What Is the Procurement Process? (Including Steps and Types)
Updated March 3, 2023
The procurement process can be essential to the success and growth of a business. Whether you're in a position that obtains the goods or services, reviews them or manages the finances, you're part of the procurement process. Learning more about it may help you succeed in your professional role. In this article, we discuss what the procurement process is, the steps you can follow, the types and procurement management.
What is the procurement process?
The procurement process is the set of steps and procedures businesses use to obtain goods or services. Procurement processes are essential to businesses because they can have a direct impact on profit, spending and saving. Businesses frequently assess the procurement processes to make adjustments and changes necessary for success in achieving business objectives. A primary goal of the procurement process is to achieve maximum efficiency and value when securing goods and services for the business.
Steps in the procurement process
Because businesses have different needs and goals, the procurement process may vary. While the details associated with their procurement process may differ, there can be some commonalities in the overall steps. Here's a list of the 10 steps a business can follow when creating its procurement process:
1. Identify the needs of the business
Businesses can start by identifying what goods and services are essential for staff to meet their goals. They may consult with staff across business departments, so they understand what goods and services to prioritize for procurement for internal purposes. Staff may also identify what hardware or materials are necessary for the continued development of profitable goods. One method they may use is drafting a plan that includes cost, profitability, value and the time it can take to obtain specified goods and services.
2. Prioritize the business' needs
Sometimes the business needs include multiple goods or services. If this occurs, businesses can prioritize goods and services to find the most cost-effective purchasing options. For example, a certain good or service may have a use for more than one department. They may also include specific details related to goods for purchase, including item numbers or details about what the service provides.
3. Submit a purchase request
Once the specific good or service required is apparent, the procurement team can submit a purchase request to the proper department for review and approval. Some businesses may have software to make their purchase requests, while other businesses may have a written request workflow. During the review process, staff may review the request to make sure there's a budget available for this purchase. They may also assess any concerns related to the purchase and make sure there's a need for this good or service.
4. Select a supplier using an RFQ
If the procurement team approves a purchase, the next step is selecting a supplier. The procurement team may do this by sending requests for quotation (RFQ), sometimes called a request for proposal (RFP), which lets suppliers provide a statement of interest, estimated costs and what goods or services they can provide. It's essential to make requests as detailed as possible so that prospective suppliers understand the needs of the business. Another option includes contacting past suppliers that the business may have records for and where a relationship already exists.
5. Negotiate pricing and terms of purchase
Once they select a supplier, the procurement team may enter contract and pricing negotiations with the supplier. This is a critical part of the process and can take a varying amount of time, depending on the number of items each party wants to negotiate. It can also help with relationship building, whether it's with a new supplier or sustaining a current supplier's relationship. The procurement team may meet with other stakeholders and departments before approving and signing a contract.
6. Create a purchase requisition and purchase order
A purchase requisition (PR) is an internal document detailing the procured goods or services. It requires approval from specific individuals or a department, depending on the business. Once the PR is complete, the team can draft and send a purchase order (PO) to the supplier. A PO is a document detailing the specific goods or services requested by the business, including any terms and conditions the parties agreed upon during negotiations. Purchase orders can get to suppliers through email, fax or postal mail.
7. Review goods or services
The business has the option of accepting the procured goods or services, depending on whether they meet the details of the contract. If there are any issues with the goods or services, they can follow up with the supplier to solve them in a timely manner. After receiving the goods or services, the procurement team may review the following for quality:
Items arrived in good condition
Items were complete without parts missing
The supplier met the delivery schedule
Services met contracted obligations
8. Review and compare the invoice
The supplier can send the procurement team, or another specified department, the invoice. This team may review the invoice using a method called three-way matching, which compares the invoice, the purchase order and an itemized list from the supplier. They may also inspect the goods and services to confirm everything arrived in good condition.
9. Make the payment to the supplier
If everything matches after reviewing the invoice, purchase order and receipt, then the procurement team may begin the payment process. This process, and timing for payment, could vary depending on the business. The financial department then processes the payment and sends it to the supplier based on the format established in the contract.
10. Keep all important records
It's important to maintain records of all documentation of the procurement process for the following reasons:
Relationship building with suppliers
Future purchases with the same supplier
Better pricing with future purchases
Noting suppliers that worked well
Tracking where issues may have occurred
Models for future procurement processes
Types of procurement
Here are four types of procurement:
1. Direct procurement
Direct procurement is the obtainment of goods, materials or services a business can use to generate profit through the production of an end-product or resale. The direct procurement items can include equipment, hardware, raw materials or resale items. The goals of obtaining these items include developing ongoing relationships with other businesses and suppliers and continued growth in earnings.
2. Indirect procurement
Indirect procurement is the obtainment of goods, materials or services used internally for support of daily operations. They may help team members with job performance, travel and managing facilities. Indirect procurement items can include outsourcing, office supplies, perishable items, furniture or transportation vehicles. The goals of obtaining these items include creating an operational work environment and optimizing support for staff.
3. Services procurement
Services procurement is the obtainment of people-based services. For example, a business may want an external marketing service to handle communications, promotional materials and outreach. The goals of obtaining these external services can include filling service gaps and giving full-time staff time for other responsibilities related to business objectives. Businesses may get external services for IT support, security services, customer service, contractors or law firms.
4. Goods procurement
Goods procurement is the obtainment of physical items that professionals can use for services or resale. For example, a business may obtain software subscriptions for office use. They may also get furniture that employees can use temporarily and then repurpose as a resale item. Goods procurement items can be direct or indirect procurement, depending on their use and value to the business.
What is procurement management?
Procurement management is overseeing all the steps involved with procuring goods and services. Depending on the business, this may be done by an individual, a team of individuals or by members of various departments. Their responsibilities may include communicating with external suppliers, building short-term or long-term relationships with suppliers and comparing costs to profits of goods and services to make sure the business receives the maximum value. Depending on the type of business, professionals can use procurement management interchangeably with purchase management or source management.
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