Introduction
Picture yourself in your favorite shopping mall with all the brands you love. Someone gives you their card and asks you to shop for anything you like within the card’s limit. Sounds dreamy, right?
But when you actually start your shopping spree, you’re overwhelmed with choices. What should you buy first? How much should you buy from one brand? How do you plan your purchases without exceeding the card’s limit? You’re steeped in confusion.
This is what a company would look like without a procurement process.
When you set out in the market to procure goods/services for your business, all the moving parts and nuances in the process are enough to make you numb. You need a well-defined procurement plan with the right tools and practices to win at procurement.
What is the procurement process?
Procurement is a stepwise process of sourcing and receiving goods/services for a business’s proper functioning. It helps organizations plan their purchases from external vendors in a streamlined way while saving costs and establishing healthy relationships with the suppliers.
A solid procurement process aims to maximize the value of goods/services purchased by ensuring due diligence and strategic decision-making.
Multiple stakeholders are involved in a procurement process, typically divided into two parties—the accounts payable team and the department/group requesting a purchase. Accounts payable will review and approve the money for the purchase, while the latter will handle other steps like asking for the purchase, finalizing vendors and checking performance.
Types of procurement
There are three main types of procurement processes. Let’s understand the difference between each type:
- Direct procurement: focuses on the acquisition of goods that directly drive revenue growth. These goods are primarily raw materials for production or stock items required for the seamless functioning of the organization. This procurement method aims to build long-term relationships with the suppliers. For example, a furniture manufacturing company will use direct procurement for its raw materials like wood, fabrics, metal, etc.
- Indirect procurement: focuses on sourcing goods for a company’s day-to-day operations. This procurement process optimizes a company’s workflow and reduces production costs to increase overall profits. It involves transactional relationships with the vendors. For example, a marketing agency purchases a project management tool for optimal functioning.
- Services procurement: focuses on procuring services required to achieve the desired goals and deliver ROI to the clients. This method involves outsourcing a task to contractors or consultants for their expertise. These are primarily contractual or one-off supplier relationships. For example, a SaaS company secures the services of an SEO consultant to plan and implement its SEO strategy.
Procurement differs based on the purpose and types of goods/services procured. But it also varies significantly from strategic sourcing.
Procurement vs. strategic sourcing
Procurement can sound a lot like strategic sourcing, but the two concepts differ starkly. The devil’s in these details:
- Strategic sourcing is about analyzing your purchasing power and creating an aligned strategy for managing your supply chain and supplier relationships. It’s the process of building a supply chain infrastructure optimized for your budget.
- Procurement isn’t concerned with building supply chain processes. Instead, it focuses on sourcing, onboarding and paying vendors for specific business requirements. It uses the supply chain workflows already in place.
- While procurement involves regular transactions for paying suppliers, strategic sourcing is essential for a company’s overall spending management and improvement. Procurement works narrowly, and strategic sourcing focuses on all business expenses and supply chain infrastructure.
Now that we’ve clarified the difference between these two concepts and explained what procurement is, let’s understand how a procurement process works.
What is the process of procurement? — Breaking it down into 7 steps
A standard procurement process includes seven steps to systemize the flow of acquiring goods and services. With a systematic approach, you get better visibility into every purchase, build healthy and long-term relationships with vendors and maximize compliance.
Take a look at the seven steps of a good procurement process:
Identification
The first step is recognizing the need to purchase goods and services from external vendors. The department placing the request for procurement has to document their requirements, covering details like:
- Scope.
- Timelines.
- Vendor shortlist.
- Estimated costs.
- Expected quantity.
The department will submit this to the procurement team for validation.
Requisition request
After their requirement is validated, the department will submit a requisition request to the procurement team. At this stage, multiple stakeholders review this request to check for the actual need for goods/services request, budget availability and policy compliance.
Purchase order & RFP
Once the requisition review process is completed, the procurement team will create a purchase order and send out requests for proposals (RFP) to multiple vendors. These RFPs will give you an estimate of costs, timelines and quality of services offered by different vendors.
Evaluation & paperwork
The procurement team and an evaluation committee will review all the RFPs to compare and shortlist the best quotations. Following their discussions, they’ll hire the necessary vendors and share the purchase order.
This is where all the legal paperwork comes in as well. Before officially onboarding a vendor to your organization, you have to get them to sign a contract and other documents.
