Procurement Management: What is it? Definition, Processes, and Planning
As we continuously evolve into a paperless society, there needs to be a way to tighten the reins on accounting processes. Manual procurement is full of issues from lost documents to sluggish approvals and high processing costs.
Supplier relationships can also suffer from poor management, late payments, and inefficient dispute resolutions. The bottom line is that if you want to run a successful accounting department, there needs to be a solid procurement management plan in place.
This helps build an environment that tracks purchases, creates opportunities, enables growth, and controls spending.
What is Procurement Management?
Procurement management is about taking control of an organization’s spend. It’s administration over the process of purchasing goods and services, which requires preparation, solicitation, and payment processing.
Procurement involves several departments in a company and includes purchasing from preferred vendors, under a stipulated budget, on or before a contracted deadline.
What is the Purpose of Procurement?
The main purpose of procurement management is for a company to source and acquire the best possible goods and services to fulfill business objectives.
When done correctly, a procurement team can save a company time and money by negotiating favorable terms and prices with potential suppliers. This department is responsible for tasks like:
- Purchase orders
- Develop term contracts
- Acquire supplies and services
- Dispose of surplus property and equipment
The procurement department is very conscious of all project requirements and accountability in the expenditure of public funds.
Benefits of Cloud-Based Procurement Solutions
Everything is better in the cloud and your procurement solution is no different. Quality standards can be greatly improved, as the cloud allows for total control over spending.
Businesses can handle the process of requisitioning, sourcing, procuring, and paying more efficiently. Modernizing procurement services provides a variety of benefits that can include:
Cloud-based procurement management is incredibly cost-effective. You don’t need to pay huge upfront costs or maintenance fees for a SaaS procurement solution.
This enables an organization of any size to streamline its procurement process while keeping operational expenses at a minimum. That’s one of the main advantages of using the cloud. It provides infinitesimal storage space for a small price.
Modern procurement through the cloud allows a business to keep costs under control, choose the most valuable suppliers, and appraise risks at a fraction of the price. No matter the project scope, cloud-based procurement helps to reduce processing costs and time while adhering to company policy and eliminating overage spending.
The cloud is a shared environment so, by nature, it will always improve visibility and procurement performance. Procurement management solutions typically come with an intuitive dashboard that provides a 360-degree view of the entire procure-to-pay process. Users can check the status of any purchase or deliverables at a glance.
This helps a business spot gaps in the process and fix them in real-time to enhance efficiency. Easy-to-interpret and quickly accessible reports ensure a business makes data-driven decisions with more strategic planning.
A cloud-based procurement system enables a seamless flow of information throughout an organization. This happens irrespective of a specific role, department, or location. Simply put, the cloud allows everyone to communicate, all the time, from anywhere.
The cloud is the ultimate digital bridge. It helps to speed up the decision-making process and reduces the overall turnaround time. This can only happen through quick data retrieval and seamless collaboration.
By giving employees access to cloud-based procurement systems, you are allowing a cohesive space where everyone can get exactly what they need. It also allows everything to be monitored according to company policy.
An automated and cloud-based procurement system helps an organization rapidly meet evolving market demands without having to pay for expensive upgrades.
The flexible nature of cloud-based procurement management means a faster time-to-market. Project schedules are shortened. Less time is taken to implement and tailor a product/service around processes while ensuring time and cost savings.
Additionally, the cloud enables a business to decrease the overall amount of manual transactions through the entirety of the procure-to-pay cycle. Selection criteria allow a platform to automatically perform tasks like:
- Manage revisions to procurement documents
- Weigh contracted negotiated prices
- Create purchase orders
- Process non-manual supplier invoices
Procurement software that is licensed often comes as a disconnected piece of code that stands apart from existing procure-to-pay tools.
Today, more platforms gravitate towards cloud management. This allows for seamless integration opportunities and capabilities through API integration. It also helps to eliminate manual intervention and data redundancy and offers a single version of the truth without any friction.
Cloud-based procurement can also benefit the employees of an organization. Giving people the autonomy to make their own purchases and the ability to control spend elevates employee engagement and job satisfaction.
