To ensure success, every company needs to purchase goods and services in the most efficient way possible and get the best deals**. Procurement management can help businesses achieve this. In this article, we'll cover what the procurement management process is and what best practices you can follow to ensure the success of this process.
Procurement management is the process involved in managing a company's purchase of goods and services from merchants and sellers. This includes self-purchases. It is an integral part of most company operations, including identifying products that need to be purchased, obtaining approvals, sending purchase orders, ensuring that deliveries are received on time, checking the quality and quantity of items, and more.
The goal is to effectively extract maximum value from the purchase and ensure that the business can continue to make the required purchases by minimizing the risk of the ** chain. Ultimately, it's about keeping the business running smoothly and efficiently.
In the world of procurement, many similar terms are used haphazardly and can be confusing. Before we dive into the procurement management process, we'll clearly define three terms you need to know before we get started.
Procurement
This is done before making a purchase, and it involves strategically sourcing and vetting the best possible merchants. It evaluates factors such as quality, delivery time, and merchant reputation.
Purchase
This is a process that involves the purchase itself. It usually starts with a purchase requisition (described below) and ends with a purchase order (also described below).
Procurement
Procurement is the entire process that a company goes through in order to obtain the goods and services it needs to conduct its business.
The procurement management process is a cycle that involves everything in between, from internal requirements to external payments. While different organizations have different ways of managing procurement, the procurement management process typically follows the following seven steps.
Purchase requisition
Every purchase starts with a requisition, and a purchase requisition is how the team states the requirement and requests internal approval. The requisition is usually paper or electronic** and outlines the exact requirements for the purchase and the justification for the cost. Requisitions are easier to manage with purchasing software than with paper** or Excel.
Budgeting and approval
Once a requisition is received, the manager and procurement team will review it to ensure that it meets viable demand and check that there is enough space in the budget for the purchase. In some cases, the team manager will be the final decision-maker in the approval process, and in others, it will be the procurement team itself.
Request for quotation or request for quotation
Some, but not all, procurements require a Request for Proposal (RFP) or Request for Proposal (RFQ), which are similar but not identical. These requests are sent to all relevant vendors and asked to submit a request or proposal that meets the required needs. Alternatively, some companies skip this step by looking at the merchant directory or contacting them directly.
** Quotient Selection and Contract
Once an RFP or RFQ is received (which it will not receive if you skip that step), the company will review it for the best terms and capabilities to meet their needs. It won't be the only deciding factor, as speed of delivery, quality, ESG sourcing compliance, and many other factors will influence which vendor to choose.
Organizations can also draft a contract at this stage of the process, outlining all the details of payment terms, delivery expectations, quality, and more. However, this is not a requirement and can be addressed later if there is an immediate need to proceed with the purchase.
Purchase orders
In order for the purchase to take place officially, the organization will send a Purchase Order (PO), which is a formal document that states all the information required for the purchase: quantity, delivery address, estimated delivery date, payment terms, etc. Once the merchant confirms that an agreement has been reached with the purchase order, it becomes a legally binding document to ensure delivery and payment by the buyer.
Receiving
This is the step in which the goods or services are delivered. It is important for the team to check that the delivery meets the quantity, quality, and other requirements detailed in the purchase order and contract. The merchant will also send an invoice and if the order meets their expectations, it will be reconciled and paid in the next step.
Accounts payable
Once the order and invoice are received, the Accounts Payable team will take care of the payment. However, they will use a process called "three-way matching invoice approval" to check if they are not paying extra or paying for items they did not receive.
In this process, they verify the consistency of 3 documents: purchase orders, receipts, and invoices. If all three match, then they can pay the invoice. If not, they will send it back for clarification. Using a procurement management system for purchases and accounts payable makes it easier to match these documents and ensure fast and correct payments.
Note that throughout the process, your organization can change needs, find new insights from market research, change vendors, or take any action you can think of to get better terms. Procurement teams should always look for ways to get more value out of the procurement process.
While following a procurement management process is a good start, executing it right from the start and sticking to a strategy can help capture the most value. Best practices help your organization go beyond short-term goals and stay on mission as it executes its day-to-day procurement processes. Each company will have different best practices based on their unique needs (which is why it's best to use a flexible software system), but these three provide a common framework that any organization can use.
Develop a procurement strategy
It's wise to have an overarching strategy in place before you start implementing your day-to-day procurement management processes. The strategy should not be specific to procurement alone, but to procurement as a whole, including procurement and accounts payable. Your overall strategy should start with a mission statement that sets the tone for what you want to achieve.
Establish your procurement cycle
Creating a procurement cycle that fits your budget is key to procurement management. The procurement cycle is a step that your organization must go through before making a purchase. It includes ensuring the demand for the product, determining how much product is needed and when. This is part of the procurement process and involves moving from a purchase requisition to a purchase order. It involves the approval of multiple people and can involve many different factors, such as cost, urgency, timeline, and budget.
The most important thing is that the system must be easy to use, otherwise it won't work. A White Code Procurement Management System is a robust procurement management system that offers all of the above benefits and is easy for your team to get started. Whatever choice you make, investing in the right procurement system is key to better procurement management and probably the most important best practice.