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The order team

Every organization engages in some level of procurement strategy, whether using an ad hoc process or administering a large, well-documented procurement practice. While managing and tracking procurement spending may vary, how the process is defined shouldn’t vary. 

 

How do organizations define procurement? Is the definition of procurement important to company success? 

 

We’ll help you gain a clear understanding of procurement, including: 

  •    What it is, its importance to your business, and the steps in a successful procurement strategy 
  •    How using procurement technology can significantly reduce the time and expense of successful procurement management 
  •    How to improve the procurement cycle in your organization 

 

What is procurement?

Procurement is the process of sourcing, acquiring, and paying for goods and services. While many organizations use terms like “procurement,” “purchasing,” and “sourcing” interchangeably, these are different components of the total procurement function.

 

Where purchasing focuses on ordering and delivery, and sourcing pertains to the suppliers used for purchasing goods, the term procurement refers to the entire process. This includes sourcing, acquisition, settlement, analysis of procurement data, and future-spend planning. 

 

Why is procurement important in business?

Every business requires materials, goods, and services to achieve its desired outcomes. Whether it’s software for communication, raw materials for making products, or services to maintain facilities, keeping the organization running is an expensive and time-consuming task. 

 

The primary mission of a procurement department is to acquire the goods you need at the best price and terms. Procurement professionals excel at building supplier relationships, negotiating advantageous terms, and streamlining the procurement process from the identification of a need for services or goods to invoice payment.

 

With a streamlined procurement process, organizations increase cost savings, minimize wasteful spending, and analyze how and where budgets are most efficiently deployed. The money preserved through good procurement practices spurs growth and insulates the organization against downturns.

 

Types of Procurement

Companies engage in different types of procurement, depending on business needs and immediate goals.

 

Direct Procurement: This is the acquisition of goods and services directly related to production within your organization. Examples might include raw materials, software, services, or products that directly support the production of the products your company sells.

 

Indirect Procurement: Anything not directly related to the production of goods is indirect procurement. This category includes office supplies, software the company uses to communicate, or facilities services not connected to a specific product your company offers.

 

Whether direct or indirect, companies require two types of purchases: 

 

Goods Procurement: Any tangible object, finished or unfinished. Raw materials, office supplies, desks, and other physical goods fall under goods procurement.

 

Services Procurement: Any non-tangible purchase. This refers to professional offerings such as consulting services or facilities repair. It also encompasses purchases such as software. Software as a Service (SaaS) has proliferated in business use and is often one of the most significant service-based expenditures in an organization. 

 

How procurement works 

Strong procurement management is one of the most critical components of an organization’s financial health. Procurement is often one of the most substantial portions of revenue spending, so it’s essential to keep a careful eye on expenditures at a granular level. This level of spending optimization requires a cross-departmental effort that draws on oversight from finance, legal, IT, and supply chain management stakeholders.

 

Procurement may seem like the intermediary between internal stakeholders and suppliers. In reality, the department is responsible for the continuous administration and improvement of the procurement process and supplier lifecycle. 

 

There are many stages of the procurement process. Most procurement and purchasing activities fall into some general categories, including: 

 

Planning: Establishing budgets for departments or teams. This planning process happens in cooperation with the finance team and departmental stakeholders. 

 

Sourcing: Using competitive analysis and current strategic sourcing partnerships to identify the best suppliers to meet company needs. This evaluation process is conducted in conjunction with department heads and purchasing approvers.

 

Acquisition/Payment: Ordering, reconciling, and paying for goods and services and meeting organizational needs while maintaining spending control — this close attention to price and terms ensures the acquisition of the best quality products at competitive prices and under the most favorable terms.

 

Evaluation: Using past performance and current data to understand and strengthen supplier relationships, prepare for future spending, and analyze available data to uncover further cost savings and improve the bottom line. 

 

Steps in the Procurement Process

Procurement practices are most effective when they follow a repeatable, optimized process. While every procurement team establishes a unique process for sourcing, acquiring, and paying for goods and services, the procurement cycle usually follows the following steps:

 

  1. Identify a need: A stakeholder surfaces the need for a product, materials, software, or service in order to create products or conduct daily business. This need is outlined in an intake form or requisition form. 

 

  1. Submit a purchase requisition: The stakeholder completes purchase requests. This form should include all relevant information needed to approve and process the purchase. The requisition may include recommendations for solutions or service providers. 

 

  1. Evaluate potential suppliers: Depending on the process and type of purchase requested, procurement evaluates possible solutions and selects the best vendor to fulfill the request. Sometimes this takes the form of a competitive bidding process, such as a Request for Proposal (RFP), Request for Quote (RFQ), or a “three bids and a buy” process. 

 

  1. Negotiate terms and conditions: Once the best supplier has been selected, the negotiation process begins. The procurement team will work with the sales rep to establish pricing and terms for the purchase. Negotiations should be completed only after all departmental prerequisites have been met. 

 

  1. Create a PO: Procurement drafts a purchase order to acquire the goods or services from the supplier. In most cases, the PO goes through a separate approval process to ensure that all transactions meet expectations and check for potential issues or discrepancies. Procurement then transmits the purchase order to the supplier for fulfillment.

 

  1. Receive and review goods: The supplier fulfills the order as requested. Once the goods or service is delivered, the procurement team receives the goods and inspects them to ensure the quality and accuracy of the shipment. If the order does not meet expectations, the receiver may seek adjustments from the supplier or return the shipment. 

 

  1. Reconcile and match: After receipt of goods is complete, a three-way match is conducted to ensure the shipment, invoice, and PO all match. The procurement team also conducts supplier evaluations to ensure all expectations and contact conditions are met during the delivery process. 

 

  1. Invoice approval and settlement: Once three-way matching is complete, the supplier invoice is submitted for processing. The invoice is batched, coded, and scheduled for payment. 

 

  1. Post-close activities: The procurement team is responsible for post-close operations and purchasing analysis. This may include record-keeping, reporting, spend analysis, supplier evaluation, contract management, and supplier onboarding (in cases where contracts are completed or terminated).

 

How Order can help manage procurement

Maintaining a streamlined procurement process and analyzing data is no small feat. Even in new and growing companies, procurement may deal with dozens of vendors and thousands of invoices. This generates an excess of data that can only be fully utilized with the help of technology. 

 

Using procurement software to automate processes and centralize the data reduces the strain of manual procurement processes, and allows teams to understand how the organization spends money.

 

Order can help improve the purchase-to-pay process by:

 

  •    Allowing businesses to analyze and contextualize purchasing data in order to set more accurate budgets and plan capacity effectively. 
  •    Streamlining the vendor selection process and empowering buyers to use strategic sourcing partners when acquiring goods and services. 
  •    Centralizing contract, benchmarking, and supplier data to create better leverage in negotiations.
  •    Automating three-way matching and reconciliation to reduce effort and time spent on the process. 
  •    Streamlining the invoicing and vendor payment process to reduce manual data entry, eliminate invoice exceptions, and integrate and consolidate vendor payments.  

 

When you define procurement processes in your organization and empower your organization with the benefits of a robust procurement platform, the savings and productivity quickly add up. 


To get a better understanding of how Order can help your organization, schedule a demo and see the platform in action.