A Guide to the Procurement Cycle: Stages and Best Practices Explained

Business spending management may be hard, but not always. Modern organisations use a proven technique to consider, source, acquire, and pay for products and services transparently and measurablely. The procurement cycle is a crucial part of a company’s methodical approach to buying products and services.

This tutorial will show how standardisation may streamline the procurement process and make it less intimidating.

You’ll understand the procurement cycle, identify between forms of procurement, and understand why it’s crucial for any firm, regardless of size, by the conclusion.

Jump in!

What is procurement cycle?

The procurement cycle—also known as ‘the procurement process’—includes all steps in buying products and services, from recognising requirements to paying and preserving records.

This cycle, tailored to an organization’s objectives and operational demands, enables timely, cost-effective, and compliant resource acquisition, laying the groundwork for operational efficiency and financial health.

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Seven-step procurement cycle guidance

The procurement process of any organisation may vary, but there are similar processes that ensure efficient and successful procurement.

Please discuss these phases and their importance in the procurement cycle.

Step 1. Determine needs

The procurement cycle starts here.

Clearly define the commodities or services your organisation requires to move forward. Before ordering, consider pricing, quality, quantity, and cadence.

This will all affect the following stages of the cycle, so without a clear list of department needs, you may become stuck.

Know what you need and why. The bottom line.

Step 2. P3urchase requisition

After defining needs, click ‘create purchase requisition’. Specifications, quantity, and budget are included in this official request for products or services.

Purchase requisitions organise and regulate procurement and ensure that purchases are pre-approved and linked with the organization’s needs and rules.

Step 3. Purchase requisition approval

The final step is reviewing and approving this purchase request. This checks budget compliance and needs, preventing wasteful spending.

Approvers will evaluate the request for need, cost-effectiveness, and organisational goals, adding supervision.

Step 4. Choose vendors

The vendor selection step is crucial to procurement. With whom will you work?

This process entails analysing and selecting vendors based on criteria you presumably set during Needs Identification, such as pricing, quality, dependability, and service metrics.

Step 5. Write and approve purchase order

Purchase orders must be created and approved after vendor selection. The PO specifies quantities, descriptions, pricing, and contract terms.

Remember that the PO is a legally binding agreement between the buyer and supplier, and its approval is necessary to continue the procurement cycle.

This complete introduction to accounts payable procedures and automations can decrease bottlenecks and save your finance team time.

Step 6. Manage orders

Order management entails tracking deliveries and guaranteeing contract compliance.

The procurement cycle requires timelines, quality control, and contract compliance. Good order management helps find and resolve inconsistencies early, guaranteeing seamless operation and customer satisfaction.

Step 7. Review and pay invoices

After service delivery, the procurement cycle ends with invoice assessment and payment.

The purchasing procedure guarantees that products and services match the order and that payment conditions are met. Timely and correct payment builds strong relationships with suppliers and may pay off if you work together again!

Keep and update records.

Finally, procurement openness and accountability need record storage and updating. It requires precise records of transactions, contracts, receipts, and correspondence. This practice helps with future audits and compliance checks and gives data for procurement process analysis and improvement.

What distinguishes direct, indirect, and services procurement?

Businesses need to understand indirect, direct, and services procurement to optimise their purchasing approach. Each affects cost management and supplier relationships differently in strategic procurement.

Purchase directly

This involves buying items and resources directly used in product production. A smartphone maker buying microchips or a vehicle manufacturer buying steel.

Direct procurement affects manufacturing and product quality and is intimately related to the company’s main operation. Due to their size and strategic importance, these purchases are carefully planned and anticipated with long-term suppliers.

Purchasing indirectly

Indirect procurement buys items and services that support a company’s operations but aren’t part of the end product. Software licences, office supplies, and housekeeping services are examples.

Although these purchases may appear unimportant, they are vital for daily business operations. Multiple vendors and spend categories make indirect procurement more unpredictable and need a more flexible strategy.

Service purchase

Due to its expanding relevance, this indirect procurement subcategory warrants special emphasis. Buying consulting, legal, or marketing services instead of commodities.

