Unraveling the secrets of procurement: Exploring processes, types, and stages.
Learn how procurement works, the processes, types, and stages involved, and the importance of the procurement function within the wider business context.
Procurement plays a critical role in a company’s growth and profitability. For that reason, crafting a procurement process that's effective, simple, and reduces costs is worth it.
For instance, you can level up how you buy and renew SaaS by using purchasing software with plenty of useful procurement insights and automation. With its built-in notifications, reporting capabilities, and centralized dashboard, procurement software helps manage the multiple steps involved in the procurement process.
But first, it’s worth knowing the procurement process inside and out.
What is procurement?
Procurement is acquiring goods or services from third-party vendors through various methods. This includes tendering, competitive bidding, or direct purchasing. It can span a variety of buyer activities, including making purchase orders, managing payments, updating billing terms, and taking care of the end-to-end activities that involve purchasing goods and services.
Procurement teams are those individuals responsible for finding competitively priced tools and supplies and sourcing deals that offer the highest value for the price. Finding such deals is only one part of their process—companies also use effective procurement strategies to ensure profitability and maintain better cash flow.
The good news? The procurement process shouldn’t be a series of manual tasks. With today’s technology, a lot of it can be automated.
Why is procurement important in business?
Companies need to buy products and services to operate, but they can do so without a dedicated procurement department.
The purpose of the procurement department is to maximize the company’s return on investment for these purchases.
This ROI maximization comes from a variety of practices, such as:
- Price negotiations during vendor sourcing
- Identifying opportunities to consolidate software licenses
- Sourcing backup vendors to prepare for potential supply chain shortages
- Enforcing data security requirements to minimize the risk of a data leak
- Holding regular supplier performance review meetings to keep vendors accountable to contractual performance requirements
- Renegotiating software contracts before they renew
- Putting purchase approval workflows in place to maximize internal compliance and reduce risk of unapproved spending
The difference between procurement, purchasing, and supply chain
The terms procurement, purchasing, and supply chain are often used interchangeably, and though there are many similarities between them, they are not the same.
Procurement management is the broadest of the three. It includes everything throughout the procurement cycle, from assessing business needs to strategic sourcing of potential suppliers and, eventually, payment processing once goods have been received.
The procurement function includes activities like:
- Company needs assessment
- Market analysis
- Make or buy analysis
- Vendor sourcing and vetting
- Raising RFPs (request for proposal) and RFQs (request for quotation) with potential suppliers
- Negotiations and contract management
- Payment approval and cost savings initiatives like three-way matching to catch invoice discrepancies
Purchasing is a subset of procurement that doesn’t include top-end activities (things like vendor sourcing) but focuses specifically on buying.
That is, once procurement has vetted and approved vendors, buyers can raise purchase requisitions and get them approved through the appropriate channels.
Supply chain management focuses on the infrastructure of getting goods from your supplier, such as managing warehouses, shipping routes, and import inspections and taxes.
What are the different types of procurement?
There are four general categories in procurement, each denoting the type of purchase and its impact on the business. These include:
This type of procurement refers to buying both physical items and digital subscriptions. Buying laptops, keyboards, and project management software are all examples of what would classify as goods procurement.
Purchases falling under services procurement deal with providers that sell people-powered services. This means anything from contractors to consulting services, maintenance work, or even law services—anything people based.
Direct procurement means procuring the goods necessary to create an end product, including raw materials. For example, buying sheetrock, nails, and cement would qualify as direct procurement for a construction company.
With indirect procurement, items purchased aren’t directly tied to a company’s revenue. Rather, the items are things like office supplies and furniture critical to daily operations.
What is a procurement process?
A procurement process refers to the steps necessary to ensure the most purchase value. There are several distinct steps involved in the process worth considering.
Steps involved in a procurement process
The steps involved in a company’s procurement process differ depending on its end goal, how procurement runs, its proprietary procurement methods, and the needs it prioritizes.
Generally, procurement includes the following steps:
- Pinpointing the goods and services necessary to run the company
- Creating a purchase request
- Assessing supplier options
- Negotiating the best deal according to the needs of both parties
- Creating a purchase order
- Inspecting goods once received
- Approving the invoice and arranging for payment
- Saving a record of the entire procurement process
Stages of procurement
While there are many small steps involved in the procurement process, its entirety includes three general stages:
Sourcing encompasses the beginning stages of the procurement process. During this stage, many questions are answered. What goods and services does the company currently need? Which vendors provide these items, and of those vendors, which are the best options? Has a purchase request been created?
