Introduction
Procurement has evolved significantly from its traditional role of merely negotiating prices. In today’s dynamic business environment, especially post-pandemic, procurement efficiency is recognized as a critical strategic function that drives cost reduction, fosters innovation, and aligns closely with organizational goals. To enhance procurement efficiency, it’s essential to adopt a structured approach that leverages technology, streamlines processes, and ensures effective supplier relationships. The following eight essential steps outline how businesses can optimize their procurement strategies for better efficiency and outcomes.
Steps in procurement
The buying procedure varies by company. A solid procurement lifecycle model begins with catalogue management, then moves on to requisitions, contracts, RFQ/RFP, direct purchases and/or auctions, PO, and delivery.
Accounts payable (AP) coordination, e-invoicing, three-way matching, and payments are needed to make procurement efficient, effective, and comprehensive.
The essential procurement process steps are:
1. Automate workflow for better procurement efficiency
Each step after this may be automated, but procurement software automates the workflow, eliminating most manual errors. It simplifies purchasing, controls spend and saves money, minimises risk, shortens the buying cycle, and reduces maverick (off-contract) spending.
E-procurement lets buyers and sellers transact online instead of on paper. These systems are normally only accessible to registered users, unlike e-commerce. By connecting buyers and suppliers directly and using EDI, transaction procedures are reduced and stakeholders may see all operations in real time.
2. Manage catalogues
To submit the initial request and issue the first PO, you must know which suppliers/vendors have been approved for future business. This will save a lot of time while sourcing vendors for requests.
Procurement managers update and manage that catalogue. If you use legacy processes, this could be time-consuming. The Catalogue Management component of procurement software should be easy to use and mimic the online buying experience most users love. A good Procurement solution lets vendors update their catalogues in the system, saving time and ensuring accuracy.
3. Assess needs
You must know what to order, whether it’s recurrent, new, or one-time. That judgement is frequently made by procurement, functional, and department chiefs.
4. Request a buy.
After identifying a need, the requestor (who may be a firm employee with little authority but acknowledgement of need) submits a purchase requisition. These can be done manually, in writing, or with the company’s e-procurement software. To order the proper goods in the right amount, the request should be detailed.
Department heads and procurement managers will assess that demand and generate a purchase order (PO) if accepted, depending on company protocols.
5. Make a PO
The purchase order is issued after the requisition is approved. Using paper and manual processes to generate a unique purchase order number might lead to errors, as with other operations. Procurement may enter inaccurate information, causing issues when an invoice does not match the PO.
Electronic POs eliminate this risk. A cloud-based e-procurement solution will automate the requisition-to-PO-to-supplier workflow, auditing, validating, and eliminating errors.
6. Send RFQs in procurement efficiency
A supplier catalogue should help you find the best source for the order. If your seller has fulfilment concerns, consider other providers.
After approving a requisition, procurement may issue RFQs or RFPs for services. The number of vendors contacted should be enough to evaluate competitive bids without wasting time.
Procurement should consider more than price when choosing a supplier. Risk assessment must be factored in to ensure vendors can deliver on time and comply.
7. Contract negotiation, PO submission
After procurement chooses a supplier, pricing, terms, delivery date, and compliance are negotiated. After agreeing, a contract and PO are sent.
A blanket contract may encompass a large range of products and services. With senior staff approval, procurement can avoid requisition and PO approval. An e-procurement solution simplifies this.
8. Receive products
When a cargo arrives, it must be checked for PO compliance within stipulated limits. Contracts sometimes include amount-ordered tolerances, which set an acceptable percentage over or below the requested quantity.
If the shipment matches, AP must enter all line-item information to match the supplier invoice to the PO and Receipt of Goods. If product is damaged or does not match the PO (wrong items, missing items), the shipment can be refused.
Companies without Receiving departments frequently assign this to Procurement. Shipments must be recorded into the system immediately because AP often receives the supplier’s invoice before the package arrives.
The method for acquiring services is similar, but companies’ quality assurance steps vary.
Know procurement lifecycle
I indicated earlier in this article that procurement lifecycle steps may vary by company. Different stakeholders may approve and create requisitions.
Direct procurement, indirect procurement, maverick spend (a troublesome subset of indirect procurement), and services procurement all have concerns.
