What is Procurement: An Overview of the Purchasing Process

What Is Procurement?

Procurement is the process of acquiring the necessary goods or services for a business. It involves various procurement steps to ensure effective management of procurement strategy. A procurement officer, procurement analyst, or procurement specialist will oversee this process to secure the best value for the procurement management of any business. The procurement process includes stages of procurement such as purchasing, sourcing, and vendor assessment.

Procurement is the method of discovering and agreeing to terms and purchasing goods, services, or other works from an external source, often with the use of a tendering or competitive bidding process.

The procurement life cycle encompasses procurement procedures such as e-tendering and e-procurement and procurement process steps to follow which encourage digital technology for efficiency and transparency in the procurement process.

Overall, it plays a vital role in managing supply chain management including supplier relationship management and ensures that businesses acquire the necessary resources to operate it effectively.

Key Takeaways of Procurement

When it comes to business spending it is important to know about Procurement such as preparation, solicitation, and payment processing. This will require collaboration amongst different departments.

• It is an important aspect to run your business successfully. It involves various activities such as
  • finding suppliers,
  • negotiating terms with the suppliers,
  • making purchases,
  • and keeping track of supplies.
• To identify any weaknesses or inefficiencies it is essential to regularly monitor and review the procuring process.
• Technology also plays a significant role in streamlining the procuring process by automating tasks and monitoring the procuring process.
• Expenses can be categorized based on the specific needs of the procuring process.
• It's important to note that strategic procurement focuses on long-term planning, whereas purchasing is more transactional in nature.

Why Procurement Is Important in Business?

Procurement is the crucial step of supply chain management. It allows a company to find out trustworthy suppliers who can offer optimum prices for goods and services which fulfil the need of the company. This is important for various requirements such as sourcing raw materials, finding a marketing service provider or obtaining new office supplies.

Through the procurement process, businesses can carefully the supplier that fulfils all the business requirements at a reasonable price. This will help in avoiding wasting time, and money, and devoting much time and money to other important areas.

In Procurement, a Blanket Purchase Order (BPO) is commonly used. It is a type of Purchase Order that allows a business to set up an agreement with the suppliers to deliver goods or services over a specified period without giving different individual POs every time. This will ensure streamlining of the procuring process and facilitates efficient ongoing supply chain management.

Types of Procurement

There are many types of procurement that a business can engage in. The one way in which procurement types can be distinguished is direct and indirect. Another way is to classify procurement as goods are service procurement. These types are further discussed below.

• Direct Procurement- It involves materials and components which are necessary for producing an end-product that directly contributes to the company’s main product or service. For example., a manufacturing unit will purchase raw materials and parts. Whereas a retailer will purchase items from a wholesaler for resale to the customers.
• Indirect Procurement- On the other hand, involves purchasing items that are necessary for daily activities. This doesn’t directly contribute to the company’s main product or service. For example, this may include purchasing office supplies, and furniture, incurring advertisement or consultancy expenses and equipment maintenance service.
• Goods Procurement- It is primarily focused on obtaining physical items such as software subscriptions, parts, etc. This can be both direct and indirect procurements such as raw materials or office supplies respectively.
• Service Procurement- Service procurement, on the other hand, involves obtaining services provided by various people. Similar to goods, services can include both direct such as labour directly involved in the business and indirect such as things such as on-site security services.

Steps in the Procurement Process

Procurement process consists of several key steps that businesses should follow to acquire goods or services as per their needs. Here are the following steps involved in an effective procuring process.

1. Identify the Company’s Needs- First of all, the business needs to determine the specific goods or services requirement. This may include a new item which the company never previously purchased. This involves understanding the technical details like materials or any specifications needed for the items. Consulting with relevant departments will help the businesses to ensure the needs of each department are considered or not.
2. Submit Purchase Request- A formal purchase request also known as a purchase requisition is made to notify the company of the need. It includes details such as price, quantity, and time frame. The department which oversees it can review the request and approve or reject it before proceeding further.
3. Selection of Vendors- If requests are approved by the concerned department then all potential vendors are assessed based on factors like cost, reputation of vendor, quality of goods or services and reliability.
4. Negotiating Price and Terms- A business as a best practice should get at least three quotes from the suppliers before making any decision. All the multiple quotes should be compared. After selecting quotes by comparison, negotiations take place to finalize the price and terms. Once agreed upon, the terms are documented in writing.
5. Create a Purchase Order- Once price and terms negotiations are done, a purchase order (PO) is to be filled out and sent to the chosen vendor. This Purchase order provides detailed information regarding the goods or services required.
6. Receive and Inspect the Goods- The delivered goods should be carefully inspected for any errors or damage. Businesses must be ensured that the delivery matches the specifications in the purchase order and meets quality expectations.
7. Conduct Three-way Matching- The businesses should conduct three-way matching by way of comparing purchase orders, order receipts or packing lists, and invoice to ensure they must match. This will prevent any unauthorized payment or payment against inaccurate invoices. Any discrepancies are addressed and resolved before payment.
8. Approve the Invoice and Payment- If the three-way match is accurate then the invoice is approved for the payment. Businesses should have a consistent invoice payment process which will help ensure timely payment and maintains good relationships with their suppliers.
9. Keep Record of Transactions- Businesses should maintain a detailed record of the entire procuring process including purchase requests, negotiations, invoices, and receipts. These records will help with reordering, audits, tax compliances and also in dispute resolution.

