To ensure your business is profitable, you must first consider the best way to buy and acquire your goods and services. What happens if your company fails to provide a reliable supply of goods and services essential for the business?
A successful procurement process ensures you always stay successful. It allows you to reduce costs, purchase top-quality applications and products, reduce employees’ time, and provide greater transparency.
What is Procurement?
Procurement is the process of sourcing and purchasing products and services required to manage business processes. It involves planning, researching, sourcing, negotiating, decision-making, and controlling supplies.
Whereas the primary purpose of purchasing is to invest in cost-effective, high-quality supplies that provide the best value for your business.
Procurement vs Purchasing
Procurement and purchasing appear to be the same, but they aren’t.
Procurement involves several steps and is a long process. Purchasing goods or services includes fewer steps and is only for one transaction. Here are a few differences between the two things:
| Procurement | Purchasing |
| Is a long-term process | Is a short-lived process |
| Requires building strategies | Is a transactional process |
| Works towards achieving bigger goals | Looks for the best prices for the need |
| Long-term relationships with suppliers | Doesn’t focus towards building relationships |
| Identifies the need | Fulfills the need |
Imagine your company is looking for a new CRM system. There are two options – directly purchase the first CRM system you hear about or hire a procurement company or team to do the job. The former is convenient but doesn’t ensure the best results. Conversely, the latter is initially challenging and costly but will save you cost in the long term and deliver the best results.
Procurement vs Sourcing
The procurement process is related to strategic sourcing. In fact, sourcing is an element of procurement. Strategic sourcing develops the supply chain infrastructure to ensure the lowest-end costs. In contrast, procurement uses established supply chains to guarantee an uninterrupted flow of supply.
Types of Procurement
The three kinds of procurement processes are:
Direct Procurement
It is the process of purchasing goods or services, impacting the company’s bigger goal, i.e. profitability, scalability, and sustainability.
Indirect Procurement
It’s the process of acquiring goods and services to smoothly run the company’s operations, such as buying CRM software.
Services Procurement
It’s the process of hiring vendors to help you run your business. For instance, you need a marketing agency to spread brand awareness. You need a sound vendor management system if you’ve outsourced several functions.
Why Does Your Business Need a Procurement Department?
Procurement teams are experts in handling a company’s requirements for buying goods and services, keeping strong relationships with vendors, and improving processes. Here we’ve outlined a few benefits you’ll get from keeping a procurement department:
Increases Cost Savings
Keeping a procurement department is costly. But this cost is reduced when you have an effective team working for you. The cost to keep the procurement team is optimized when the team onboards vendors with the best possible quality at the best rates.
Improves Relationship with Suppliers
Onboarding the best suppliers ensures you’ll care for them and won’t let them go quickly. For that, you’ll naturally keep good relationships with them. This act will maintain a strong business bond between you, the suppliers, and the company.
Improves Processes
Having this team ensures everything related to acquiring goods and services is streamlined. You will have a system where it gets convenient to check on things running out of stock, things you don’t need anymore, and things getting outdated. That will lead you to make effective procurement policies in the company’s best interest.
Reduced Fraudulent Activities
When there’s no procurement department, it gets challenging to track what items are required. Anyone could raise a buying request and the company unknowingly provides the goods to the individual. The individual could have misled the company by getting free stuff for personal use.
8 Steps in the Procurement Process Flow
Procurement process is tricky. You need to have a plan for that. Here’s our step-by-step guideline to having an effective procurement process:
- Need identification: Know what is or could be required by each individual in related departments.
- Purchase requisition: Develop a system to record every transaction. Spread this knowledge with each department.
- Review of request: Review the request raised by a team or an individual. Reconfirm from the relevant department’s line manager to know if the request is fair.
- Vendor assessment: It is time to look for the best suppliers and onboard only the best.
- Quotation request: Then send the purchase request to several top vendors.
- Negotiation and contract: Negotiate if the supplier could further reduce the cost. Then place the order
- Receiving supply: Confirm if the goods received are according to the initial requirements and if the price is similar to what was initially quoted.
- Payment: Pay the vendor as agreed and keep a record of that.
Monitoring the Procurement Process
Monitoring the effectiveness of the procurement process is the most important step towards establishing a strong process. Here are the four most important KPIs to be tracking:
- Purchase order cycle time: The time from placing an initial request to the procurement department to the time of transmitting purchase orders to vendors.
- Supplier lead time: The time it takes to send an order request to the time of receiving goods.
- Supply defect ratio: The quality of products/services from the vendor. It is the ratio of good and bad products/services.
- Fulfillment accuracy: The ratio between orders placed to orders fulfilled.
Best Practices to Optimize the Procurement Process
How do you nail procurement? We’ve highlighted the best practices for optimizing the procurement process:
Risk Identification & Mitigation
Be aware of the risks that come with making a purchasing decision. Establish risk management procedures to anticipate and avoid potential problems. Price fluctuations, incorrect prediction, interruptions in supply, and many other issues could influence your supplier relationships and place your company at risk.
To reduce the risk, you must devise a response plan which includes diversifying suppliers, installing supply chain management software, defining clear conditions for ending contracts, etc.
Inventory Optimization
Optimizing inventory is limiting the amount of inventory and ensuring that it will meet your needs for the present and future. The challenge is finding the right balance between preventing stockouts and avoiding overstocking.
Strengthen Your Vendor Management Practices
If you’re looking to build lasting relationships with vendors, take the time to establish an effective vendor management plan. It involves streamlining the process of invoice processing and communication and monitoring the performance of vendors. Implementing a single system for managing vendor relationships can ensure open communication and guarantee that both parties are accountable.
Establish a Custom Workflow
There needs to be a universal approach to workflow, creating an appropriate workflow to meet the specific requirements of your business. If you have a well-organized procurement process in place, you’ll be able to manage the process and spend more time looking up the information you require for making an educated choice.
Automate Procurement Process with eProcurement Solutions
The process of manually procuring goods and services can be time-consuming and susceptible to mistakes. Automating your procurement process allows you to improve supply chains, relieve employees of their routine duties and make room for other essential tasks, such as developing relationships with suppliers or locating cheaper and more efficient supplies.
How 403 IT Solutions Help in Procurement Software and Hardware?
403 IT Solutions is an advanced IT service provider in Canada. We have been in the business for long and know the complete procurement cycle. We help businesses identify their needs, onboard the best vendors, create a system that reduces pain, minimizes the processing time, and gets you to things you need.
Contact us for more details.