Procurement processes can sometimes be misunderstood by those outside the mechanism. Therefore, we want to provide a general overview of the nature of procurement processes.
Procurement is essentially a vital business function that involves acquiring the goods and services a company needs to conduct its daily operations.
Procurement, which has the power to influence a company's profitability, can enable the company to obtain the materials it needs at the lowest cost and provide the maximum value possible.
Procurement Processes...
Procurement processes are the steps and procedures that businesses use to purchase goods or services from external sources.
While they may vary greatly depending on the structure and needs of each company, they generally include the following basic steps:
1. Identifying which goods and services the company needs
The business must first identify its requirements for a specific product or service.
2. Sending a procurement request
Once the required goods or services are identified, the procurement team may send a procurement request to the appropriate department for review and approval. A procurement request is a document specifying what is needed, why it is needed, when it is needed, and how much it will cost.
3. Evaluating and selecting suppliers
The procurement team then researches potential suppliers who can provide the desired goods or services. Factors such as reputation, quality, price, delivery time, availability, and sustainability practices are evaluated.
The procurement team then selects one or more suppliers based on various criteria and negotiates terms with them.
4. Creating a purchase order
Once a supplier is selected and terms are agreed upon, the procurement team creates a purchase order (PO). This is a formal contract authorizing the supplier to deliver the goods or services.
The PO includes details such as quantity, price, delivery date, payment terms, and other specifications.
5. Receiving and inspecting the goods
When the supplier delivers the goods or services ordered by the PO, the procurement team receives them and checks if they conform to the agreed specifications and quality standards.
Any discrepancies or defects are reported to the supplier, and replacements or refunds are requested.
6. Three-way matching
Before approving payment to the supplier, the procurement team performs a three-way match, checking that the PO, invoice, and goods or services receipt are consistent and accurate.
This helps prevent overpayments, underpayments, or fraud.
7. Approving the invoice and arranging payment
Once everything is confirmed to be in order, the procurement team approves the invoice received from the supplier and arranges payment according to the agreed terms.
Payment method, currency, location, and preferences of both parties may vary.
8. Maintaining records of all transactions
The final step in the procurement process is maintaining records of all transactions related to each purchase.
This includes documents such as procurement requests, POs, invoices, receipts, and payment approvals.
These records help track expenses, monitor performance, ensure compliance, and support audits.
What are the types of procurement?
Procurement can be classified based on various criteria:
Nature of goods or services procured: For example,
• Direct procurement
This involves purchasing raw materials or components used directly in the production of goods sold to customers.
• Indirect procurement
Indirect procurement refers to purchasing goods or services that are not directly used in production but support commercial activities such as office supplies, utilities, or travel expenses.
Level of involvement of internal stakeholders:
• Centralized procurement
This involves having a single department or unit responsible for conducting all procurement activities for the entire organization.
• Decentralized procurement
Decentralized procurement involves different departments or units independently conducting their own procurement activities.
Decentralized procurement can increase flexibility, responsiveness, and customization based on local needs and preferences.
• Hybrid procurement
Hybrid procurement involves a combination of centralized and decentralized procurement models.
This can help balance the advantages and disadvantages of both approaches and optimize efficiency and effectiveness.
How can procurement processes be optimized?
Procurement processes can be optimized by implementing various strategies and techniques such as:
• Regular spend analysis
Spend analysis involves analyzing past and current spending data to identify patterns, trends, and improvement opportunities.
Spend analysis can help reduce costs, improve quality, increase savings, and enhance supplier relationships.
• Strategic resource allocation
Strategic resource allocation involves developing a long-term plan to procure goods or services that align with business objectives and goals. Strategic resource allocation can help optimize value creation, reduce risks, promote innovation, and gain competitive advantage.
• Utilizing technology
Leveraging software tools or platforms that can automate, facilitate, and streamline procurement processes is essential in today's business environment.
Technology can help reduce manual errors, increase transparency, enhance collaboration, and improve decision-making processes.
Conclusion
Procurement processes, which are the backbone of any business that requires goods and services to operate, involve a series of steps aimed at finding the best suppliers, negotiating the best terms, and monitoring the delivery and quality of purchases.
While procurement processes may vary depending on the nature and scope of the procurement, their objective is common: to optimize processes, create value, and achieve business objectives.
Procurement is more than just buying things; it is a strategic way of managing resources and enhancing performance, making it indispensable for every business.