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.
Identifying the 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.
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.
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.
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.
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.
Hi there! My name is Marijn Overvest, I'm the founder of Procurement Tactics.
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Procurement Process Examples
- Gary is a procurement manager for a mobile phone company.
- Upper management wants him to source a new supplier for chipsets that are needed for their upcoming new mobile phone. Once he can find a new supplier, Gary must then procure 1000 new chipsets for their new mobile phone factory.
Gary is assisted by Marlon, the company’s sourcing specialist. Together, they come up with a simple five-step procurement plan which follows:
- Gary and Marlon do market research. They check past supplier records and take note of the number of chipsets ordered and the amount per chipset.
- Both men realize find out that the company’s old supplier for the chipsets has closed down years ago.
- Gary has Marlon source potential new suppliers for the chipsets.
- Marlon finds three new potential sources for the chipsets and gives the information to Gary.
- Gary compiles each data and together with Marlon, holds a meeting with upper management for discussion.
Request for Information (RFI)
- Gary asks upper management for information regarding the past chipset procurement. Because the old procurement manager did not leave much information, Gary decides to find a new supplier instead.
- Gary has Marlon send a letter to the new suppliers, asking each for information regarding their supplies and the pricing per supply.
- Once Marlon receives the information needed from the potential suppliers, he and Gary hold a meeting to decide which source they’ll pick.
- Once the potential source for the supply is picked, Gary creates a purchase order to upper management for 1000 new chipsets.
- He also requests upper management for a budget for the said procurement.
Request for Quotation (RFQ)
- Once the purchase order is ready and the budget decided, Gary sends a request for quotation to the potential supplier.
- The potential supplier replies and Gary holds a meeting with upper management to discuss the quotation.
- During the meeting, the market value for the chipsets are also discussed and the quotation coming from the other potential suppliers are analyzed.
- Upper management believes that the price for the chipsets is too much and they want Gary to hold negotiations.
- If the supplier does not agree. Upper management may need Gary to find another supplier.
- Gary personally meets with the potential supplier over lunch, to which Gary himself pays as part of a show of goodwill towards the supplier.
- After a few introductions, Gary starts negotiations for the procurement.
- Gary carefully approaches the negotiations as the supplier believes that the price for his supplies is fair and that business is currently not booming.
- Gary applies for a concession, stating that his company is also trying to make this deal work on a tight budget but should the supplier agrees, there will be more procurement deals for the supplier in the future.
- The supplier finally agrees after a three-hour negotiation over lunch.
- After negotiations, Gary pays for the newly ordered chipsets and receives the receipt for the purchase.
- The supplier also signs a contract with Gary for more purchases in the future.
- Gary stores all procurement documents, receipts, and contracts in his company’s procurement software for future reference.
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- 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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