be on time. On time deliveries means customer satisfaction. So, the procurement process is directly linked with improvement of the customer values. 

 

If we go behind and select the best vendors which offer quality materials then customers will also receive the best product for their money’ worth.

 

  1. Easy Entry to Markets

 

In today’s time, entering new markets is tough.  A company has to invest a lot of time, money and efforts to understand and enter markets. Sometimes customers do not like the product offered and the company has to bear the repercussions for it. 

 

Sometimes existing suppliers provide everything needed for the new product. But many times new vendors have to be located. Therefore, if the procurement process is done effectively then entering new markets becomes very easy. It will become easy to face the competition and make a foothold.

 

  1. Handling Risk

 

Every business has to face risk. But the risk becomes very high when a company has to depend on external stakeholders for supplies and raw materials. If the suppliers are scattered, then the risk becomes more. 

 

If a company follows Just in time inventory system or outsources some of its materials then also risk is very high. The ultimate responsibility in all such cases belongs to the procurement team. 

 

The procurement process should be designed in such a way that it takes least time to complete the orders and get the materials. Alternate sources should also be considered keeping in mind various situations. 

 

In short, when risk is so high, some measures should be taken to mitigate them.

 

Also Read | Guide to KPI


 

Steps in Procurement Process

 

Procurement process of each company varies and depends upon the structure and products produced. But generally, the there are 9 steps in the Procurement process which are:


Steps in Procurement Process : 1. Identify the materials 2. Submit PR 3. Assess and select vendor 4. Negotiate 5. Create PO 6. Receive and inspect 7. Conduct matching 8. Approve Invoices 9. Keep records

Steps in Procurement Process


 

  1. Identify the materials needed by the Company

 

The first and the foremost step in the procurement process is to estimate the type and quantity of items needed. Companies might restock some raw material or purchase a new material. It may start a new production line and require materials that have to be outsourced. 

 

So, it is important to find out what material is needed and how much it is needed. This estimate should be made after considering the purchase department, inventory database, stock officers or whoever is concerned with it. Needs of each and every concerned department must be considered.

 

  1. Submit Purchase Request to the Purchase Dept

 

A purchase requisition must be made to the purchase department or finance department. It is a formal request for purchase and it notifies the company that a need has arised for raw materials or any inventory related item. 

 

The purchase requisition must contain the quantity, specifications, type and other details along with the amount of the material needed. After verifying the requisition, the purchase department will approve the request

 

  1. Carefully Assess the Vendors and then Select

 

Once the purchase requisition is approved, the next step is to find out which vendor is the best. For this, a vendor request for quotation is sent to the best suppliers. Multiple vendor requests are sent so that companies can compare which one is the best in terms of cost, quality and timeliness. 

 

Reputation and history of the vendor is equally important while selecting. Nowadays companies are focussed on social responsibility as well because it is linked with goodwill

 

So, companies are more inclined towards suppliers that offer environmentally sustainable raw materials. Therefore, in the procurement process, assessing the vendors and then selecting them is a crucial step.

 

  1. Negotiate

 

After quotations are received it is time to select the best one. A general rule of thumb is comparing at least 3 quotations together. Carefully each quotation must be examined and if you need to reject an option then reject it. 

 

But have a solid alternative for it. Once you have selected the best one, get everything in writing. 

 

Also Read | What is a Tender?

 

  1. Create Purchase Order to the Vendor

 

After the vendor is decided, prepare the purchase order and send it to the vendor. The PO should contain all the details about the raw materials needed like- quantity, technical specifications etc.

 

  1. Receive and Inspect

 

Once the goods reach the premises, they have to be inspected. Quality checks and counting is done to ensure everything is present or not. In case of a defect, goods are sent back. It is recorded in books as purchase returns and cost is adjusted accordingly.

 

  1. Conduct Matching

 

The next step in the procurement process is to do a three-way matching. Purchase Order, receipt and invoice are matched. The main goal is to check for any extra or unwanted payment. 

 

PO is compared with the invoice to match the prices and quantities. In case of any mismatch, required actions must be taken.

 

  1. Approve the Invoices

 

If everything matches then the next step is to approve the invoices. Once approval is given, payments are initiated. Invoice processing should be done timely. 

 

Accounts payable before being settled must be matched with the invoices. To maintain better relations with the suppliers, timely settlement of credit within the credit cycle is important.

 

  1. Keep Records

 

The last step of the procurement process is to make sure everything from step 1 to step 9 is documented and recorded properly. All the records are useful later on. 

 

Maybe while auditing or internal checking these documents can come handy. In case of any dispute with the vendor, records will work as proof in your favor.

 

 

How to make the Procurement Process more Efficient?

 

Procurement process is one of the most important processes carried out in a business. In order to make the procurement process more efficient and fast employees can work on the following things:

 

  1. Double Checking Everything

 

The main objective while carrying out the procurement process is to ensure that business is successful in saving costs and reducing the cost of the final product.  Therefore, everything related to purchase should be checked at least twice. Communicating openly is one way to make the process simple and easy.

 

  1. Build Relations with the Vendor

 

Having a long relationship with a vendor has so many benefits for the business. Better option is to get into a partnership with the vendor to streamline the procurement process. This will save cost and make everything faster. It will also save time in many ways.

 

Also Read | Cost of Production

 

These are just two things. There are so many other ways to make the procurement process more efficient and quick. Ultimately, every business wants to increase the profits and satisfy the customers. So, the procurement process must be designed carefully keeping all the factors in mind.

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