The Procurement Cycle is a cyclical process of key steps when procuring goods or services for the organization. This interactive tool is strategically developed to guide and enlighten the members of the company through the procurement process with links to relevant knowledge to support every step through the procurement journey.
Procurement is an important part of any organization’s operations, and having a well-thought-out procurement process in place is vital for success. Procurement typically goes through several steps, which can be broken down into a procurement cycle. The Procurement Cycle is an important part of an organization’s procurement process. It involves several steps, including market research, contract negotiation, selecting a preferred supplier, and managing assets.
Table of Contents
What is the Procurement Cycle?
The Procurement Cycle refers to the series of events involved in purchasing the goods and services required by our organization. This process helps us save precious time and money. It is a continuous cycle and the process starts when there is a need for acquiring products from outside vendors.
An example of a procurement cycle for a SmartPhone company could include the following steps:
- Identifying and analyzing the needs of the organization
- Search for vendors & suppliers
- Request bids from vendors & compare offers
- Negotiate terms, prices, and other conditions with the selected supplier
- Finalise contract terms and close the deal
- Monitor performance and ensure customer satisfaction
- Finalize payment
- Review the success of the procurement cycle
These steps can be repeated as needed to ensure the best practices are being followed for successful procurement. It is important to have an efficient system in place so that all stakeholders involved in the process understand their roles and responsibilities. This helps ensure that the organization can maximize its procurement efforts. Proper communication and documentation of the process are also essential for efficient procurement management.
Importance of Procurement Cycle
The Procurement Cycle is an important part of a company’s operations. It helps ensure that the organization gets the best value for its money and that it receives quality products and services from reputable suppliers. The process also helps to reduce costs by encouraging competition among vendors, ensuring better deals are obtained.
The Procurement Cycle is an important part of the business process. It’s a series of steps that take place when an organization needs to purchase goods or services to fulfill its operational needs.
- It starts with the planning process, which involves identifying what is needed and researching potential vendors.
- The next step is issuing a request for proposal (RFP) or quotation, which is when vendors are invited to submit their bids.
- After the bids have been evaluated and compared, contract negotiation is done, a selection is made, and a contract is signed.
- Finally, the goods or services are received and payment is made. It’s important to understand the Procurement Cycle to ensure that the best deals are being made and that operational needs are met.
As such, it’s beneficial to have a good Procurement Team to handle the Procurement Cycle. They are responsible for researching potential vendors, comparing bids, and negotiating contracts. Procurement teams gain insight into the market and use their expert knowledge to ensure the best deals are secured for their organization. Procurement Managers are responsible for overseeing the Procurement Team and ensuring that all of the Procurement Cycle’s steps are taken.
Steps of the Procurement Cycle
1. Need Recognition
The procurement cycle begins with need recognition. The purchasing department and the management of the company must understand and figure out the needs of new product development from internal or external sources. The product required is the one that needs to be reordered from the vendors, or it is the new item for the company.
2. Specific Need
The right product is quite crucial for the company. Some industries have standards to help determine the specifications of the products required whilst some of the industry’s domains have no point of reference whilst ordering the products such as the management might have ordered the product in the past for some other requirements. If not, then the business must specify the necessary product by using identifiers such as color, weight, and other vital specifications.
3. Source Options
The next step involves the company needs to determine the sources from where to obtain the product. Many companies have approved vendor lists that are regular suppliers. If this is not the case, the company will need to search for a supplier using purchase orders or research a variety of other sources such as social media, internet portals, and other lucrative sources and reference points. The company will qualify various suppliers shortlisted to determine the best product suited for the business operations.
4. Price and Terms
The next step in the line is that the company has to investigate all relevant and vital information to determine the best price and terms for the product required. This will depend on if the company needs ready products or specialized materials that are made to order. As per the thumb rule of the market, the company will shortlist three suppliers before arriving at the final decision.
5. Purchase Order
The purchase order is a formal document and is used to buy materials between a buyer and seller. It defines the aspects of price, specifications of the product, and the terms and conditions of the product and all other mandatory terms as per the requirements of the industry.
6. Delivery
The purchase order must be delivered, usually by means of e-mail or personal delivery. Many a time, the specific delivery method is specified in the purchase order. The recipient then acknowledges receipt of the purchase order and both parties involved keep a copy in their records as proof and for future reference.
