When it comes to understanding the procurement process, one of the most important details that you deal with is the procurement cycle. In short, the cycle is the stages that outline the steps that should be taken by buyers throughout their time in the procurement phase.
eXceeding has over a decade of experience helping businesses and organisations develop their procurement procedures, from refining procurement processes to establishing the process from start to finish.
Working with organisations such as UNICEF, housing associations, local authorities, educational establishments and NHS organisations, as well as high tech and corporate companies, eXceeding has years of experience delivering solutions in the procurement field.
Don’t take our word for it though, this is what UNICEF said about their experience working with eXceeding:
“eXceeding reviewed our procurement policies and helped us to better understand our spend. Their consultant took the time to understand our needs, in terms of compliance and internal processes, before making recommendations which ultimately resulted in cost savings and a more efficient – and consistent – way of working with our suppliers. Thanks to eXceeding we now have the tools in place to monitor spend and performance across our supply chain.”
In this guide, you will learn about the procurement cycle and all of the stages that are involved. We will cover all the elements such as needs recognition, contract development, invoicing and record keeping amongst other things.
Procurement is a defined structure, method and technique used by organisations to streamline their purchasing processes of materials, goods and services, whilst reducing costs, establishing relationships with suppliers and improving time efficiency in the process. Procurement can be direct, indirect, reactive, or proactive in nature.
Most individual organisations will set procurement policies that effectively govern their choice of suppliers, products and services, as well as the methods and procedures that will be used to communicate with their suppliers. Effectively, it is like an individual going to specific shops for groceries, goods and services and selecting the best stores based on their requirements of time, budget and offers.
Many organisations will have a set procedure that involves contacting suppliers and service providers to create proposals for goods or services that are going to be potentially purchased.
The procurement process involves:
Identifying customer and supplier requirements.
Choosing the right tools and processes to communicate with suppliers.
Getting together the information for tender responses, proposals and requests for quotes.
Setting policies for evaluating bids, proposals, quotes, and suppliers.
A procurement process is a series of steps that are essential to get a product or service purchased from a supplier cataloguing the steps from purchase order to invoice approval. In particular, this will be with suppliers that are already established in large part thanks to the relationships that have been built over some time or thanks to other factors such as budget, quality of product or service, timescales or opportunities for innovation.
One of the main things we want to avoid in all procurements is risk. Things such as; inaccurate internal needs analysis, poor supplier selection, disorganised suppliers, insufficient supplier relationship management, non-compliance and ineffective contract management processes, internal manual processing, delays and supply chain disruption, and lack of talent.
Any one of these risks is dangerous in the procurement cycle, but more than one can cause a devastating effect for the organisation over a long period with potentially far-reaching impacts.
However, if you want to mitigate these risks, the need for procurement planning becomes even more important. By having a plan in place, you can foresee these issues before they even occur and find solutions to any of the areas which might need strengthening or further investment.
The procurement cycle is the stages that outline the steps that should be taken by buyers throughout their time in the procurement phase. They clearly show what the buyer needs to do throughout the whole process.
This is where having an efficient procurement process becomes even more important. By determining the needs of the procurement process with efficiency, organisations can create a streamlined process that supports their requirements, through to supplier selection and then on to payment, a seamless process.
There are distinct procurement cycle stages which we are going to cover in the following sections.
There are, of course, professional bodies that give global gold standard advice around the procurement stages. One such body is CIPS, which are the professional body for the procurement and supply profession. Using its global standard, network, education, expertise and charter for the public good, ensures that procurement and supply chain management professionals have the capabilities and responsibility to deliver sustainability goals for their organisations.
In the CIPS procurement cycle, there are 13 steps, whilst all procurement cycle explanations can be found to include only seven key stages. These are:
To learn more about what the CIPS does, you can find more information here.
We will take a look at the seven key stages in more detail.
Needs Recognition and Analysis
This first stage is about understanding what the organisation needs and then in response to that need, sketching out an accurate plan for procuring goods and services promptly and at a reasonable market rate.
If you think back to the risks associated with not having a plan, not recognising your actual needs can have drastic knock-on consequences. It can include things like choosing a supplier that is too expensive, or you may buy far too many of one product, or the service does not meet expectations. In turn, this can lead to unsold stock, which piles up and causes increased storage costs, having to pay twice for the services, or paying over the market rate. Worst case scenario is that you may find yourself unable to pay the said supplier for the next batch of goods or services.
Several questions can be asked at this stage to identify if the goods and services fulfil the identified requirements, such as;
Supplier Identification and Selection
Once your needs have been identified, the second phase is understanding who your suppliers are and should be. The supplier identification and selection process can involve tendering – a process where suppliers are asked to submit very specific information based on the organisation’s needs.
