A reliable procurement procedure is vital for financial and operational success. The appropriate method accelerates projects and equips everyone while controlling costs. The key steps in a well-managed procurement process? How can you track your procurement practice to ensure optimal results?
Examine the procedures needed to create a successful procurement process. We’ll also discuss procurement kinds and the best KPIs to track your process and meet company needs.
Defining Procurement
A company’s procurement process involves sourcing, procuring, and paying for goods and services. It’s essential to running firms smoothly and ensuring everyone gets the tools, materials, and software they need to be productive.
Good procurement management reduces manufacturing delays, improves supply chain management, and saves money through strategic buying.
Difference between indirect, direct, and service procurement
All purchasing follows the same method, but there are several categories. Every needs different cost control and management.
The main procurement kinds are direct, indirect, and service.
- Direct procurement is buying commodities or software for product production. Raw materials, equipment, resale items, machineries, and supplies are examples.
- Purchase items or software for overhead (not specific product). Office supplies, desks, computers, and amenities are examples. It may contain general-use apps like Slack or Zoom.
- Purchase non-employee consultancy for direct or indirect use. Legal, contract-based, freelance, and managed services including security and facilities are examples.
- laptop acquisition KPI tracking
Procurement stages
Although procurement is ongoing, each purchase has three phases:
- Sourcing: The company determines what it needs, requests and approves it, and analyses providers.
- Purchasing: Procurement negotiates with the supplier, creates and transmits the order, gets the goods or services, analyses delivery performance, and accepts (or rejects) the order.
- Payment: Accounting matches invoice, PO, and requisition, authorises and transmits invoices for payment, and records post-close.
Procurement Process Steps
1. Determine need: A stakeholder or department head needs a product, software tool, or service. Restocking office supplies or supporting a new project may be the reason for this purchase. These may be part of the annual budget and procurement preparation or a last-minute purchase. In a request, the stakeholder outlines the needs to be met.
2. Issue a buy Requisition: The stakeholder generates an intake form or buy requisition using the identity information. This official request for products or services includes all ordering and payment information. Purchase reqs recommend options based on procurement type. In a software acquisition, the stakeholder may incorporate three evaluation tools.
3. Departmental Review: Multiple departments may approve the purchase request. The department head, legal, security, and IT departments often have purchase risk mitigation and compliance obligations. When hiring new suppliers, this review is crucial.
4. Budget Allocation: After approval by the necessary approvers, deals go to the finance team for budget allocation. Finance can authorise spot buys for small, one-time purchases and direct the stakeholder to perform them. Finance or procurement may negotiate larger, contract-based purchases from here.
5. Request for Quotation (RFQ): To analyse significant acquisitions like high-volume commodities, consulting services, or software, the negotiating team will request bids or RFPs from numerous suppliers. This is called “three bids and a buy.” This helps the team comprehend each option, compare bidder features and cost, and do due diligence before negotiating. At this step of the purchasing process, the team may opt to work with a strategic sourcing program’s recommended vendors.
6. Contract negotiation: Based on numbers and contract terms, the procurement team negotiates needs with the selected supplier. The team negotiates for the best price and payment terms to meet the purchase request. Buyer executes contract and sends Purchase Order if negotiating team and supplier reach agreement.
7. items delivery: The supplier delivers the items or services based on the PO. Buyers check goods for quality and correctness after delivery. If the items don’t match the PO or are defective, the buyer can return them or contact the supplier. For future reference, the buyer should document any differences between the order and the goods provided.
8. Matching: To assure correctness, the buyer matches the purchase requisition, purchase order, and invoice three times. This triple-check is needed to resolve inconsistencies between products delivered and payment.
9. Invoice approval: After a three-way check, the accounts payable department codes and submits the invoice for payment.
10. Payment: The buyer pays the supplier electronically. Buyers get discounts for early payment.
11. Post-close recordkeeping: Teams preserve records after payment to analyse and plan. These include supplier appraisal, contract management, spend reporting, etc.
The finest KPIs for procurement tracking
To improve your procurement strategy, track metrics to understand your process and results. These are Key Performance Indicators. By setting and monitoring business KPIs, you enhance process, shorten procurement, and increase profits.
Key KPIs to track include:
Cost per invoice (CPI): Payment processing. This KPI measures procurement payment efficiency. Manual processing raises CPI. Automation lowers invoicing costs by speeding up processing and decreasing errors.
Invoice exceptions: The percentage of invoices with coding, processing, or payment mistakes during purchase. Exception rates approximate 5% for most organisations. Rates above this indicate invoicing and payment processing issues. As with CPI, automation greatly lowers this number.
Emergency purchase: Number of unplanned spending incidents each quarter or year. Unexpected incidents may indicate project planning, budgeting, or procurement concerns. Process issues may raise risk, maverick spending, and capital efficiency.
Vendor defects: Percentage of vendor deliveries with damaged or non-conforming products. The defect rate and other supplier-focused KPIs may indicate the need to offboard a vendor or strengthen your strategic sourcing programme.
Procurement life cycle: How long a need takes from purchase requisition to settlement. Long lead times hinder production and affect downstream distribution and cash flow.
Enhancing procurement Automated KPIs
Many organisations find areas for improvement after enhancing and tracking procurement using KPIs. Using procurement software to scale is the best answer, not adding staff or complexity. So, you save money on employee pay, decrease errors, and establish a process that grows with your organisation.
If automation could improve your most important procurement KPIs, explore a solution that works for your organisation.
