Procurement refers to the range of procedures that are undertaken to source necessary goods and/or services, which are essential for smooth day-to-day business operations. For instance, a manufacturing company might source raw materials. These are steps that fall under the procurement umbrella:
How can Procurement help your business?
However, companies do not always consider each stage part of the process procurement is a vital part of any business, as it enables reliable sourcing of supplies. To meet the needs of a business, It’s important to consider the quality and cost of suppliers. This not only saves valuable resources but also contributes to profitability of the business
- Sourcing
- Negotiating
- Receiving in
- Maintaining Records
What are the four types of procurement
Goods Procurement
This concerns the procurement of actual physical goods. However, items such as software can also be classified within this category. You need efficient logistics management in order to achieve successful goods procurement.
Services Procurement
This centres around people based services. For example, outsourcing HR advice, hiring a lawyer or temporary staffing services.
Direct Procurement
This refers to the acquisition of items used to produce an end product. For example, a manufacturer buying raw materials to fabricate their products.
Indirect Prodcurement
This encompasses the purchasing of good that, although fundamentally for daily operations of a business, don't significantly influence the company's financial position. An example of this is the purchase of office supplies.
What is the 80/20 Rule in Procurement?
The Pareto principle, more commonly known as the 80/20 view in procurement, is a theory that proposes that 80% of a company’s overall value comes from 20% of the inputs. In simpler terms, much of the result is produced from a relativity small number of resources.
The 80/20 rule can be applied in multiple ways. For example, once the 80/20 rule is applied by identifying the top 20% of suppliers that are accountable for 80% of a company’s spends, efforts can be made to ensure that relationships with these suppliers are optimised to the best possible standard. In doing so, the possibilities of long-term partnerships, better deals and cost savings are all more likely to be achieved.
The 80/20 rule can also be applied by identifying the top 20% of goods that make up 80% of a company’s order volume.
What are the Nine Stages of Procurement?
The process ca be fairly complex. It involves multiple stages which need to be navigated effectively to ensure an efficient process. The nine stages of procurement are:
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1. Identification
To begin the process a company must first identify the requirements needed for the goods and/or services. This stage involves diving deep into the needs of the business to explore exactly what is needed.
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2. Purchase requisition
Once the purchase needs for the business have been sourced, a purchase requisition can then be made. In simpler terms, this means that a purchase request is submitted to either company management or the finance department. This request must include as much information as possible, including the cost of the goods/services, and management can then either deny or approve the request.
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3. Vendor Selection
If a purchase requisition is approved, vendor selection can then take place. This involves both researching and identifying potential vendors who can best meet business needs. It is important to not only focus on the cost of the purchase but also on the reputation, quality and perhaps the values of the potential supplier. Once suitable vendors have been selected, a Request For Quote can then be submitted.
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4. Negotiation
The recommended approach is to submit at least three Request For Quotes so that all elements of the quotations can be considered and negotiations can begin if necessary.
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5. Purchase order
A detailed purchase order should then be completed, authorised and sent over to the chosen vendor as a way of official order request.
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6. Receiving in goods
Once the goods have been received, a thorough inspection should be carried out. This is to ensure that what has been received matches the purchase order and the quality of the goods at a minimum meets the company’s expectations.
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7. Three-way matching
This is a control process, likely to be carried out by the Accounts department, whereby the purchase order, supplier invoice and goods receipt notice are all checked to ensure accurate delivery and billing has taken place.
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8. Payment
Once it has been confirmed that the three-way matching was successful, the invoice should be approved and payment arrangements should be made.
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9. Record keeping
It’s essential to document the entire purchasing procedure from start to finish. There are a great number of reasons as to why record keeping is useful. For example, auditing purposes, resolving disputes and ease of reordering at a later date.
What is a Procurement Cycle?
Each step of the procurement process is collectively known as a procurement cycle. It is the complete operations of acquiring necessary goods and/or services needed for a business. A procurement cycle is often a helpful visual tool to ensure that all steps of procurement have been followed correctly. A well-planned cycle also acknowledges the relationship between the procurement process and the overall corporate strategy, including the importance of complying with the company rules and regulations.
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