Procurement plays a vital role for every business. Companies need to procure goods and services to continue operating.
However, poor procurement practices and inefficient processes can result in slow approval cycles, missed payments, higher costs, and even instances of fraud.
An effective procurement management system can help you address these challenges.
In this article, we’ll take an in-depth look at procurement management, including what it is and why it’s important. We’ll also cover the steps in the procurement process and how you can use frevvo’s automation software to automate them.
Click the links below to jump to the section you want to learn more about:
- What Is Procurement?
- What Is Procurement Management?
- Why Is Procurement Management Important?
- What Are the Steps in the Procurement Process?
- Top Procurement Management Challenges
- How Technology Can Improve Procurement Management
What Is Procurement?
Procurement is the process of purchasing the goods and services that a company needs to support its operations.
Procurement plays a vital function in every business. Operations will come to a standstill without the necessary goods and services a company needs.
There are three types of procurement:
- Direct: Direct procurement is obtaining anything you need to manufacture a product. Examples include raw materials, parts, and other components.
- Indirect: Indirect procurement means purchasing items that you need to support your daily operations. Examples include office supplies and equipment.
- Services: Services procurement includes procuring people-based services (e.g., contractors, consultants, etc.).
The process for each type of procurement will generally follow the same set of steps, which includes sourcing, generating requests, negotiating contracts, and more.
Watch a 3m video of an automated PO workflow in frevvo.
What Is Procurement Management?
Procurement management is the practice of managing the processes that your company carries out to acquire the goods and services it needs to operate. These processes include evaluating vendors, creating purchase orders, approving invoices, and more.
Smaller companies may have just one person handling procurement activities, while larger organizations may have an entire department dedicated to purchasing.
There are three P’s in the procurement management process:
- People: People are the individual stakeholders responsible for different stages of the procurement process. Their tasks include creating contracts, approving invoices, and more.
- Process: A business process is a set of steps that employees perform to complete a task. Establishing well-defined processes ensures that employees follow the same steps, which delivers more consistent outcomes.
- Paperwork: Paperwork is the documentation that’s required for different stages of a procurement process. For example, one step of the procurement process is creating and approving purchase orders.
Properly managing each procurement process is by no means easy. But effective procurement management can help your company control its spending better and improve overall efficiency.
Why Is Procurement Management Important?
Supply assurance was one of the biggest procurement challenges that chief procurement officers (CPOs) faced in the past 12 months.
- 56% said that some key suppliers have gone bankrupt.
- 41% had to expedite shipping to secure timely delivery of goods.
- 36% said suppliers failed to meet new requirements.
- 32% said they were losing revenue due to supply shortages.
- 11% experienced brand damage because of supplier issues.
Without effective procurement management practices, your company can find itself in a position where it can’t secure the goods and services it needs in a timely or cost-effective manner.
Imagine that a key supplier goes bankrupt or is unable to meet its delivery schedule. If this happens, it can bring your business operations to a halt and cause your company to lose customers.
Having an efficient procurement management process to source vendors, negotiate contracts, and issue payments can help you manage supply chain risks and ensure business continuity.
Reducing costs is a top priority for 76.4% of CPOs. Procurement management can help your company lower its procurement costs by negotiating better contracts and improving supplier relationships.
What Are the Steps in the Procurement Process?
Procurement varies for every company. For example, a large retailer will likely have a different procurement process than a small business that specializes in a particular product.
However, there’s a basic “blueprint” that many companies follow to procure the goods they need to operate. The procurement process typically involves the following steps.
Step 1: Identify Internal Needs
The procurement process starts with identifying internal needs. It involves specifying product requirements and setting criteria that need to be met before researching vendors.
It can also include software. For example, the HR department may submit a request for software that assists with the onboarding process. During this step, they may also work with your finance team to establish a budget based on their needs.
Step 2: Evaluate and Select a Vendor
The next step involves researching potential vendors, requesting quotes, and making a final selection based on extensive research. Most companies already have a list of approved vendors they have professional relationships with.
Depending on your needs, this step may involve creating a Request for Proposal (RFP) — a document that includes details on goods or services you’re looking for. It allows you to collect offers and bids from potential suppliers.
