What is Procurement Management?
The procurement management function makes sure that all the processes involved in a business’s acquisition of products, materials, goods, and services run smoothly. Depending on the business and industry, purchasing, procurement, and sourcing may be used interchangeably. Purchasing and procurement provide the actual operational function whereas sourcing is considered the strategic function.
In the Manual procurement management process, processing costs are high, documents are lost or misplaced, approvals are slow, and discounts are missed. Additionally, the supplier relationships are damaged due to late payments, inefficient supplier management and protracted procurement cycles. Many organisations are now looking towards digitalising their procurement management process to drive efficiencies in their back office functions as well as gaining real cost benefits.
Across all industries, procurement management seeks out and manages relationships with external suppliers to obtain items at the most competitive price and at the highest quality. Therefore, procurement management impacts a company’s bottom line directly and is vital to its overall business strategy.
The procurement management function makes sure that all the processes involved in a business’s acquisition of products, materials, goods, and services run smoothly. Depending on the business and industry, purchasing, procurement, and sourcing may be used interchangeably. Purchasing and procurement provide the actual operational function whereas sourcing is considered the strategic function.
In the Manual procurement management process, processing costs are high, documents are lost or misplaced, approvals are slow, and discounts are missed. Additionally, the supplier relationships are damaged due to late payments, inefficient supplier management<span< a=””>> and protracted procurement cycles. Many organisations are now looking towards digitalising their </span<>procurement management process to drive efficiencies in their back office functions as well as gaining real cost benefits.
Across all industries, procurement management seeks out and manages relationships with external suppliers to obtain items at the most competitive price and at the highest quality. Therefore, procurement management impacts a company’s bottom line directly and is vital to its overall business strategy.
Why is Procurement Important?
The procurement of such goods/services affects the overall cost because it includes not only the price paid, but the overall cost of providing the good or service as well. Check out this video from the Supply Chain Sustainability School for more details.
Procurement includes many steps – such as creating quality standards, sourcing, negotiating with suppliers, purchase orders, and maintaining inventory – but its role usually ends once your business received the goods or services. This is where supply chain management comes in as an integral part of your company’s management as those goods and services acquired through procurement will become an integral part of your supply chain.
So what makes procurement so important?
1. Reduction of cost and increased savings – Purchasing makes up a substantial part of every company’s annual budget. Profit margins and the bottom line of the company are directly affected by the cost of good and services bought. It is impossible to avoid these costs, of course, but by implementing a smart procurement management strategy you can cut your costs significantly. The impact of such savings – even if they are small – can be significant for your company, with reduced input costs leading to an increase in revenue.
2. Transparency & Control – Procurement can hold a complete view of an organisations documentation and procurement habits. This in turn allows organisations to make better decisions in the future based on historic data and insights.
3. Drive confidence & efficiency – Procurement offers organisations to standardise and automate their procurement processes. This can significantly reduce the number of hours spent creating esourcing activities on excel spreadsheets, chasing suppliers on email and analysing their responses. A procurement function will also allow company’s to build a full picture of their suppliers, their capabilities and even create stronger and longer lasting relationships with them.
What Are The Key Steps In The Procurement Process?
If you’re running a business that usually handles multiple transactions a day concerning suppliers and clients, it’s essential to establish a practical procurement strategy. It will involve how you manage your products or services, carry out negotiations and store business documents. A typical Procure-to-Pay (P2P) process will take these steps:
1. Identifying what you need – With the help of cross-functional stakeholders, the procurement-to-pay process begins by determining and defining the business requirements. After an identified need for goods/products and a Terms of reference (TOR) for services is determined, procurement teams draw up Statements of Work statements (SOWs) that define high-level specifications for the goods/products.
2. Create a Requisition – A formal purchase request is created after specifications/TOR/SOW have been finalised. After ensuring that all administrative requirements have been met, the requester submits the completed purchase requisition form. Any procurement manner can be requested, from standard purchase orders to consignments and subcontracts.
3. Purchase requisition approval – A department head or procurement officer reviews the submitted purchase requisition. Following evaluation of the need, verification of the available budget, and validation of the purchase requisition form, approvers can approve or reject a purchase requisition. Purchasing requisitions that cannot be resolved by the approver are usually rejected for correction and resubmission.
4. Create a Purchase Order – TIP* If this is a one off purchase or low value, then a spot buy might be less time consuming than raise a PO. You might be able to put the purchase through a credit card (PCard).
5. Purchase Order Approval – To ensure the legitimacy and accuracy of specifications, purchase orders are now reviewed by an approval loop. Purchase Orders (POs) that have been approved are sent to the supplier. The supplier can either accept, reject, or begin negotiations after reviewing the purchase order.
