Purchasing is a key area for any business. After all, contracts with suppliers are managed there, the receipt of goods is controlled and the strategy for the entire purchasing cycle of the company is established. To ensure process excellence, organizations have been investing in procurement techniques and tools.
But here comes the detail: there is some confusion between the meaning and scope of each of these concepts. Because it is precisely to avoid any doubts that we have prepared today’s post. Interested? Keep reading, then!
WHAT DOES PROCUREMENT MEAN?
The term in English comes from the Latin “Procurare”, which meaning has to do with administering, taking care of, or taking care of other people’s businesses. Currently, procurement is understood, in practice, as a broad process that encompasses several elements, stages, and tasks related to the administration of the entire Logistics Chain of a company.
Thus, although confused with the notion of “purchasing”, procurement is much more than the act of acquiring, receiving, and paying for supplies for the company. This would be just one of the activities encompassed by it.
Therefore, we can say that it concerns the entire acquisition process, but with added strategic actions. In practice, from the search for the best suppliers in the market to post-purchase, procurement encompasses activities such as:
- Quotation, estimate, evaluation, and selection of suppliers;
- Negotiation and synchronization between company and suppliers;
- Management of minutes and other contracts;
- Purchase of goods, raw materials, and services;
- Transport, logistics, and order;
- Performance evaluation and feedback from deliveries and suppliers.
Then, according to the procurement concept, the responsible department manages the entire logistical cycle that involves the relationship between suppliers and the company – as well as the management of goods and other supplies that need to be purchased.
Also, the use of the resource provides more security for companies when making supplies purchases. In this way, reliable planning is created that can avoid losses to the business, in addition to delays in production or delivery of goods, improving logistics.
WHAT ARE THE BENEFITS OF USING PROCUREMENT?
The changes brought about by procurement provide several benefits to the company, as soon as it optimizes business results. See the main benefits below:
- Time savings: the buyer can view the information in the system, identifying the best options for each operation. Purchase orders can be carried out according to the production schedule, in an automated way;
- Greater competition between suppliers: with the registration of several suppliers, buyers can better evaluate them, inserting prices and payment terms;
- Cost reduction: through the automation and optimization of the processes involved, with the evaluation of many suppliers, it is possible to acquire products and inputs quickly, ensuring advantages such as saving financial resources;
- Greater quality: supplier management, process standardization, and market research are some of the points that aim to add quality to the organization’s products and services. Instead of looking for the lowest price only, professionals look for the most attractive deals, generating quality in the products offered to customers;
- Increased responsibility: nowadays, institutions must look beyond the products and services offered. Adapting to environmental impositions, valuing sustainability, and understanding the social impact are essential for companies seeking development, and this also includes procurement.
Among other advantages are:
- Agility in processes;
- Clarity, objectivity, and help in making the best decisions;
- Competitive advantage;
- Better customer service;
- Strategic vision through understanding the data generated in the system;
- Increased efficiency throughout the company’s purchasing management.
Thus, it is possible to see that the purchasing process can be understood as the beginning of the supply chain. Thus, the success of a company begins precisely at this stage. For this reason, it is necessary for it to be increasingly effective, providing several benefits for the business.
PROCESS, PEOPLE, AND PAPER
The best way to implement an effective procurement process is to focus on the three important elements, also called the 3 P’s: Process, People, and Paper.
Process: refers to the main workflows and the set of activities performed for the acquisition of goods and services. There is enormous scope for streamlining workflows to achieve maximum production, and many procurement engineers spend hours tweaking variables to understand how to improve their fundamental processes.
People: The number of external and internal customers involved in a typical procurement process is often too many to count. It includes the key decision-makers, the people who actually carry out projects, and those who will be impacted by decisions and processes. Ensuring good communication between all parties involved, and aligning their expectations is important to the successful execution of projects. In addition, the people involved are not only on your side of the organization but also outside of it, so you should consider in your supplier management strategies how you will handle your relationships.