When workers have the tools to immediately utilize approved vendors, it makes for a better experience all around. The faster employees can access the supplies they need, the quicker the job gets done. It also ensures compliance, reduces unnecessary spending, and helps a business achieve cost savings.
Additional benefits include:
- Improved compliance and regulation
- Remove bottlenecks from the approval process
- Smart redistribution of labor
What is the Procurement Lifecycle?
In order for a business to work effectively, management must fully comprehend the system in which products and services are obtained. Much like sales or marketing, the procurement process has a definitive lifecycle that requires both public and corporate funds to be managed responsibly.
There is a step-by-step strategy used to identify requirements for a desired product or contract. The procurement lifecycle is important to follow as it ensures the company is successfully meeting its objectives and goals.
Step 1 – The Recognition of Need
The procurement process always starts when a business realizes they need to obtain goods or services from another company.
With this in mind, the first step is to look at the business as a whole. Then, continue to recognize the needs of each department and project team. This presents a greater level of visibility on all the spending required for the business.
So a “need” is the universal catalyst for procurement planning.
The product or service that presents a solution can be sourced from either internal or external places. It can be an item that needs to be reordered or a completely new brand.
The object is to first focus on the fact that there are tools lacking to get a job done. Starting with “need” will lay the foundation for the procurement lifecycle process.
Step 2 – Defining the Need
Now it’s time to drill down on exactly how your business needs can be met. This is where you get into details to find the product and/or service that gets the job done.
Finding the right product or market is a critical step in reaching business success. Many industries have pre-defined standards in place to determine the specifications required, while other markets have no point of reference at all.
There is a possibility a company has ordered the same product in the past, but if not, certain specs need to be hammered out, like:
Having predetermined specifications in place will make this entire process easier. Once this is done, you should also research the surrounding market. This can help you scope out the positioning of a product and identify potential competitors.
Step 3 – Sourcing Options
Now it’s time to consider a list of suppliers. This is the start of important business relationships. If you choose to work with the wrong supplier, it can pose a great number of challenges that could affect your success.
Without research, a business could end up paying more than it should or settling into contracts with unacceptable delivery times. This will only delay operations and hold you down.
When looking at suppliers, always weigh your options. A comparative analysis is in order to determine which brand suits your business best. Some factors to consider include:
- Production capabilities
- Cost and pricing
- Ease of communication
- Contractual obligations
That’s just a small list to start. Every business will have specific needs to fill that can be added to this list. The important step is that you have a list, to begin with.
Some companies will generate a list of approved vendors. This is a great idea as long as it is continuously updated with new information or changes.
Step 4 – Negotiating Terms
Once you have selected the perfect supplier, it’s time to talk business. This is a “make-it-or-break-it” step because even though a vendor can check all the boxes, if the contract doesn’t fit, the relationship is null and void. This stage is also important because this is where you agree on a price.
After a complete statement of work, a business can put in a request for proposal, which will prompt the negotiation process. However, contracts go beyond pricing. You should also consider stipulations like:
- Terms and conditions
- Standard operating procedures (SOP)
- Scope of the project
Both parties should always keep a copy of the contract so it can be easily referred to throughout the job.
Establishing Price and Terms
If you want a better understanding of the market average and how to streamline costs, analyzing previous contracts can help. If you feel you have agreed to a high price or unfair terms in the past, then learn from those mistakes.
Consider a rolling contract that locks prices and terms into place. This not only saves you from renegotiating terms, but it can also lead to early-pay discounts and other perks. That’s because you’re essentially promising money to a supplier over the course of time.
Finding the best price and terms often depends on the direct needs of the company. A business should also consider products that are already in stock and any specialized materials required.
It is normal for a business to look at three different suppliers before making a final decision. It’s important to poke around and do the research rather than settling for the first vendor you come across.
Step 5 – The Purchase Order
The next step is to establish an order for purchase between the two parties. A purchase order (P.O.) is put in place to allow for the purchase of materials from the seller to the buyer.
A P.O. defines many factors of the procurement process and includes:
- P.O. number for reference
- Description of goods and/or services
- Specifications of the product
- All pricing and costs
- Approval workflow
- Terms and conditions
- Any additional obligations
A project manager should always read over the purchase order to ensure there are no errors. The contract on a job generally agrees to the whole collaboration, while a purchase order contractually agrees to individual jobs. Nowadays, a P.O. comes in digital form and is typically sent via email.