Stages of the Procurement Process

The above-discussed steps of the procurement process can be further categorised into three main stages namely: Sourcing, Purchasing and Payment. In purchasing stage, Global Procurement means purchasing involves sourcing internationally.

• During the Sourcing Stage, the businesses identify their needs. Submitting purchase requests and by evaluating the vendor’s potential, builds a strong relationship with the suppliers.
• In the Purchasing Stage, negotiations of price and terms are done also purchase orders are created. During this stage, Goods and services received are inspected and verified. This will ensure items meets the required specifications and quality standards.
• In the last Stage which is the Payment Stage, the three-way matching process is conducted by the accounts payable team. This stage ensures that the purchase order given, actual goods received and invoice of such goods are accurate matches with each other.

Procurement Challenges

Businesses may face several challenges while managing the Procurement process without having comprehensive procurement software. Here are some common points which show your procuring process may face difficulties.

1. Fragmented supplier base- Sometimes dealing with multiple suppliers across different categories can be difficult. It may lead to difficulty in leveraging volume-based discounts, inconsistency in providing service or complex contract management.
2. Lack of visibility- Limited visibility into its spending makes it hard to track and analyze expenses. This lack of visibility can hampers cost control efforts, budgeting, and strategic decision-making.
3. Manual processes- A business's reliance on manual and paper-based processes can slow down the procuring process. Tasks like purchase requisitions, taking approvals, and invoice processing can become time-consuming.
4. Compliance and risk management- Managing compliance such as involves adhering to internal policies, legal requirements, and supplier agreements and mitigating risks associated with it such as supplier non-compliance and data breaches can be challenging and time-sensitive.
5. Limited strategic focus- Its activities often focus more on operational needs than strategic value.

To overcome these challenges, it is important to adopt efficient processes. Implementing Procurement software, such as our AP automation software, can improve data visibility and enable strategic sourcing practices to optimize your procuring operations.

Best Practice in Procurement

Now that we have discussed the challenges in Procurement, let's explore some of the best practices and strategies to overcome them and establish an efficient procuring process in your company.

1. Streamline processes with automation- The use of technology and automation tools can digitize and streamline the procuring process. This will reduce manual errors, improve efficiency, and save time.
2. Centralize procuring activities- Establishing a centralized platform for managing all procuring activities can provide transparency and improve accountability which will streamline the workflow.
3. Conduct spend analysis- Businesses need to analyze their Procurement spend to gain insights into expenditure patterns.
4. Implement strategic sourcing- Adopt strategic sourcing practices to source the right suppliers, conduct competitive bidding, and negotiate favourable terms. Build strong supplier relationships and achieve long-term cost savings.
5. Establish clear Procurement policies and guidelines- Develop clear policies and guidelines to ensure compliance with regulatory requirements and industry standards.
6. Foster stakeholder collaboration- Involve end-users in the supplier evaluation and selection process to ensure their needs are met and increase user adoption.
7. Integrate with other systems- Connect your procuring tools with other systems, such as accounting software and ERP systems to enable seamless data flow.

By implementing these strategies, organizations can enhance the efficiency, cost-effectiveness, and strategic value of their procuring processes.

Competitive Bidding and Procurement

One important aspect of the procurement process is competitive bidding. Competitive bidding is a method used by organizations to select suppliers or contractors for the provision of goods, services, or works. It involves inviting multiple vendors to submit bids or proposals for a specific project or requirement. This process ensures that the organization obtains the best value for its money by encouraging suppliers to compete against each other based on factors like price, quality, and terms.

Here's how competitive bidding typically works:

• Preparation: The organization identifies its procurement needs and prepares a detailed request for proposal (RFP) or invitation to bid (ITB) document. This document outlines the project requirements, specifications, evaluation criteria, and terms.
• Invitation: The RFP or ITB is sent out to a select group of potential suppliers or contractors who meet the criteria. This can be done through an online procurement platform or by directly contacting potential vendors.
• Submission: Vendors review the RFP or ITB and prepare their bids or proposals. They submit their offers within a specified timeframe, including detailed information about their pricing, proposed solution, and any relevant qualifications.
• Evaluation: The organization's procurement team evaluates the received bids based on predetermined criteria. This evaluation may include factors such as cost, quality, technical capability, delivery time, and past performance.
• Selection: After a thorough evaluation, the organization selects the winning bid based on the best fit for its requirements. The selected vendor is then notified, and negotiations may ensue to finalize the terms and conditions.
• Contract Award: Once negotiations are complete, the organization awards the contract to the chosen vendor. The terms and conditions are formalized in a legally binding agreement.

Competitive bidding promotes transparency, accountability, and fair competition in the procurement process. It helps organizations achieve cost savings, obtain high-quality goods and services, and mitigate risks associated with supplier selection.

How Masters India Can Help in Managing Your Procurement?

MastersIndia can help businesses in managing their Procurement process through their Account Payable Solution. With the help of AP solution, MastersIndia provides automation for the process, specifically the Procure-to-pay (P2P) cycle.

MastersIndia's AP Solution also provides advanced features such as automated invoice matching, three-way matching, approval workflows, and real-time visibility into invoice status.

Conclusion

Procurement is a critical function within businesses that involves obtaining goods and services to meet the company's needs. Technology and automation play an important role in enhancing procuring processes and a well-executed procuring process contributes to the overall success of the business.

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