The Procurement Cycle
Last updated: September 26, 2022
Procurement managers must have a firm grasp of the importance of the steps in the procurement cycle and how to adapt the process to the company's needs. A well-run procurement process saves a business money and improves profit margins. Optimizing the procurement cycle is a continual process of improvements that managers make to keep the company supplied through maximized efficiency and minimized risk and spending.
Understanding the procurement process will make the process of making it more efficient and effective a little easier.
While the goal of the procurement cycle is sourcing supplies for a company, there are many more steps before and after the purchase. Each of these steps contributes to the overall efficiency of the process.
Overall, the process includes selecting reliable suppliers, acquiring goods or services from those suppliers and maintaining relationships with them. This general process may include multiple steps to achieve. The needs of each company differ, so there is no set process of steps for every business's procurement process. Knowing how to adapt the cycle to a business's size and purchase needs is essential for procurement managers to get more out of every dollar spent on the process.
Maintaining a procurement cycle includes regularly weighing the quality of external suppliers against their costs and determining whether to renew relationships with suppliers at the end of contract terms. If the quality or need for the purchase of goods or services becomes outweighed by the cost, the cycle will shift to finding a new supplier. Regular assessments of the suppliers in the procurement cycle will help companies to cut costs and become more efficient.
The image of a circle often accompanies discussions of the procurement cycle. Like a circle, the process does not have a set end. By recognizing that procurement is cyclical, improvements become built into the process.
Another reason to understand the procurement cycle is to establish specific steps to take to find the best vendors, establish relationships, assess goods and determine whether to keep the same vendors or choose others.
An efficient procurement cycle ensures a company has the products needed to keep operating. Direct procurement commodities allow the company to manufacture the goods it sells while indirect commodities include services and goods that keep the operations proceeding smoothly. Adequate supplies of both indirect and direct commodities are essential for productivity. An efficient and effective procurement process ensures a company has enough materials to keep moving forward.
Effective procurement ensures every step of your company's operations has the necessary materials for success.
For the direct commodity side of procurement, manufacturing can continue unabated with a steady supply of the raw materials needed for production and transporting them to their destination for sales. Indirect commodity supplies also aid productivity and include repair services, marketing materials and services, lab supplies, consultation services and more.
Effective procurement will ensure a just-in-case supply of goods so that a steady stream of commodities continues to arrive at the business even in uncertain times. Good supply acquisition ensures resiliency that can keep a company afloat amid difficulties.
Planning for the future requires thinking about how to keep supplies coming to a business. Effective procurement strategies will provide the resiliency companies need to remain competitive long into the future.
The procurement cycle constantly evaluates the cost of supplies. This reevaluation of vendors with each cycle ensures the lowest prices for the types of products or services needed while balancing vendor quality and effectiveness.
Minimizing overall costs through efficient procurement can directly impact company profits. Lower spending means higher profits, even with the same sales volume. It also improves your place among other businesses in the marketplace. When your business controls its costs, you can pass the savings onto your customers and become more competitive.
Effective procurement that lowers costs is a transparent process that makes evaluating costs easier. Stakeholders that demand increased company spending transparency will appreciate the cost minimization achieved through effective and efficient procurement.
The procurement process puts you in charge of the quality of indirect and direct commodities. With good vendor relationships, you may negotiate better goods or services for lower prices. High-quality raw materials contribute to better-quality produced goods.
Better quality indirect goods and services can also impact operations. For example, better marketing services are more effective at increasing customers. High-quality consultant services provide better ROIs and can save time.
Cost and quality are important in the procurement process. An effective procurement cycle balances both to ensure a company has the quality of goods and services it needs to succeed.
Many indirect spends aim to save time instead of money. Effective procurement of these services or goods reduces the time required by employees to do tasks. For example, procurement consulting services save time required by procurement management in researching vendors, evaluating options and maintaining data on industry supply and pricing changes.
Effective maintenance, repair and operation (MRO) procurement reduces the time in looking for services and parts needed for the upkeep of production equipment. Quality MRO services save a company by reducing downtime and the additional costs incurred by that. In many businesses, saving time is the same as saving money, and effective and efficient procurement can fulfill both aspects.
Companies may differ in the steps they take to acquire supplies. Regardless of the steps taken, the process should always be under constant evaluation and improvement. Some common stages in the procurement process include the following:
Direct or indirect commodity needs require regular reevaluation. Occasional operations changes or upgrades may shift these needs. Improved processes or company expansions may change the types or volumes of raw materials required for production. For example, a shift from in-office work to remote work may change the volume of needs for office supplies.
Assessing needs ensures your company only purchases the goods it requires without overspending. Each department will prioritize separate necessities. Production will have direct procurement requirements while accounting or other internal operations will have indirect commodity needs. Both direct and indirect commodities are essential for operations and need assessment during this step of the procurement process.