7. Expediting
The expedition stage of the purchase order addresses the timelines of the materials delivered. It becomes quite important if there are any delays in the entire procedure. The issues that arise in the process most include payment dates, delivery times, and the completion of the order.
8. Final Receipt and Inspection of Purchases
Once the vendor delivers the product, the recipient company accepts or rejects the items as per the specifications and terms noted in the purchase order. Acceptance of the items receives obligates the company to pay for them to the vendor.
9. Invoice Approval and Final Payment
Three vital documents are required for the final payment method – the invoice itself, the receiving document or the proof of delivery, and the original purchase order signed by both parties. The agreement of these documents confirms both the parties involved and any sort of discrepancies must be resolved before the recipient makes the final payment. The payments are made in the form of cash, cheque, bank transfers, or other types of electronic transfers depending on the terms and conditions agreed upon.
10. Record Maintenance
In the case of audits and other accounting procedures, the company must maintain proper records for the proper evaluation. These include purchase records to verify any sort of tax-related information and the document of purchase order confirming the warranty of the required information.
Procurement Methods Used in an Efficient Procurement Process
1. Open Tendering
Open tendering is shorthand for competitive bidding in the Procurement Cycle. In this method, the companies bid on goods in an open competition or open solicitation way. In the process of Open tendering, the company needs to adhere to the below-mentioned aspects:
- Advertise locally in the market
- Have a list of unbiased and coherent technical specifications
- Have objective evaluation means and measures
- Be open to all qualified bidders maintaining the transparency
- Be granted to the least cost provider without contract negotiations
This method encourages effective competition to obtain products required with an emphasis on value for money. However, considering that it is a procedure-based method quite many experts feel that this method is not very suitable for large or complex acquisitions owing to its intense focus on the output process instead of rigid compliance to the standards.
Disadvantages of Open Tendering:
- Complex requirements are not very suited to this method
- Extended timelines
- Complications in defining the exact needs and requirements of the procuring company
2. Restricted Tendering
Unlike the open tendering method of the Procurement Life Cycle, restricted tendering only places a limit on the number of requests for tenders that can be sent by the various suppliers in the market. And because of the selective nature of this process, restricted tendering is also known as selective tendering. Restricted tendering is considered a competitive procurement method but the competition is limited to agencies that are invited by the procuring team.
The procuring company should establish a set of guidelines when selecting the suppliers as randomized selections will not be very apt for the entire process. This method is selective to find the best-suited and qualified suppliers to procure goods from plus it also saves a lot of time and resources for the company.
3. Request for Quotations
This procurement method is used for small-valued products or services required by the company and is the easiest and simple method of procurement without any sort of complexities involved. This method ensures a fast and quick procurement process without much paperwork. There is no formal proposal drafted by either of the parties involved in this method. The procurement entity selects a minimum of three suppliers for the quotes. After the comparison of quotes and the services provided by the suppliers, the best one is selected.
4. Single-Source
The single-source procurement method is the non-competitive method that should be used under specific circumstances in the organization. Single-source procurement occurs when the company intends to acquire products and goods from a single supplier. This method has to undergo a strict approval process from the company management.
Benefits of a Procurement Cycle Process
- Saves a lot of time ensuring the right solutions to meet your business needs and requirements. It also helps in ensuring the right price and cost efficiency
- It avoids overlooking the vital steps that may cause problems in the future, plus it offers transparent accounting systems.
- It helps the company to decide what to buy, when, and from where to buy. It allows for determining and checking if expectations are realistic.
- It is an opportunity for all stakeholders of the company involved in the process to meet to discuss particular procurement requirements. These stakeholders can be the vendors, end users, the procurement department, and technical experts to provide their inputs on the specific requirements.
- It allows the company to create the procurement strategy for procuring each requirement that will be included in the entire procurement plan. Such a strategy includes the aspects of a market survey and determining the procurement method as per the requirements and the market circumstances.
- The company can assess the feasibility of combining or dividing the various procurement requirements into different packages as per the merit of the situation.
Tools Used in the Procurement Life Cycle
Procurement intake form
Procurement intake forms are documents that outline the goods and services needed by a company. This form also includes deadlines, budgets, and other important details. Procurement intake forms help ensure that procurements are handled in a consistent, reliable, and efficient manner.
Procurement policy
Procurement policies guide organizations on how they should handle the procurement process. Procurement policies often define the company’s objectives, such as selecting reliable suppliers, maintaining accurate asset management, and conducting market analysis.
