Procurement: What it Is and How to Create Your Own Process

Procurement specialists are jacks of all trades. 

They identify and appraise vendors, negotiate contracts, and obtain goods and services while minimizing costs and maximizing profitability for a business. 

If handled correctly, procurement can dramatically improve your business. It’s a challenging job, with outdated technology, inaccurate data, and supplier issues to contend with. As supply chain issues worsen, new procurement challenges emerge. Here is everything you need to know about streamlining your procurement process and setting yourself up for sustainable success. 

What is procurement?

The act of procuring products, services, or materials involves identifying and negotiating terms with a third party. In most cases, this is accomplished through a competitive tendering process. Procurement is often defined as the act of making purchases.

Difference between procurement and purchasing

Though procurement and purchasing are often used synonymously, there are important differences. The term purchasing refers to the act of ordering goods and services. Creating and fulfilling purchase orders as well as arranging payments for purchases fall under this category.

The purchasing process may include:

• Approving expenditure requests.
• Issuing purchase orders.
• Accepting and verifying goods and services.
• Creating packing slips for purchases.
• Processing payment to suppliers.

Importance of procurement

Purchasing is thus one aspect to procurement, which refers to the whole buying process for a company. While it includes the purchasing of goods, services, and property, as described above, it also involves strategic planning. Here are some of the benefits of procurement.

Increase profitability

Profitability and procurement go hand in hand. A high percentage of a company’s expenses go towards supply chain management.

In year one, retail businesses spend 31% of their budgets on raw materials, inventory, and suppliers alone.

By negotiating deals and creating supplier relationships, procurement managers can help lower costs. They can also alleviate tail spend problems, which arise when you have too many suppliers and miss out on volume discounts. 

Identify inefficiencies

In addition to cost and margin, procurement specialists focus on speed. Inefficient supply chains slow down your business and cut into profits. By gaining a clear understanding of your procurement process, you can identify blockers and increase efficiency. 

For example, you might need to upgrade to a modern software solution if you are currently working off paper and spreadsheets. Perhaps you are working with suppliers who aren’t truly invested in your success, rather than exploring other, more affordable alternatives. 

Bringing in a procurement specialist can help you focus on details and address small issues before they become major issues. 

Find the right suppliers

As noted above, learning how to procure products and services makes it easier to find suppliers who can provide you with competitively priced products and services. Whether you are procuring raw materials or manufactured products, the process is the same. 

This is particularly important when you need a key supplier, such as a fabric vendor for your most popular product line. The procurement process can help you find the right supplier at the right price.

When you’re growing a commerce business, it’s crucial to have the right products, in the right places, at the right time, that way you never miss a sale.

Jay continues, “Choosing a supplier is table stakes when it comes to getting products that meet your customers’ expectations and staying profitable in the long term. A good supplier relationship can often be the difference-maker in staying competitive.”

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Types of procurement

• Direct procurement
• Indirect procurement
• Services procurement

Let’s take a closer look at each of these different types of procurement to learn more.

Direct procurement

Purchasing raw materials, machinery, and wholesale items directly related to a company’s end product is known as direct procurement. Contract suppliers and procurement officers play the most prominent roles in the process.

Indirect procurement 

Indirect procurement refers to the purchase of goods that do not directly affect the end product or the bottom line of a company. These purchases, such as office supplies, are important to keeping the business running smoothly. 

The office manager of a small firm might be assigned indirect procurement activities, while for a large corporation, a facilities management firm may be hired to oversee those purchases.

Services procurement

In services procurement, a company identifies, analyzes, and procures different types of services it needs. As a business, you might require a variety of services in order to be able to operate effectively, including law firms, contractors, on-site security, and other people-based services. 

How procurement works

There are several steps in procurement. Identifying the need for a product or service is the first step. Assessing and negotiating terms and costs with suppliers follows. After that, you purchase and receive the products. A small business might hire an outside procurement manager to handle the process.

The procurement manager handles:

• Sourcing activities.
• Vendor negotiation and management.
• Choosing products and services.
• Authorizing purchases.
• Receiving products and services.

A good procurement strategy can accomplish a number of things. For example, a company can save money when negotiating terms and pricing. It can also ensure that the supplier is efficient, dependable, and on time.

Procurement stages

1. Sourcing stage
2. Purchasing stage
3. Payment stage

Sourcing stage

Procurement begins with sourcing. This includes things like identifying and assessing vendors and picking ones that are the right fit for the company. This stage requires you to:

• Define the need for a product, material, or service.
• Research the market.
• Run sourcing events.
• Vet suppliers.
• Negotiate contracts. 

Purchasing stage

As we mentioned above, purchasing involves buying goods and services. It’s a transactional part of the procurement process that focuses on getting what the company needs. 

Payment stage

Accounts Payable ensures order and invoice accuracy by conducting three-way matching. After the invoice is approved, the payment can be processed. It is important to keep a record of all invoices, orders, and payments, so that they can be compared and analyzed later on.

Steps in the procurement process

• Identify goods and services
• Submit purchase request
• Assess vendors
• Negotiate terms
• Create purchase order
• Receive goods
• Three-way matching
• Approve invoice
• Record-keeping

There are many steps within the procurement process, so let’s examine each step to help you execute the process smoothly.