This stage of the process will also include budgeting for each department’s commodities and getting approval for purchases within that budget range.
Examine potential vendors for the needed commodities. This process may include requesting information, quotes or proposals from the vendors. Acquiring this data allows for more direct comparisons of vendors, including pricing, products and delivery times.
Intelligently evaluating the vendors should include information beyond cost. Risk assessments, supplier diversity, supplier reliability and vendor security all may become additional factors to consider during the process, depending on company values and goals.
The process of evaluating vendors for indirect spend can be more difficult due to the nature of the products and services they offer. Indirect spend focuses on either saving time or money, whereas direct spend mainly aims at lowering costs and waste. Connections with indirect spend vendors can make the selection of these suppliers easier. For companies that don't have these connections, consultants in indirect spend procurement can help.
Choosing a vendor means finding one that will work to provide your necessary commodities within budget, deliver on time, have good communications, be accountable, operate ethically and have minimal risk.
Regular reevaluation and selection of vendors ensure the performance of the vendor and its pricing match the needs of the company. Taking extra time to examine the work of current vendors and compare them to other suppliers could net significant savings.
New vendors will require the negotiation process to start fresh. Negotiating with the supplier ensures both your company and the vendor reach an agreement on the prices and volume of goods for delivery.
For current vendors, companies may use previous contracts as starting points for negotiations. Going through the process of renegotiating with previous vendors can save money or ensure acceptable pricing continues.
This stage of the procurement cycle may include a discussion of long-term sourcing goals. A vendor may account for a long-term relationship when negotiating prices.
Topics to address during negotiations include the following:
- Terms and conditions of supplying goods
- Payment method
- Contract length
- Delivery deadlines
- Itemized commodity costs
- Work scope
- Expectations for work
Once both parties agree to the terms of supplying the commodities, they create a contract to formalize their relationship terms. The contract creates a legally binding relationship between the parties.
With a contract finished, the purchasing portion of the procurement cycle can start. Purchase orders from external suppliers outline specific information for each delivery, including amounts of goods or services ordered, total costs, types of commodities and approval for the delivery.
With the purchase orders finalized, the company sends the vendor payment and delivery information to start the process of getting the goods or services. Purchase orders indicate individual agreements for each order, rather than the overall relationship between the vendor and company the contract outlines. Companies should retain purchase orders for their records to use in the review of vendor performance.
When the vendor delivers the commodities, the company needs to audit the delivery to ensure accuracy and quality. Log receipt of the delivery and the status of the goods upon arrival. This information will help in assessing the performance of the vendor.
For instance, if your company requested the delivery of new machinery for the manufacturing of your products, you'd note the time the goods arrived and if the machinery arrived intact and ready to use. If the delivery was incomplete or included damaged materials, you'd record this fact and how the vendor responded.
Was the vendor easy to reach for replacement parts or products? How quickly did they fulfill the request? All vendors can make mistakes occasionally, but failing to correct the problem, delaying the correction or not acknowledging the error should serve as signs to choose another supplier in the future.
Finally, examine all information gathered on the performance of each vendor. Was the vendor able to meet the terms of the contract, fulfill purchase orders on time and supply the company with quality commodities?
Evaluating vendor performance should include whether the vendors met contractual requirements and how well they communicated with your business. Can the vendor adapt to changes in your company’s needs? Do you still require the commodities ordered?
Reviewing vendor performance leads back to the first step of the procurement cycle, which is evaluating business needs and whether the vendor can continue to meet those needs. Additionally, the end of the contract time should prompt the cycle to restart with a reevaluation of company needs and selecting vendors to fulfill them.
Dryden Group supports procurement managers in optimizing their indirect spend process for the purchase of operational goods, such as lab supplies, office supplies and other elements needed to keep operations running. We have an established system we've honed to ensure efficiency throughout the procurement process.
Audit. Benchmark. Optimize. We aim to reach these goals while improving your procurement process through four distinct steps:
- Planning and strategy development: Our consulting team assesses your company's needs. At this stage, our team collects data about your company to improve our ability to optimize the procurement strategy. Then, we create a strategy for indirect procurement for your business.
- Analyze: Our vast database of indirect suppliers' prices allows our teams to create an accurate analysis of the strategy and customized assessments of our clients' spend with implementation suggestions.
- Implementation: Our industry connections allow us to optimize your contracts to ensure savings. Your business benefits from efficient indirect procurement from the suppliers throughout the contract terms. Over time, your company will see significant savings in indirect procurement processes.
- Optimization and measurement: We conduct assessments of your procurement processes every month to ensure continued efficiency and compliance.
Get the support you need regarding indirect spend in the procurement cycle from Dryden. Saving in the procurement process protects your company's profits. Contact our team at Dryden today for assistance.