Procurement is an essential part of any business, but many entrepreneurs and managers overlook its complexity.
In this article, we’ll break down what procurement is and walk you through each step of the procurement process, so you can optimize your buying decisions.
What is Procurement?
Procurement is the process of acquiring goods or services to meet the needs of a business. It includes everything from sourcing, negotiating, and purchasing to managing suppliers and monitoring deliveries. While often considered synonymous with purchasing, procurement is a broader concept.
It covers not just buying, but also activities like leasing, renting, or entering into contracts to ensure the business has what it needs to operate efficiently. The aim is to get the best value for money, considering factors such as quality, quantity, and delivery time.
The 7 Key Steps in the Procurement Process
Understanding the procurement process is crucial for ensuring smooth operations and avoiding costly mistakes. Below are the seven key steps involved in procurement.
1. Identifying the Goods and Services Needed
The first step in the procurement process is to assess and understand the business’s needs. This could involve evaluating what raw materials, equipment, or services are required. In larger organizations, it’s important to collaborate with various departments to gain visibility into the required resources, which aids in better financial planning and budgeting.
- Key Action: Determine exactly what your business needs to purchase.
- Example: If you’re expanding a printing press, you’ll need to assess the type and number of machines required.
Quick Tip: Regularly reassess your business needs, especially if you’re scaling up, to ensure you’re aligned with your operational goals.
2. Considering a List of Suppliers
Finding the right supplier is crucial to your success. The supplier you choose will affect both the cost and the reliability of your business operations. It’s important to consider multiple options and compare prices, delivery schedules, and supplier reputations.
- Key Action: Research and compare suppliers.
- Characteristics of a Good Supplier:
- Timely deliveries
- Ability to meet production demands
- Strong communication skills and work ethics
Quick Tip: Build relationships with suppliers to ensure better service and negotiate favorable terms in the long run.
3. Negotiating the Price and Terms
Once you’ve identified a suitable supplier, the next step is to negotiate the price and other terms. This stage is crucial for ensuring both parties are happy with the agreement and that the procurement process is cost-effective.
- Key Action: Discuss price, delivery timelines, and terms to ensure mutual benefit.
- Example: If you have ongoing agreements with other suppliers, try to leverage those to negotiate better pricing.
Quick Tip: Always aim for a win-win situation where both parties feel valued.
4. Finalizing the Purchase Order
After finalizing the price and terms, it’s time to create the purchase order (PO). This document serves as a formal agreement between the buyer and the supplier, detailing the goods or services, quantity, agreed price, delivery date, and other conditions.
- Key Action: Prepare and send the purchase order to the supplier.
- Details to Include in the PO:
- Description of goods/services
- The agreed price and quantity
- Delivery timeline and location
Quick Tip: Ensure all details are accurate to prevent discrepancies later.
5. Receiving the Invoices and Processing Payments
Once the supplier delivers the goods or services, they will send an invoice. This invoice should match the terms outlined in the purchase order. Payments are usually made within an agreed-upon period, such as 30 days.
- Key Action: Review invoices and ensure they align with the PO.
- Tip: Paying invoices promptly can strengthen your relationship with suppliers.
Quick Tip: Keep records of invoices and payments for transparency and future audits.
6. Managing the Delivery of the Order
Delivery is a critical phase in the procurement process. Once the purchase order is placed, the supplier is responsible for delivering the goods. Ensure the delivery meets the agreed specifications and timelines.
- Key Action: Check the order upon arrival for any discrepancies.
- Example: If a printing press orders new machines and parts are missing, it could delay production and impact customer relations.
Quick Tip: Immediately report any discrepancies to the supplier for quick resolution.
7. Maintaining Records of Invoices and Payments
The final step is to keep detailed records of all invoices, payments, and purchases made. This is important for auditing purposes and for tracking how well your procurement process aligns with your budget.
- Key Action: Keep records organized and review spending regularly.
- Tip: Analyzing your spending trends can help you identify areas where you may be overspending and prompt you to seek new suppliers if necessary.
Quick Tip: Use procurement software or digital tools to keep track of records and streamline the process.
Conclusion: Streamlining Your Procurement for Success
By following these seven steps, you can build a strong procurement process that ensures your business acquires what it needs efficiently and cost-effectively. Start by assessing your needs, researching suppliers, negotiating favorable terms, and maintaining good relationships with vendors. Over time, these practices will help optimize your business operations, reduce costs, and ensure timely delivery of goods and services.
Procurement isn’t just about buying; it’s about making smart, strategic decisions that contribute to your business’s long-term success. By applying these steps, you’ll be well on your way to mastering procurement and driving growth.