Assessing service quality, controlling delivery, and assuring value for money are distinct problems of services procurement. It needs careful consideration of supplier capabilities, SLAs, and relationship management.

CPOs and procurement teams must understand these disparities. It helps target tactics, control costs, and meet organisational goals.

Why is the Procurement Cycle important?

‍Any business’s operational and financial stability depends on the procurement cycle, especially if market trends persist.

According to the Hackett Group, worldwide procurement requirements increased 10.6% in 2023, highlighting the necessity for a well-trained workforce to manage procurement procedures for operations.

The procurement cycle may do more than assist firms get the greatest products and services at the best costs.

It can strengthen supplier relationships, which can boost long-term success and supply-chain savings. Streamlining procedures allows employees to spend less time on administrative duties and more on strategic activities that offer demonstrable value to the organisation, boosting productivity.

In an increasingly competitive and complicated business world, firms may succeed by understanding and optimising the procurement cycle.

Can you optimise your procurement cycle? Best practises and strategy

Improving your procurement cycle involves using data and technology to make educated decisions that save time and money. Industry statistics and insights can help you improve procurement management:

1. Digitise manual tasks in procurement cycle

If you haven’t already, digitise.

Research from The Hackett Group indicates that digital transformation may save procurement costs by 45% and boost efficiency by 30-50%.

Optimising electronic purchase orders and invoices speeds up approvals and payments, improving procurement for all parties.

2. Automate

Automation is key to improving procurement. McKinsey says automating procurement can save 3% of total cost yearly.

3. Standardise procurement cycle guidance

Standardised procurement provides efficiency and uniformity. Providing a clear route from procurement to payment creates expectations and reduces misunderstanding.

4. Boost procurement data visibility

Making smarter judgements and notifying stakeholders about order status and action is made easier with procurement data visibility.

A centralised AI-powered procurement platform like Zip can discover spending trends, supplier performance, and cost-saving opportunities with real-time analytics and notifications.

5. Track actionable metrics and insights.

Identifying and evaluating key performance indicators can indicate the efficiency and efficacy of the procurement process.

Cost savings, spending management, and supplier performance may all help analyse the procurement cycle and find areas for improvement. Review these KPIs on a regular basis to ensure that your procurement plan is on track to satisfy corporate objectives.

6. Centralise purchase data and paperwork

Your contracts, purchase orders, supplier information, and performance measures are all in one place, making access and administration easier.

The Top Procurement Cycle Challenges?

Though meant to maximise operational efficiency, the procurement cycle has its problems. Organisations wanting to simplify procurement and enhance efficiency must understand pain spots.

Let’s examine the most typical procurement issues.

Outdated or manual methods of Procurement Cycle

Manual or obsolete procurement practices are a major issue. They increase mistakes, slow procurement deadlines, lower productivity, and confuse the process.

Human mistake in manual data input might cause inaccurate orders or financial disparities. Outdated systems that cannot keep up with agile procurement needs exacerbate this inefficiency. Digitise, as indicated.

Poor procurement visibility

Lack of procurement visibility is another issue. This can overlook cost-saving possibilities and damage procurement strategy.

Without a complete procurement process picture, it’s hard to spot overpaying, negotiate better supplier terms, or optimise inventory levels. Key stakeholders may not be alerted that they need to authorise or sign off on purchases, which might delay them.

Poor vendor management

Vendor management is crucial to procurement. No centralised and standardised mechanism makes it hard to interact with many providers across categories.

This discord can hamper communications, service levels, and vendor performance.

Strong supplier relationships and timely delivery of goods and services need effective vendor management.

Excessive spending

Maverick spending is unapproved or mismanaged purchases outside of procurement regulations.

This sort of expenditure can break protocols, resulting in greater costs, unregulated spending, and low-quality goods. Maverick spending disrupts standardised procurement practices and might affect a company’s budget and procurement strategy.

Minimising risk in Procurement Cycle

Risk mitigation, which aligns procurement with organisational rules and regulatory requirements, is complicated.

An unoptimized procurement cycle can make it harder for the procurement team to monitor compliance and minimise supply chain interruptions, regulatory non-compliance, and contractual conflicts. A seamless and compliant procurement process requires a strong risk reduction plan.