The importance of procurement in supply chain management has gained momentum in the last few years as technology advancements have driven us to a fast-paced lifestyle. Even though we have come far from the times of physical documentation of each individual purchase, the importance of carefully selecting goods and services needed for business transactions needs to be carefully planned out. By enabling a pipeline for a company to get supplies through vendors at the lowest cost. Procurement can directly affect a company’s bottom line.
Procurement in an overview can be defined as a variety of activities undertaken to obtain goods and services. A procurement team will aim to obtain competitively priced supplies and gain the most value out of them. Another definition also states that procurement is a variety of processes from business requirements and sourcing suppliers to payment processing and lining multiple vendors for the same order.
Procurement as a part of Supply Chain Management is vital in a business function and an efficiently managed procurement service helps increase business profitability. These activities go beyond obtaining goods and services, including sourcing, negotiation, purchasing, and tracking supplies. Over time, organizations have evolved to define “Purchase” as “Procurement” and while the former means a one-step process, the latter involves a more delicate strategic process.
Principle of Procurement:
An organization needs a variety of goods and services for its proper day-to-day function and given a procurement team is dealing with the company funds, the steps from placing an order to sending money after receiving the order involved several steps. This is regarded as the ethical code as it holds employees responsible.
Teams must responsibly manage funds in an economical and efficient procurement process. They must perform a cost-benefit analysis and assess the risks all the while deriving value out of low-cost procurement.
Organizations and procurement teams also have to place competitive bids from multiple suppliers for the same good and they must carry out the procurement process in such a way, that they maximise the value of the goods and reduce time delay. Apart from these, procurement teams must maintain certain levels of transparency with the organization as well as the seller unless for legal requirements.
Since people in the procurement team are accountable for their work and actions, they have to conduct it without any errors. Even before the term ‘trust’ comes into the picture, the individuals in a procurement team should be perceived in the organization as trustworthy, honest, reliable, and responsible.
Key Performance Indicators of Procurement:
There are certain KIPs that an organization needs to follow on a regular basis that helps boost the efficiency of the procurement process, track the progress made and align the team with business objectives. These KPIs can be noted as:
- Purchase order cycle time
- Supplier lead time
- Supplier defect rate
- Supplier availability
- Number of suppliers
- Fulfilment accuracy
- ROI of the procurement process
Parts of Procurement:
The components of procurement that must be aligned for the process to work smoothly consist of three parts.
- Procedure: An efficient procurement team helps an organization stay on track by keeping procurement costs low, the timely arrival of supplies and catering to business needs. This requires a strategic plan that helps the team be accurate and time efficient and every individual in the procurement team is aware of their responsibilities. If a procedure is not in place, it leads to inefficiency, overpayment, and delay in delivery from suppliers.
- Team: With a procurement procedure in place, the team of people in the procurement process going through the tasks must be specialists. There are stakeholders and every cost is accountable for the purchase of goods and services. The size of the procurement team depends on the amount and value of goods and services that an organization needs.
- Documentation: For a process to go smoothly for present and future purposes, paperwork is imperative. These records are stored for the organization’s knowledge, keeping supplier records, and helping the business maintain an efficient procurement process. Even if the individuals in a team are replaced, the records ensure that procurement is made in a timely manner without any disruption.
Steps of Procurement Process:
- Identification: First comes the step of identification and a procurement team initially identifies the organization’s requirement for certain items and goods. This may be new or previously ordered items that need to be re-stocked. First, the procurement team checks with all departments in an organization to get a clear idea of the needs which is then taken for further process.
- Request Submission: For any high-volume purchase of goods, the procurement team needs to put a formal request to the company with specifications about the item, quantity, and price. Then the finance team can approve the request and finally, the procurement team can go ahead with the purchase plan.
- Vendor Assessment: After clearing the items that must be procured, the team needs to identify the suppliers through which the items can be purchased. The suppliers are requested a quote from the procurement team and a supplier should be assessed not only on cost but speed, quality, and reputation of the seller.
- Negotiation: After the quote is sent to the procurement team, they negotiate to reduce the price to the best value or cancel the purchase from the seller. When a quote matches the preference of the procurement team, they send a formal request to the seller.
- Purchase Order: Once the price and quantity are settled, the purchase order is made with exact order details mentioned for the supplier to fulfil.
- Inspection of Delivered Goods: Once the goods are delivered, the procurement team must inspect the number of goods delivered and for damaged goods.
- Invoice and Recordkeeping: After the goods are delivered, the invoice is generated after which payment is made by the finance team of the organization. An invoice structure followed on a regular basis ensures that payments are made on time, and these are then recorded for bookkeeping and future purposes.
In retrospect, the steps of procurement can be divided into three stages. The first stage is called the “Sourcing Stage”, followed by “Purchasing” and finally comes the “Payment”.
Technology Efficiency: Even in procurement, technology can aid in reducing functional errors and help increase productivity and reduce procurement costs to as low as 25%. Strategizing and bookkeeping is made simple with procurement software and teams easily track their supplies with dashboards. This helps in business profitability and revenue generation and with the broad range of activities that a procurement team has to follow up with on a daily basis, supply chain and procurement software solutions are here to work hand-in-hand, not to take away jobs but to make it easier for people.
Shinjini Sarkar, Senior Content Specialist at Quadrant Knowledge Solutions