How to Create an Effective Procurement Strategy

4 min Read

Procurement is an inevitable aspect of all business organizations. In order to have the power of globalization, an organization should have contact with the best local supplier at the best price. If you feel that the procurement process is achieving your strategic goals then you should know that it is doing right.

The procurement process is a series of steps that an organization identifies and follows in order to obtain goods and services for their goals and objectives.

In the procurement process organization’s revenue is spent on acquiring goods and services. Furthermore, 65% of large organizations, 66% of mid-sized organizations, and 55% small organizations manage to spend from enterprise-level and successful procurement system helps in achieving high profits. Apart from the high profits, a procurement process helps an organization enhancing supplier performance, compliance, risk management, and sourcing cycle time.  

In order to fulfill the sourcing requirements of an organization, you have to periodically assess supplier performance. A procurement process helps in identifying the strengths and weaknesses of the suppliers onboard and strategies for performance improvement. It helps in developing a long time relations with the supplier. On building relationships with the supplier, synergies created between the two parties resulting in high propositions that provide maximum value for both the supplier and buyer. A well-implemented procurement process enables an organization’s higher visibility into stakeholder performance.  The procurement process is not just purchasing goods and services for an organization but it involves an in-depth understanding of requirements by all business units, identifying the right supplier, periodically evaluate supplier performance, and negotiating contracts.

In order to prevent supply chain disruption in the procurement process, you should manage risks such as financial risk, operation risk, and contract risks, etc.

Steps for an Effective Procurement Process

Identify the Requirement

The procurement process starts when an organization requires deliveries of goods and services from an external supplier. This first step of the procurement process entails identifying and consolidating the requirements of all business units in an organization. This provides visibility in spending areas and categories to identify areas for cost savings.

Identify and Evaluate a list of Vendors

After knowing the requirement the next step is to identify the list of trusted suppliers. This process involves a simple web search or through more structured measures like RFPs, RFQs, RFIs.

This process involves the evaluation of relevant suppliers. The evaluation includes pricing, quality of service, industrial reputation and recognitions, warranty and guarantee provisions, and customer service. After the assessment is complete, the supplier who offers maximum value and the best market pricing earns the deal.

Sub-processes in this stage could include tendering, bid management, compliance checks, contract management, supplier relationship management, etc.

Submit Purchase Requisition

In this, you need to get a thumbs up from the person in the internal department who controls finances to purchase your goods and services. This includes creating a purchase requisition document and submitting it to that department. You need to know that in this you are not purchasing directly from the vendor in fact you are getting approval to do so. The process of turning a purchase requisition into a purchase order is known as the purchase order process. 

It depends on the company’s procurement process this could be straightforward or could include multiple steps of approval depending on the value of the order. While purchase requisitions vary depending on the organization, the supplier would share the information with purchasing for their approval: purchaser’s location or department, the quantity and description of supplies requested, the name of the vendor that is providing the goods, and the price.

Create Purchase Order

After the purchase requisition has been approved the department that controls the finances issues a purchase order to the vendor. This the step where the buying happens. These orders are basically created using an electronic purchasing system or a full procure-to-pay software which enables them to track purchase vendors and submit them electronically. If there are no contracts involved then purchase orders are considered legally binding documents.

In this also the information may vary, the supplier’s purchase order would include the name of the company purchasing the goods and services, the description and quantity of the goods, price, mailing address, payment information, and invoice address.

Receive Invoice and Order

This can happen in delivery on receiving invoice and order may or may not happen together; one may arrive before the other. The vendor sends an invoice to the purchaser which describes exactly what the order includes. The invoice always confirms the sale and reaffirms exactly when the payment is due. 

The purchaser gets a limited amount of time to notify about the issues(if any) to the vendor after receiving the order. Three documents- purchase order, order receipt, and vendor invoices- are aligned and reconciled.

Pay for Goods and Services

This step includes the involvement of the finance team of the company. After receiving the order and invoice, the accounts payable team will process the invoice. Matching the invoice against an approved purchase order and the delivery details for the order follows the best three-way matching in the account matching process.

Record for Audit

The last step is to record all the invoices to track spend and the various expenditure after receiving the delivery.