Order management
This step covers everything that happens from signing the paperwork to paying the invoices. The suppliers will deliver the goods/services requested in the previously agreed-upon timelines. The purchasing department will also inform the suppliers in case of any flaws or complaints.
The department can approve or reject the receipt of goods based on the quality delivered. Before the invoicing process, the team also reviews every supplier’s performance based on multiple parameters, such as:
- ROI.
- Timelines.
- Compliance.
- Communication.
- Quality benchmarks.
Once the evaluation is complete, the vendor can share an invoice for the goods/services delivered while the department reviews it for errors.
Invoicing & review
Invoicing is one of the most crucial and rather chaotic steps in the procurement process. With so many stakeholders involved, it takes longer than usual to complete.
The purchasing department will check different documents, like the purchase order, final invoice and goods receipt. If there are any mistakes, the invoice is returned to the vendor for revision. If there are no discrepancies, the invoice is sent for payment authorization and record-keeping.
Accounts payable
The procurement process ends with the finance team processing the payments for the invoice received. They also save these documents—the purchase order, goods receipt and invoice—for every order for future reference.
The accounts payable process can be streamlined through accounts payable automation to reduce the manual effort involved in payment processing.
6 Reasons why you need a procurement process
Until a few years ago, sourcing products for your business was as simple as talking to a bunch of vendors and going for the best-priced one. Today, the equation has changed big time.
Without a full-fledged procurement process, you’ll be left struggling against high prices, risks, dependencies and many other challenges. If you’re still second-guessing the need to create your own procurement process, these six reasons will convince you otherwise.
Avoid uncertainties in the supply
The most important benefit of building a procurement plan is removing all uncertainties and gaps in your supply chain management framework. Instead of focusing solely on costs and hiring vendors, a good procurement process weighs multiple options to ensure you’re going for suppliers you can trust.
What’s more, with every step in the process, you can be more confident of your purchase request and the vendors. It enables you to establish meaningful relationships with the vendors and work with a long-term goal in mind.
Create standardized contracts
Most procurement processes are prone to delays, whether it’s in vendor onboarding or payments. This creates mistrust among both parties and reduces efficiency in meeting your procurement requirements.
To ensure efficient management and compliance, contract lifecycle management software can streamline the entire process, ensuring that every contract follows a standardized set of stages.
Reduce risk & dependencies
Procuring goods/services from external vendors is a risky business with multiple dependencies that can potentially slow down your operations and growth. You’re facing risks like inaccurate need analysis, poor planning, no supply chain workflows and improper order management.
On the flip side, a solid procurement plan will do all the heavy lifting on your behalf to eliminate all these risks and optimize the process. Besides, it can also remove supplier dependencies to ensure you can scale procurement whenever needed.
For example, if a supplier faces delays or stops deliveries for a while, your procurement process will provide alternative solutions to keep production running smoothly.
Cut costs & maximize savings
The procurement process is designed to increase a business’s profitability by reducing expenses on sourcing goods/services. By collecting and reviewing RFPs from multiple vendors, your team can identify the most cost-effective vendors for your requirements.
The process also gives you more transparency into every procurement stage to avoid spending leakage. Besides, you can request discounts and negotiate prices with vendors by communicating with them directly.
Achieve greater process efficiency
Once you’ve implemented a seamless procurement process, you can make it more efficient using automation. Automate the repetitive tasks to improve the speed with which you complete different steps.
Besides, since this plan streamlines every aspect of procurement, you’ll inevitably be more efficient in hiring and paying vendors.
Enhance supplier relationship management
The success of your procurement strategy hinges directly on the strength of your relationship with suppliers. A good procurement plan removes the confusion from the process and sets you up for long-term success with your suppliers.
By giving vendors clarity on your supply chain workflows, invoicing practices and primary requirements, the process establishes your expectations and informs them of their role.
How to build & optimize your own procurement process: an actionable playbook
Building your procurement process is just the first step. You have to consistently review and optimize the process for more efficiency, greater compliance, better coordination and more savings.
We’ve outlined five procurement best practices to optimize your process and succeed in the long run:
Align your business goals with the procurement strategy
Picture this: your procurement team meets the senior leadership to review quarterly performance. While the procurement folks joyously list their wins regarding cost reduction and vendor management, the CXOs offer a look of disappointment and say, “this isn’t our priority.” Dead silence.
