An effective procurement process is crucial for company growth. As you scale and expand into new markets, you rely more on consultants, local experts, and outsourcing. And the smoother this process, the easier it is to scale.
Yet, developing a comprehensive procurement process is a common challenge for businesses of all kinds. It’s tricky to find the right balance between the price and quality of outsourced goods and services.
Choosing the right suppliers is imperative to smooth supply chain management and successful business partnerships. Although the exact procurement process differs from one company to another, most follow seven key steps.
In this article, we break down each of these steps and why they’re important to implement in your company’s procurement systems.
What is the procurement process?
Procurement is the sourcing and acquisition of outsourced services or goods to support company operations. This involves a number of responsibilities, from identifying your company’s needs and finding a range of suitable suppliers to meet them, to negotiating contracts and managing supplier relations.
In an increasingly competitive market, businesses outsource external goods and services to:
- Increase their operational efficiency and output
- Expand production and grow the company
- Optimize for cost savings
- Streamline supplier management
- Improve supplier relationships and performance
The truth is, there isn’t a “one-size-fits-all” procurement process for companies. Depending on your business structure and objectives, your finance team may need to adjust, skip, or add elements to its strategic procurement.
The following seven steps are best practices and should be used as a guideline to develop your company’s unique procurement system.
The 7-step procurement process
- Assess your company’s outsourcing needs
- Compare outsourced market options
- Use strategic sourcing to choose your suppliers
- Choose supplier and negotiate contract terms
- Implementation and integration of vendor collaboration
- Review vendor performance
- Keep accurate records of vendor invoices
1. Assess your company’s outsourcing needs
The first step in any good procurement process starts with an inward assessment. Perform an internal needs analysis to determine your company’s highest priorities for outsourcing. Figure out which departments and functions need external support to perform better.
Consider the volumes and types of commodities and services needed, plus the timeframe. The procurement process doesn’t just affect your teams but end users and customers as well.
2. Compare outsourced market options
The next step is conducting thorough market analysis to find the best vendors. There are many elements to consider, including:
- Delivery times
- Reviews and reputation
- Risk assessment
Rank how important these elements are within your operation, and define what success looks like for each of them. Evaluate vendor compatibility based on how they fit into this criteria.
Doing market research gives you a realistic expectation of current prices for specific goods and services. This informs the negotiation phase and determines how much budget you should allocate to outsourcing.
You can also save time by identifying previous external suppliers, and whether past contacts are still relevant. It’s easier to negotiate prices with existing or previous suppliers that have long-term relationships with your business.
3. Use strategic sourcing to choose your suppliers
It’s essential to balance internal and outsourced work efforts. For example, outsourcing certain internal tasks to cheaper labor doesn’t guarantee productivity. You can risk doubling or overlapping responsibilities, which eats into cost.
The goal is to complement your internal operations with vendors that optimize your existing systems.
Strategic sourcing helps companies develop smarter and stronger vendor partnerships. SMEs usually choose from a list of best potential suppliers after doing market research.
Larger companies often use the RFP (request for proposal) process for big-ticket projects. This uses selective bidding and solicits proposals directly from vendors. The procurement team picks the best vendor after an in-depth evaluation of eligible applicants and their proposed solutions.
4. Choose supplier and negotiate contract terms
After choosing your supplier, it’s time to negotiate contract terms. When creating the contract details, you should clearly outline:
- Your budget
- The expected scope of work
- Duration of the contract (one-time or ongoing)
- Expected delivery dates
- Legalities, terms and conditions
The contract should be as clear and concise as possible, and signed copies should be given to both parties. Reviewing previous vendor contracts can help you optimize cost savings and streamline project scope for similar collaborations in the future.
When negotiating prices, small concessions can lead to greater returns for both businesses in the long run. Knowing when and where to compromise is a valuable skill in both procurement and vendor management.
5. Implement and integrate vendor collaboration
The onboarding process begins once the contract is signed by both parties.
Be aware: Onboarding vendors can be more challenging if your product or operation is highly complex. This can require more oversight to ensure smooth integration of new workflows or supply chain processes.
Transparency and communication are key to contract compliance and healthy supplier relationships. Include your vendors in relevant news and meetings, so they’re aware of changes or developments that can affect delivery.
6. Review vendor performance
Stable and lucrative vendor relationships allow your business to focus on driving continuous improvement and growth. It’s critical to measure vendor performance to maintain this competitive advantage–yet many companies overlook this step.
Benchmark your company’s progress by performing in-depth analysis and feedback sessions with your vendors. Evaluate their results based on consistent delivery and quality of services and products.
If your business goals are not met, address the issue with your vendor to discuss solutions.
7. Keep accurate records of vendor invoices
Keep a clear record of all your supplier invoices, purchase orders, delivery reports, and payments. These show how much your company has spent on outsourcing, and the overall return of those investments. You also want to keep this documentation on file in case of an audit.
That being said, it’s much easier to keep the books compliant with a digital paper trail. Manual spend tracking and data entry are vulnerable to human error. Even the smallest mistake can lead to serious consequences.
Automated spend management software is a smart solution that streamlines your accounts payable process. Finance teams can manage vendor invoices and AP processes in seconds, from a centralized online platform.
Strong procurement processes use real-time spend data
The truth is, it isn’t possible to make smart spending decisions reactively. If finance only gets a picture of company spending at the end of the month, it’s too late.
In contrast, real-time spend visibility gives teams valuable data and insight to plan and distribute budgets proactively.
Using a spend management solution like Spendesk, finance can track and monitor the progress of all budgets in a centralized platform, at any time. Purchase details are automatically logged for every single transaction and linked to the individual purchaser–so budget managers are always aware of what’s being spent and why.
Spendesk company cards use pre-allocated budgets with clear spending limits. So employees can make purchases autonomously and confidently, knowing they’re compliant with the company expense policy.
With greater control and visibility over spend, finance teams and management can identify more cost savings opportunities in the procurement process.
Business growth comes naturally when companies empower and enable their teams to plan, analyze, and spend funds effectively.