Are you someone who has been struggling with understanding the idea and the concept of the procurement process? If yes then you have landed in the right place. This article is going to be your savior. Drop all your distractions and read this complete end-to-end guide to the procurement process right away.
A business is a venture that is based on periodic investments to keep it functional. This investment is made for inventory as well as other assets required by the company for a smooth run. These assets can be a light bulb, stationery items, chairs, etc. These assets and investments can be more specific as well like machinery, raw material, services, maintenance, and more.
In the article you will learn more about:
- What is Procurement?
- Components of Procurement
- What is Business Procurement?
- Types of Business Procurement
- What is Procurement Process?
- Procurement Process Flow
- Steps of an Effective Procurement Process
- Essential Procurement KPIs
- Stages of Procurement
- What is the difference between Direct, Indirect, and Service procurement?
- How are Procurement, Sourcing, and Supply Chain different?
- How can Deskera help in the procurement process?
What is Procurement?
To understand the complete guide of procurement, it is essential to learn the titled meaning of the term procurement. The term procurement implies the process of the activity of buying or sourcing assets and services for business. This process of procurement is generally performed for large-scale purchasing for a business.
Procurement is an essential part of any business. Procurement ensures the production of the final goods and services by a business. These goods and services are the ultimate product of the business, hence making profits.
Components of Procurement
Procurement has 3 components.
Human resource is the primary component of any procurement process. To make the process successful each time, the human resource on higher as well as a lower level in the organization should be involved. The amount of human resources required in a procurement process depends on a few aspects. These aspects are
- The size of the organization
- The nature of the process
- The goal of the process
- The size/ requirement of the process
A well-working process is based on a step flow structure. The steps included in the process should be well researched. These steps should be interconnected. Overlapping of the steps should not happen. With the correct formations of detailed steps, the process obtained with highly efficient, goal-oriented, and easy to observe and work with. A detailed step flow also eliminates the opportunity of corruption and fraud for the business, employees, and suppliers.
The procurement process can be a one-time process or a long term process. To analyze the process for understanding its improvements, efficiency, and effectiveness, making a record is vital. The process of record making should be included in each unique procurement process. It acts as an essential component when analyzing the KPIs of a procurement process.
What is Business Procurement?
Businesses run on strategies and policies. Business procurement is procurement policies set by an individual business entity. The procurement is developed with a consideration of the nature of business. The main aim of these policies is to provide a compatible channel for communication with suppliers and goods. The policies are vital for keeping track of proposals, quality checks, budgets, etc.
The business procurement process may seem simple. However, it involves multiple folds of tasks, making it a complete process.
The task procurement involves are –
- Identifying the need for assets
- Finding the suppliers
- Setting and sticking to a budget
- Vetting with strategy and compliance
- Analysis of proposal by suppliers
- Final Purchasing of the goods
Business procurement is not just about ensuring a smooth assets on-boarding process. It is also about carrying out a procurement process that defines the culture, and motives of the company. For instance, if a company’s motive and USP is to support small scale laborers and artisans, they will not go for a high-end bulk raw material producing supplier.
Types of Business Procurement
Business procurements are tailored as per the ethics of the businesses. Business procurement formulations thus can be divided into three major types.
As the name suggests, this procurement consists of strategies and policies to conduct a process to gain sustainability. This is an environment-friendly procurement process. A large number of businesses are changing their terms and moving to conduct environment-friendly procurement to get their inventory. This means businesses are sourcing assets through sustainable sources.
Sustainable procurement policies include –
- Minimizing waste production
- Reducing and treating greenhouse gas releasing
- Producing without polluting and toxic material
- Conserving energy resources
- Avoiding the usage of nonrenewable resources
- Reduction in packaging material for raw material
These are some of the policies enlisted in and worked within sustainable procurement.
Avoiding White Collar Crimes Procurement
The nature of business procurement naturally accommodates the scope of white collar frauds. The Economic Crime and Fraud Survey’s reports mention procurement fraud to be the highest committed economic fraud.
The multiple tires of management in a company including subordinates, ordinates, and superiors make the process complicated. The channel is hampered with solid communication which creates a space for fraud.
Most recurring white collar frauds in a company are bribery, fake biddings, fake asset purchasing invoice, etc. A lot of these frauds take place while outsourcing. But 37% of white collar procurement frauds take place because of internal factors.
