Procurement Process in 5 Ideal Steps: The Ultimate Template
The procurement process should be something that all procurement managers be aware of. If you don’t or you are here to improve it, then don’t worry; you are definitely in the right place.
For this article, we will be tackling the entirety of the procurement process. We’ll walk you through the definition of the process, the actual process itself, how we simplified it for your efficiency. Also, we added various examples of the procurement process that you can discuss and share.
By the end of this article, you should have an idea of what a procurement process is, how you’ll be using it, and how to improve your own process.
To give you an overview, this article will discuss the following:
- Identifying The Procurement Process
- The Procurement Process Simplified
- Market Research
- Request For Information (RFI)
- Request For Quotation (RFQ)
- Negotiation Phase
- Contracting Phase
- procurement Process Examples
Identifyingthe Procurement Process
As procurement managers, we already know what procurement means.
It is simply the act of buying and negotiating for materials needed by you or your office. The word “procurement” itself comes from the word “to procure” or “to get”. Sounds simple enough, right?
Therefore, the term procurement process means the whole procedure of price discussions, negotiations, market research, and even up until the delivery of the actual goods.
It is the implementation and identification of steps or processes to ensure that the business can acquire goods and services needed to meet its requirements and achieve its objectives.
You could also look at the procurement process into four simple processes:
- Decide what you want to buy
- Locate the goods.
- Receive the purchased goods.
- Pay for the goods.
Now it would be good if the whole process itself were just that simple. However, it’s not.
The reality is, the procurement process is more complex than it seems. There are a lot of factors to consider and sources to look at. Not to mention researching the actual price of the goods can also take some time.
Finally, when you’ve managed to find the goods and negotiated a good price for the goods, a procurement manager has to think of the schedule for the delivery.
The Procurement Process Simplified
Try to Google the term “procurement process” and you’ll end up with hundred (or even a thousand) search results.
You see, every expert in the field of negotiations and procurement has their procurement process and they’d very much want you to follow their ways too.
However, all it does is muddle the whole process. Some of the processes are either too complex or too simple that the actual important information needed for each process is forgotten or not discussed.
Thus, the need for a clear, practical, and simplified procurement process is needed. And that is what we are going to aim for with this article.
Have a look at the image below:
We know that there are a lot of procurement processes out there that offer dozens of steps but we believe that having too many processes will not only confuse you, it will also take you too much time to invest in.
Having a simple yet efficient procurement process will not just save you time and effort, but resources as well. The time saved can be spent on other important tasks, such as sourcing for other suppliers, canvassing for other solutions, and others.
But we’re already getting ahead of ourselves. Here are our 5 easy procurement process steps.
Step 1– Market Research
The assignment to buy goods or services can come from companies, managers or procurement managers themself. More about that in step 2, but before a procurement manager starts procuring supplies, there must first be a need for the said supply. Therefore, it’s the procurement manager’s responsibility to recognize the need for supplies and to develop market research for the said supply.
Market research will help the procurement manager come up with the exact number or amount for the needed supplies.
For example, an IT company has around 40 people coming in as new hires and there are only 20 computers for use. The procurement manager’s market research must have data and research that will help him/her in making sure he knows everything needed for buying additional computers for their growing company.
Some of the questions that a procurement manager should ask during market research should be the following:
- Does the company have a current supplier?
- Does the company have an alternate supplier in case the original supplier is gone?
- Does the company have an ample budget for procurement?
- Is there a shortage of the material that the company is trying to procure?
- If yes, will this affect our company’s budget allocation for the procurement?
- Is there an alternative if the supply needed is not available?
The market research should also cover sourcing for new available suppliers. Depending on the company or not, sourcing specialists can help the procurement manager in identifying new sources of supplies.
Finally, the market research helps in identifying key information needed for the next steps. Information such as pricing per supply and brand quality is important and should be included in the research.
Click here to know more about Market Research.
Step 2– RFI (Request for Information)
The second step involves asking for information not just from suppliers, but from the heads of the department or branch that need the supplies.
Because before you create a purchasing order, you will need to come up with the exact number of supplies needed. Information such as the number of available supplies and the pricing per supply are just some that you can ask when making the request.
When doing market research, you must ask the following questions:
- Which department or branch in the company needs the supplies?
- How many supplies are needed?
- How long should supplies last? A month? A year?
- Does the branch already have a reliable supplier?
- Is there an opportunity to look for new suppliers?
- How much budget is allocated for the said supply?
This is why market research is the first step of our procurement process since it will help you identify key information about the supplies you need.
Once the procurement manager has enough data, a purchase request is then sent to higher management for budget approval. This is where company management will then decide how much budget is given to the procurement manager, based on data that was given by the initial market research.
The RFI can be considered a part of the process where you ask for more information from the branch managers, sourcing specialists, and others involved.
Click here to know more about Request For Information (RFI).
Step 3– RFQ (Request for Information)
The request for quotation is the part of the procurement process where you ask suppliers for their initial pricing for the supplies needed. Usually done by letter, the procurement manager sends the request while the supplier responds by giving the initial price for the supplies.
For an idea on what to ask the supplier, here are some questions that one can ask:
- Does the supplier have a warehouse for the supplies?
- Where are the supplies located?
- For materials supplied outside of the country, how long will delivery take?
- For materials supplied locally, how long will delivery take?
- How much is the initial price per supply?
- Is there a shortage of the said supplies right now?
Once a reply from the RFQ or request for quotation is received from the supplier, the procurement manager should hold a meeting to discuss the quotes given. A detailed analysis for each pricing is considered while the initial market research will give the procurement manager an idea of how much each supply is priced at a market level.