In the sourcing phase, seeking established, trustworthy partners who provide quality goods and services at a great price is crucial.
The purchasing stage comes after you’ve vetted vendors and are ready to negotiate terms. Purchasing decisions are finalized, and goods and services are received. The final stage is to inspect the delivered goods to ensure the order was properly fulfilled.
Here, you verify the accuracy of your invoice for payment. This step includes keeping a thorough record of every stage of the process. This record protects both parties and serves as a reference point for the future.
How to optimize your procurement process
Software is one of the best ways to optimize the procurement process. Today, all the tedious record-keeping and paperwork that would otherwise require a manual process can be largely automated. Still, several ways to optimize the procurement process save you both time and money.
Create standard procurement operating procedures
Establishing a standard procurement process ensures you’re mindful of your budget and get the most out of your purchases. It helps uncover improvement areas and creates quicker processes while keeping costs low.
Establish a single source of truth for all procurement needs
Along with creating standard operating procedures, or SOPs, for your procurement process, establishing a single source of truth is crucial for an effective end-to-end process with plenty of visibility. Procurement doesn’t suffer because of outdated information, poor record-keeping, or disorganized data.
A single source of truth makes key data available to all stakeholders and streamlines the process of identifying a need, submitting a purchase order, and making a payment.
Invest in ongoing procurement education
While it’s easy to overlook, investing in ongoing procurement education pays off long-term. With ongoing education, procurement professionals can better manage vendor processes and negotiations to make informed decisions.
Whether procurement training happens through in-house learning and development initiatives or third-party resources, your procurement outcomes will improve with ongoing professional development.
Streamline the sourcing process with automation
Automation is procurement’s best friend. It quickens tedious manual processes, reducing the time to start and finalize your company’s procurement process.
Investing in robust procurement-ready software like Vendr frees your procurement team to use their time on higher-impact activities.
Keep track of your most important KPIs
The better you keep track of your most important key performance indicators (KPIs), the better your procurement process will be over time. Tracking KPIs ensures all procurement efforts are completed according to standard. It’s also a great way to identify parts of your procurement process needing improvement.
Effectively keeping track of ongoing procurement KPIs is best managed with automation. Once set up, automation does the work of gathering, organizing, and, in some cases, even analyzing KPIs for you.
Some examples of procurement KPIs worth tracking include:
- Purchase order and invoice accuracy
- Procurement ROI and benefits
- Compliance rate
- Rate of emergency purchases
- Supplier lead time
- Spend under management
- Purchase order cycle time
- Supplier defect rate
- Vendor availability
- Cost per invoice and purchase order number
What are procurement principles?
Procurement principles are like the code of conduct a company follows to stay ethical. Not all procurement principles are the same for all companies.
These are some of the most common procurement principles:
- Accountability: Team members executing the procurement process are deemed responsible for their actions, including any decisions made. To ensure team member accountability, fail-safe mechanisms may be put in place.
- Value for money: Funds should be managed efficiently through initiatives like in-depth risk assessments and cost-benefit analyses. The quality of goods must be considered when vetting a possible purchase as the value it presents for its price.
- Competitive supply: Companies should seek competitive bids from the best suppliers for every purchase—unless there is a justified exception.
- Transparency: Relevant key procurement information should be readily available to anyone within the company, suppliers, and even the public.
- Consistency: Procurement policy and operating procedures should be standardized and consistent across the organization.
- Fair dealing: Suppliers should be treated with fairness. This includes keeping commercial information confidential when applicable. Public companies cannot impose any limiting constraints on suppliers.
- Integrity: Procurement funds are to be used for their designated purpose. Procurement agents should always strive to establish trust, be reliable, act honestly, and take ownership of responsibilities.
- Effectiveness: The procurement process should maximize value and minimize waste.
- Responsiveness: Communication expectations should always be met, thus establishing trust and streamlining procurement activities.
- Legality: Procurement agents are to conform to legal procurement requirements.
Establish a better procurement process
By now, you’re familiar with how important it is to establish an effective, ethical, standardized, and automated procurement process. With the right tool, that process is a reality.
As a procurement automation tool, Vendr ensures every life cycle step is optimized and accounted for. Procurement software supports supplier relationships, eases the purchasing process, and ultimately grows your bottom line.