These are some ways in which companies protect themselves from these frauds –
- Order placement should only be authorized by one position in power
- Only dealing with reliable suppliers
- Scanning purchases to find the odd patterns
- Keeping a thorough record of ordered inventory
Fair Labor Procurement
A lot of multi million companies have been recognizing their role in fair labor practices. Companies have started to prepare their policies considering the fair labor practices that follow. In several countries like Vietnam, China, Nigeria, Bhutan, etc. laborers are forced to work at low prices. They are forced to work in unsanitary conditions. At times, labors have been a victim to human trafficking as well.
Several businesses have established policies to ensure these practices are not followed by them.
What is Procurement Process?
What is procurement process exactly? The procurement process is establishing policies and a set of processes to ensure inventory and assets for business. The aim is to meet the objective of fulfilling the requirement of the business through a systematic channel. The process benefits the business in incurring less cost in inventory making the business save more while making the entire job efficient.
The procurement process is not constant and identical for each business. It is tailored as per the business’s needs, aims, ethics, and a lot more.
Procurement Process Flow
Every business runs with a unique procurement process. This means every business procurement process flow is unique as well. But the basic process remains the same for the most part. The procurement process flow begins with the inventory team identifying the requirement. After identifying the requirement, the team prepares a quotation of the requirements. This requirement draft then reaches the finance team for budget and procurement team for approval.
• When the company already has suppliers -
Once the draft is approved, it is forwarded to the supplier. If the draft is rejected, it is sent back to the inventory team with a specified reason.
• When the company does not have predetermined supplier -
The process flow moves in a different direction when there are no predetermined suppliers. When the order draft is approved, the procurement team gets to work. this motivates leader and the employees with a structured work process. They prepare the list of requirements and a list of potential suppliers. The procurement team sends the requirement to different suppliers and asks for quotations. The team then verifies and analyzes the quotation. The most suitable supplier is then contacted for delivery.
The process of payment and invoicing begins once the assets are delivered. The procurement team takes a thorough check of the assets delivered. The invoice is sent to the finance team. The inventory team checks if the requirements are met or not. Once all the departments have performed their roles, the finance department passes the payment of the supplier. This is the end step of the process flow.
7 Steps of an Effective Procurement Process
Every process involves pre-defined steps for a smooth flow. Here are the 7 effective steps of the procurement process for an assured and smooth flow.
1. Identification of Requirement
Identification of the requirement is the first step of the procurement process. The inventory team carries out a detailed check of stock and assets. The team analyzes the assets in hand and notes the requirement. The process is carried out both manually as well as through the system.
2. Cross Checking to Prepare Requirement Draft
The inventory team substantially prepares a draft of requirements. This draft includes the products and services required. It also includes the number of services and products required. After preparation of the draft, it is cross checked with the present inventory. Once approved by the inventory team, the draft is forwarded to the procurement team and finance team.
3. Analysis of Requirement Draft
The requirement draft reaches the procurement and finance team in the third step. Here, both the teams analyze the requirement draft. The procurement team checks the last supply received and the last transaction of the products and services. The finance team checks the bandwidth of the budget they can approve for the requirement draft. The finance team also analyzes the returns and previous investments on the assets. If the analysis of the detail in the requirement draft is approved, the process moves to the next step.
4. Finding a Suitable Supplier
The next step is to find a suitable supplier. The procurement team comes into action and calls various suppliers for a quotation. The process involves background checks of the supplier to ensure trust. The team inspects the quality of the products and service, the average cost, the delivery details, etc. After a thorough inspection and analysis of quotes received, the team picks their suppliers.
5. Negotiating the Price
Negotiating the charges is a must in business. Even the slightest difference in amount can cause a huge impact on the budget. In this step, the finance team and the procurement team together decide the budget of the supply they can approve. The teams then negotiate with the supplier to settle the terms.
6. Inspection of the Supply Received
Once the supply is received, it is extremely important to take a thorough inspection. This can save the company a huge amount of money. The process filters extra unordered products, the quality checks, and it helps in catching frauds if there are any.
7. Approving Invoice and Making Payment
Once all the 6 steps mentioned above are completed the finance team analysis the invoice. It is important to check the authenticity of the invoice. It is also vital to analyze the mentions of the amount and assets in the invoice. The process is completed after the invoice is fully paid by the finance team.
Essential Procurement KPIs
The procurement process aims to save costs and add value to the company. To derive these aims more efficiently out of the process, companies keep improving the procurement process. Procurement KPIs are then used to check whether the process is delivering the desired results or not.
What is Procurement KPI?