That’s a classic case of a misaligned procurement strategy. Procurement isn’t limited to a 7-step framework. It has to align with your overall business objectives to be profitable.
Essentially, your procurement strategy should align with:
- Finance goals: depends on the equation between cost and risk and the finance team’s directives on spending.
- Technology goals: how is your business adapting to tech changes and preparing an advanced IT architecture for your procurement plan.
- People goals: relies on your HR-related strategies for hiring and talent acquisition.
Aligning your procurement objectives and plan with the overall business goals will keep your team on the right track and produce better ROI for your business.
Use process mapping to outline the correct flow
Process mapping will visualize every stage of your procurement process and offer more clarity on how it works. A well-defined procurement map gives all stakeholders an overview of where the process starts and ends.
While vendors can use the map to understand your workflow better, your team can rely on this map to identify gaps and scope for improvement. For example, by laying down all the steps of your procurement flow on a map, your team will be able to recognize the steps or tasks you can automate and achieve greater efficiency.
Here’s a great example of what a procurement process map looks like:
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Create SOPs to streamline every handoff
A standard procurement process involves many stakeholders, like the purchasing department, the procurement team, the vendors and the finance team. You can design SOPs to streamline the entire process and ensure every stakeholder performs their role correctly.
Here are a few SOPs to consider for a frictionless handoff process:
- Requisition request creation: Share guidelines with the purchasing departments to create a requisition request for any requirement. You can also share samples of what an ideal request document looks like.
- Request for proposal creation: Guide vendors on what you expect to see in their RFPs with an SOP for RFP creation. This will bring more consistency to your proposals and simplify the decision.
- Vendor shortlisting: Create a standard process to shortlist vendors. This SOP will include the parameters to consider when reviewing a vendor and the steps to make the final decision based on your review.
- Vendor onboarding: Design another SOP to onboard a vendor seamlessly. Include a list of the necessary documentation, details about the company policy and other guidelines that a supplier must be aware of.
- Order management: Inform your teams on the process of managing goods/services from an external vendor and tallying the receipt of the goods. Add your instructions for evaluating supplier performance.
- Invoicing and review: Lastly, create a review and approval process for invoices. Outline the roles of vendors, procurement team and finance team in finalizing and processing invoices promptly.
Feeling overwhelmed with how you’ll design and roll out so many SOPs? You’re not alone.
But what if there was an easier, faster and more effortless way of designing SOPs in a few seconds? Luckily, there is.
Scribe allows you to create fully customizable step-by-step SOPs by simply recording your screen. The tool will convert all your actions into stepwise instructions, complete with annotated screenshots, text, videos and GIFs. You can also embed links, edit any steps or include additional steps.
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Here’s an example of how you can create and share a Scribe with a single link:
Lance, a product manager, explains how Scribe has changed their work.
“We are thrilled that we found this solution. Scribe will enable us to quickly create new (and rework old) instructions for our many products. Additionally, we can improve how we onboard internal staff with step-by-step guides for our processes. Scribe's tools can be learned in minutes. They don't bog it down with too many options and features, which is a good thing. The price is also fair, which made adoption a no-brainer.”
Design a vendor management framework
Not every vendor will be able to fulfill your requirements. Maybe they’ll miss the quality benchmarks or fail to meet the timelines. Things can go south with a supplier quickly without a vendor management framework.
A vendor management plan covers every single detail about your relationship with vendors during procurement—from hiring and onboarding to reporting, time tracking and invoicing.
Creating such a framework can build more transparency for both parties. Your suppliers know the complete scope of work, while you can follow the predefined flow and work more effectively to complete the process.
Pro tip: Make your vendor management framework a living document and include tips or best practices to improve vendor relationships. Document updates and adjustments in the framework for better ROI in the future.
Test & deploy the process
The final step in the matrix is testing your procurement plan. Conduct mock runs of your plan to check if it achieves your expected objectives and looks for gaps. Take this opportunity to fix these gaps and optimize the process further. Once the testing is complete, you’re all set to roll out your procurement process.
Level up your procurement process with SOPs
SOPs can be the difference between success and failure in your procurement process. Without SOPs, your stakeholders will be left scrambling for the right information about what to do in different stages. With SOPs, everyone will have the information and means to perform their roles successfully.
The best part? Scribe takes away the hassle of creating multiple SOPs for your procurement process. Sign up today to see how it can change the game for you!