Direct procurement — Smartphone and device manufacturers need chips and processors, whereas construction companies need plywood, vehicles, and tools.
Business continuity requires these products/materials, hence procurement normally has a list of long-term suppliers. Sourcing and contract discussions will take less time. Direct procurement is usually centralised, allowing budget management.
Indirect procurement — Office supplies and furniture, IT gear and software, cleaning supplies, janitorial, telecom services, and more are needed to run the firm.
Although necessary, these expenses are not immediately reflected in a product or service’s cost of goods sold and do not affect the company’s bottom line. Indirect procurement has less monitoring and cash flow control, unfortunately. This is risky since these items and services might account for 15–30% of a company’s annual spend.
Even with less monitoring, indirect procurement should use contracted vendors at agreed-upon prices and terms. AP, Finance, and Procurement should also have cash flow visibility procedures. However, decentralisation and a lengthy supplier list can undermine control.
Rogue, tail, and dark purchasing are all forms of maverick spend, a type of indirect procurement. This occurs when an employee buys necessary products outside the standard process. Companies with various sites and no process protocols typically experience this. The following issues permit maverick spending:
- Decentralisation – Office supplies and maintenance services are needed locally. Multiple stakeholders that may or may not communicate with Corporate Procurement handle purchasing. One-time, off-contract purchases are common.
- Lack of visibility – Corporate may not see orders. If the shipment is never entered as received, AP will receive an invoice they cannot validate fast. No visibility makes controlling spend and cash flow very impossible.
- Supplier relations Due to the quantity of things and services used in daily operations, indirect goods suppliers are the opposite of the 80/20 rule, where 80 percent of goods come from 20 percent of suppliers. With maverick spend, 80% of suppliers supply 20% of items. This many vendors make it difficult to maintain connections.
The major difference between product and services procurement is that services procurement is hard to box. This involves new project parameters, quality measurement, qualifications, contracts, delivery, and other requirements. The method is different and service providers have a greater range of capabilities and outcomes, making services procurement more complicated.
Top procurement process improvements
Once you realise how complicated procurement is, you must optimise your strategy and processes. Some tips:
1. Automation, automation, automation — An e-procurement system can expedite your procedures and provide you more control over each transaction phase. Your procurement team can track every order, saving time on supplier calls and emails.
2. Centralise data – Procurement, Contract Management, and AP teams must see all relevant data, from supplier information to invoice status, to maintain accuracy and control over B2B transactions. Using paper documents in several locations makes that practically impossible. Digitising all data and giving stakeholders access lowers errors and late payments.
3. Standardise processes—Procurement processes are not monolithic. However, processes and regulations must be standardised across the organisation, especially if it has many locations. Communicate these practices to managers and staff with purchase authority. Management should also set benchmarks to evaluate and adjust processes.
4. Don’t be caught short on inventory – In recent years, just-in-time inventory has been used to avoid charges for goods that sit on shelves. COVID-19 has changed that perspective; many industries are encountering material and product shortages. And what they can find costs more.
5. Improve supplier relationships—Whether you’re evaluating products or services procurement, approach suppliers as strategic partners. You should have enough providers to cover any circumstance (think COVID), but keep the list manageable. Finding, verifying, and onboarding new suppliers is time-consuming and expensive. Though important, price shouldn’t be the only indicator of a good source. You want the most trusted vendors when you need a product or service.
Bad procedures’ risks
Companies without an effective procurement process may lower profitability and limit procurement value.
Automating procurement processes and using e-procurement software can reduce many paper and manual issues, but procurement managers might take additional steps that cost the organisation. Mis-keyed POs that can’t be linked to invoices; paying too much for goods owing to absence of standard procedures; late payments that irritate suppliers who may no longer consider you a “preferred” customer; loss of potential discounts for purchases; etc.
Conclusion
In conclusion, enhancing procurement efficiency is not just about adopting the latest technology or automating processes—it’s about creating a cohesive strategy that integrates automation, data centralization, process standardization, and strong supplier relationships. By following these essential steps, businesses can not only reduce costs but also drive innovation and maintain a resilient supply chain that is prepared for future challenges. Effective procurement management is a powerful tool that, when optimized, can significantly contribute to the overall success and sustainability of an organization.