Once the process is officially closed, the procurement team and evaluation committee will review the offers and determine which one best fulfills their needs.
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Step 3: Negotiate Contracts
Once you’ve narrowed down your list and selected a vendor, you can begin the negotiation process. It could be straightforward or involve more back-and-forth discussions to negotiate the price and terms of the contract.
Then, once the details are confirmed and the terms are agreed upon, both parties sign a legally binding supplier contract.
Step 4: Approve a Purchase Requisition
It’s often the standard procedure for departments to submit a purchase requisition to the purchasing department for internal approval. This kicks off the purchasing process.
Here’s an example of a purchase requisition form:
When submitting a purchase requisition, you’re not actually purchasing anything yet. You’re getting approval from a manager or department head first. Using a purchase requisition ensures that employees follow business processes and can prevent instances of fraud.
Step 5: Create a Purchase Order
The next step in the procurement process is to create a purchase order (PO), which typically includes the following details:
- PO number
- Date of purchase
- Vendor information
- Buyer information
- Order details
- Delivery date
- Delivery address
- Shipping method
- Payment terms
Here’s an example of a purchase order form:
The purchase order becomes legally binding once a vendor receives and approves it.
Step 6: Receive and Review Vendor Invoice
Once a vendor receives the purchase order, they’ll get to work on preparing the order. In the meantime, they’ll send over an invoice along with prices and payment due dates.
This step typically involves matching invoices against a corresponding purchase order to validate the invoice. An invoice approval workflow that integrates with your accounting system allows you to perform this matching automatically.
Step 7: Confirm and Audit Delivery
At this point, the vendor will deliver the goods or services as promised according to the terms established in the contract.
Once you receive the order, you’ll audit and confirm the delivery. If anything is missing or products don’t meet certain quality standards, you’ll file a discrepancy report with the vendor.
Step 8: Issue Payment
The next step in the procurement process is to issue payment. But first, you’ll need to perform a three-way match — matching the purchase order, vendor invoice, and receiving document.
Performing this match is necessary to prevent instances of accounts payable fraud. If everything looks good, you’ll issue payment according to the contract terms.
Step 9: Maintain Records
Finally, maintaining accurate records is an important step in the procurement process.
Not only does it allow you to maintain an audit trail, but it can also make it easier for your accounting team to see a full breakdown of spending by vendor.
Top Procurement Management Challenges
Procurement depends heavily on having clear processes in place to ensure that everything works efficiently. However, no process is immune to missteps along the way.
Here are some of the most common procurement challenges:
- Risk management: Risk is always a challenge in the procurement process — non-compliance, supplier-related issues, and even fraud can affect your bottom line. Delivery delays can also hurt your business. 47% of organizations have experienced missed, late, or short shipments.
- Process inefficiencies: Relying on manual processes to manage procurement is time-consuming and prone to errors. Repetitive tasks like manual data entry also take employees away from higher-value work. 42% of business leaders say that automation can speed up task completion.
- Long cycle times: Without a system in place to procure goods, certain workflows in the procurement process can take longer than expected. This can prevent your company from capturing early payment discounts.
To give an example, companies that rely on manual methods to process an invoice take 45 days on average, while those with automated workflows take just five days — a difference of nearly 90%.
- Maverick spending: Companies can lose as much as 16% of negotiated savings when employees purchase goods or services without following pre-established procurement policies. This kind of spending is also more difficult to track, which can cause problems with spend management.
- Lack of transparency: 60% of business leaders say a lack of transparency in the procurement process is a risk to the company. A lack of transparency in the procurement process can slow down decision-making and make finding the information you need harder.
Using the right tools can help you address and overcome the procurement challenges described above. Let’s look at how in the next section.
How Technology Can Improve Procurement Management
Relying on manual methods for your procurement processes may work if you’re only working with a handful of vendors, but it’s not scalable, and it’s error-prone.
Here’s how using technology like frevvo’s process management software can help you improve procurement management.