Paper: Although we call it paper, it refers to both the physical and digital files of documents such as contracts, negotiation details, receipts, fees, budgets, etc. that belong to the procurement world. Investing in technology systems, which help to move away from tracking data into spreadsheets, can make it more efficient and accurate, as well as help with auditing purposes. After all, having your contract terms in hand can sometimes be as important as the negotiation process itself.
SOME OF THE PROCUREMENT ATTRIBUTIONS
Purchase record
Procurement includes the control of transactions made with suppliers, which makes it possible to build a history of relationships with partners. This type of action is important for the company to be able to assess certain factors, such as quantities purchased by the time of year, price variations, and quality of supplier deliveries.
As a rule, control is carried out with the aid of technological tools for monitoring previously established metrics and financial control of transactions. A widely used solution at this time is Enterprise Resource Planning (ERP), but there are still companies that use traditional spreadsheets – which require a huge manual work, bringing delay and opening up room for simple errors (even typing), but which can generate considerable impacts.
The purchase record must also be accompanied by the correct storage of contracts. To do so, a tip is to use document management software that, in addition to allowing digital archiving, offers agility in consulting and sending files.
Order receipt
It is also part of the procurement to receive and evaluate deliveries from suppliers, checking standards of quality, quantity, loss, and, finally, compliance with deadlines. In a way, a kind of quick audit is carried out to identify whether what was agreed in the contract with the supplier is being respected in practice.
Process standardization
The main purpose of the procurement is to establish efficient purchasing cycles and then, increase the agility of deliveries while reducing costs for the company. To do so, procurement seeks to synchronize the receipt of materials from suppliers with the internal work of the business. The idea is to make the company only use external resources when necessary. For this, you need to know your own demands.
Much of process standardization is linked to establishing good contracts. The purchasing department can work with a standard contract, but is adaptable to each supplier, according to the characteristics of the relationship. To speed up the process, remember to use digital files, take a look at the advantages of Custom Reports which can be more easily edited on demand and sent with security and legal validity — as long as they receive an electronic or digital signature.
It is also worth mentioning that it is possible to use smart contracts, especially with IT suppliers. Basically, these are digital contracts capable of being fulfilled automatically. It sounds complicated, but it’s simple: the file has its own logarithms capable of identifying and monitoring pre-combined quality metrics.
Environmental requirements
In the 21st century, the search for sustainable processes is no longer a differential, but a duty of any company. That is why so many investments in green technology, saving natural resources, and reducing environmental impacts arising from it have been made in the corporate world. In procurement, this concern also includes the supply chain.
It is up to industry professionals, therefore, to establish sustainability rules for their suppliers, such as the use of biofuel in the trucks responsible for freight and the adoption of recycled or recyclable raw materials.
Social Impact
In addition to caring for nature, companies also need to engage positively with the communities they are related to. Once again, procurement takes this care to partners, setting up guidelines to reduce the impacts caused, such as excessive noise or dust. But there’s more!
Social concern also includes ethical requirements. It is possible, for example, to veto suppliers that present poor working conditions for their employees. This sector can also be responsible for the relationship with suppliers that are public agencies, establishing the necessary policies so that no one in the supply chain makes mistakes — ranging from fraud to bribery.
Adoption of Technology
If, on the one hand, there is e-sourcing, on the other, we have e-procurement, which can work on platforms similar to e-sourcing, with the internet being used as a means of bringing suppliers and companies closer together. But it is also possible to integrate with other management systems, especially ERPs.
In this way, the purchasing sector can use data from other areas to improve the relationship with partners, allowing for faster and more accurate negotiations. Furthermore, with this tool, it is possible to generate automatic reports to support decision-making by managers.
Logistics overview
The establishment of basic guidelines for the relationship between the company and partners, from the drafting of contracts through transport safety standards, until reaching receipt: this is procurement.
The important thing is that the purchasing sector is aware that its role is not simply to trigger suppliers independently. It is necessary to analyze the entire purchasing chain, identifying points of low fluidity — such as the slow import of raw materials due to the difficulty of dealing with bureaucratic obstacles. In this case, the purchase involves other sectors of the company, such as the tax areas.
