Introducing Procurement

The procurement process encompasses a series of steps that are essential for acquiring goods, services, or materials required by an organization. While the fundamental steps remain consistent, the specific details and intricacies of the process may vary depending on the nature of the procurement, such as direct or indirect materials, services, or specialized processes like stock transfer. Regardless of the type, the procurement process typically involves identifying the need for a particular item or service, conducting market research to identify potential suppliers, soliciting bids or proposals, evaluating and selecting the most suitable suppliers, negotiating contracts, and, finally, managing the ongoing relationship with the chosen supplier(s). However, despite the above mentioned differences, the core objective of the procurement process remains consistent: to ensure the timely and cost-effective acquisition of goods, services, or materials necessary for the smooth functioning of the organization.

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The procurement process consists of several steps that form a continuous cycle. We begin with what is known as strategic procurement, and in this course, we provide a summary of the overall process. However, we explore each step in more detail later on. ​

​Steps 1 to 7 will be skipped for recurrent purchases.​

1. ​Spend Analysis: At the beginning of the procurement process, the organization analyzes and categorizes its present and future spending habits, identifies opportunities to save money, and creates a plan for managing different categories. This is an important strategic activity because it allows the organization to align its procurement with its business goals and priorities.​​
2. Category Management Strategy: The organization identifies the specific types of goods and services it requires and assigns them to different teams or managers. These category managers are then responsible for creating and executing sourcing strategies for each category, considering the organization's needs and the conditions of the market. This process is also considered a strategic procurement activity because it allows the organization to maximize its purchasing influence and gain a competitive advantage.​
3. Identification of Requirement​: Involves the organization recognizing a specific need for goods or services and outlining the details such as the desired specifications, quantity, quality, and delivery timeframe.
4. Supplier Identification:​ Involves the process of finding and assessing potential suppliers who can meet the organization's needs in terms of cost and timeline. The organization can utilize different methods like online Requests for Information (RFIs) and databases, referrals, trade shows, or past contracts to gather information about potential suppliers.
5. Request for Proposal/Quotation (RFP/RFQ): ​At this stage, the organization reaches out to the suppliers who have made it to the shortlist and provides them with comprehensive information about what is required. This includes specific deadlines, detailed specifications, terms and conditions, and the criteria that will be used to evaluate the proposals. The suppliers are then expected to submit their proposals or quotations, which should showcase their capabilities, experience, pricing details, lead times, and other relevant conditions.
6. Supplier Evaluation and Selection: The organization compares and ranks the proposals or quotations from the suppliers, based on the predefined criteria. The organization may also engage in negotiations, conduct site visits, or perform audits to validate the statements made by the suppliers. Finally, the organization selects the most suitable supplier(s) according to their specific needs.​​
7. ​Negotiation and Contract Agreement​: Negotiation and agreement on the contract terms between the organization and the chosen supplier(s). The details of the contract are discussed and finalized, including aspects such as the extent of the work, the cost, and the timeline for delivery, the method of payment, any guarantees or warranties, and the procedure for resolving any disputes that may arise. Once both parties are satisfied with the terms, they sign the contract, making it a legally binding agreement.​
8. Purchase of Goods or Services:​ This step involves the acquisition of what the company needs in terms of quantity, quality, delivery date, and any other relevant information.
9. Delivery and Inspection​: After the supplier provides the goods or services to the organization according to the purchase order and contract, the organization examines the goods or services to ensure they meet the required quality, quantity, and standards. If any problems or inconsistencies are found, the organization informs the supplier. This step is part of the operational procurement process, as it involves receiving and confirming the goods or services.​
10. Invoice Processing: ​In this stage, the supplier sends a document called an invoice to the organization, requesting the payment of the goods or services they provided. The invoice typically contains important information such as the invoice number, date, description of the items or services, quantity, price, and payment terms. This is part of the organization's operational procurement process, as it involves handling and managing the invoice internally.​

In the next unit, we will learn about the procurement process of direct materials.