Purchase & Procurement process

Mar 25, 2022 in Production

11 MIN READ

ultimate-guide-for-handling-purchase-and-procurement-processes-in-smes

Do you know what is procuring in business? How much time your company spends managing the procurement process? Have you ever found your company dragging into high losses due to non-optimal utilization of resources and timely delivery of the product to the customers? Then the answer to all these problems of yours is related to the Procurement process.

If you are managing a company or organization, then you must be aware of the fact that the Procurement process plays a very important role. When we talk about the Procurement process, it is the most complex process in any organization that holds more than 50% of operating costs for any industry. The research tells us that procuring in an SME will have a great impact on its standing in the market, growth, stability and success of the company. Therefore, it's very important to streamline this system as it is one of the core processes of a manufacturing business. A well-managed procuring system can help the organizations to optimize their expenses and ensure that all the resources are effectively utilized but if not handled properly, it can cause a loss in business and chaos. Through this article, the Ultimate guide for handling Purchase & Procurement processes in SMEs, I will explain to you, as an SME manager, how to manage these processes effectively and efficiently.

What do you mean by the Procurement Process?

Procurement is the act of acquiring or purchasing services or items on a large scale in business.

To operate, all businesses require certain commodities and services. Pencils, pens, paper, and other stationery products are required by almost every business. While doing so, they also require specific raw or processed materials, such as cameras and speakers in the case of a smartphone manufacturer.

Cash registers and digital payment processing services are required in malls, small retail, and wholesale stores. And most businesses require various aspects of employee benefit packages, such as life insurance, healthcare plans, and payroll management systems, among other things. A procurement process is required to obtain the aforementioned and many additional items.

Purchase and procurement process

Procurement refers to the complete process of procuring the commodities and services that a business requires to function. And there are various processes involved in that procedure, including -

  1. Identifying requirements
  2. Inventory management
  3. Supplier research, evaluation, and selection
  4. Carrying out contract discussions
  5. Developing Supplier Relationships
  6. Creating purchase orders and requisitions
  7. Receiving and inspecting products
  8. Payment processing

Difference between the Purchasing process and Procurement Process.

Procurement and purchase are often confused. Purchasing is a subset of procurement that refers to the individual transactions that occur during the purchasing process, including as

  1. Creating Purchase Orders.
  2. Purchase orders are submitted.
  3. Receiving and inspecting products.
  4. Payment processing.

The purchase process is a series of procedures that occur while purchasing products and services, particularly for recurring orders, established suppliers, and basic items.

Difference between purchasing and procurement

Purchasing is less strategic than procurement. The initial step in procurement, determining needs, is critical and can have a significant impact on a company. It examines a range of elements, including firm growth objectives, cost-cutting regulations, and efforts to streamline operations, and is often driven by company strategy.

Procurement is about more than just buying and selling things; it's about receiving the resources a firm needs in a timely, efficient, and cost-effective manner.

Why is the procurement process so crucial?

Procurement, when done correctly, leads to business growth in multiple ways.

First and foremost, it improves the bottom line. Bulk order discounts are higher for companies who have a properly defined procurement procedure and follow it consistently (with no instances of bypassing).

They also have better supplier relationships and have fewer challenges with supplier support. They also face fewer legal issues when purchasing products and services, such as signing up for an online service without first seeking legal advice.

A well-designed procurement strategy can help you prevent significant shortages of essential supplies. For example, if inventory isn't properly tracked, your company may have trouble completing customer contracts, which may negatively impact customer satisfaction. When you order the products you need at the last minute, you are forced to prioritise delivery time over cost – a tactic that, if used frequently, can result in financial losses.

When purchasing complex items or services, the procurement process can assist you in making better judgments. Many providers, for example, provide desktop support services for small and large businesses, but selecting one that meets your company's specific needs requires investigation.

Reaching out to numerous possible suppliers, assessing their offerings in detail, meeting with a shortlist of providers, and selecting one for contract negotiations is all part of a well-designed procurement process. As a consequence, you're likely to get a product that's an excellent fit for your needs and will last a long time.

For all of these reasons, establishing a robust procurement process is worthwhile. But what if you already have one and it's frequently ignored? In that case, your company is most likely suffering one or more efficiency-related difficulties that need to be addressed.

Workflow Steps Involved in the Procurement Process.

To ensure that a company's procurement strategy is effective, beneficial, and ultimately something that develops a company's market position, companies must take specific actions.

A creative and functional procurement process workflow is the answer to all of these criteria, from defining what kind of goods and services a firm need, their quality, and pricing, to keeping a record of all the required paperwork and files. Let's take a closer look at the steps.

1. Recognition is Required

Companies must first identify and acknowledge the demand for certain items in all sectors of their organisation before beginning the process of buying goods and services.

As the initial step of the procurement cycle, this is when firms must think and develop an effective plan for acquiring products and services from an external provider.

Business units inside a corporation must also develop a strategy for how much they are willing to spend for items when they will need them, and so on.

Another thing to remember at this stage of the cycle is to keep all important stakeholders aware of what is going on to avoid disagreements later in the process.

2. Purchase Requisition

A purchase requisition procedure is initiated when an employee within a firm files a procurement request or clients seek the assistance of the marketing team to obtain a certain product.

As such, purchase requisitions are simply documents (digitised in this day and age) that allow businesses to collect data on what types of products the organisation would need to procure when these goods and services would need to be acquired, how many of the products the company would require (demand and supply), and so on.

3. Requisition Review

At this point in the procurement cycle, the purchasing procedure formally begins.

