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What Is Procurement? A comprehensive guide
As organizations scale, it quickly becomes evident how critical it is to have strong processes in place that ensure healthy financial practices and standardization across the organization.
Without proper standard procedures in place, particularly on the financial side, organizations can quickly spiral out of control which can lead to serious problems. At the core of it lies one of the most fundamental processes any organization must set in place—procurement.
But what is procurement exactly? And how does it work? In this comprehensive guide, we dive deep into this essential business process and everything you need to know to implement it in your organization.
What is procurement?
Procurement is a process by which goods, services, raw materials, or works are acquired by a company from vendors or suppliers. However, it’s not to be confused with purchasing goods and services.
Instead, procurement involves a broader and more strategic process to acquire goods or services that includes negotiations, approvals, and more.
Put simply, it’s a way for any organization to evaluate their purchases and a way to have intradepartmental checks and balances during the process.
Why is procurement essential in business?
Not only is procurement vital for securing all the goods and services that an organization needs to operate, but it also ensures organizations have an effective and systematic way to request, approve, and track purchases and control spending.
The procurement process also serves as a critical part of the supply chain process, helping organizations evaluate reliable vendors and suppliers and find competitive prices that match their needs.
Ultimately, the procurement process can help reduce costs, increase efficiency, and build mutually beneficial relationships with suppliers.
Take a product tour today and find out how Xledger’s cloud ERP software can streamline your organization’s procurement process.
Types of procurement
Not every procurement process is created equal. Procurements are typically classified into various categories, according to how goods or services will be used by the company. These categories include:
Indirect procurement
Indirect procurement refers to the process of acquiring the resources needed for the company’s day-to-day operations but doesn’t affect the company’s revenue.
For example, office supplies like pens or computers are essential to running most businesses. However, while the daily operations wouldn’t be possible without these items, they are not directly responsible for driving revenue.
Direct procurement
Direct procurement is the opposite of indirect procurement. This process focuses on acquiring goods needed to drive up revenue, such as those involved in the production of an organization’s products.
Raw materials, packaging boxes, manufacturing equipment, and resale goods are all examples of direct procurement goods and services.
Goods procurement
Goods procurement is the process of acquiring materials or tangible items like raw materials or office supplies. The procurement of goods can be either direct or indirect, but it does not include the acquisition of services.
Services procurement
Service procurement refers to the process of contracting people-based services to operate your business. This can range from contracting an accounting firm to logistic services that help your organization deliver products from one location to another.
The procurement of services can be either direct or indirect, but it does not include the acquisition of goods.
Elements of the procurement process
There are 3 key elements involved in every procurement process. These elements are commonly known as the 3 P’s of procurement; Processes, People, and Paper.
1. Process
Every procurement procedure involves standard processes outlined by the organization. These include processes for reviewing orders, approving invoices and vendors, paying for goods and services, etc.
Think of them as instructions with best practices to follow so that each department can work independently while still meeting the standard that your organization seeks to achieve.
2. People
Every procurement procedure involves stakeholders responsible for different stages and processes. These are typically assigned as part of the standard procedures developed by each organization.
3. Paper
Last but not least, there is paperwork and documentation involved in the procurement process. This includes not only invoices but also information about suppliers and standard procedure documents used for best practices.
Steps in the procurement process
The procurement process varies from organization to organization. However, there are a few key steps that drive most procurement processes.
1. Recognizing a need
The first stage of the procurement process is recognizing the need for a good or service that needs to be acquired. This might be set forth by any department at any given time.
2. Submitting a purchase request
Once the need is identified, the department typically submits a purchase request. The request is typically directed at the procurement department, the finance department, or someone within the department who is in charge of procurement operations.
3. Review and approval
After the purchase request is submitted it’s reviewed by the relevant stakeholders and approved or denied. If approved, it moves to the next stage.
4. Identifying a supplier
Depending on the request, the organization might need to find a new supplier or vendor or choose to use one whom the company has an ongoing relationship with.
5. Request and review a supplier proposal
A Request for Proposal (RFP) might be issued by the company if the proposal requires one. This is a process by which the vendor or supplier sets forth their proposed pricing and indicates what services or goods it covers.
However, in the case of more straightforward transactions like office supplies, this step might be skipped or pricing could be offered through a catalog or web portal.
6. Negotiate a contract
During this stage, both pricing and contract details are negotiated.
7. Issue a purchase order (PO)
A PO is a commercial document issued to the seller that outlines the quantities, prices, and needs of the order. Put simply, it’s an official document that outlines what the buyer is interested in acquiring.
8. Receive the order
As soon as the buyer receives the service or order, they evaluate the product’s performance to ensure it matches the purchase order.
9. Approve or dispute the invoice
After the goods or services are inspected and delivered, the invoice is either approved and paid or disputed.
10. Archive records
It is critical to ensure proper record-keeping after the transaction is completed. This includes archiving invoices, receipts, and purchase orders for accounting purposes and in case there are any future disputes.
How an ERP helps with procurement
The procurement process involves so many stakeholders, processes, and decisions, that managing it without the proper software can easily become an administrative nightmare.
By leveraging Xledger, organizations can automate the entire purchase requisition process, manage suppliers, track financial data in real-time, manage inventory, and much more. All within one easy-to-use comprehensive solution that connects all aspects of your business in one place.
Xledger online ERP software is a category leader that specializes in streamlining procurement processes for organizations of all sizes.
We invite you to take a product tour and explore all the features our world-class ERP has to offer. Free your finance team from tedious and repetitive accounting tasks and contact us today.
Free your finance team from tedious and repetitive accounting tasks and contact us today.
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