The information from the market research, once again, is invaluable because it will give the procurement manager an edge when proceeding towards the next procurement process.
Click here to know more about Request For Quotation (RFQ).
Step 4– Negotiation Phase
Perhaps the most challenging yet exciting phase during the procurement process, the negotiation phase is where the procurement manager tries to get or procure the supplies either at a reasonable price or amount.
Negotiations can also extend towards the procurement manager offering concessions towards the supplier in the hopes of doing more business in the future.
During the negotiations phase, the negotiator should consider asking the following:
- Is there an ample amount of supplies for the order?
- Are there special discounts that the negotiator can take advantage of?
- Who is the contact person for the supplier and from the company?
The negotiation phase is also the event where the skills of a professional procurement manager may shine; once successful, this means he/she has proved his/her mettle as a master negotiator!
During the negotiation phase, always make sure to be ready with the information you gathered during the market research phase.
Click here to know more about the Negotiation Phase.
Step 5– Contracting Phase
The final step of the procurement process, the contracting phase is where the procurement manager takes care of all contracts, invoices, receipts, and documents that were signed and are needed during, before, and after the entire procurement process.
During the contracting phase, there are only a few questions involved, but to make the process smooth, the procurement manager should check on the following:
- Were the supplies delivered in good condition?
- Were there any delays with the delivery?
- How can the supplier avoid delays (if it happened) in the future?
- Was payment settled with the supplier?
Most companies employ the use of procurement software to keep all important data and documents stored digitally. For more traditional companies, the procurement manager has to keep track of all receipts and must store them for future reference.
The contracting phase is also important because if there is a need to procure more supplies from the same supplier, all contracts, documents, and receipts can be used for market research once more.
Click here to know more about the Contracting Phase.
Real-Life Examples of Procurement Process
Nestle is on a mission to achieve its goal of net zero and transition towards a regenerative food system. The company recognizes the importance of how raw materials are produced and sourced.
Thus, Nestle instituted a plan to focus on plant science, dairy livestock, agricultural systems science, and their environmental impacts. Additionally, it plans to work in close collaboration with its internal and external partners to achieve its goal.
Although Nestle has their own way of sourcing suppliers, it still follows the usual process of procurement which are the Market research, Request for information, Request for quotation, negotiation phase, and contracting phase that we are going to discuss with you.
1. Market Research
In market research, Nestle ensures that all the suppliers work according to the same principles and values that it uses for itself. This is due to the fact that their ultimate goal is to do business sustainably which will preserve itself and the environment for future generations.
One of their commitments is that they will ensure that the raw materials they will source are not associated with damaging existing rainforests.
They also have a policy that they follow which is the Nestle Responsible Sourcing Standard that describes the requirements and ways of working that they apply together with their suppliers to ensure the sustainable long-term supply of materials and services
2. Request for Information
For Nestle, their procurement will be involved at the beginning of any process relating to commercial discussions and supplier selection. The procurement department of Nestle will handle the overall sourcing process, lead supplier selection decisions, and recommend the suppliers they chose to the business stakeholders.
The department’s involvement at the beginning of the sourcing process will allow Nestle to have an appropriate analysis of supply risks and measures to counter those risks.
Additionally, Nestle’s sustainable sourcing is built on its own Responsible Sourcing Standard that sets out basic non-negotiable standards and crucial sustainability practices that it requires for its suppliers, employees, agents, and subcontractors to meet its goal.
3. Request for Quotation
As Nestle is a multinational company, it has an excellent sustainable sourcing team that ensures that the raw and packaging materials that it sources from its suppliers meet its standards. This is due to the fact that every year, Nestle sources an average of 25 million tons of raw and packaging materials, along with services and indirect materials.
All significant purchases of Nestle will undergo a competitive bidding process to ensure that it is consistently acquiring competitive cost, service, and quality from its suppliers.
Nestle has a prequalification for potential suppliers that will be undertaken to create a shortlist of suppliers. This will ensure that Nestle will have an early understanding of the potential supplier’s capability. Nestle’s requirements are according to:
- Food/packaging safety and quality
- Technical and R&D Capabilities
- Responsible sourcing
- Financial stability
Nestle will only invite the shortlisted suppliers to participate in the quotation process or request for proposal.
4. Negotiation Phase
Once the suppliers provide their proposals, the shortlisted suppliers will be evaluated against a predetermined set of evaluation criteria to know if they meet all the requirements of Nestle.
The evaluation criteria of Nestle contain:
- Price Conditions
- Service Conditions
- Food/ packaging Safety and Quality
- Technical, R&D, and Innovation Capabilities
- Responsible Sourcing
- Financial Stability
All important information regarding the supplier’s proposal and any risks associated with the supplier or the delivery of materials will be shared with Nestle to ensure that informed decisions are made that take into account all the relevant details.
Additionally, potential suppliers of Nestle will be further assessed to ensure the compliance of each of their supplying sites. The key focus of supplier assessment will be:
- Responsible Sourcing
- Food/Packaging Safety and Quality
This assessment will be used to make an approval decision as to whether the supplier can or cannot be used to supply goods or services to Nestle
5. Contracting Phase
Once selected, the supplier must abide by the Nestle Supplier Code when delivering their goods to Nestle.
Furthermore, procurement agreements and transactions will be approved by duly authorized personnel within the Nestle organization and the supplier’s organization. A formal approval process will be documented which includes approval levels, roles, and responsibilities of all parties.
+ What is a procurement process?
A procurement process is a process of buying or procuring supplies for the company
+ How to create a good procurement process?
To create a good procurement process, there should be ample time for market and product research, good sourcing of suppliers, and data gathered from all sources through a fully working automation process.
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