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Feb 14, 2021

How the Purchasing Procurement Process Works: What You Need to Know

by Arielle Kushner

purchasing procurement process

Buying goods and services is usually an easy process for an individual. But for a business—purchasing those same goods and services can be a lot more complicated. 

Finance departments in organizations of all sizes have to deal with large quantities of cash and supplies. They have to manage multiple vendors and make serious budgetary decisions every day. And these decisions can directly impact a company’s bottom line.

Completing all of these essential tasks with paper and spreadsheets is nothing short of an organizational nightmare, which is why procurement automation and digitization are a modern must-have when it comes to the purchasing procurement process. 

That’s why companies today are hyper-focused on finance automation as a tool to boost productivity and unlock new levels of cost-savings across the organization.

But before we do a deep dive into procurement automation—let’s first talk about the procurement and purchasing processes of a typical business. How do they differ? And how can automation streamline them?

What is the procurement process?

Every business’s procurement process cycle is unique and depends on context and needs. Procurement in general refers to the strategic process of sourcing the materials and services a business needs to create its own products and handle internal operations. The procurement process flow includes:

  • Need recognition. Any team member who wants to purchase something gets that purchase’s need approved or rejected by supervisors. Can the need be fulfilled through a current supplier, or will a new vendor be necessary? Does the budget allow it? Only once this need is approved can the right vendor be selected and the process of supplying can begin.
  • Researching vendors. Compare different suppliers and their product offerings. Which one works best for the current need? Has your team already onboarded a vendor for the same product offering and if so, do you have a good working relationship with them? These considerations can help save time and money. 
  • Generating RFQs. RFQs are “requests for quotations.” Once a budget is approved, the procurement team gets in contact with potential vendors or suppliers to compare bids.
  • Negotiating contracts. Is it possible to negotiate cost or delivery timeframes? Negotiating contracts works well for building relationships with your vendors. You can (and should) also renegotiate contracts with existing vendors so you can maintain the best price year after year. 
  • Analyzing KPIs. How successful was your procurement process? Part of the job is analyzing key performance indicators like cost savings, return on investment, and profit margin. Excellent bookkeeping facilitates this step, especially if all related documents are stored in the same location and easily accessible.

There are a few different types of procurement:

  • Direct procurement refers to obtaining raw materials and equipment intended to manufacture the products and services you sell. This type generates profits directly.
  • Indirect procurement involves the goods you use for internal use, such as management or supporting employees. The products you receive here impact your daily operations. Most mid-size organizations who deal with procurement work with this kind of indirect procurement. 
  • Services procurement includes things like software subscription fees. It includes what you need to keep your employees working together and processes flowing.

How do you simplify the procurement process? Finance teams should take stock of their current process in order to identify any areas for improvement. If there are steps along the way that tend to create bottlenecks, involve too many stakeholders, or create additional unnecessary actions, it’s best to refine them to save time and resources. 

You can think of procurement as finding the most efficient way to obtain the tools your business needs while building positive relationships with suppliers. 

All stakeholders involved must work together to carry out each step of the process, which becomes more complicated the more important or expensive the goods are. Adding automation to the mix helps lessen the load of paperwork and data analysis, and also facilitates communication among the stakeholders.

What is the purchasing process?

A somewhat related but vitally different part of the procurement process  is the purchasing phase. It focuses on the transactional process of making purchase orders and completing the payment. Many professionals consider it a sub-process of procurement, as it includes the short-term tasks of deciding on costs and completing transactions. The steps involved are:

  • Receiving purchase requisitions. Internal staff members issue purchase requests to the procurement team for help fulfilling a need. If the need is verified and the budget is approved, the requisition becomes a purchase order.
  • Creating purchase orders and distributing them to the proper vendors. This step also includes processing and evaluating RFQs and sending the payments.
  • Receiving the products themselves and performing quality assurance. Warehouse management may be part of the process as well.

The steps involved in the purchasing process, while important and necessary to procurement as a whole, deal less with the relationships between buyers and vendors, and more with the transactions.

How to sharpen your procurement strategy

Whether you’re part of a large enterprise with chief procurement officers, or procurement is left up to your finance team, a procurement process can almost always be tweaked and adjusted for better results. This is where crafting or refining a procurement strategy comes into play.  