A purchase order can be issued only when a purchase request has been checked, approved, and examined for budgetary reasons by procurement managers, financial controllers, or personnel responsible for procurement within an organisation.

At this point, the procurement team goes over a requisition package and determines whether there is a genuine demand for the products or service. Employees also take steps to comprehend and analyse the product requirements, such as the quantities needed and the intricacies of the goods, as well as ensuring that the organisation has sufficient finances to make the purchase.

The procurement team must also take the appropriate safeguards to ensure that all departments engaged in the acquisition are kept up to date on what is going on, to avoid costly mistakes later on.

4. The Solicitation Procedure

Soon after a purchase requisition is accepted by the procurement team and a subsequent purchase order is filed, the company embarks on the creation of a specific and detailed procurement plan with an interconnected solicitation process.

Based on the complexity of the demand, the team will select the direction of the procurement plan.

Once the procurement team has determined the budget for the purchase, they will issue Requests For Quotation (RFQ) to a variety of external suppliers.

While some businesses have an authorised supplier catalogue that includes a list of vendors who have already passed the selection criteria, others must compare bids presented by suppliers to determine which vendors they can solicit for their current demand.

5. Evaluation and Selection

After the solicitation procedure is completed, financial controllers and the evaluation committee can begin analysing and evaluating vendor quotations. Businesses can pick which vendor is most suited for their present demand at this step of the procurement cycle.

Businesses may consider other characteristics of a supplier's value to establish compatibility with the company.

If the purchase order is just a duplicate of past orders, businesses will already have a supplier list on hand. As a result, firms would not have to be concerned about whether the supply is of high quality. Companies would also save a lot of time because they would not have to vet the vendors.

However, if a purchase order is relatively new, with new items on the list, businesses must devote time and effort to researching suppliers to see whether the supplier can be depended on for quality and cost, as well as their reputation and timeliness of service.

Other characteristics that firms seek in a supplier include accountability, ease of communication, production skills, ethics, and how prioritising relationship growth and maintenance.

6. Contract negotiation and finalisation of price and terms

At this point in the cycle, financial controllers and procurement teams decide on a provider for an existing requirement. Typically, businesses select a provider based on at least three quotations.

Businesses make the ultimate decision after closely examining the quote in terms of cost-effectiveness, product quality, speed of delivery, and so on.

If the company has initiated a bidding procedure to select a supplier, the vendor will be chosen based on the conditions and requirements provided for the bid. This selection process is open and transparent for businesses to choose vendors who provide high-quality products at the greatest possible pricing.

Companies can sign contracts when they have completed and negotiated the terms of the contracts, taking into consideration delivery timelines and other factors. A copy of the purchase order is then delivered to the supplier.

When a seller accepts and acknowledges a purchase order, it immediately creates a legally binding contract between the vendor and the customer.

7. Order Management

Order management occurs essentially when a provider delivers the required goods and services within the agreed-upon schedule.

Once the products have been delivered to the customer, the company conducts a comprehensive check of the order and notifies the supplier of any anomalies discovered during the process.

Businesses ensure that they have the purchase order, packaging slips, and supplier invoices (the three-way matching system) with them at all times to make order administration an easy, simple, and smooth procedure.

Read More - Order Management: 3 Biggest Challenges SMEs faces

8. Approval of Invoices and Disputes

Companies will approve the invoice and evaluate papers relating to the purchase once they have accepted the order and determined that the following investigation has satisfied the customer.

The documents are evaluated and compared for discrepancies once an organisation is satisfied with the purchase requirements and content with the delivery of things and payment request invoices.

The invoice is accepted and payment is paid according to pre-existing terms if the company is satisfied that there are no anomalies.

9. Record-Keeping and Review

Businesses retain a thorough record of all essential documents to simplify taxation, the auditing process, and bookkeeping. This is the scene after a purchase order's payment process is completed.

Purchase requests, order receipts, and previously approved invoices are all stored in a centralised area.

Because record-keeping is a continual job, these documents are checked regularly to resolve any conflicts that may emerge between a firm and its supplier.

A thorough inspection and evaluation of records may also help organisations and vendors avoid repeating mistakes, helping them to be more efficient in the process. Using automation solutions like TranZact to optimise the process and collect and save critical business data is a wonderful way to save time and money.

Way Forward

Businesses must stay on top of their game in this ever-changing, competitive, and aggressive climate if they want to continue raising sales and growing. As a result, an effective procurement process with updated functions and systems that can keep up with a more demanding digitised environment is essential.

With the use of automation tools, you can make full use of a paperless procurement process system wherein all documents are approved digitally, thereby making tasks simple, quick, and competent. Furthermore, the businesses can manage their vendor management tasks in one place accessing all the supplier-related documents such as purchase orders, invoices, and price quotations in one go.

And with the introduction of a digitized tool like TranZact, businesses don’t have to depend on exhaustive spreadsheets or dispatching information across numerous systems when it comes to budgeting. Instead, companies can set limits to the budget, oversee spending and lay restrictions wherever necessary. Also, employees can gain access to a plethora of information and relevant data that can accurately review, analyze and compare the performance of suppliers. And with TranZact BI dashboarding feature they can identify areas that may pose a risk to the procurement process and even determine the areas that require improvement.


TraZact

TranZact is a team of IIT & IIM graduates who have developed a GST compliant, cloud-based, inventory management software for SME manufacturers. It digitizes your entire business operations, right from customer inquiry to dispatch. This also streamlines your Inventory, Purchase, Sales & Quotation management processes in a hassle-free user-friendly manner. The software is free to signup and gets implemented within a week.