What is procurement management, and why is it important?

Procurement

Procurement management is a critical component of running a profitable business. When managed well, a business stays profitable and overhead costs are low. However, without a sound procurement management process, you risk overspending, poor vendor relationships, or delayed production cycles.

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Taylor Bruneaux

Published on

July 14, 2022

October 26, 2022

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Procurement management is a critical component of running a profitable business. When managed well, a business stays profitable and overhead costs are low. However, without a sound procurement management process, you risk overspending, poor vendor relationships, or delayed production cycles. 

Effective procurement management is a cornerstone of a thriving business, whether they’re vetting SaaS vendors or purchasing raw materials. 

What is procurement management? 

Procurement management refers to the process of supervising and directing the many activities involved in procurement. It includes the steps leading up to overseeing the acquisition of goods and services, creating purchase orders, and even includes record-keeping. 

As a procurement manager, it’s your job to get the best value for the investment in tools, office supplies, raw materials, and other supplies necessary for running a business. 

What is the importance of procurement?

Without a proper procurement process, it would be difficult to run a business profitably. The purchasing needs of a business are best governed by a standardized process that’s cost-effective and overseen by knowledgeable managers. 

A smooth procurement process: 

Has a direct impact on your bottom line—Purchasing necessary supplies like machinery, tools, raw materials, and equipment,  to successfully run a business tends to be one of the biggest expenses. For that reason, getting the most value from these purchases is critical to staying profitable. 

Related: How to Run a Business Impact Analysis for Your SaaS Stack

Without the organized methodology involved in the procurement process, even the smallest expenses can quickly add up to unsustainable levels. 

Serves as a way for businesses to establish reputable relationships with suppliers— Establishing a reputation by forming relationships with key suppliers is also part of the procurement process. These relationships serve the business by enabling better deals, increasing product quality, and adding flexibility. As both the complexity and scale of supply chains grow, establishing relationships with reputable suppliers becomes that much more important. 

Reduces supply chain risk—A procurement process is crucial in reducing supply chain risk because of the relationships it establishes with dependable suppliers. The better you vet credible suppliers with a healthy track record, the fewer supply chain bottlenecks a business has to solve.

Impacts profit margins—Procurement plays into a business’ long-term strategy and financial planning. Improving cash flow and keeping expenses low to improve profit margins over time requires a sound approach to purchasing goods and services. 

What are the steps of the procurement process?

The procurement process differs depending on each company’s size, priorities, structure, and goals. However, many of the fundamental steps are the same. 

1. Identify company needs

Need goods or services from a third-party vendor? Identifying your company's needs is the first step in procurement management. Before you can create a purchase order and search for suppliers, your company’s expenses must be visible and accounted for.

Throughout the identification process, a few questions are worth asking once you’ve pinpointed the need for a good or service. For example, are there quality requirements for the goods or services you need to purchase? What is the delivery timeline for those needs? What are the inventory levels of that specific need? 

Be specific with identifiers like parts numbers, size, and other characteristics relevant to the needs in question. It’s good practice to communicate with key stakeholders in each department to ensure purchase orders are accurately fulfilled. 

2. Create a purchase request

Sometimes known as a purchase requisition, a purchase request is a document that informs a company of its internal need for a good or service. Department managers and team leaders are commonly tasked with creating purchase requests. 

If the purchasing department approves the purchase, the procurement department can start looking at potential vendors or service providers to choose the best option and begin the purchasing phase. 

3. Assess your options 

At this stage of the procurement process, it is clear what items or services need to be purchased, and each purchase request has been approved. Team members can now send potential suppliers requests for quotes. 

But the process of assessing potential vendors to purchase from doesn’t stop at price comparisons to get the best deal. This stage requires evaluating vendors through a variety of procurement activities, including: 

Sustainability initiatives and public reputation—Ethics and environmentally friendly practices form part of today’s modern businesses as they ultimately affect your bottom line. For that reason, making an effort to create supplier relationships that are environmentally conscious through initiatives like ethical carbon accounting practices and waste management can have a positive impact on a business's public image. As you walk through the assessment process, considering the other party's sustainability initiatives is good practice.  

Production capacity—Can your supplier scale with the needs of your company? Getting clear on a supplier’s production capacity, specifically where its limitations lie, is critical information for ensuring your company’s production cycle runs smoothly and goods are delivered on schedule in different scenarios. 

Quality and performance—Assess vendors on how well they can manage and deliver quality goods. Suppliers with a history of excellent management, product realization, and the ability to make improvements when required will have an easier time delivering results that meet company standards. 

