Procurement Cycle: From Sourcing to Purchase Orders
Welcome to our guide on the procurement journey, where we'll explore the process from finding what's needed to purchasing for your business. Procurement is crucial for businesses, involving steps to get goods and services effectively and affordably. Understanding this purchasing life cycle helps organisations run better, lower risks, and grow smartly. Let's dive in and discover the key stages together.
What is the Procurement Cycle in Businesses?
The procurement cycle is the step-by-step process a company follows to buy goods or services from outside suppliers. It starts with identifying what's needed, finding suppliers, selecting the best one, making the purchase, receiving the goods or services, paying for them, and evaluating the supplier's performance. It's like a roadmap that guides how things are bought and paid for in a business.
10 Steps of Purchasing Life Cycle
- Identify Needs
- Sourcing
- Vendor Selection
- Purchase Requisition
- Purchase Order Creation
- Order Confirmation
- Goods/Service Receipt and Inspection
- Invoice Processing
- Payment Processing
- Supplier Performance Evaluation
1. Identify Needs
The purchasing cycle begins with pinpointing the organisation's needs, be it for goods, services, or both. This encompasses grasping the requirements, specifications, quantities, budget constraints, delivery timelines, and any regulatory or compliance aspects. Moreover, it often involves reaching out to different departments or stakeholders within the organisation to ensure all relevant needs and preferences are considered. This collaborative effort aids in precisely defining the procurement process's scope and ensures that the eventual purchase aligns with the organisation's overarching objectives and strategic goals.
Example: A company's marketing team identifies a need for promotional merchandise for an upcoming event, such as branded t-shirts and pens.
2. Sourcing:
Once the needs are identified, the next step is to source potential suppliers or vendors who can fulfil those needs. This can involve market research, issuing requests for proposals (RFPs), and evaluating potential suppliers based on factors like quality, cost, and reliability.
Example: The procurement team researches potential suppliers of promotional merchandise, obtaining quotes and proposals from different vendors.
3. Vendor Selection:
After evaluating potential suppliers, the organisation selects the most suitable ones based on criteria such as price, quality, delivery times, and past performance. This may involve negotiations to finalise terms and conditions.
Example: After reviewing proposals, the company selects a vendor based on factors like price, quality, and delivery time. They choose a vendor known for high-quality branded t-shirts & pens at a competitive price.
4. Purchase Requisition:
Once the vendor is selected, a purchase requisition is generated. This is an internal document that formally requests the purchase of goods or services. It includes details such as item descriptions, quantities, delivery dates, and budget codes.
Example: The marketing team submits a purchase requisition detailing the quantity, specifications, and budget for the promotional merchandise to the procurement department.
5. Purchase Order (PO) Creation:
Based on the purchase requisition, a purchase order (PO) is created and sent to the selected vendor. The PO is a legally binding document that outlines the specifics of the purchase, including prices, quantities, delivery dates, terms, and conditions.
Example: The procurement department creates a purchase order based on the requisition, specifying the agreed-upon terms and conditions and sends it to the selected vendor.
6. Order Confirmation:
Upon receiving the PO, the vendor confirms the order, verifying that they can fulfil the requested goods or services within the specified terms and conditions. This confirmation may include details such as expected delivery dates and any additional information.
Example: The vendor receives the purchase order. The vendor will verify the ordered quantity for t-shirts and pens and confirm the order, providing details such as the expected delivery date and any special instructions for customisation.
7. Goods/Service Receipt and Inspection:
Once the goods or services are delivered, they are received and inspected to ensure they meet the specified requirements and quality standards. Any discrepancies or issues are documented and addressed with the vendor.
Example: Upon delivery of the promotional merchandise, the marketing team inspects the items to ensure they meet the specified quality standards and match the order details.
8. Invoice Processing:
After the goods or services are received and accepted, the vendor sends an invoice to the organisation for payment. The invoice is verified against the corresponding PO and receiving documents to ensure accuracy.
Example: The vendor sends an invoice for the delivered merchandise to the company's accounting department. The invoice is matched against the purchase order and receiving documents to verify accuracy.
9. Payment Processing:
Once the invoice is verified, it is approved for payment according to the organisation's payment terms. Payments may be made via various methods such as checks, electronic transfers, or credit cards.
Example: Once the invoice is verified, the accounting department approves the payment according to the company's payment terms. Payment is made to the vendor using the agreed-upon method, such as electronic transfer or check.
10. Supplier Performance Evaluation:
After completing the procurement process, the organisation may evaluate the performance of the supplier based on factors such as quality, delivery times, responsiveness, and adherence to terms and conditions. This evaluation helps in assessing supplier relationships and making decisions for future procurement activities.
Example: After the event, the marketing team evaluates the vendor's performance. It is evaluated based on factors such as the quality of the merchandise, adherence to delivery schedules, and responsiveness to any issues. This evaluation helps inform future purchasing decisions.
Utilise Procurement Cycle
By carefully following these steps, companies can efficiently handle the procurement cycle, making sure they get what they need at the right price and quality, while also obeying rules. They start by figuring out what they need and then finding the best suppliers. Once they pick a supplier, they make a request to buy stuff and then create an order. After the supplier confirms the order and delivers the goods, the company checks them and pays the bill. Evaluating how well the supplier did helps the company improve future purchases. Overall, this process helps companies buy things smoothly, saving money and ensuring they get good stuff.
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