The Procurement Cycle can be defined as the cyclical process of key steps when procuring goods or services for the organization. This interactive tool is strategically developed to guide and enlighten the members of the company through the procurement process with links to relevant knowledge to support each and every step through the procurement journey.
10 Steps of the Effective Procurement Cycle
1) Need Recognition
The purchasing department and the management of the company must understand and figure out the needs a new product development from the internal or external sources. The product required is the one that needs to be reordered from the vendors, or it is the new item for the company.
2) Specific Need
The right product is quite important and crucial for the company. Some industries have standards to help determine specifications of the products required whilst some of the industries domains have no point of reference whilst ordering the products such as the management might have ordered the product in the past for some other requirements. If not, then the business must specify the necessary product by using identifiers such as color, weight, and other such vital specifications.
3) Source Options
The next step involves that the company needs to determine the sources from where to obtain the product. Many companies have the approved vendor lists who are the regular suppliers. If this is not the case, the company will need to search for a supplier using purchase orders or research a variety of other sources such as such as social media, internet portals, and other lucrative sources and reference points. The company will qualify various suppliers shortlisted to determine the best product suited for the business operations.
4) Price and Terms
Next step in the line is that the company has to investigate all relevant and vital information to determine the best price and terms for the product required. This will depend on if the company needs ready products or specialized materials that are made to order. As per the thumb rule of the market, the company will have short list three suppliers before arriving at the final decision.
5) Purchase Order
The purchase order is the formal document and is used to buy materials between a buyer and seller. It defines the aspects of price, specifications of the product, and the terms and conditions of the product and all other mandatory terms as per the requirements of the industry.
The purchase order must be delivered, usually by the means of e-mail or personal delivery. Many a time, the specific delivery method is specified in the purchase order. The recipient then acknowledges receipt of the purchase order and both parties involved keep a copy in their records as a proof and for future reference.
The expedition stage of the purchase order addresses the timelines of the materials delivered. It becomes quite important if there are any delays in the entire procedure. The issues that arise in the process most include payment dates, delivery times, and the final completion of the order.
8) Final Receipt and Inspection of Purchases
Once the vendor delivers the product, the recipient company accepts or rejects the items as per the specifications and terms noted in the purchase order. Acceptance of the items receives obligates the company to pay for them to the vendor.
9) Invoice Approval and Final Payment
Three vital documents are required for the final payment method – the invoice itself, the receiving document or the proof of delivery, and the original purchase order signed by both the parties. The agreement of these documents provides confirmation from both the parties involved and any sort of discrepancies must be resolved before the recipient makes the final payment. The payments are made in the form of cash, cheque, bank transfers, or other types of electronic transfers depending on the terms and conditions agreed upon.
10) Record Maintenance
In the case of audits and other accounting procedures, the company must maintain proper records for the proper evaluation. These include purchase records to verify any sort of tax-related information and the document of purchase order confirms warranty of the required information.
Procurement Methods in the Effective Procurement Process Cycle
1) Open Tendering
Open tendering is shorthand for competitive bidding in the Procurement Cycle. In this method, the companies bid on goods in an open competition or open solicitation way. In the process of Open tendering the company needs to adhere to the below-mentioned aspects:
- Advertise locally in the market
- Have a list of unbiased and coherent technical specifications
- Have objective evaluation means and measures
- Be open to all qualified bidders maintaining the transparency
- Be granted to the least cost provider without contract negotiations
This method actually encourages effective competition to obtain products required with an emphasis on the value for money. However, considering that it is a procedure based method quite many experts feel that this method is not very suitable for large or complex acquisitions owing to its intense focus on the output process instead of rigid compliance to the standards.
Disadvantages of Open Tendering:
- Complex requirements are not very suited for this method
- Extended timelines
- Complications in defining the exact needs and requirements by the procuring company
2) Restricted Tendering
Unlike the open tendering method of the Procurement Cycle, restricted tendering only places a limit on the amount of request for tenders that can be sent by the various suppliers in the market. And because of the selective nature of this process, restricted tendering is also known as selective tendering. Restricted tendering is considered a competitive procurement method but the competition is limited to agencies that are invited by the procuring team.
The procuring company should establish a set of guidelines when selecting the suppliers as randomized selections will not be very apt for the entire process. This method is selective to find the best-suited and qualified suppliers to procure goods from plus it also saves a lot of time and resources of the company.
3) Request for Quotations
This procurement method is used for small-valued products or services required by the company and is the easiest and simple methods of procurement without any sort of complexities involved. This method ensures the fast and quick procurement process without much of the paperwork. There is no formal proposal drafted from either of the parties involved in this method. The procurement entity selects a minimum of three suppliers for the quotes. After the comparison of quotes and the services provided by the suppliers, the best one is selected.
Single source procurement method is the non-competitive method that should be used under specific circumstances in the organization. Single source procurement occurs when the company intends to acquire products and goods from a single supplier. This method has to undergo a strict approval process from the company management.
The various internal and external circumstances that call to cycle this method are mentioned below:
- Emergencies in the organization
- If only one supplier is available and qualified to fulfill the requirements in an efficient manner
- If the advantages of using a certain supplier are quite clear
- If the company requires a certain product that is only available from that one specific supplier
- For the continuation of work processes that cannot be reproduced by another supplier in the market
Benefits of a well designed Procurement Cycle process
- Saves a lot of time ensuring the right solutions to meet your business needs and requirements.
- Right price and cost efficiency
- Avoids overlooking the vital steps that may cause problems in the future.
- The selected supplier is well familiarized with the business operations
- Transparent accounting systems.
Importance of Procurement Planning in the Procurement Cycle
- It helps the company to decide what to buy, when and from where to buy.
- It allows determining and checking if expectations are realistic in nature.
- It is an opportunity for all stakeholders of the company involved in the process to meet in order to discuss particular procurement requirements. These stakeholders can be the vendors, end users, the procurement department, and technical experts to provide their inputs on the specific requirements.
- It allows the company to create the procurement strategy for procuring each requirement that will be included in the entire procurement plan. Such a strategy includes the aspects of market survey and determining the procurement method as per the requirements and the market circumstances.
- The company can assess the feasibility of combining or dividing the various procurement requirements into different packages as per the merit of the situation.