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What is Procurement?
Procurement is the process of sourcing goods and services for business operations. The business’s internal procurement team procures these goods and services from external vendors.
It’s important that the procurement process is as optimised and cost-effective as possible. Businesses with smooth procurement processes will likely be more profitable since a sizeable chunk of the budget goes towards procurement.
In most businesses, the Procurement or the Accounts Payable department takes care of the procurement process. AP or Procurement Managers are responsible for receiving vendor requests across departments, scouting and selecting the best suppliers, and managing invoice payments and compliances.
Process of Procurement
The procurement process, also called Procure to Pay involves multiple stakeholders, cross-functional approvals and lots of paperwork and compliance requirements.
Without powerful procurement management software, the process is prone to mistakes and delays. Today, businesses automate their AP process with tools like RazorpayX Source to Pay.
These tools help businesses manage their entire procurement process in one place. Equipped with features like vendor portals and automations, RazorpayX Source to Pay simplifies the procure-to-pay process like nothing else.
Steps in the Procurement Process
The process of procurement begins with need identification. A department may identify the need for the services of a particular vendor or tool that needs a subscription.
For example, a marketing team might realize they need a new social media analytics tool to track campaign performance better. They gather requirements, set a budget, and then research potential vendors who offer tools with desired features, pricing, and integrations.
This need identification sets the stage for the entire procurement process. It drives them through supplier selection, negotiation, and contract finalization to ultimately gain access to the tool that fulfils their initial need.
Once this need is identified, the department makes a purchase request with the procurement team of the business. A purchase request is a formal notification communicating requirements to the procurement team, who can review the request and approve or deny it.
If approved, the procurement team submits a Request for Quote (RFQ) to the selected vendor. A request for quote (RFQ) is a formal document that a company to solicit price quotes from potential suppliers for specific goods or services. It’s essentially a way for the buyer to ask vendors, “How much will it cost you to provide me with this?”
Once an appropriate price is reached, the procurement team may initiate a Master Service Agreement (MSA) with the vendor listing terms and conditions governing the relationship between business and vendor. At this stage, the legal teams of both business and vendor may be involved.
The AP team then fills out a Purchase Order (PO) to send to the supplier. The PO will have to be reviewed and approved by all stakeholders – the original requesting department, the finance team and procurement heads.
Getting these approvals manually and sorting through all the paperwork can be tedious. Businesses without automated systems are much more likely to face errors, delays and broken processes which can affect supply chain and operations.
Once all the approvals are in place, the PO is sent to the supplier, who receives, processes it and begins working on the requested goods or services.
The goods or services are delivered to the business along with a Goods Receipt Note (GRN). The procurement team and requesting departments check and verify the goods or services against the GRN and may request for replacements or refunds if the deliverables are not of expected quality.
Once all parties are satisfied, the vendor raises an Invoice against the business, listing how much money the business is liable to pay. All vendor invoices combined consist of the Accounts Payable short-term liability.
The final step is to pay the vendor. Upon maturity of the invoice, the procurement team does 3 way matching of the PO-GRN-Invoice to verify all information is correct. The finance team finally initiates payment to the vendor, after ensuring all compliances are met and taxes are deducted.
Importance of a Good Procurement Process
A well-oiled procurement engine secures the right resources at the right price, ensuring smooth operations and maximizing value. It fosters strong supplier relationships, mitigating supply chain risks and unlocking innovation.
It fuels cost savings through strategic sourcing and intelligent negotiation, freeing up resources for growth and new opportunities. When optimized, the procurement process transforms from a mere cost center into a strategic powerhouse, quietly boosting the entire organization’s efficiency and profitability.
Procurement processes are weighed down by tedious tasks, multiple stakeholders across departments, differing timelines, paperwork and compliances. An automated procurement process takes over all these boring, repetitive tasks like paperwork and managing approvals, leaving strategic work like deal negotiation to the humans.
- Faster flow: Automated processes are significantly faster – it turns slow, manual slog into a smooth, efficient machine. Paperwork and projects stay on track with timelines, keeping business running smoothly.
- No errors: Robots don’t make mistakes – all automated processes are reliable and accurate, eliminating the possibility of lost invoices or surprise bills.
- Data-driven insights: Automation means the process is fully digitized – valuable data can be collected every step of the way. This data can be turned into powerful insights to help teams find better deals, avoid bad suppliers and save money.
Types of Procurement
Procurement can be categorized based on the purpose of the goods or services being procured.
- Direct procurement: This refers to the acquisition of goods and services that are directly used in the production of the final product or service offered by the business. For example, a a manufacturer of bicycles would procure raw materials like steel and rubber, as well as components like wheels and gears, through direct procurement.
- Indirect procurement: This involves the purchase of goods and services that are not directly used in the production of the final product or service but are essential for the day-to-day operations of the organization. Examples of indirect procurement include office supplies, IT equipment, janitorial services, and marketing materials.
- Services procurement: Encompasses the acquisition of professional services from external providers. This can include a wide range of services, such as legal advice, accounting services, security services, and market research.
In addition to these, procurement can also be categorized in other ways.
- By the method of purchasing: This can include open tenders, closed tenders, and negotiated contracts.
- By the source of supply: This can include domestic procurement, international procurement, and e-procurement.
- By the value of the purchase: This can be classified as small, medium, or large value procurement.
How RazorpayX Source to Pay Helped Cellbell Optimize Procurement Process
Cellbell is a fast-growing furniture marketplace that shot up to popularity after their appearance on Shark Tank. Their product was top-quality, the customer service was top-notch and the customers were happy.
But on the inside, it was getting tougher to manage multiple vendors, complex financial operations – cumbersome workflows were threatening vendor and investor relationships.
With automations, integrations and super-smooth dashboards, the RazorpayX Business Banking suite brought instant clarity to Cellbell financial processes.
With the Source to Pay vendor management solution, Cellbell was able to pay their vendors before time, improving cash flow and financial stability.
Procurement vs Purchasing
|Transactional – acquiring goods/services at right price/quality
|Strategic – creating value through acquisition
|Ordering, expediting, receiving, paying
|Identifying needs, selecting suppliers, negotiating contracts, managing relationships, optimizing costs
|Narrow – individual transactions
|Broad – entire lifecycle of sourcing & managing
|Less strategic – immediate needs & budgets
|Strategic – long-term goals, risk management, supplier performance
|Strategic focus on mitigation
|Sophisticated tools & data analysis
What are the stages of procurement?
The stages of procurement are as follows: need identification, sourcing, negotiation & contracting, order fulfillment, payment & invoice.
How to optimize the procurement process?
Using technology and software to automate repetitive tasks like PO generation, invoice processing and data entry is one way to optimize the procurement process.
Who is a procurement manager?
A procurement manager is responsible for overseeing and managing the entire procurement process within the business. They typically deal with identifying and defining procurement needs, sourcing suppliers, negotiating suppliers, and managing vendor relationships.
What are procurement documents?
Several essential documents are used throughout the procurement process including purchase requisitions, request for quotation, purchase order, invoice and contract.
What are the types of PO?
There are several types of POs including standard PO, blanket PO, contract PO and rush PO. Each type of purchase order has different uses and timelines.
What is an invoice in procurement?
An invoice is a document sent by the supplier to the buyer after the goods/services have been delivered or performed. It details the cost of the goods/services, payment terms, and any relevant information like delivery details or invoice due date.