Procurement Management, Everything You Need To Know

In today’s competitive business environment, it is very difficult to survive and grow without a good grasp on the core principles of procurement management. Survival and growth compliment each other and cannot exist without one another.

Guide to Procurement Management 

1. What is procurement?
2. Types of procurement
3. Procurement vs. purchasing – what’s the difference?
4. What is meant by procurement management?
5. What are the steps involved in procurement management process?
6. Why you should automate procurement management?

Procurement is the process of buying goods and services from vendors, typically for business purposes. Most companies have a designated buyer responsible for purchases, typically a senior manager with a staff of procurement specialists. The buyer's job is to find the best products and services for the firm at the lowest price, and to find new sources for purchasing a particular item or service when needed.

To understand how procurement can play a vital role in your company’s success, you first need to know the different types of procurement:

1. Direct Procurement - Direct procurement is the process of purchasing goods and services that are utilized in the core operations of a business. The goods and services procured through the process of direct procurement eventually find their way to the end customer or client of the business. These purchases are generally made in large quantities. Examples would include raw materials, components and parts, machinery.
2. Indirect Procurement - Indirect procurement is the process of procuring assets and services for a business that aren't directly tied to the operations or manufacturing wings of a company. Examples would include purchasing equipment repair, office supplies and myriad service sector products and services.
3. Services Procurement - Services procurement consists of an integrated set of proven and economical business processes and practices used to efficiently procure professional services. From law firms to on-site security services, through outsourced HR processes or on-equipment training, service procurement is about procuring the people-based services your company requires.

Procurement is an overarching term that describes the process of identifying the market for a product or service, building relationships with suppliers, evaluating cost savings and constructing contracts. Purchasing is a sub-process of procurement. Purchasing relates to the buying of goods or services, purchase orders, invoicing, shipping notifications, goods receipt and payment. The two terms are closely related but mean very different things in practice.

Procurement management involves sourcing (identifying and selecting suppliers), negotiating (establishing terms and conditions for supply), purchasing (acquiring goods and services at the best prices by following the approved process), monitoring (identifying and managing risks), and reporting.
While procurement management is about strategic sourcing, it also includes a lot more. It has been said that procurement management is organizational body, soul and spirit. It is an organizational body, because it is about enabling an organization to make optimal use of its resources through cost effectiveness and efficient procurement of goods and services. It is soul because the procurement process involves identifying the core competencies of an organization and aligning them with the desired outcome of procurement activities. It is spirit because it empowers organizations to achieve their goals through a holistic approach to sourcing goods and services.

Even when you buy simple items like pencils or clothes, they're often supplied to meet strict specifications. That's why there is a process for purchasing called procurement management. Proper procurement procedure consists of seven main stages:

1. Identifying the requirement for goods or services
2. Identifying and evaluating vendors/suppliers
3. Negotiation of contracts with the selected supplier
4. Raise purchase requisition (PR)
5. Generate purchase order (PO)
6. Quality checking of requested goods
7. Invoicing and payment

Step 1: Identifying the requirement for goods or services

The first step is to define your requirements. This entails listing all of the goods and services your organization needs to purchase, thinking about which of those high priority are and which are not. It’s also important to consider your company’s strategic goals and mission, because procurement decisions are often geared toward supporting those priorities.

Step 2: Identifying and evaluating vendors/suppliers

Once you know what your needs are, it’s time to determine who will supply them. You first need to identify potential suppliers, which usually require you to do some market research.

Step 3: Negotiation of contracts with the selected supplier

The next step is to establish the terms of the agreement. This generally includes pricing, delivery, payment terms and so on. 

Step 4: Raise purchase requisition (PR)

After you’ve identified the vendor and agreed on the details, the next step is to raise a purchase requisition (PR) which is basically an approval from the department responsible for approving purchases that includes a description of the good/service, pricing, quantity and supplier information.

Step 5: Generate purchase order (PO)

Once the PR is approved, it’s time to issue a purchase order to the vendor. This includes assigning a PO number, which makes it easier for your supplier to process your order and for accounting to track it.

Step 6: Quality checking of requested goods

Companies should audit the requested goods to ensure the suppliers have met quality expectations.

Step 7: Invoicing and payment

The final step is to process the payment once the invoice is delivered to your company. This generally involves reviewing and accepting the invoice, then passing it along to your accounts payable department for payment.

The procure-to-pay process management is manual, repetitive and often inefficient, lacking in transparency and quality. Employees spend a lot of time with this activity as they have to review numerous sources, create an extensive spreadsheet or manually collect information from various vendors. Poor spending decisions are made, leading to the unnecessary purchase of products, services or materials at higher costs. On average, procurement professionals spend 30% of their time fulfilling routine procurement processes such as creating, approving and distributing purchase orders.
It doesn’t have to be this way!
The right procurement automation software for small business can shave days off your procurement cycle by streamlining the process of sourcing the right products, simplifying approval workflows and automating tasks throughout the whole purchase journey. It leads to faster delivery times for the business, consistent results and increased visibility over expenditure. This can deliver more value to the supply base, remove inefficiencies within your business, identify savings that can be reinvested, and ultimately help you succeed faster in your marketplace.