Vendor history—Does the vendor have a good track record? Have they been dependable in past deliveries? Is their approach to supply chain management effective? As part of the assessment process, vendor history can expose potential issues and set expectations for doing business with that company.

Risk management—Assessing a supplier’s supply chain gives you a glimpse into how well they mitigate risk. Performance metrics like delays and response times are key indicators of the risks you’d be taking on if you decide to do business with that vendor. 

At the assessment stage, providing surveys, visiting supplier facilities, and communicating with different staff members on the supplier’s team are ways a company can thoroughly access a supplier’s potential. As relationships develop with dependable suppliers over time, this part of the process can be streamlined. 

4. Negotiate deals

Once you’ve found a supplier with a thorough assessment process, deal negotiation for contract terms begins. Arriving at a price point fair to both sides is a key part of the procurement process. 

Clearly setting expectations for both parties is critical. Sit down with your chosen supplier and outline clear contract terms such as: 

  • Scope of the deal
  • Quality standards
  • Contingencies
  • Delivery timelines

Once both parties have arrived at a deal that meets each of their requirements and accounts for any discrepancies, the next step is to create a purchase order. 

5. Create a purchase order

Once suppliers have been assessed and a deal has been reached, you can create a purchase order that includes: 

  • A clear outline of the goods or services requested
  • The number of goods purchased
  • Official approval for a purchase order
  • A summary of all costs involved in the order
  • Reference numbers
  • Any additional notes and information requested

Once the purchase order is received and approved by both parties, suppliers start the order fulfillment process. 

6. Inspect received goods or services

The procurement process doesn’t end at the purchase order stage. Once your supplier has fulfilled and sent your order, you need to go through an inspection process. 

Were the goods sent exactly as requested? Was there any damage during the fulfillment process that needs to be addressed? Are parts of the order request missing? 

As orders are fulfilled, don’t skip over the inspection part. Double-check your purchase to ensure you aren’t met with substandard goods or flawed items once you’re ready to use them. Accurate orders prevent production life cycle disruptions and keep your production process running smoothly. 

7. Approve invoices and arrange for payment

Once inspected, invoices are approved, and payment arrangements are fulfilled. The better payment records you keep, the better reference points you’ll have for future deals.

This gets us to our final step, the record-keeping component of an effective procurement process. 

8. Save a record of the entire process

The procurement process is a multi-step undertaking. Each step forms a fundamental part of a workflow that ensures quality while keeping costs down. That’s why saving detailed records of the entire procurement process is important. 

Yet,  the larger your organization, the more unsustainable it becomes to do this manually. However, incorporating the right procurement software can ensure a large part of the record-keeping is organized and logged through automation. 

Keep accurate records of your: 

  • Payment history
  • Invoices
  • Approvals
  • Contracts
  • Audits
  • Budgets
  • Purchase requests
  • Assessment procedures

Why automate procurement management

Because procurement management is such a methodical process with several steps, it’s the perfect candidate for automation. Through an automated workflow, you can customize to the needs of your company’s procurement procedures. Properly vetting vendors happens more efficiently and submitting purchase orders is made easy.

How Vendr helps

The procurement process involves multiple steps and requires attention to detail, and for a good reason. Its direct impact on a company’s bottom line shouldn’t be taken lightly. The more refined your procurement workflow—especially when you add automation to the picture—the easier time you’ll have fulfilling purchase orders and acquiring quality goods with minimal mishaps. 

For that, procurement tools like Vendr help modern procurement teams save money on software purchases. Specs like projected spending, stack overlap, and total spend visibility lead to faster and more economical decision-making.  

Once onboarded, Vendr oversees the end-to-end process of SaaS spend management with features that make strategic sourcing easier. Running spend analysis becomes automated, and with its record-keeping features, you eliminate time-consuming tasks like chasing down emails, searching for warranties, and digging for procurement contracts. 

With Vendr, closing deals quickly while maximizing cost savings becomes a reality. 

"Vendr has really improved our procurement process because it allows our business stakeholders to focus on the things that matter to their daily roles, instead of having to spend a lot of time in the pricing and contract negotiations." - Gavin Zee Head of Commercial Transactions, Sentry

Try our template to learn to request and buy software while evaluating your best options. 

Level up your procurement process

Whether you’re a high-growth company in the process of establishing sound business operations or you’ve created a procurement strategy for purchasing SaaS, Vendr helps add visibility, cut resource usage, and streamline the end-to-end procurement process for companies that want to refine how they manage their tech stack. 

Contract management becomes easier, time-consuming processes are eliminated, and smart notifications help you stay on top of your procurement management plan. 

Try Vendr’s free savings analysis to learn how much money your SaaS procurement management system is leaving on the table. 

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