Money Matters

What is procurement in business? Everything you need to know

Procurement is an essential part of doing business. Here's how good procurement can help you build profitability, avoid risks, and scale to new heights.

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As your business grows, you’ll need to introduce new goods and services that keep operations efficient and profit margins high. But with so many suppliers for everything from software to raw materials, knowing who to choose can get a bit overwhelming. 

That’s why many businesses put a process in place for finding, assessing, and purchasing anything new. This is known as procurement. 

In this article, we cover the basics of procurement in business, so that you can start making more confident and informed decisions when bringing in goods and services. 

This includes: 

  • What is procurement?  
  • Why follow a procurement process? 
  • Procurement process example 
  • Types of procurement 
  • Final thoughts 

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What is procurement ?

Procurement is the structured process of taking ownership of any goods or services within your business. It usually involves a few key stages, including researching your options, negotiating the price and frequency of purchase, and arranging and taking delivery. 

Procurement versus purchasing 

The term procurement sometimes gets mixed up with purchasing, but they are distinct (yet closely related) concepts. While procurement is a strategic long-term process, purchasing is the transactional activity that happens at the end of that process. 

It’s the more specific part where you place an order with a supplier, receive the product or service, and pay for it. It involves things like raising purchase orders, receiving delivery, and handling invoices and payments. 

Why follow a procurement process? 

The main reason to put a procurement process in place is so that you can quickly and consistently find the right goods and services for your business and its supply chain. 

This is particularly important for those focussed on growth.  

If demand for your business outpaces your capacity to fulfil it, the quality of your output and profitability of your business will take a hit. When this happens, you need to quickly bring in goods and services that protect both. 

A tried and tested procurement process will achieve this. 

As well as standardising and speeding up how you acquire new goods and services, procurement delivers at least 4 key benefits:  

  1. Cost savings 

You’ll consistently find goods and services at competitive prices while ensuring they still deliver the value you need. 

  1. Quality control 

You’ll be confident that the goods and services you’re bringing in meet your quality standards. 

  1. Risk management 

You’ll be able to identify and select suppliers that have a good reputation and are financially stable, minimising the risk of supply-related interruption to your business. 

  1. Competitive advantage 

When your procurement process is efficient, you can get the goods and services you need faster and at a lower cost than competitors. This helps you respond quickly to unexpected market shifts and keeps you on the front foot. 

Procurement process example 

So, what does the ideal procurement process look like? It depends on the size of your business, how often you’re likely to need new goods and services, and the level of impact your choices will have.  

Some businesses simply have 3-4 stages, whereas others take a more complex and strategic approach.  

Here’s an example of a typical procurement process (be sure to adjust this to your needs): 

  1. Identify business needs  

First, figure out what your business needs. This will require some internal engagements with each team or department to understand their challenges and how new goods or services could help. After this, prioritize the requirements based on their potential impact on long-term profitability. 

  1. Research suppliers 

Once you know what you need, do thorough market research to find potential suppliers. Reach out to your networks for recommendations and check reputable review sites in your industry. Consider factors such as price, quality, reliability, and supplier expertise.  

  1. Request proposals or launch tenders 

Whether you’re choosing from a select group of specialists or are open to a wider market, you’ll need to invite offers from suppliers. This can come in many forms, from requesting proposals and quotes to tender bids (more on this below) and will help you understand how specific suppliers could solve your problem. 

  1. Evaluate offers and negotiate 

Once the proposals, quotes, or bids are in, evaluate them against your criteria. Again, this could include price, quality, reliability, service level, etc. It’s always worth trying to negotiate with the suppliers to secure the best possible deal, as they’ll be fully aware that they’re competing with others for your business. 

  1. Contracting 

After successful negotiations, it’s time to formalize the agreement with the chosen supplier. Draft a detailed contract that clearly outlines expectations, deliverables, payment, and any other relevant terms and conditions. Get this checked over by a legal expert to make sure your interests are protected. 

  1. Place orders 

With the contract in place, generate purchase orders that specify the quantity, delivery date, and other essential information to guide the supplier in providing what you need. 

  1. Maintain the relationship 

Going forward, it’s best to proactively maintain your relationship with suppliers. This includes keeping regular communication, voicing any concerns, working together to resolve issues, and treating it like a collaborative partnership. 

  1. Inspect the goods 

Whenever you receive the goods or services, make sure to inspect them for their quality and check they’re meeting the standards you agreed upon. If you have any concerns, it’s best to voice these early in the relationship, so you can clarify your expectations moving forwards.  

  1. Invoicing and payment 

Review supplier invoices against the agreed-upon terms and verify them against your purchase orders and delivery records. If everything is above board, process payments in line with the agreed terms. 

  1. Evaluate and improve 

As the relationship evolves, remember to continuously review the performance of suppliers. Speak to those in your business that deal with them and get feedback. If you identify areas for improvement, pass this on to the suppliers. After all, they can’t fix any issues that they’re unaware of. 

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Types of procurement proposals and tenders 

When you’re ready for suppliers to submit their offers, think about how would be best to receive them. The size of your company, how specialized the product or service is, how quickly you plan to make a decision, and how much information you need, will all determine which approach is right for you. 

If you’re a small company that’s looking for basic office supplies, you might just need some quotes from local suppliers. But if you’re a national business looking to upgrade site security across multiple offices, you’ll need something more in-depth. 

Here are some common types of procurement proposals and tenders: 

  1. Open tendering 

This is a competitive bidding process where all qualified suppliers are invited to submit their offers. It’s typically used for large-scale and high-value procurements. The process is open to anyone who meets the pre-defined qualification criteria. 

      2. Restricted tendering 

In this method, only a select number of pre-qualified suppliers are invited to submit bids. It’s usually used when there is a limited number of known suppliers who can meet the requirements, or for specialized projects where expertise is crucial. 

      3. Request for Proposal (RFP)  

An RFP is a document that outlines the buyer’s requirements and invites suppliers to submit their proposals. The focus is not only on price but also on the technical aspects, quality, and other evaluation criteria. RFPs are common for complex projects or services. 

      4. Request for Quotation (RFQ)  

An RFQ is used for goods or services of lower value. Buyers request quotes from suppliers based on specifications, and the supplier with the most favourable quote is usually awarded the contract. 

      5. Single-source procurement 

This method involves procuring goods or services from a single supplier without competitive bidding. It’s often used when there’s only 1 known supplier who can meet the buyer’s requirements, or in cases where urgency or exclusive expertise is involved. 

      6. Framework agreements 

These are long-term agreements with suppliers for the procurement of goods or services over a specific period. They define the terms, conditions, and prices, providing flexibility and efficiency in subsequent procurement processes. 

     7. Reverse auctions 

In a reverse auction, you publish your requirements and potential suppliers compete by submitting successively lower bids. The supplier with the lowest bid at the end of the auction is awarded the contract. This method is used to drive down prices and get the best value for money. 

Final thoughts 

By putting a solid procurement process in place, you’ll be able confidently and consistently find the right suppliers for your business. This will pay off whenever your business experiences a spike in growth, as you’ll be able to quickly bring in and new goods and services that maintain profitability.  

Start by drafting a procurement process based on some of the stages in this article and try it out the next time you need to bring in something new. Remember to document and review the process itself, so that you can fine tune and improve it as your needs change.