10 Steps Toward an Effective Procurement Process

Procurement is a critical activity for the success of any enterprise.

However, managing the activity has moved from a manual procurement function to a more efficient way of overseeing the operation through cutting-edge procurement software.

Effective procurement has gone further by adopting sustainable procurement practices while addressing the business requirements of the company and the stakeholders.

What is Procurement?

Broadly, procurement is the act of managing procedures and processes to acquire materials for manufacturing the finished goods based on the demand forecasts; within a given budget and time constraints

What is Effective Procurement?

Effective Procurement processes follow several standardized steps. Of course, these may vary slightly from organization to organization depending on reshaped policies, organization size and the size of the procurement team.

Businesses adopting advanced procurement software solutions have realized improved effectiveness of their procurement processes. These platforms offer unmatched data security, scalability, responsiveness, uptime, great performance and easy implementation with timely and world-class support.

The following 10 steps are crucial to building an effective procurement process:

1. Procurement Planning

The first step involves assessing the procurement requirements at an enterprise level. The team evaluates demand projections from various verticals and analyzes the previous year’s (historical data) expenses. Further, the current market trends are analyzed, and risks assessed.

The procurement plan and sourcing strategy are then defined and developed for the year, including adopting sustainable procurement practices. Eventually, procedural, budgetary and managerial approvals are completed to implement the procurement plan.

Additional Read: Building Blocks of a Best-In-Class Procurement Strategy

2. Purchase Requisition or Indenting

Proper approvals must back any procurement activity as it involves an outlay of funds. The project head, the end-user department and its head, and the budget approving authority must approve the purchase requisition.

3. Identify Suppliers

This step is critical as it involves selecting suppliers who fulfill the “Five Rights” objectives (Right Quality, Right Quantity, at the Right Time, Right Place at the Right Price). It is crucial to assess the suppliers’ locations, whether registered with the organization, reputation and credibility, capability to fulfill the order reliably, response time to rush orders, and ethics. Some companies evaluate a vendor’s sustainability quotient too.

4. Float the RFQ

The Request for Quotations (RFQ) is floated to the list of suppliers shortlisted. The RFQ document contains all the necessary information required for a supplier to

review and quote accordingly. The RFQ is issued when the company wants the lowest price for its requirements.

5. Appraise the Quotes

Once all the quotations are received, they are appraised based on the cost of procuring the item, freight charges, delivery terms, etc. A comparative assessment of the above parameters is tabulated for easy decision-making.

6. Negotiate and Sign the Agreement

On successfully completing the supplier evaluation, a list of vendors is shortlisted and called for further negotiations. Sometimes, organizations may appoint two or even three

vendors to mitigate risks. A mutually agreed contract is then drawn up and signed by both parties.

7. Release Purchase Order (PO)

The purchase order (PO) is released to the supplier/suppliers once the agreement or a contract is signed. This document confirms the supplier/suppliers for the order.

8. Material Receipt and Quality Check

On delivery of the material, a physical inspection is carried out. The item is checked for the correct part, and the quantity is verified. The product is then handed over to

the inspection authority for technical verification and quality as per the specification. The goods receipt note (GRN) is created if the delivery is accepted. Any non-compliance based on the agreement is recorded and conveyed to the supplier.

9. Invoice Approval and Process Payment

Once the delivery of goods is accepted, the three-way matching process is carried out – the supplier invoice and packing list are matched with the PO for the terms and

conditions and the GRN for checking discrepancies. If no distinction is observed, the invoice is approved and payment is released.

10. Maintain Records for Audit

Maintaining all the documents – policies, budget approvals, RFQ, quotations, comparisons, PR, agreements/contracts, PO, invoices, packing lists and GRN – helps the organization in several ways.

• For auditing and filing statutory and compliance requirements.
• In case of any disputes, the records may be required to resolve them.
• Data will be available for referral while reordering the items.
• For referring to the data at the time of reordering.

Conclusion

Due to the pandemic, the disruption in the last two years has brought a new perspective to the supply chain and procurement functions.

The rapid changes often seen in the markets and the environment aggravate the situation further, forcing enterprises to evolve and embrace digital transformation.

Human-managed procurement and supply chain activities are archaic and no longer viable to track and manage risks. Disruptions are here to stay, and the only way forward is to automate the end-to-end supply chain and procurement processes quickly by investing in suitable supply chain and procurement software solutions.