Simple Procurement Cycle

Step 1 Requirement Determination: Find out what you need and how soon it is needed. It is recommended that you talk to your colleagues who will be using the product or service. Their insight is important. They are likely to have some knowledge about what is available in the market place, both in terms of quality and price.

If you are a buyer being asked to procure a product, here are some questions you should ask:

• Does the person have the authority to request this product?
• Do we really need this product?
• How soon is this product needed?
• Is this the correct amount and how do we know?
• What is the delivery address?

Step 2 Source Determination: Investigate the market, using the information from your colleagues as a starting point. 

Be clear what your budget is and how much you have available to spend. Then find out what is happening in the market place, including whether there are any new suppliers offering more competitive prices. Some issues to consider?

• Is now the right time to buy, in terms of price and quality?
• Will you get a better price with a larger order?
• Will your existing supplier consider reducing their prices?

Step 3 Supplier Selection: Choosing a supplier. You need to let potential suppliers know what it is you want to buy and give them time to work out whether they can meet all your requirements.

Create a tender document, which should include:

• The type of products you need.
• The number of products you need.
• The delivery schedule.
• A service level agreement.
• Terms and conditions.

Include key stakeholders in this process to make sure you create the best tender document for your requirements.

Getting it right now will avoid problems, with potential delays and additional costs, at a later date. For example, if an order is supplied wrongly against a given specification, you can reject it without incurring costs.

Once the tender document is produced and approved, you can reach out to potential suppliers. 

You can send the document to a list of approved suppliers from your existing database. But it may be an opportunity to identify new suppliers, using external databases and internet searches. Your own sales representatives might also be able to recommend new suppliers.

Once you have selected potential suppliers, you are ready to send them the formal documents. Include the detailed specification and documentation setting out your requirements, along with clear timescales to respond.

Suppliers can respond by post, fax, email or by telephone.

You should wait until the formal deadline has passed before you evaluate all the proposals you receive. It is important to make sure that bids meet the specifications before the prices can be reviewed.

Your decision should not just be based on price. The lowest price does not always offer the best value for money. There are other factors to consider, including:

• Can they supply the products or services you need?
• Can they consistently provide the quality you demand?
• Is the supplier well financed?
• Is the supplier a good neighbour and doing their best to be environmentally friendly?
• Will they work well with you?

Once the most appropriate supplier has been selected, then the contract negotiations will start. These should include:

• Quantity: how many items are required?
• Quality: what specifications have to be met?
• Delivery: where and when?
• Payment terms: when and how will invoices be paid?
• Disputes: how will these be resolved?

Once the contract is authorised and signed by both parties, the agreement is legally binding.

Step 4 Order Processing : Now you have agreed a contract, it is time to place an order. You need to send a purchase order to the supplier based on this agreement.

The purchase order includes:

• Order number
• Product description
• Unit price
• Number of units required
• Delivery time and date
• Delivery address
• Invoicing address
• Payment terms

Most purchase orders are sent electronically, although they can also be sent by post or fax or be hand-delivered.

Step 5 Order Monitoring: Monitoring orders is very important. Just because a procurement professional has awarded a purchase order to the most suitable supplier, it does not guarantee supplier performance.

Contracts can be amended if both parties agree. If, for example, after a few months of working together the buyer realises that they would benefit from having larger amounts of products delivered, the delivery quantities can be changed.

Key performance indicators, or KPIs, help a buyer to monitor the supplier’s performance. Over time this gives a view of the overall outcome of how the supplier has performed throughout the duration of the contract.

However, if there is a problem the buyer does not have to wait for an official review to raise it. Good communication between the buyer and the supplier should mean it can be dealt with immediately.

Step 6 Goods Receipt:

You can make a big difference to your procurement cycle by taking steps to ensure you are ready to receive the product or service you have ordered. A change in supplier can be the ideal opportunity to upgrade your warehouse operations. Changes can include:

• Product coding and classification
• Space, layout and racking
• Frequency of deliveries

It is a good idea to have in place arrangements to ensure that an order will arrive in the right quality and packaging to meet the agreed standards and set timelines.

Exception expediting: the buyer only takes action when the organisation sends out signals of material shortages.

Routine status check: to prevent materials supply and quality problems, a few days before the expected delivery, the buyer contacts the supplier to confirm delivery date.

Advanced status check: for critical purchase parts, a detailed production plan will be handed over to the buyer and during the process the buyer will carry out periodic checks. Expeditors should always work closely with the buyers within procurement to make sure that delivery dates are known and action can be taken if necessary.

It is important to store or file the purchase orders that have been raised. Purchase orders should be kept for several reasons:

• To check that goods/services received, conform to the purchase order specification.
• To refer to terms agreed that were set out in the purchase order.
• In case a business has an audit.

Step 7 Payment: You must make sure that the invoices received agree with the purchase order. If they don’t, you need to investigate and work with the supplier to make any corrections.

Differences between purchase orders and invoices could be related to the following:

• Incorrect specifications
• Short/over deliveries
• Incorrect prices charged

Invoices can be corrected by suppliers issuing credit notes.

As obvious as it may sound, payment of suppliers is very important. Payment terms will be agreed during the contract negotiations.

Payment terms can add value to a contract. If two suppliers provide a quotation and their offers are identical except for the payment terms, value for money could be gained by accepting the longer payment terms. This can help your cash flow.

It is important to pay suppliers on time. If suppliers do not receive money from their customers, they will not be able to pay their debts and production or supply could stop.

Paying suppliers on time can also help to reduce costs. If suppliers have a good cash flow, they can pay their supplier quicker and this will result in prices being lower. Having a good cash flow is also favourable should a supplier wish to make an investment or take out a loan to purchase an asset.

There are a number of different cycles which build on this basic model. Another popular model is available from the Chartered Institute of Purchase and Supply, which you can download here. It has 13 stages, and stresses the importance of the supplier relationship and of monitoring performance to look for continuous improvement.

Step 8: Contract Management: The process by which the contract manager seeks to ensure that the contractual obligations of both buyer and supplier are implemented, performed and measured so as to achieve the requirements & performance laid down by the KPI’s and SLA defined by the contract.