The Comprehensive Guide to Procurement and Its Steps Involved

Procurement involves a series of activities that ensure a company obtains the goods and services necessary for its daily operations. This process is crucial for managing costs, ensuring quality, and maintaining efficient supply chain management. This article aims to provide a detailed understanding of the procurement principles and the six main steps involved in the procurement process. Additionally, it delves into the strategic and operational aspects, highlighting the importance of transparency and fairness in the procurement and purchasing functions.

Understanding Procurement Principles

Procurement operations should be conducted based on fundamental principles that ensure fairness, equity, transparency, and free competition. These principles are critical to maintaining a level playing field and preventing any form of impropriety. When adhering to these principles, companies can ensure that they have a robust and fair procurement process that benefits all stakeholders.

Core Steps in the Procurement Process

The procurement process typically involves six main steps:

Identify the Requests: This step involves recognizing the need for goods or services. This could be triggered by the expiration of a contract, new projects, or increased demand for specific products. Select the Vendor: Once the need has been identified, the next step is to select a vendor. This selection process should be based on careful evaluation and comparison, ensuring that the chosen supplier meets the company’s requirements and standards. Submit the Purchasing Requisition: After the vendor is selected, the company should submit a requisition to the procurement department. This document outlines the details of the purchase, including quantities, prices, and specifications. Generate Purchase Order and Invoice: The procurement department then issues a purchase order (PO) to the chosen vendor. This PO includes all the necessary details and serves as a legally binding agreement. Once the goods or services are received, an invoice is typically issued by the supplier. Make Payments: The purchasing representative or department reviews the invoice and submits it for payment to the accounts payable team. After verifying the details, the invoice is paid according to the terms agreed upon in the PO. Maintain Records: Efficient record-keeping is essential in procurement. This includes maintaining a database of vendors, purchase orders, invoices, and other relevant documents. This thorough documentation helps in the future, ensuring compliance and transparency.

Detailed Breakdown of Procurement and Purchasing Functions

While the procurement process is straightforward, it can be further broken down into two main categories: strategic and operational functions.

Strategic Procurement Functions

Define the Requirement: This involves understanding the exact needs of the company and defining what is required in terms of goods or services. Issue an Invitation to Tender: Solicit bids from multiple suppliers to ensure a fair and competitive procurement process. Compare Tenders: Evaluate the submissions from potential suppliers to determine which one offers the best value and meets the company’s needs. Product Selection: Choose the supplier who is the best fit based on the comparison of tenders. Proof of Concept/Pre-Production Items: Test the products to ensure they meet the required standards before full-scale production. Commercial Negotiations: Negotiate the final terms of the agreement, such as pricing, payment terms, and delivery timelines. Contract Signing: Formalize the purchase agreement with the chosen supplier.

Operational Procurement Functions

Raise Purchase Requisitions: Initiate the procurement process by identifying and requesting the necessary goods or services. Obtain Spend Authorization: Obtain approval for the procurement request from the appropriate management level. Generate the Purchase Order: Issue a formal purchase order to the supplier with all the necessary details. Transmit PO to Supplier: Send the purchase order to the supplier for confirmation and execution. Follow-Up: Monitor the delivery timeline and ensure the goods or services are delivered on time. Receiving and Inspection: Inspect the delivered goods or services to ensure they meet the specified standards and specifications. Proof of Delivery (POD): Obtain a confirmation of delivery from the supplier. Invoice: Receive the invoice from the supplier. Three-Way Matching: Verify the invoice against the purchase order and proof of delivery to ensure accuracy before payment is authorized. Purchasing Representative Authorization: The purchasing representative authorizes the accounts payable department to process the payment.

Conclusion

The procurement process is a critical function that impacts a company's overall operations and financial health. By understanding the principles and steps involved, companies can ensure that they are procuring goods and services efficiently and effectively. Adhering to these guidelines and maintaining a transparent, fair, and competitive environment is key to a successful procurement strategy.