A procurement strategy is the plan your team puts in place in order to acquire necessary goods and services from trusted vendors, while meeting your budgetary goals and schedules. It also refers to the compliance and or legal requirements of all parties involved in order to achieve the desired end result. 

Types of procurement strategies include:

  • Cost management (and often cost reduction). It’s important to note that each of these procurement strategies will also result in cost reduction. Teams can manage or reduce their costs by taking steps to shlash maverick spend, implementing a vendor management system (which we’ll talk more about below), and generally optimizing existing processes such as automating and eliminating the need for manual, time consuming ones. 
  • Risk management. Proper risk identification and analysis will help finance teams reduce the likelihood they will encounter it, and reduce the odds that an encountered risk will cause any long-term harm. Staying on top of these possible risks means mitigating the chances of fraud, high costs, issues with quality, and delivery risk.
  • Global sourcing. You don’t always need to be limited to local vendors. Take some time to research the best prices and consider the most cost-effective location for the products you need to source. Organizations often find that manufacturing costs as well as labor costs for direct procurement needs are lower abroad. 
  • Vendor management. Working with vendors is a required part of procurement. As organizations grow, it can become increasingly difficult to keep track of the many vendors you’ve worked with, who you’ve already taken the effort to onboard, remembering who you liked working with and why, and much more. Putting a proper vendor management system into place can help to automate the manual tasks like vendor data entry, and manage vendor contracts. It’s also a great way to stay on top of contract renegotiations so that you can resign with a trusted vendor for a good price and avoid renewal fees. 

Any procurement strategy, or a combination of many strategies can be used as part of a healthy business model. A finance team’s procurement function will use this selected strategy to expedite accurate payment processes, source trustworthy vendors, and maintain proper records throughout the entire process.

Choosing a healthy procurement strategy

  • Analyze your business spend. When exploring what strategy is best for your team and organization as a whole, you’ll need to first analyze and determine your current organizational spending. This will help illuminate what holes can be patched, and where to go from here.  
  • Determine business needs and goals. Agreeing on what the business wants to achieve as a whole will help finance teams better understand how they can work to support those goals. 
  • Outline objectives. Set a plan in motion. Outline team responsibilities needed to achieve the goals you outlined. That could mean implementing a new managerial software or automating your procurement process altogether. 
  • Define your official policy. Make the appropriate adjustments to your existing policy by making things more straightforward for all stakeholders. Just like you outline (and can now update) your approval matrix, having a clear hierarchy of steps and procedures will make it easier to uphold the purpose of the strategy as your team works and grows. 

Main steps to ensure a functioning purchasing procurement process

Automation is the most important improvement you can make to a purchasing procurement process. Because most businesses deal with a large number of stakeholders for every purchase, the process can become complicated and a hassle to work with efficiently. A large stack of paperwork, and even back and forth email communication, introduces the almost certain possibility of human error and delays.

You can be more efficient and more accurate with automated procurement software that also helps with supplier or vendor management. Automation streamlines a PR to PO process, generates instant data reports, and eliminates the need for repetitive or manual data entry. You will enjoy more visibility into your processes and receive more data and actionable insights to empower future decision-making.

Your team will especially appreciate the extra time they will have to focus on more important tasks like improving upon procurement strategies and maintaining important communication with business partners and suppliers. Some of the tasks that automation can assist with are:

  • Simpler purchase order creation
  • Sending emails and updates to keep all stakeholders informed and in the loop
  • Discovering when to order additional products
  • Reminders regarding vendor contracts
  • Integrating procurement processes with your Enterprise Resource Planning platforms
  • Getting notifications through SMS or email regarding procurement statuses

Automation shortens the procurement and purchasing cycles overall by digitizing most of the process. As a result, you can still keep your business’s current procurement process when you make the switch but you’ll be saving time by bypassing all the manual data entry and other manual processes contributing to bottlenecks. 

Making the switch is easier than ever now thanks to third-party platforms like Approve.com. Whether you’re looking for a few tweaks to your current procurement process or need a complete overhaul, you’ll be able to eliminate friction with a simple and customizable solution. Get started on purchasing procurement automation today and see the benefits as soon as possible.

Interested in implementing a spend management system that simplifies and streamlines your business’s existing process? Check out Approve.com and request a free demo today!

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