Written by Marijn Overvest | Reviewed by Sjoerd Goedhart | Fact Checked by Ruud Emonds | Our editorial policy

The 7 Steps in 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 available budget.

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 terms 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.

4. Contract 

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. 

Advantages of Having a Good Procurement Cycle

This section discusses the advantages of having a good procurement cycle, highlighting key points that contribute to organizational success:

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 can control your cost. 

2. Increase Productivity

Using the external market to your advantage allows you to have a competitive advantage in your field. 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

Conclusion

In summary, the procurement cycle, as detailed in this guide, plays a crucial role in guiding procurement managers through the intricacies of acquiring goods and services. The seven steps highlighted underscore the significance of strategic planning, sourcing, negotiation, and meticulous record-keeping.

Understanding the procurement process is essential for businesses to avoid chaotic acquisitions and ensure considerations of cost, quality, and supplier integrity. The benefits of a robust procurement cycle are evident, ranging from cost minimization and increased productivity to building a resilient supply chain.

This ultimate guide equips procurement professionals with valuable insights, emphasizing the importance of embracing new technological advances. As businesses strive for efficiency, competitiveness, and resilience, a well-executed procurement cycle emerges as a cornerstone for achieving these objectives.