Identify goods and services

The first thing a business must do is determine its needs for a specific item or service. Examples of this might be purchasing a brand-new item for the company that it has not purchased before, restocking existing goods, or renewing a subscription.

You’ll identify specific needs such as:

• Technical specifications 
• Materials 
• Part numbers 
• Service characteristics 

In this stage of the procurement process, talk with all departments that will be impacted by the purchase decision to make sure you meet everyone’s needs. 

Submit purchase request

Next, the individual that needs to procure the new supplies or services makes a formal purchase request. Also called a “purchase requisition”, the purchase request is sent to a department manager or procurement team. It contains specifications such as:

• Price
• Time frame
• Quantity 
• Other important information 

The person reviewing the purchase request can accept or deny it. If approved, the team can move forward with choosing a vendor. 

Assess vendors

Once your team has come to an agreement, you can look for possible vendors that can deliver the material, product, or service. The more vendors you need to consider, the broader the scope of the vendor-selection process should be. Consider the following for each vendor:

• Cost
• Speed
• Quality
• Reliability 
• Reputation 

For example, you might want to work with vendors who follow sustainable and environmentally-friendly guidelines. You’ll need to fact-check each vendor’s claims and see if they are a good fit. 

Not all vendors will match your minimum requirements, and the team will have to decide which vendors to contact for more information. Create a request for information (RFI) for those select vendors, then create a shortlist based on their responses. 

Negotiate terms

Get at least three quotes from vendors before making a purchase decision. You can negotiate quotes where appropriate. Have good backup vendors in place in case you don’t move forward with your shortlist. Put final terms in writing once you’ve agreed upon them. 

Create purchase order

Complete a purchase order that defines the price, specifications, and other terms and conditions of the product or service. After signing a contract, send the purchase order to the vendor to be fulfilled. 

Receive goods

Upon delivery, inspect the product before accepting it. Make sure the good is up to quality standards (no damages or missing elements) and matches what was in the purchase order. You can reject the product if it is not up to standards. 

Three-way matching

Before an invoice is approved for payment, it is compared with the purchase order, invoice, and goods receipt to ensure they match, known as a “three-way match”. Paying an invoice partially or in full depends on a three-way match. 

Approve invoice 

When the above items match, the supplier’s invoice will be approved for payment. Put a consistent invoice payment process in place to deliver on-time, reliable payments. This will reduce late fees and strengthen your relationship with vendors. 

Record-keeping

All aspects of the procurement process should be documented, from purchase requests to price negotiations, invoices, and receipts. Documents can be beneficial in many ways. In addition to helping the company order future goods at a good price, they help with audits and tax calculations. Having clear, comprehensive records can also aid in resolving disputes.

Procurement tips and strategies

• Procurement software
• Hire a Procurement Manager
• Keep diligent records
• Unify inventory management

Procurement software

Technology can help retailers manage procurement and reduce process costs by 30%. With procurement software, you can: 

• Delegate authority
• Establish approval criteria
• Set a limit on spending
• Flag any policy violations

A manager can examine the impact of expenditures on budgets before approving requests. Knowing the impact of expenditures on budgets enables effective cost management.

Purchasing and expense reports should be transparent and accountable. Fraudsters are deterred from attempting rogue purchasing activity by audit trails, approval workflows, and the element of accountability.

Hire a Procurement Manager

Procurement managers source products and services for their organizations. Based on the company’s budget and the necessary supplies, they create a purchasing strategy and then locate appropriate vendors. They also negotiate good deals for your store and strengthen supplier relationships. 

According to data from Indeed, the common wage for procurement managers is $27.81 per hour.

You can post a job on Indeed to find qualified candidates for your Procurement Manager role.

Keep diligent records

Maintaining an effective procurement process requires keeping records. From pre-tendering to payment, retailers must keep accurate records of the entire process. You should also make them easily accessible for reviewers in case of an audit. 

Make sure you keep records of each step, including solicitation documents, the selection process, negotiations, and agreements. Document all relevant communications from parties such as procurement managers and approvers during the process.

By looking at your records, you should be able to re-tell the story from scratch. 

Unify inventory management

Successful retailers ensure they have enough stock in the right places at the right time by managing their inventory. Having the right amount of inventory is key to effective inventory management. Overstocking can be dangerous, as can running out of inventory.

Inventory management becomes more complex as your business grows. Supply chain issues and shifting demand affect the suppliers and providers you source and buy from.

Using Shopify POS, you can manage retail and warehouse inventory in the same back office. The inventories in Shopify are automatically updated as you receive, sell, return, or exchange products in-store or online–there is no need to reconcile manually.

On the Shopify App Store, merchants can choose from a range of inventory management apps. Among them are:

Optimize your procurement process

It’s clear that procurement is something you cannot ignore. Do everything you can to set up a system that lowers costs and builds sustainable supplier relationships. 

Remember that it’s an ongoing process. Sometimes a supplier will shut down or not work in your favor anymore. It’s OK. With a procurement strategy in place, you’ll be able to continue working with suppliers that best meet the needs of your company.

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