Every company carries out its procurement process with pre-determined aims. KPIs are the tools to assess if the procurement process is helping in achieving the aims. These KPIs give a solid ground to the company to experiment. With the help of the results obtained, the company can impose changes in the process to derive better results. The KPIs answer some of the most important questions related to procurement like –
- Is the organization saving enough costs?
- Are organization goals being met?
- Is the process efficient?
- Is the process helping the procurement improve?
- What are the required improvements?
Here is a list of some of the most essential KPIs a business will need to assess its procurement process.
1. Adequate Specified Orders
This KPI helps the business in ensuring the orders. This policy incorporates the process of drafting an order. The procurement team should take a thorough check of the inventory. The requirements should then be noted in accordance with the accurate required quantity. This way the business can keep track of the amount of inventory being ordered and being used in a cycle.
2. Supply Defect Rate
This KPI makes a business keep record of the amount or number of defective pieces arriving in each order. Through this, the company can establish an analyzed conclusion on the effectiveness of the supplier. This helps the business in drawing a calculative decision to work or not with the supplier in the future.
3. Accurate Order Supply Rate
Keeping track of the order supply is essential. A lot of suppliers commit fraud. A lot of suppliers charge the businesses for the supplies they did not order and they did not receive. A lot of time to charge more money on the invoice, suppliers add unordered items in the order. Suppliers at times also charge for the items they have not delivered.
With this KPI, a business saves money, saves itself from being a victim to fraud, and dealing with the wrong suppliers.
4. Time Span Churn by Supplier
Time is money. The more time the process takes the more opportunity business losses. To analyze the supplier‘s efficiency, it is wise to keep a record of time span churn by a supplier. This way, if the supplier is constantly working with delayed timelines or a longer expected span, the business will know. The business then will be able to take an analyzed and calculated action to improve efficiency.
5. Time Span Churn by Complete Process
The more time spent in the process of procurement, the more money a business loses. This KPI helps in estimating the time the entire procurement process takes. With the analysis, the business will be able to make the required improvements to make the process more efficient.
6. Budget Percentage Acquired by Supply
This KPI is used by the finance team. This KPI helps a business understand the percentage of the budget being spent on the supply. This also helps in understanding the profits being derived out of the investment being made in the supply.
7. ROI of Procurement
This KPI is an internal analysis tool for the procurement team. It assists in determining the ROI, profitability, and cost-effectiveness of the process.
Stages of Procurement
Procurement is a long process. This process involves multiple folds of tasks and steps. All these steps have a great impact on the entire procurement process. To make it simpler to understand and conduct, we have divided the process into stages. Essentially, the procurement process is divided into three stages. Each of these stages involves steps of the process with the aim to successfully conduct through the stage.
This stage includes 4 steps precisely
- Creating a purchase order
- Analyzing the requirement
- Finalizing the supplier
- Placing the order request
This stage involves all the steps that are required to place an order. Beginning with identifying the requirement to place the final order, every step falls in this stage. The business gets in touch with the supplier at this stage. It is beneficial for the long term to maintain a healthy relationship with the supplier.
This stage includes all the steps required for buying the order. The 4 steps involved in the stage are
- Acceptance of the order
- Negotiation of the terms and conditions
- Receiving the order
- Inspecting the supply
It is vital to keep a check on the supply process before it begins. This stage includes the entire process of arrival of the supply. It is important to conduct a thorough inspection once the supply arrives.
This is the third and final stage of the procurement process. Here the supplier is granted his payment to complete the process.
- Analyze accuracy of invoice
- Approve delivery
- Initiate payment
- Keep record
Payment is the end of the procurement process. Before initiating the payment, there are some steps to follow. Analyzing the invoice and approving the delivery is a must. This saves the business from being a victim of fraud.
What is the difference between Direct, Indirect, and Service Procurement?
Procurement can be divided into three different categories. These categories are based on nature and the requirements the process aims to fulfill. On the terms, the three different procurement categories are direct procurement, indirect procurement, service Procurement.
All the categories of the procurement process are conducted with the aim to meet organizational goals. All these processes directly or indirectly help the business make money. However, making money can and cannot be the aim of interest for the process.
Direct procurement is aimed and conducted to meet the requirement of the raw material. Direct procurement helps a business obtain raw materials in order to produce final goods. These goods are the money-making factors for the business through sales and profits. Thus direct procurement is directly involved in the system of sales and products for a business and organization.
