How to use procurement strategies for business resilience

Procurement is a process that sounds simple, yet involves a combination of complex activities. Every type of business requires some form of procurement, whether it’s sourcing raw materials, finding office equipment, or hiring consulting services. 

By efficiently sourcing all the goods and services needed for day-to-day operations, procurement plays a significant part in the overall growth of the business. 

What is procurement?

Procurement refers to the combined activities involved in obtaining goods or services, usually when a company needs to make a relatively large purchase from a third-party supplier. 

While the emphasis in procurement is on the latter stages, when the goods are finally purchased and delivered, the entire process can entail identifying business needs and requirements, sourcing suppliers, negotiating terms, and keeping a clear record of all receipts and purchased items. 

The main purpose of procurement is to ensure a company has all the resources it needs to operate efficiently and with a healthy margin.

The difference between procurement and purchasing

Procurement and purchasing are two often interchanged terms with very distinct meanings. 

Purchasing is the transactional step of acquiring specific goods or services. More focus is placed on the action itself, creating and receiving an order to meet current company needs. Some tasks typically included in purchasing decisions are:

• Placing orders with suppliers
• Making a payment for the order
• Receiving the delivered goods
• Submitting the invoice to the accounts payable team

While purchasing is part of the procurement process, the latter encompasses several other steps beyond acquiring goods or services. Procurement requires making strategic decisions that affect how a company runs and its bottom line.

Procurement covers a wide range of activities, from analyzing business needs to maintaining supplier relationships to ensure that companies receive the most value from their purchases. The steps involved in procurement are detailed in the following sections.

Eight steps of the procurement cycle

While every company obtains goods and services differently, depending on its specific model and needs, some core functions take place in most procurement cycles. Here are the eight key steps involved in the procurement process: 

1. Identify the goods or services needed

The first stage of the procurement process starts when a company has identified the need for a specific good or service. Depending on whether it’s a first-time or repeat purchase, procurement assesses the company’s needs in detail to determine the best purchase. This step can involve talking to different teams, looking at the existing supply chain management, and performing other internal research. 

2. Create and review the purchase request 

Once initial research is done, an official purchase request is created to clearly outline the company’s needs, the purchase proposed to meet that need, and any associated requirements. 

This document helps align all departments, including management and accounts payable (which handles procure-to-pay processes). Approved purchase requests are then used when reaching out to suppliers. 

3. Evaluate potential vendors

The goal in this step is not to get as many options as possible or find the most affordable provider. 

In most cases, the procurement department sends a request for quotation (RFQ) detailing all specifications to a shortlist of select vendors. 

When the competitive bidding process is done, the vendors are then carefully evaluated according to the company’s requirements. Evaluation requirements can be pricing, delivery time, scope of work, any included warranties, and customer service. 

4. Negotiate vendor terms and conditions

Once one or two suppliers have been selected, the next step is to negotiate contract terms. This is crucial for gaining the most value for the company and potentially establishing a mutually beneficial working relationship with vendors. 

It's important that procurement understands current market rates for the specific deliverable to find areas where total expenses can be reduced. The final contract should include all agreed-upon terms and be signed by both parties. 

5. Finalize the purchase order

A purchase order is a contract and official offer given by a company to a supplier. It outlines the product details, delivery schedule, payment terms, and the approved workflow for all purchased goods or services.

Purchase orders are either drafted or approved by the company's accounting team, and are then sent to the supplier to place an official order.

6. Receive and check the delivered order

Procurement should receive the goods or services from the vendor on or before the date outlined in the contract. (If there are any delays, the vendor is responsible for notifying the company.) 

It is procurement’s job to check for the expected quantity and quality as soon as the order is delivered and maintain a record of all purchased goods. If an order does not meet expectations, they must reach out to the vendor to find the best possible solution.

7. Approve invoice and process payment

Procurement should strive to process payments for fulfilled orders promptly. Payments should be made as soon as possible to ensure that the business relationship stays strong and mutually beneficial. 

An automated payment software like QuickBooks Enterprise can ensure invoices are paid before the due date, preventing late fees and fostering good vendor relationships.

8. Maintain accurate record keeping 

Procurement doesn’t end after receiving the product or service. All purchase orders, receipts, and any other records should be properly filed. Accurate records are a lifesaver in case any disputes that arise. They’re also helpful in showing how much a company is spending on goods and services, and any potential areas to save in the upcoming year.

Three types of procurement

There are several methods of procurement, classified by how the company uses the particular products or services. The four most common types are direct, indirect, and services procurement.

Direct procurement

Direct procurement refers to obtaining any goods needed for a company’s production. For example, in the case of a manufacturer, direct procurement activities involve purchasing raw materials or other inventory types related to the final product. 

For a retailer, on the other hand, direct procurement could be the acquisition of wholesale products or packaging. In general, direct procurement is needed to drive profit and revenue for the company. 

Indirect procurement

Indirect procurement involves the strategic sourcing of goods or services for a company’s internal use. These include items that support day-to-day operations, such as office supplies, travel accommodations, or contractual services. Indirect procurement does not immediately affect a company’s end-user or its bottom line.

Service procurement

Service procurement is defined as the hiring of external professional or labor-based services. Examples of services commonly procured are work rendered by maintenance companies, consultants, legal firms, or temporary staff. 

Best practices for effective procurement operations

The most successful procurement methods are strategic and focused on delivering the most value to a company. There are several proven best practices a company can start applying to do this.

Establish a clear procurement process

Effective procurement requires input from multiple parties, including internal teams and third-party vendors. A clear, structured process keeps everyone aligned and aware of how the company is procuring goods and services. 

Implement three-way matching 

It can be challenging to monitor different supplier deliveries, especially for larger companies that procure many goods and services. A practical solution is three-way matching, which works by checking the purchase order, order receipt, and supplier invoice. 

These three documents should have matching information for the same order. Using three-way matching to check deliveries as soon as they arrive allows your team to guard against making any errors or fraudulent dealings. 

Embrace transparency with your suppliers

Only 50% of procurement leaders said they had high visibility into their suppliers in a recent survey. When a company starts working with a particular supplier on a consistent basis, it’s best to be as transparent as possible. 

Learn more about the supplier’s operations and other goods it can offer. Conversely, be clear about your company’s expectations, any seasonal shifts in orders, and even any areas of improvement that could help them increase sales. 

By being more transparent when dealing with trusted suppliers, procurement can gain trust with its business relationships and find more ways to work together.

Automate routine procurement steps

Once an established procurement process is in place, many of the routine steps can easily be run with automations. For instance, purchase request forms can be auto-populated based on previous purchases, or vendor records and invoices can be automatically updated with any changes.

QuickBooks Enterprise is built to automate and streamline the procurement process, removing the need for tedious manual tasks and reducing the likelihood of errors.

Final thoughts

Efficient procurement is essential for any growing company, from ecommerce stores to large manufacturers. By establishing clear processes and aligning the entire company's needs, a your team can greatly improve operations and overall profit. 

QuickBooks Enterprise can track the movement of all goods and inventory at each step. With automated tracking and real-time status updates, you can reduce unnecessary costs and increase productivity.