Standardize Your Processes
The procurement process has a lot of moving parts with many people involved. If your processes aren’t standardized, it can lead to issues like maverick spending and non-compliance risks.
Using process management software allows you to standardize your processes, which can help enforce stronger internal controls and ensure that employees follow the same steps, whether they’re creating a purchase order or approving an invoice.
Standardizing your processes increases productivity, keeps your team members on the same page, and helps you manage procurement risks.
Paper-based approvals are slow and prone to delays — employees waste time printing, signing, and routing documents to the right person for approval.
frevvo’s no-code platform makes it easy to create dynamic forms and automated workflows for your procurement processes. There’s no coding required, so even non-technical users can get started with the software right away.
Once you create your form, you can incorporate them into a custom Workflow. As an example, let’s say you want to automate the purchase order process.
To get started, simply follow these three steps:
- Install a pre-built template, or create one from scratch
- Customize your form, and modify the routing as needed
- Connect to external systems to auto-populate your forms
Then, test your workflow to ensure everything is working. You might also want to get feedback from the procurement department before deploying it.
Here’s an example of a purchase order workflow you can create in frevvo:
Once an employee creates a purchase order, it automatically routes to a manager for review and then to Finance for final processing.
Other procurement processes you can automate with frevvo include contract approvals, invoice approvals, and more.
Collect Electronic Signatures
It’s always in your company’s best interest to collect signatures on important documents like contracts and purchase orders. But printing and mailing forms is incredibly inefficient. It can also lead to long lead times.
With frevvo’s form builder, you can add legally binding signature components to your forms. The platform supports wet and digital signatures — a secure method of signing documents that uses a certificate-based digital ID to verify and authenticate a signer’s identity.
Watch the video below to learn how you can create legally binding signatures with frevvo:
Define Roles and Set Up Notifications
You can improve role clarity by defining clear roles for the procurement team.
By using frevvo to digitize your procurement processes, you can define roles and set up notifications to ensure that approvers are immediately notified when a document requires their attention. This can help you prevent workflow or approval issues.
Perform Three-Way Matching Automatically
Matching invoices to purchase orders and receipts is time-consuming, but it highlights any discrepancies.
With frevvo’s software, you can integrate your workflows to external databases like your accounting system to perform this matching automatically.
Centralize Procurement Documents
85% of employees waste time searching for documents.
You can use frevvo’s built-in connectors to store documents generated by your procurement workflows in an electronic document management system (EDMS) like Google Drive, SharePoint, DocuWare, etc.
Improve Spending Visibility
Using frevvo’s automation software can help you automate purchase order tracking and provide more visibility into organizational spending.
Analyzing these trends can lead to substantial savings. For example, you can track spending with different vendors and build stronger relationships with the ones your company works with most. This can help you negotiate better procurement contracts in the future.
Create Audit Trails
27% of organizations say that increasing transparency in the supply chain can reduce disruptions in the procurement process.
Digital processes create clear audit trails that help procurement professionals track and manage each step of the procurement process.
Generate Detailed Reports
Monitoring key performance indicators (KPIs) in real-time can help your company identify bottlenecks and uncover areas for improvement.
With frevvo’s analytics dashboards, you can monitor metrics like active procurements, average cycle time, expedited purchase counts, process errors, and more. Using these insights can help you further improve your processes.
Start Automating Your Procurement Processes Today
Procurement management plays a critical role in helping your company secure the goods and services it needs to operate.
However, managing each step of the procurement process manually isn’t practical in the long term. It can lead to longer turnaround times, data inaccuracies, and even invoice fraud — all of which can hurt your bottom line.
A workflow automation tool like frevvo can help your company automate and streamline your procurement process. Using the no-code interface makes it easy for you to create custom forms and automated workflows in practically no time.
The platform comes with a drag-and-drop interface — create dynamic forms, customize your workflows, set up dynamic routing, and more. Plus, you can analyze your workflows and make continuous improvements to your processes with the built-in reporting dashboards.
You don’t need to be a technical expert either to start automating your processes. Anyone comfortable with using Microsoft Excel can create and customize their own workflows without writing any code.
Get started today with a 30-day free trial to start automating your procurement process.