An organization's procurement process is commonly more complex than simply completing purchases. Visualizing your procurement process flow will enable you and your accounts payable team to manage your resources better and oversee your entire procurement process. Outlining your procurement processes will also help you identify challenges and areas to optimize, which can be critical in supply chain management.
But how do you turn a complex process into a manageable procurement process flow chart? Here are some steps to help you create a more efficient procurement process and better manage your procurement lifecycle.
What is the procurement process?
Your procurement process refers to the strategic way you purchase goods and services from a third party. Procurement involves more than just purchasing goods or services from a vendor. It involves sourcing goods and services, negotiating with vendors, and managing your supplier relationships. Therefore, your procurement processes should align with your company's strategic goals and improve operational efficiency.
Procurement processes can be conducted using different procurement models: the centralized procurement model and the local procurement model. Here's an overview of each.
Local procurement model
In a local procurement model, purchasing decisions are decentralized and made by multiple organizational departments. This can be ideal since it enables you to respond quickly to new needs and diversify your supply chain by tapping into local vendors and suppliers. The downside is that it leads to a lack of visibility for your overall procurement process, and that can lead to duplication of effort.
Centralized procurement model
In a centralized procurement model, all procurement processes are handled by a centralized procurement team. As a result, you'll create a standardized system that can be used across your entire procurement department. However, the larger your organization becomes, the more you may see bottlenecks and delays if your procurement team becomes overwhelmed.
Direct vs. indirect procurement
It's also essential for you and your finance team to distinguish between direct procurement and indirect procurement. Direct procurement involves purchasing goods and services that directly contribute to your business objectives, such as the raw materials you need for production.
Indirect procurement involves purchasing goods and services that are essential for your business but don't directly serve a vital business function. Office supplies, consulting services, and software subscriptions are examples of indirect procurement.
10 stages of the procurement process flow
Creating a procurement process flow will help you better monitor your company's procurement cycle. A procurement flow provides a framework to help you visualize and understand your entire process and aids in crafting a more strategic procurement process as a result. Here are the essential stages.
1. Identify your needs
Start by identifying the specific goods or services your company needs. This should be done before your team members submit any sort of purchase order. You'll research the kinds of raw materials or office supplies your company needs and then seek out potential suppliers that can satisfy that need.
2. Identify potential suppliers
Your vendor selection process might start by examining existing supplier relationships. Procurement teams might, therefore, begin by reviewing your current list of suppliers and contracts and determining which vendors can provide the goods and services your business needs. From there, you can research additional suppliers to determine whether another company can provide you with goods or services at a better price.
3. Choose the right supplier
Once you narrow down your list of potential suppliers, you can pinpoint the right vendor by submitting an initial purchase request. This purchase request will inform the supplier of your interest, and they will respond by providing a list of goods and services and their estimated costs.
Your purchase request should be as detailed as possible so suppliers know that they can provide your supplies at the volume you need. Sending a purchase request to multiple suppliers can also help you compare supplier performance and narrow your selection further.
4. Start the negotiation process
After determining which supplier you choose, you can start the negotiation process. You can negotiate both the price of the goods or services and the payment terms. This will ensure you secure a fair price with your vendor and understand the vendor payment process. Vendors are used to a competitive bidding process, so you may need to adjust your procurement strategy to allow for more competitive bids.
5. Create a purchase requisition form
While the previous steps in the procurement process were focused on your external supply chain, your next steps involve creating the internal infrastructure for an effective procurement process. Start by creating a purchase requisition form. This isn't the same as a purchase order. A purchase requisition is simply a purchase request made by one company employee. Managers must approve this document before goods and services can be purchased.
6. Create a purchase order form
The next step in goods and services procurement is to create a purchase order. This is the actual order form that you'll send to the supplier to purchase goods or services. Your purchase order will contain:
- Your business information.
- A description of the goods and services you're purchasing.
- A summary of the payment details.
A purchase order should also include a unique purchase order number that you can use for internal tracking purposes and that can later be matched to the invoice number you'll receive from the supplier.
7. Evaluate the goods and services
After you receive the goods or services from the vendor, you'll conduct a thorough evaluation process. This is usually simpler in goods procurement, where you can evaluate the quality of the merchandise or materials. However, you can also evaluate service procurement by determining whether the services rendered satisfy your needs.
Evaluate whether the goods and services arrived on time and are in good condition. If the supplier fails to satisfy the contract terms, you can send the items back or renegotiate the terms of your contract.