6. Goods Receipt – The buyer inspects delivered goods or services to ensure that they are in accordance with the contract terms after the supplier delivers the goods or services. Depending on the contract or purchase order specifications, the goods receipt will either be approved or rejected
7. Supplier Performance & SLA’s – This step involves evaluating the supplier performance based on the performance of the supplier so far. Many factors contribute to Total Cost of Ownership (TCO), including quality, on-time delivery, service, contract compliance, responsiveness, and TCO. Non-performance should be flagged and kept a record of for future dealings with this supplier, giving you your entire company an accurate picture of the suppliers performance across all the requisitions they have been involved in.
8. Invoice Approval- Following approval of the goods receipt, a three-way match is done between the purchase order, supplier invoice, and the goods receipt. After the invoice has been approved and no discrepancies are detected, it is forwarded to the finance department for payment disbursement.
9. Pay The Supplier – Once an invoice has been approved, the finance team will process payments in accordance with the contract. Supplier payments can be classified into the following five categories: advance payments, partial payments, progress or instalment payments, and final payments. As with point 7 above, the supplier will most likely also be reviewing your performance as a client and therefore paying them in a timely manner is vital for building and keeping the supplier relationship.
Digitalising The Procurement Management Process – eProcurement
eProcurement, also known as electronic procurement is typically known as the process of purchasing goods and services from a supplier via a procurement software.
eProcurement has evolved in recent years. Legacy eprocurement systems tend to focus on purely procuring goods and services from a supplier through a typical sourcing, eTender or eAuction activity, however newer and more advanced systems on the market have expanded the scope of eprocurement to include other procurement processes such as Contract Management, Supplier Management, and Savings Management
The Main Benefits of eProcurement
- Standardising current procurement processes – manual processes outside of a modern eProcurement system such as tendering or auctioning for goods and services, document management for purchase orders, supplier onboarding or contract management, evaluation of suppliers, negotiations and pricing savings can be extremely time consuming. However automating these processes so that everyone in an organisation follows the same procedure can not only save time however also reduce risk by having access to a comprehensive historical record of activities and minimise the likelihood of misplacing records or emails.
- Visibility of purchasing behaviours – eProcurement offers companies visibility into what they spend, who with, which suppliers they have contracts with and what savings their employees are gaining throughout their procurement function. This level of insight is invaluable to a company and can help take control of potential issues such as maverick spend, identifying areas to consolidate suppliers, and gain a helicopter view of their contracts to ensure they do not result in expensive rollovers.
How does eProcurement work?
eProcurement is designed to standardise a company’s procurement processes. Manual tasks such as chasing a supplier to sign and send a contract on email to analysing an employees savings for the year can be automated within a cloud based procurement software which in turn can reduce resource costs significantly.
- Sourcing (eSourcing)– is the process of carrying out an electronic tendering exercise with the creation of the tender, supplier responses and evaluation of results all kept within one cloud based procurement solution.
- Contract Management – is the process of a company having all of their contracts in one place, having a high-level view of their details such as contract end date and also being able to collaborate with their suppliers effectively with a function to share documentation with approvals.
- Supplier Management – is a process that drives the best value between a company and the suppliers they work with. Within strategic procurement, Supplier Management allows companies to plan, manage and improve interactions with third-parties that provide them with goods or service.
- Source-to-contract (S2C) – is the end-to-end process that begins with sourcing goods or services via eSourcing and creating a contract with that supplier. This often involves additional processes in between such as Supplier Management
- Purchase to pay (P2P) – is the end-to-end process of obtaining goods or services from a supplier who is usually already known to a company. Typically an employee will put in a request of what good or service they need, this will then be approved by a Senior Manager, sent to the supplier to fulfil the request and then through to payment for the supplier via an electronic purchase order and invoice.
- Analytics & Reporting – modern eProcurement systems offer user-friendly analysis in the form of dashboards. This critical function allows procurement and finance professionals access to insights of their own procurement activities across the entire company and to make better business and buying decisions.
An eProcurement software will help any organisation to reach the objectives of its procurement strategy more quickly and efficiently benefitting from the advantages listed above. This will then have a positive impact on the margins and reduce the internal resources required.
We provide cloud-based procurement solutions in the UK, whether for e-sourcing, contract, supplier, or savings management. If you want to take advantage of cloud-based procurement software, connect with us today to start your free trial at oboloo.com. oboloo enables organisations to be supplier smart.
Additional Resources
These external articles contain useful points to consider: