A procurement process is defined as a series of steps that a business or organization creates and follows to obtain the goods, components, products or services that are necessary to complete their goals and objectives. The process is not specific to any one industry, but rather a necessary aspect that aids in the optimization of operations.
In manufacturing, organizations are faced with globalization, which has created a large market of procurement options that provide varying pricing and quality of materials. Ultimately, cost-saving and high-quality materials are the primary objectives of developing a procurement strategy. Apart from these objectives, an effective procurement strategy can help an organization enhance compliance, supplier relations, risk management, sourcing cycle time and contract utilization.
The importance of a procurement strategy can’t be stressed enough. Let’s jump into the procurement steps in supply chain management.
Why Is a Procurement Process Important?
An optimized procurement system can help organizations manage supply chain risks that stem from a number of factors, especially trade laws and political and economic instability. Through risk management of finances, operations and contracts, a procurement strategy can prevent supply chain disruptions that negatively affect profitability.
An effective procurement strategy does not only concern purchasing goods or services. Instead, it ensures process efficiency at every stage of the procurement cycle, including:
- An understanding of procurement needs by all stakeholders
- Identification of the right supplier for meeting those needs
- Strategies to shortening sourcing cycle times
- Contract negotiation to provide the highest value at the lowest cost
The strategy should also include a periodic supplier performance evaluation, otherwise known as an audit.
Why is an audit important?
Procurement processes should rarely remain permanent. Cost inflation is inevitable and can be sudden and intense. For example, lumber costs shot up severely in May 2021, causing manufacturers to create strategies to diversify their sourcing.
A periodic assessment of supplier performance can identify their strengths and weaknesses. By identifying the areas where cost or quality has become an issue, risk management can develop innovative strategies for supplier performance improvement.
These are signs of an effective procurement process. Although diversifying suppliers can be important in some scenarios, an effective procurement process also enables organizations to build long-term relationships with suppliers, which can provide maximum value for both parties involved.
The 5 Procurement Steps in Supply Chain Management
Now that we have established the importance of a procurement strategy, here are the five procurement steps in supply chain management:
1. Define your needs.
The procurement process begins when an organization identifies the goods or services that are required from an external supplier. Usually, outsourcing happens because the internal capabilities are not possible or unaffordable.
In this first step, it is necessary to identify and consolidate the requirements of all business units to create visibility into the spend areas and categories that can highlight cost savings.
2. Research the suppliers market.
Next, identify a list of qualified suppliers or vendors to supply your business needs. While you can connect with your business contacts for references, most undergo a more structured approach, such as a request for proposal (RFP), request for information (RFI) or request for quote (RFQ) process.
The goal is to evaluate and compare relevant suppliers based on pricing, quality of service, reputation and recognition in the industry, customer service and guaranteed provisions. After the evaluation process, you should be able to identify a supplier that offers maximum value to your operations.
3. Negotiate contracts with your selected supplier.
Once you have selected your supplier, the contract process starts. This is a crucial step for any organization that requires assessing critical factors, such as scope of work, pricing, terms and conditions and timelines for delivery.
Contract analysis and negotiation can provide extensive insight into more cost saving opportunities, such as dynamic discounting, which provides the option of early payment in exchange for discounts on invoices.
4. Purchase and acquire your product or service.
Once you have finalized the contract, you will create a purchase requisition, which is a document that includes a description of the goods or services, quantity and pricing of the item and the approval of workflow. Once the purchase requisition is approved, the purchase order is sent to the supplier.
From there, you will receive an invoice for the requested goods or services and complete the payment process either pre- or post-delivery of the product or service.
5. Track the process and iterate.
Once the product is received, ensure it meets the quality standard that you expect. Be sure to track expenditures to see how cost fluctuates over time. If you discover prices are increasing, it might indicate that it’s time to find a new supplier. Or you might see that the cost of services is improving, which indicates a strong, lasting supplier-buyer relationship.
Stay Ahead of Supply Chain Risk With VPIC Group
In cases of choosing an outsourced manufacturer, VPIC Group has an established foothold in the suppliers market. For nearly three decades, we have served companies in the automotive, powersports, construction industries and beyond as their OEM supplier, delivering quality precision components with some of the fastest lead times in the industry.
Want to know more about outsourcing your manufacturing services? Download our checklist, “Should I Outsource This Component?”