Once a purchase order is approved internally, it is shared with the supplier so they can prepare the order and sort payment.
Step 6 – Invoice Processing
Once a vendor has received a purchase order, the business will receive an invoice detailing the agreed-upon price and instructions on how to pay.
An invoice will contain details of the order, so make sure you always keep a record of these for future reference. Depending on the contract, a business will have a certain amount of time to make a payment.
Most payment cycles are 30-days, where a company receives the order and has 30 days to pay and fulfill the obligation. However, it all depends on your contract. Some invoices are due immediately upon receipt, despite product or services rendered.
The best practice is to pay invoices when you receive them. The longer you hold onto them, the more things that can get in your way. Paying invoices upon receipt will also ensure suppliers are compensated on time. This helps establish a continually positive rapport between both parties.
Step 7 – Delivery and Order Audit
Now comes the time to fulfill the purchase order. Delivery can be done by person, mail, or email, depending on the goods or services rendered. The specific delivery method should always be written in the purchase order.
Be sure to keep a record of when the order is delivered in relation to when it was ordered. This helps a business track whether a supplier is upholding their end of the bargain (i.e. meeting agreed-upon delivery terms). If they’re not, then you have a proven record.
It’s critical to always double-check the delivery once it has arrived. Never assume everything is there. Insufficient inventory can disappoint customers for something that wasn’t your fault.
Standard practice should be that when the order arrives, all product is checked against the invoice. If something is missing, contact the supplier ASAP. Not only does this reduce potential downtime, it establishes more trust with vendors and may even lead to a discount.
A business can ultimately choose to accept or reject a delivery. If the items are accepted, it means you are agreeing to the responsibility of payment. A delivery can also be rejected if items are not up to par or of the quality expected.
Step 8 – Invoice Approval and Payment
If delivery is accepted, the shipping receipt and purchase order must then be matched to the invoice. This is sometimes called PO-matching or three-way matching. These documents are confirmed and agreed upon by both the receiver and supplier in order to complete the procurement process.
Any problems that occur during this step must be resolved before the recipient moves on to pay the cost of what was received. Payment for products is usually done with one of the following methods:
- Credit or debit cards
- Bank transfers
Step 9 – Maintain Accurate Records
It is critical that a business retain all records from the procurement process in the event there is an audit. That will tell you how much has been spent throughout the allotted time, which can be used to set future budgets.
Maintaining records includes overseeing all procurement documents that can be used to verify tax information and purchase orders. These records can also be used to confirm any warranty information.
These documents will help provide guidance on future purchases, like in the case of reordering. When this happens, the procurement cycle starts all over again.
The procurement cycle has a definitive structure with important steps that must be followed in order. You cannot pay an invoice without accepting a delivery, or buy products without a purchase order. From identifying top vendors to managing and reviewing performance, it’s a consistent system.
Core Activities of a Procurement Management System
Here are the main components of a procurement management system.
- Supplier management
- Contract management
The Modules of an Effective Procurement System
No matter what type of tool you use for procurement management, it should be able to perform some general tasks like:
You should be able to easily generate purchase requisitions and check the status updates in real-time, from anywhere.
There should be a universal and centralized database to capture all vendor data and avoid duplication. Your procurement management system must enable staff to enroll new vendors from within the P.O. generation process. This helps to save time and cut labor costs.
The procurement system you choose should allow users to generate purchase orders from approved purchase requisitions.
You should be able to cross-reference data in all requisitions, purchase orders, and invoices to get quick approval and clear timely payments.
The procurement management system you choose must allow for seamless integration with third-party business applications. This means employees don’t have to spend a ton of time toggling between different programs.
Metrics and Analytics
The ideal procurement system should drive actionable insights from the data captured during the procurement process. This enables a business to track key performance metrics and generate custom reports.
Top Features to Look for in a Procurement Management System
To find the best solution for your procurement process, a business should first understand the types of features this software can offer. The best approach is to make a list of your business requirements, then find a tool that matches best.
Here are some of the more common benefits to an effective procurement system:
If you’re looking for a fast approval process, there’s no other way to make it happen. Opt for a system that works through the cloud. You should be able to access the platform at any time, from anywhere, and on any device. You need that level of flexibility.
