Procurement Cycle – The Ultimate Guide of 2023
The procurement process, also known as the procurement cycle, is one of the most important things a procurement manager including analytics must know. We often talk about the procurement process but what is it? Why is it integral for procurement managers to know?
In this article, we will define what the procurement process really is and how it is essential in every company. We will explore the different steps in the procurement cycle that will help the process to be structured.
By the end of this article, you should have an idea of the procurement cycle. You will know the steps that will greatly help you in improving in your field.
Whatis the Procurement Process
When we see the word “procurement process”, we already have an idea that it’s about buying your needs. But there is more to that.
The procurement process encompasses all the steps in acquiring the goods that you need. It includes negotiation, benchmarking, discussion, and the other steps that will enable you to acquire your needs.
You might think that this process is simple, right? Unfortunately, it is not. There are a lot of factors that you need to consider before sourcing your needs.
Whyis it Important?
The procurement cycle makes you visualize the overall process of sourcing your needs. To put it simply, it is what enables a business to buy what it needs.
Just imagine if there is no process. It would be a total mess if you acquire your needs without considering the price, quality, and your supplier’s integrity.
The procurement cycle lays out the steps to guide you in acquiring your needs. It helps businesses to develop by ensuring the best price they can get without compromising the quality of their needs.
The 7 stepsof The Procurement Cycle
The procurement cycle is a crucial part of every business. It is important to the financial status of the company as you can save or spend more on procuring materials.
Below are the 7 steps of the procurement cycle that will allow your procurement to be efficient:
1. Determine the Needs of your Business
The procurement process will start once you know the needs of the department or team to operate its job effectively. Of course, you only want to procure if there is a need.
These needs can be classified into two which are internal and external. The internal needs of the company are usually the things that are required to manage or operate the business affairs. On the other hand, external needs are those materials that they will eventually sell.
To put it simply, this phase identifies the material or services, quantity, and budget that is available.
2. Source for your Potential Suppliers
After knowing the needs of the business, you must now source for your suppliers. Needless to say, for you to acquire your needs, you will need to find your potential supplier.
Sourcing for suppliers is usually done by listing those who can provide for your needs. Using strategic sourcing in this phase will help you get the best list of suppliers you can choose.
You should consider the price, quality, production capacity, and integrity of the supplier in adding them to your list. Doing your research about your potential suppliers will limit the risk of hiring someone that will eventually cost you more.
3. Negotiate the terms
You now need to negotiate the term of the agreement after selecting a supplier for your business. This phase is important to you and the supplier as you will agree to a price that is beneficial for both of you.
You can use your previous agreements to check if there are terms that put you at a disadvantage. This will enable you to streamline costs and save more money.
You have to lay out all your terms to the supplier so that you can build a long-term relationship. This relationship will enable you to open an opportunity that is mutually beneficial for both of you.
The contract binds both of you with all the terms and conditions stipulated in the contract. This safeguards you from any acts that will make your business vulnerable. After you both sign the contract, you must now prepare the purchase order.
The purchase order includes the description of the goods or services, the cost, quantities, and approved workflow. This is usually in the form of an email and circulated internally for transparency.
5. Receive the Invoice
The supplier now prepares the invoice that states the price and the payment method after it receives your purchase order. You must take note that the payment method is dependent on what you have agreed to in the contract.
6. Checking and Delivery
After receiving your purchase order, the supplier will also send the materials which will arrive at your agreed time. You should document that the order has been delivered to your business once it has arrived.
You should check if there is any inaccuracy regarding your purchase order once it has arrived. This is to make sure that your order arrived in good condition. You must contact the supplier so it can be solved immediately if you see any missing materials or damage.
7. Keep Transaction Records
It is important to keep all your transaction records for audit purposes. Also, this can be a tool to analyze your spending. Keeping all the records can be used to know if you spend more than the agreed budget.
Advantagesof Having a Good Procurement Cycle
1. Minimize Cost Across the Value Chain
Having an effective procurement cycle lowers the cost through its purchases. It allows the procurement department to check the best offers in the market. It is easy to manage your cost effectively if you see your business spending.
A procurement cycle creates transparency within your business that will improve the stakeholder relationship. You can compete more in the market if you are able to control your cost.
2. Increase Productivity
Being able to use the external market to your advantage allows you to have a competitive advantage in your field. Having an effective procurement process will allow you to produce more for fewer supplies, creating a competitive advantage.
3. Resiliency of The Supply Chain
Procurement must change its way of thinking from just-in-time to just-in-case to counter uncertainties in the future. This will allow you to tackle unforeseen situations effectively without interruptions and adjustments in your procurement process.
Having a resilient procurement cycle will last longer by managing unexpected disruptions that it may face.
4. Embrace New technological Advances
Embracing innovation is a good idea in the procurement process. It lets you communicate complex data within your business to promote a systematic approach. Embracing new tools will allow convenience and reduce costs in the procurement process
+ What is a procurement cycle?
The procurement cycle is the steps that make up the process of procurement.
+ How does the procurement cycle affect a business?
The procurement cycle affects a business through its financial efficiency. It affects how a business procures the needs, price, quality, and production capacity of the supplier.
+ Is the procurement cycle in every business the same?
The procurement cycle varies depending on what kind of business you are running. However, the listed above is the foundation of a procurement cycle.
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