RFP management software
Request for Proposal (RFP) management software helps companies organize their RFPs and Procurement-related documents. This software helps streamline the Procurement process by providing users with a central hub for all Procurement-related activities.
Contract lifecycle management (CLM)
Contract lifecycle management software helps Procurement professionals manage their Procurement processes more effectively. CLM systems enable Procurement teams to track and monitor the entire Procurement process, from initial market analysis to contract negotiations and execution. This allows Procurement Process teams to make sure that all Procurement processes are being carried out efficiently and cost-effectively.
What’s the difference between indirect, direct, and services procurement?
| Direct Procurement | Indirect Procurement | Services Procurement |
|---|---|---|
| Direct Procurement is the process of purchasing raw materials or components to create products for the business. | Indirect Procurement is the process of purchasing goods and services necessary for running a business, such as office supplies, IT equipment, or software licenses. | Services Procurement involves the purchase of professional services, such as marketing or consultancy services. |
| It requires a thorough understanding of the market, deep asset management skills, and careful consideration when selecting reliable suppliers. | It requires extensive market research, careful selection of suppliers, and effective asset management. | It requires a different approach to Procurement and typically involves a Procurement Cycle that may include the stages of initiation, requirement analysis, selection and award, and post-award management. |
| Procurement processes should be used to ensure that all costs are accurately accounted for and to ensure that the quality of goods and services is satisfactory. | Procurement processes should be used to compare costs across different suppliers and to assess the reliability of each supplier before making any purchases. | Procurement processes should be used to accurately identify the services required and to ensure that reliable suppliers are selected for each service. |
How can you Manage the Procurement Life Cycle
Managing the procurement life cycle is essential for Procurement teams to ensure that they are making the most informed decisions possible when selecting potential suppliers and evaluating their performance. Here are a few ways you can manage the Procurement process –
1. Streamline administrative tasks through automation: Automation helps ensure that all Procurement processes are carried out efficiently and accurately. It also speeds up the process and eliminates manual errors.
2. Structure your procurement process flow: Developing an organized, well-planned Procurement process flow can help improve the accuracy and efficiency of the entire Procurement process.
3. Gain insight into potential suppliers: Utilize data-driven decision making to gain better insight into potential suppliers and their capabilities. This will help ensure that you are choosing the right supplier for the job.
4. Keep the finance team informed: Keeping the finance team informed and involved in Procurement decisions will help ensure that all spending is within budget and in line with company objectives.
5. Reevaluate suppliers periodically: It’s important to reevaluate your suppliers regularly to ensure they are meeting your expectations. This can be done through periodic surveys, focus groups, and other methods.
6. Inventory management: Keeping track of inventory is crucial to maintaining good supplier relationships and ensuring that all necessary materials are in stock.
By taking the time to properly manage the Procurement process, teams can ensure that their company is making the best decisions possible when it comes to supplier selection and performance. This will ultimately lead to better cost savings and improved efficiencies across the board.
Conclusion!
The Procurement Life Cycle is a crucial part of any business. It ensures that all purchasing decisions are made in an organized and efficient manner, while also helping to protect against potential mistakes.
By following the Procurement Process correctly, it helps businesses ensure that they are getting the best value for their money while also protecting their bottom line.
With proper Procurement Life Cycle management and implementation, businesses can manage their costs and improve overall profitability.
FAQs
Q: Why is it important for businesses to adhere to all the steps in the procurement life cycle?
A: By following the Procurement Life Cycle correctly, businesses can ensure that they are making the most informed decisions when it comes to purchasing. This helps to ensure that all purchases are within budget and of high quality. Additionally, it helps to protect against potential mistakes which could result in costly delays or financial losses. Procurement teams gain insight into supplier performance
Q: What type of businesses can benefit from a Procurement Life Cycle process?
A: Any type of business can benefit from a well-executed Procurement Life Cycle. From small businesses to large corporations, the Procurement Process helps to ensure that all buying decisions are made in an organized and efficient manner. Additionally, it ensures that teams are getting the best value for their money while also protecting their bottom line.
Q: How can businesses ensure that they are optimizing the Procurement Process?
A: Optimizing the Procurement Life Cycle requires proper management of its processes. This means setting clear goals and objectives, creating an effective procurement strategy, managing supplier relationships, conducting regular risk assessments, and monitoring performance metrics.
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