10 STEPS TO A SUCCESSFUL PROCUREMENT PROCESS
Each organization’s procurement needs are unique. They vary by size, industry, products, customer sensitivity, risks, digital presence, priorities, and so on. Some organizations even choose to use different processes for specific products or customers.
But there is a basic design for the procurement process that can be tailored to your particular circumstances and needs.
Step 1: The Identification of needs
At a fundamental level, before researching and talking to suppliers, a company needs to identify requirements and assess their validity. Asking questions like—Is this a genuine need? When does the product/service need to originate? What criteria must it meet or what type of resource does it need to have? — helps the company gain clarity and avoid potential roadblocks at a later stage.
Step 2: Review and Authorization for Purchase Requisition
After the strategic analysis of the need for the procurement service, the operational aspect starts with this step. The requesting team within a company submits their requirements to the procurement team, who then thoroughly reviews the request. Approved orders are signed and pushed to the next step in the workflow.
Step 3: Budget Approval
Approved purchase requisitions are forwarded to the accounting team for evaluation against the budget. Based on past commitments with suppliers, or industry data, a certain cost estimate is checked and this budget is then approved and allocated for this specific purchase. At this stage, the company confirms the need for the product, as well as allocates a certain amount to obtain it. Keep in mind that sometimes the best price is not the lowest price, but the best combination of what you pay and what you get.
Step 4: Review of suppliers
Most companies have an approved list of vendors with whom they have previously developed relationships. Procurement systems carry this data making it easy to select a supplier for this transaction. However, in case of ambiguity with the list of suppliers (for example, a particular product was never purchased and is now being requested, or previous commitments were not very successful to be maintained), therefore, exhaustive research is needed to identify the choices.
Step 5: Supplier Selection
Typically, companies list two or three vendors before selecting one. They contact each of them to express their interest and also request estimates and other details such as the warranty expiration period and the level of support provided in case of problems. These details help the company elect a supplier to proceed.
Step 6: Negotiation and contracting with the supplier
At this stage, the company is already satisfied with the chosen supplier. This indicates satisfaction with the pricing point, with good service levels, or with the supplier’s extensive experience. The company then begins to negotiate the actual price and contract terms with the supplier. After some discussions, terms are agreed upon and both parties sign the contract and the purchase order (PO) is raised. For pre-approved suppliers, this can be a simple process as the price has already been agreed upon. It’s just a matter of implementing a contract and starting a PO. By practicing good contract management, you can simplify future engagements with suppliers.
Step 7: Receipt of goods and/or services
At this stage, the supplier dispatches the goods or provides the services for which it was contracted. Upon receiving a shipment, the company ensures that the quality and quantity meet the agreed expectations and communicates in case of any concern. In cases where a service is purchased (for example, a food stand service in your company’s cafeteria), this is likely to be an ongoing transaction, so ongoing assessment is required to ensure that the company’s needs are being answered.
Step 8: Three-Step Verification
Three-step verification is a verification between the purchase order, the supplier’s invoice, and the product delivery confirmation report (also referred to as a packing slip or receipt document). This is an accounting process that is done to account for products ordered, shipped, and received. This helps to avoid errors such as early or late payments, unauthorized payments, and quantity mismatches.
Step 9: Approval of payment of supplier invoice
After a successful three-step verification, it’s time to release payment to the supplier. This is a simple step in which the accounting team approves payment in accordance with the terms of the contract.
Step 10: Updating and Maintaining Business Records
Maintaining files is an important step in procurement. Although seen as a final step, it is an ongoing part of the entire process in which every financial and business transaction needs to be traceable. This is not only essential from an audit point of view but also useful for performing “autopsies” that help to understand the effectiveness of the procurement process or decide whether to continue the relationship with a supplier or not.
IN CONCLUSION
As you can see, when compared to just purchasing, procurement goes far beyond procurement. To carry out the extensive work involved in this process, the model uses several tools and strategies.
In this sense, procurement is very useful to improve a company’s purchasing management strategy, and also saves a lot of money.
We at Link are also specialized in Procurement, and we can optimize supply procurement processes and find the best options from suppliers that offer savings, quality, and guaranteed supply for your company! Contact us now!