8. Submit payment to the supplier
Assuming that the vendor has satisfied the terms of the contract, it's time to move on to payment processing. The supplier sets payment terms, so this is why it's wise to agree on terms during the negotiation process. One way to ensure strong supplier relationships is by submitting prompt, accurate payments. Depending on the supplier, you may be able to achieve additional cost savings by taking advantage of early payment discounts.
9. Record all transactions
Proper record-keeping is essential for any business. Your finance department can keep careful records of each transaction. This includes matching the purchase order to the supplier invoice and ensuring the contract has been faithfully honored. Maintaining these records can assist with contract management since you'll have a clear trail of transactions and can avoid disputes.
10. Review your procurement process
A successful procurement process includes a regular review process. Take time to review supplier contracts as well as your internal financial metrics. You can use your financial data to optimize your procurement processes and ensure you align your goods and services procurement process with your broader business operations.
Procurement process flow chart
It may be easier to visualize your procurement process as a flow chart. The following procurement process flow diagram can help you better understand how these processes work together throughout your procurement cycle.
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The 3 P's of a procurement process
Procurement managers commonly describe the procurement process in terms of people, processes, and paperwork. Here's how these elements contribute to your larger procurement life cycle.
People
Even if you focus on your internal processes for procuring goods or services, you'll notice that many people are involved. What do you do when procurement professionals and managers are unavailable to approve a purchase request? Your procurement plan needs to have the people in place—along with backups—to ensure that things run smoothly.
Process
Procurement departments commonly rely on multiple overlapping procurement processes to complete each transaction and ensure an efficient supply chain. Typically, a company's procurement process becomes more complex when purchasing items of higher value. As a result, your procurement management strategy should have well-defined policies and procedures to keep your supply lines running at peak efficiency.
Paperwork
Maintaining careful records throughout the procurement process helps businesses prepare for audits and use the relevant procurement data to influence future purchasing decisions. This is an excellent example of how procurement software can streamline your procurement process flow by digitally saving and centralizing your business records to aid future decision-making.
How to optimize your procurement process
Optimizing your procurement process can help your business run more efficiently and be invaluable in managing your supply chain network. Here are some tips on how to improve the operational procedures surrounding your procurement process.
Automate
Technology can streamline your procurement process by automating many core procurement functions. For example, using automation to enhance your approvals process means you'll be able to complete purchase requests. Plus, the best procurement software provides three-way matching, ensuring that your purchase order, invoice, and goods receipt match for total security.
Centralize data
Procurement software can also empower your organization by centralizing your most relevant business data. That makes it easy to tap into past purchasing records and make well-informed decisions about your future. You'll also have a clear audit trail that can be used to reflect on your past performance or settle disputes between your company and a supplier.
Diversify your supplier network
According to the 2023 Global Chief Procurement Officer survey, most American businesses are concerned about inflation and inventory shortages. Diversifying your supply chain network can address both of these concerns.
Working with multiple suppliers across different geographic areas can ensure you'll still have access to supplies even if the US supply chain is disrupted. And by working with multiple suppliers, you'll be better able to compare prices and find the best possible deal.
Pay vendors promptly
Optimizing your procurement process also means optimizing the way you pay vendors. Making consistent, on-time payments to your vendors may increase your chances of securing better contracts in the future. In some cases, you may receive early payment discounts by paying your vendors after receiving the invoice.
Again, procurement software can aid in this process by facilitating electronic payments and making sure that payments are made on time.
Standardize your procurement process
Standardizing your procurement process will ensure a clear procedure for each purchasing decision. Having a standard procedure will also make it easier to train new procurement team members and help you delegate tasks to save time.
Ready to optimize your procurement process flow?
Galileo Learning Center understands the need for a strategic process when it comes to procurement. Galileo Learning runs summer camps each year at more than 70 sites across the US. To make it happen, they have to purchase supplies, and during peak seasons, Galileo's staff has to manage as many as 50 invoices each week, taking an average of 20 to 25 hours. That's why the organization turned to BILL.
BILL's accounts payable (AP) automation allowed Galileo to get more done in less time. As a result, staff members save an average of 12 hours each week, all while maintaining a clear audit trail.
BILL can do the same for your business. By leveraging BILL's automated features, you can transform your procurement strategy to keep you and your procurement team operating at peak efficiency. Additionally, BILL's three-way matching minimizes errors and ensures total accuracy. Discover more by exploring what BILL has to offer, and learn how BILL can improve the way you purchase supplies and manage vendors.