Indirect procurement aims to meet the requirements of internal staff and units for facilitating the working process. Indirect procurement helps in procuring the goods and services required for day-to-day operations. Thus this process is indirectly involved in business and meeting organizational goals.
Service procurement is procuring service-based requirements that are required for once. These could be subscriptions, paying for software, or any other professional service acquired. Service procurement works for the short term on a one-time contract basis.
Here is a detailed set of difference in the three kinds of procurement processes.
How are Procurement, Sourcing, and Supply Chain different?
Procurement, Sourcing, and Supply Chain are all major processes. Every organization uses these processes to target the retention of its goals. The processes are similar in their nature, but widely apart from the orientation of conduction towards the goals.
Supply Chain is the process with the greatest potential and magnitude in conduction. Procurement is a process that ensures the requirements of goods and services required to run a business and to make it profitable. The sourcing process is part of the procurement process.
Procurement Vs Purchasing
Procurement and purchasing are two processes that often land people in confusion. The two processes are similar in context but are different as well.
Procurement is a long-term process. It includes identification of the requirements, fulfilling the requirement, and saving the cost for the business. The process also targets maintaining healthy relationships with suppliers.
Purchasing is a sub-process of the procurement process. Purchasing involves preparing the order draft, placing the order, receiving the order, and initiating the payment.
The procurement process is a process with a high magnitude and higher number of components involved. The aim of the procurement process is to benefit the business in several ways. Purchasing on the other hand is a sublet process that makes the procurement process a whole. The aim of the purchasing process is to complete the requirement.
Procurement Vs Sourcing
The procurement process begins by identifying the resources required by the business. It then developed to fulfill those requirements. The next step forward is establishing relationships with the suppliers. After which the process requires a thorough inspection of the supply and the invoice. In the end, the invoice is paid and a record is maintained to end the process.
Sourcing again is a sublet process. It is a part of the procurement process. Precisely, sourcing is the process of understanding where and how to find the source business’s requirements. The process includes the understanding of the requirement in detail. It also includes apt research on suppliers and the quality of the supply they may obtain. The process ends with finalizing the supplier or the sources of resources.
Procurement Vs Supply Chain
Procurement is a complete process. It starts with identifying the requirements of a business. The end goal of the procurement process is to obtain the requirements at a saved cost and maintain a relationship with suppliers.
Supply Chain is a mega process. The procurement process is a subpart of the supply chain process. This process begins with the procurement process and ends up at production and supply of the final goods. The process ends when the final consumers of the final goods meet.
Here are the steps involved in the supply chain
How Can Deskera Help in the Procurement Process?
A business has to keep track and record of accounting books, inventory, and overall management of procurement. This can become difficult when done manually. This is why it is wise and vital to invest in software to make journal entries, maintain inventory records, and generally carrying out the procurement process smoothly.
Deskera Books is a software that makes the entire procurement process easier. It helps in making journal entries. It helps in automating the process of entering sales and purchases into double-entry accounts. The software will help you save time as it keeps a clean record of debits and credits in books. With the software, you get an uninterrupted, ready-made Balance Sheet, Profit and Loss Statement, and a lot of other financial reports.
In other benefits, Deskera also provides software solutions for HR, attendance, payroll management, inventory management, and customer relationship management. Deskera People lets your employees mark and see their attendance, apply for a day off, and also claim expenses with just one click online among a lot of features.
Deskera CRM allows the user to manage sales and support from one platform. From sales pipeline preparation to generating leads through email marketing, Deskera CRM assists with it all. It also records the opening rate and the click through rates for email marketing.
Deskera in brief is the software that helps you achieve a majority of your business goals. These goals are generating more leads, flawless record management systems, and effortlessly managing customers. It helps in providing a seamless digitized shopping experience to the customers. It also helps in keeping the employees and staff of the organization updated with their personal and professional records.
The software works on analytics that will help the business in identifying the most common trouble the customers are facing. The software picks up the queries generated by the customers. These queries are then refined by the software to highlight the most common queries in the lot. The business then can rectify the trouble its customers are struggling with.
- Procurement process is a process that identifies the requirements of a business and fulfills them. The process aims to keep a consideration to save the investment cost. It comprises multiple folds of tasks.
- Every business is unique. The goals and vision of every business are unique. Thus every business has a unique set of procurement policies called business procurement.
- Procurement, Sourcing, Purchasing, and Supply Chain are similar but different processes. All these processes help a business in meeting its final goal.
- Direct, Indirect, and Service procurement are three categories of procurement processes.
- Business uses procurement processes to minimize costs and increase productivity.