This enables a business to receive real-time notifications, and return with quick approvals, every step of the procurement process.
Customizable Dashboard and Workflows
Every organization has a different purchase order process. The system you choose should allow a company to customize controls, tailor the dashboard, and mold workflows around its unique process.
The accounting software must be able to automate three-way invoice matching. This means verifying and matching the data from purchase orders, receipt notes (GRN), and invoices to ensure there are no discrepancies.
An effective procurement management tool will enable a business to make smarter purchasing decisions and speed up the entire approval process. This gives you the right data, at the right time for stakeholders to say “yes” on a budget.
Your procurement system should allow for seamless integration functionality with third-party accounting tools. This means you can easily connect existing ERP platforms and keep the workflow moving.
Supplier Lifecycle Management
Mitigating supply chain risk and managing supplier relationships is one of the primary functions of procurement. That’s why the solution you choose should be able to onboard, monitor, and manage a supplier’s performance at all times. If anything changes, automatic alerts can notify you with current data.
Customized Visual Reports
In order to drive actionable results, you need to visualize efforts. The most effective procurement management platforms allow a business to extract and generate custom reports.
Visually rich reports help a business better understand operations and make more precise, data-driven decisions.
The Five Pillars of the Procurement Process
Whether you are doing business with a vendor down the street or buying goods from across the globe, there are still some universal tenets and standards built into the procurement process. These are called the “Five Pillars” and are as such:
#1) Value for Money
It’s not always the vendor with the lowest price that should win the bid. If the lowest price means an inferior product, you may want to think again. The product or service should always present good value for your money.
#2) Open Competition
Everyone has a reasonable chance to compete for your dollar. Ensure that the procurement process is transparent and fully understandable. There should be no favoritism toward any bidder.
#3) Ethics ad Fair Dealing
No bribes or gifts should be accepted from potential suppliers. This can muck up the waters of an honest procurement system.
#4) Reporting and Accountability
You must always be able to account for actions and plans. Effective reporting methods must be utilized and all parties held accountable for procurement actions.
Promote business with disadvantaged individuals. Any good procurement policy can play a bigger part in the development of a better economy and diverse community.
Why Managing Procurement is Important
Managing the procurement process is typically divided into four major components:
Procurement is one of the most critical systems in business because it deals with the obtainment of resources. Without the procurement process, your company would have no materials or tools to work with. It is a strategic function that works to improve profitability on all fronts.
Procurement activities help a business to:
- Reduce material prices and costs
- Identify better sources of supply
- Keep operations running smoothly
- Ensure all items and services are properly acquired
- Save time and resources
- Maintain a good relationship with suppliers
In essence, everything during the procurement lifecycle serves to increase the bottom line. Proper procurement ensures all projects and processes can proceed efficiently and have the resources to achieve success.
In many cases, the importance of procurement is recognized by placing the head of procurement at the executive board level. This makes a stakeholder the person who ultimately decides how the company spends money.
Automating the Procurement Process
The ultimate goal in modern procurement is to automate as much as possible. The more remedial tasks you can “set-and-forget”, the easier life will be.
Manual procurement management is rife with things like:
- High processing fees
- Uncontrolled costs
- Messy management processes
- Lost or misplaced documents
- Sluggish approval cycles
- Missed discounts
Additionally, supplier relationships can suffer from late payments, poor management, and inefficient dispute resolutions. Relying on manual tools creates an inaccurate and non-uniform process that causes leakage of revenue, missed opportunities for growth, and outright theft.
The Future of Procurement
As technology advances, digital procurement techniques are becoming increasingly popular. Not only do these tools cut down on errors and delays, they help skilled buyers do their job more efficiently.
Data storage systems and low-cost cloud computing are completely reshaping the procurement management process. Today’s shifting landscape allows for more advanced cloud and mobile capabilities, while the IoT (Internet of Things) is exponentially changing the way daily operations are conducted.
Relevancy means staying abreast of these new technologies to determine the best course of action.
To prevent the ubiquitous loss of time and money, organizations need to integrate all procurement functions, track purchases, control spend, and develop an environment that leverages supplier relationships and stimulates growth.