What is Procurement and Steps Involved in Procurement Process

 What Is Procurement

Procurement is the process of buying goods or services for business purposes. Procurement is a much broader term that includes purchasing also. So we can say that Purchasing is part of Procurement.

Procurement involves sourcing and purchasing goods and services from an external source to fulfil the requirements of the organization which will lead to profitability and efficiency. Procurement involves all kinds of acquisitions which include leasing, renting, and contract to arrange goods and services. Procurement is done when we aim to acquire raw materials and supplies specifically for large businesses at a large scale, at the best possible price. Here various factors are considered like quality, quantity, and delivery time.

Procurement is a simple purchasing arrangement specifically with a single supplier. The effective procurement process involves multiple stages like:

• Choosing Potential Supplier
• Negotiating the terms and prices
• Investigate the purchases
• Purchasing the product or service
• Monitoring the delivery of product &
• Renewing the orders & establishing a relationship with the supplier

A strong procurement process will help in the financial efficiency of the business. It will help in paying the right price for goods and services, help in minimizing the delivery time, and helps in choosing the best partner for your business. The procurement process will completely depend on the size and type of the business. We will discuss 7 key steps which we should follow in the procurement process.

Identifying the Goods and Services Needed:

The first step in procurement is to realise and understand the need to obtain goods and services from the external organization. Recognise the need of each and every department so that you will have overall visibility of the spending that is required in the company. This helps in financial planning and cutting the costs wherever necessary.

For Example - If you are setting up a printing press, initially you need to outline how many and what type of printing machine you need, or if the printing press is expanding its current operations, the organization should come back to this stage and assess what kind of machines do they need to meet the customers need and demand.

Considering the list of suppliers:

Finding the right kind of supplier who meets your expectations is very vital in the business. If you chose to work with the wrong supplier then it will have a negative impact on your business in the long term. Not only you end up paying more but it will affect the deliveries and it could delay our business operations also. So thorough research is needed before finalising the supplier. So we should always have some options in suppliers and compare all the different options and then finalise the best suited for your business. The supplier should have certain characteristics which are:

• He should be accountable for timely delivery
• He should have the production capability to meet your demands
• There should not be a communication gap.
• He should have work ethics &
• He should focus on building relationships with the buyer.

Negotiating The Price & Terms with Selected Supplier:

Once the supplier is finalised, the next step is the negotiation of terms and conditions with the Supplier. This is very important because this is the stage where the price negotiation happens and it's important to both parties to create a win-win situation. Contracts and terms not only cover the price negotiated but also covers the business conditions and timelines of delivery. Here in this stage analyse if any previous agreements are there so that you can streamline the costs and save money.

Finalizing the Purchase Order:

Once the contract is ready between the two parties, it's time to finalize the purchase order. The purchase order is the commercial document prepared by the buyer and sent to the supplier. The purchase order will have details like description of goods are service required by the buyer, negotiated and agreed price, quantity required, place of delivery order number, date and name of the supplier. 

Once the Purchase Order is approved then it is sent to the finance team for its release and sent to the supplier. Once the Purchase order is received at the Supplier site, the order is made ready and sent to the buyer as per delivery timelines agreed in the Contract stage

Receiving the Invoice and Payment Processing:

Once the supplier receives the Purchase Order, he will send the Invoice and instructions on the payment process. On this Invoice, the order details are also mentioned so it's important to keep a record of this Invoice for future reference. Depending on the agreed terms of payment, the buyer will have a certain amount of days to make the payment to the supplier. Usually, in business, it will be 30 days credit period. Payment depends on the agreed terms between buyer and supplier also on the strength of the relationship between both parties.

It is always recommended to pay your invoices as you receive them, this will make supplier appreciate the fact that you always pay on time. During certain times the supplier may also include extra materials in your order at little or no extra cost due to your loyalty. 

Delivery of the Order:

Again depending on the terms, the delivery will happen soon after your purchase order has been sent in. Always double check on the order when they have arrived at your place. So when the order arrives, take the invoice and have a thorough check in the delivery made. If there are any discrepancies the immediately inform the supplier with proof to rectify the delivery issues such as shortages and excess deliveries. 

For Example - Suppose, If the printing press has ordered any upgrade on their machines and if it is delivered with missing parts then it will affect the production of prints and it may delay the orders going out. This delay will affect the relationship of the Printing press with their customers.

Maintaining the Records of Invoice:

Always make sure that you keep all the records of your Invoices and Payment records. Here in case of any audits carried out, we will get to know how much exactly we have spent within the allotted time. It will also help in analyzing the spending in the future also. Keeping all the invoices will help in understanding whether you are overspending or sticking to the planned budget.

For Example - If the printing press business looks back and analyze their records and find any overspending on the materials, then they can decide to look for a new or alternative supplier.

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