In order for a company to work effectively, the management must understand the process in which products and services are obtained. The procurement cycle describes the step-by-step process used for identifying the requirement for the company to retrieve the product or contract. Both public and corporate funds must be managed responsibly when going through this cycle. The procurement cycle is an important process to follow as it ensures management successfully meets their set goals.
Procurement Cycle Steps
Below are the most common procurement steps you need to be familiar with:
Step 1: Need Recognition
The business must firstly identify the need for a new product. It could be sourced from either internal or external sources. The need from the company may be to reorder a product or it could be a new item completely. It is important to identify the need for a product so the process can be managed efficiently and effectively through the procurement cycle.
Step 2: Specific Need
Finding the right product or market for the company is a highly important step in the cycle. There are often standards put in place in some of the industries in order to determine the specifications required, while others have no point of reference to look upon. There is the possibility that the company has ordered the product in the past but if not, then they must specify which product they want using identifying factors such as colour, packaging and weight. Having specifications in place will make this process easier. Then there is the need for researching the marketplace, scoping out the positioning of a product will identify potential competitors in the marketplace.
Step 3: Source Options and Plans
The next step in the process is finding out where the product can be obtained. The company may use a list of approved vendors to find somewhere that can source the product. If this is not the case, then the business will have to find a supplier using purchase orders or research other sources, for example magazines, the internet or using sales representatives. The company will then develop a strategy and follow through with the supplier that gives the best product or service for the business, to fulfill their need.
Step 4: Price and Terms
The business will then move on to determining the best price and terms for the product they require. This often depends on the needs of the company, the products they already have in stock or specialised materials they require. Following the process, it is normally recommended for the business to look at three different suppliers (market engagement) before they come to making a final decision. It is important for the company to look around to see if they can find a good deal for the products they require. Researching different brands will allow them to find the best deal and terms that match the product or service they are looking to acquire.
Step 5: Purchase Order
The purchase order is put in place to allow for materials to be purchased from the seller to the buyer. It will specifically define the price and all the specifications of the product. The purchase order will also feature all of the terms and conditions of the product and services, which must be read by the buyer. The purchase order will also show any additional obligations. It is vital this is read properly to identify any errors.
Step 6: Delivery
The next step requires the purchase order to be delivered. This is typically done by fax, mail, email or personally by the supplier. Often the specific delivery method is written in the purchasing documents sent to the buyer. The buyer will then acknowledge the receipt of the purchase order and both parties will keep a copy of it in case of needing it in the future.
Step 7: Expediting
This step in the procurement process addresses the timeliness of the service or materials that have been delivered to the company. This is a particularly important part of the process, especially if there are any delays in the delivery. Issues often noted in this step of the process include payment dates, delivery times and completion of the work.
Step 8: Receipt and Inspection of Purchases
Once the products have been delivered, the buyer must accept or reject the items. If the items are accepted, it means the company is responsible for paying for them. It is important that the products are inspected thoroughly to check they are up the standard expected from them. If they are not happy with the quality then they must contact the supplier to rectify the issue.
Step 9: Invoice Approval and Payment
There are three important documents, which must match the invoice request payment. These are the invoice itself, the receiving document and the original purchase order. These documents are agreed and confirmed from both the receiver and supplier in order to finish the process of buying new products. Any problems in this step must be resolved before the recipient goes forward to pay the cost of the products ordered. Payment for the product is most typically through cases, credit letters, checks, bank transfers or other types of electronic transfers.
Step 10: Record Maintenance
It is vital that the company retains all proper records in the case of audits happening. These include any purchase records, which can be used to verify any tax information and purchase orders to confirm the warranty information provided with the products. Purchase records also provide information for future purchases such as if products want to be reordered. This means the procurement cycle will start from the beginning again.
As you can see, the cycle provides a clear structure and important steps to follow. Identifying, conducting analysis, selecting, managing, performing and reviewing are highlighted throughout.