The most important step here is, Requesting for Information (RFI), Pre-Qualification Questionnaire (PQQ), or Selection Questionnaire (SQ), which provides you with the opportunity to gain relevant information from suppliers. This includes items such as the size of the business, financial situation and resources.
An RFI/PQQ/SQ allows you to cross reference the supplied information with your preferred supplier requirements, which will help you understand whether the supplier meets the criteria to be included in the tender process.
Of course, suppliers today will also be selected on other criteria such as availability, pricing, green credentials, ethical practices and other factors – however, understanding if they meet your needs remains the most important element of successful procurement.
To be able to make the right judgements on suppliers, researching the marketplace is going to be key. This will not only help identify those who can meet your needs but also those who are also reliable, ethical and have offers that are based on performance or payment terms or even seasonal extras.
Contract Development and Agreement
The next stage in this process is to develop and agree on contracts with the identified suppliers – this will happen after the tender evaluation stage or following a successful RFI/PQQ/SQ with identified suppliers. The contract covers the lifetime of the partnership and will include the terms and conditions for supplying the goods, works or services, as well as covering things such as agreed timescales, costs, required stock levels to minimise risk, Service Level Agreements (SLAs) and Key Performance Indicators (KPIs).
All of these contracts should identify and define the agreed obligations from suppliers.
Importantly, the contracts can be used to measure against targeted SLAs and KPIs and help you manage supplier relationships over the long term. You can raise issues or identify where the process can be improved and find opportunities for mutual innovation. Remember, maintaining supplier relationships are part of the success of the procurement process and helps you to establish better conditions for your products and services to flourish to your customers as well.
Purchase Order Preparation and Submission
The procurement cycle now moves into the purchase order preparation stage. This is where once a product or service has been identified to be ordered, a formal purchase order (PO) is raised and submitted (usually following approval from department heads or senior management.)
A purchase order should contain at the very least the purchaser and supplier details (names, addresses), the order itself (product or service description, technical specs, price, quantity), and payment terms (due date and form of payment, e.g., bank transfer, credit card).
The difference between a contract and a purchase order is that a contract establishes the long-term relationship between the two parties whilst the purchase order represents a single transaction. For example, payment terms are set in the contract, but a purchase order is only showing what is required for the purchase that one time.
Order Delivery and Verification
Order delivery and verification is part of the procurement cycle where the goods or services are delivered from suppliers. Once received, the purchaser will examine the products or service to see if it meets the agreed contract terms and conditions. This is where any issues may be raised with the supplier if things do not meet the agreed terms and conditions.
This includes things such as, was the product delivered in the agreed timescales or were the goods/services delivered exactly as ordered or as required, within agreed SLAs/KPIs?
Service review meetings can be used at this stage or further down the line, to understand how the supplier is doing when compared to the contract that was agreed to. Any information that helps the supplier relationship manager understand the performance of the supplier will help ascertain if the supplier can continue to be used or not.
Invoicing and Payment Processing
The procurement cycle now moves on to the supplier issuing their invoice. This is where the contract terms come into play, as the invoice will reflect the contract in terms of things such as agreed payment terms, timescales and even delivery dates in some instances.
From the purchaser’s side, once an invoice has been received, it will only be processed once it has been approved. Questions for this stage include;
Once these have been answered, the payment can be processed.
Accurate Record Keeping
The procurement cycle requires accurate record keeping throughout, from supplier selection to purchase orders, to paying invoices and supplier relationship management. All the documents that are used throughout the process can be used for finance and supplier reviews. Supplier relationship management is again essential to help establish if the supplier is sticking to agreed terms and any payment discounts that may be in the original contract.
Doing this through technology solutions is not only the easiest option as it reduces paper trails and waste, but also, it helps to streamline the process and improve future transactions too. It also helps to improve efficiency, both in time used by the system over people but also cost saving is established by reducing errors and having a system that is designed for purpose.
The procurement cycle is the stages that outline the steps that should be taken by buyers throughout their time in the procurement phase. It helps to establish what procurement departments should be doing in their procurement process and give a greater understanding of the importance of contracts with suppliers, terms and conditions as well as keeping all the documents in a centralised location for supplier relationship management purposes.
At eXceeding, we can help organisations get to grips with their procurement processes and create a strategy that suits them to deliver not only cost savings but also a streamlined process, saving time and reducing human error. With over a decade of experience and helping brands such as Cambridge University Hospitals, Aspall, Origin Housing, and BGL Group to improve their procurement strategies, why not contact us to see how we can help you achieve your goals.
If you want to learn more about procurement, download our ebook which has more on the subject and useful information.
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