It can be devastating to hear when a key vendor goes bankrupt. Unfortunately, vendors may shut down for various reasons, which can hamper your own operations.
The next immediate step then is to find another vendor.
But do you have a process in place to source vendors? Does the purchasing team know what their roles and responsibilities are?
To ensure minimal disruptions to your operations, you need to plan for contingencies like vendor bankruptcies.
This is where a procurement plan comes in.
In this article, we’ll explain what a procurement plan is and why you should create one. We’ll also cover the steps to creating one for your company. Finally, we’ll look at how you can automate your purchasing processes with frevvo’s procurement automation software.
Click the links below to head to the section you want to learn more about:
- What Is a Procurement Plan?
- Why Do You Need a Procurement Plan?
- How to Create a Procurement Plan
- Automate Your Procurement Process With frevvo
What Is a Procurement Plan?
A procurement plan is a document that details the entire procurement process — the steps that companies follow to procure the goods and services they need to operate.
It also outlines roles and responsibilities for your purchasing team, defines vendor selection criteria, establishes the types of contracts you’ll use, and more.
The goal of a procurement plan is to streamline the procurement process. Instead of starting from scratch each time, you can simply pull up an approved plan and adapt it accordingly.
Procurement plans typically include the following details:
- Roles and responsibilities
- Needs and requirements
- Project timelines
- Project constraints
- Vendor selection criteria
- Contract types
- Payment terms and methods
- Risk management
We’ll dive into each of these in a later section. For now, let’s take a look at why you need a procurement plan if you don’t already have one.
Prefer to see and hear it rather than read about it?
Let us show you how easy it is.
Why Do You Need a Procurement Plan?
Creating a procurement plan can help standardize your purchasing processes and even benefit your bottom line.
Reduces Supplier Risks
Managing supply chain volatility is one of the biggest challenges that many companies face. In fact, 56% of chief procurement officers have said that key suppliers have either gone bankrupt or have been severely hampered.
Creating a procurement plan to source and select vendors can help you reduce supplier risk. If a key vendor goes bankrupt or is unable to meet its obligations, your purchasing team can refer to the procurement plan to quickly find a suitable replacement.
90% of business executives say that increased transparency leads to better decision-making across the organization. This also applies to purchasing.
Without transparent processes, mistakes are bound to happen — employees may duplicate orders or make purchases using non-approved vendors. This can lead to overspending and even delayed projects.
A procurement plan makes the procurement process more transparent. And when you use procurement automation software, your purchasing team will be able to track each step of the process from one central location.
Helps Ensure Compliance
Creating a procurement plan can help ensure compliance with established policies.
Why is this important?
Aside from reducing the risk of errors, a procurement plan can prevent instances of maverick spending — when employees purchase goods or services outside of established policies.
Maverick spending can negatively impact your bottom line. In fact, companies lose as much as 16% of negotiated savings when purchasing teams don’t use preferred vendors.
Enforcing a procurement plan can help ensure that all purchasing decisions comply with company-approved policies and vendors.
Lowers Procurement Costs
With a comprehensive procurement plan, your company can source vendors faster, speed up negotiations, and pay invoices more quickly — all of which can help lower procurement costs.
In short, creating a procurement plan is extremely beneficial for your bottom line. It provides purchasing teams with everything they need and sets clear expectations.
Now, let’s look at how you can create a procurement plan.
How to Create a Procurement Plan
Procurement varies from organization to organization.
For example, large retailers will likely have different purchasing requirements than manufacturing facilities. However, there are certain details that every procurement plan should include.
Let’s take a closer look.
1. Describe the Procurement Process
In this step of the procurement plan, you’ll provide a complete breakdown of the procurement process starting from requisition to paying the vendor.
A typical procurement process involves the following steps:
- Identifying internal needs
- Evaluating vendors
- Negotiating contracts
- Approving an internal purchase requisition
- Releasing a purchase order
- Receiving and reviewing an invoice
- Confirming and auditing delivery
- Completing payment
- Maintaining records
No matter what products or services you’re procuring, having a formalized purchasing process is key to creating a procurement plan. Work with your purchasing team to detail each step.
2. Outline Roles and Responsibilities
The next step to creating a procurement plan is to establish the parties involved in the purchasing process, along with their roles and responsibilities.
Here are some of the key functions of purchasing departments:
- Identify internal needs for goods and services
- Source reliable suppliers to meet requirements
- Negotiate prices and delivery terms
- Coordinate deliveries and shipments
- Run quality control and product testing
- Ensure compliance with all regulations
- Manage budgets and maintain accurate records
- Manage relationships with vendors
The purchasing team will consist of various professionals who are responsible for overseeing these tasks. These include a purchasing manager to supervise procurement-related activities, purchasing agents to evaluate suppliers, and a contract manager to prepare contracts.
Make sure that you outline the roles and responsibilities of your purchasing team. You should also specify who can make and approve changes to any procurement documentation.
3. Determine Needs and Requirements
This section of the procurement plan describes the goods and services that your company is looking to procure. It can include tangible goods like office equipment or raw materials and intangible goods like software licenses.
Regardless of what you need to procure, you should include all pertinent details — sizes, quantities, technical requirements, etc.
Make sure to also include a statement that justifies why you’re purchasing certain goods or services from external suppliers instead of sourcing internally.
4. Define a Project Timeline
The next step is to set a project timeline. This is important because procuring goods before you actually need them will only take up valuable space.
An efficient procurement plan will include specific timeframes to minimize holding costs. This will also give your purchasing team deadlines for when they need to start and complete certain tasks.
5. Determine Project Constraints
Every project has constraints and limitations that it must abide by. Cost constraints are the most obvious example, as you may have a limited budget for purchasing goods and services.
Other types of project constraints include:
- Quality specifications
- Scheduling limitations
- Scope and deliverables
- Security requirements
- Industry regulations
Make sure that you detail any project constraints and limitations in your procurement plan.
6. Define Vendor Selection Criteria
In a typical procurement process, the purchasing department will issue a request for proposal (RFP) and vendors will respond with proposals or bids.
Then once the solicitation process begins, your team can collect proposals and evaluate each one. Defining vendor selection criteria can help you narrow down your choices.
Selection criteria can include:
- Costs: If a proposal doesn’t fit within your budget, you could either move on to the next one or enter into negotiations with the vendor.
- Delivery: If a vendor can’t deliver goods or services within your desired timeline, then look for one that can.
- Quality: Vendors must be able to meet certain quality standards before you can consider their proposals.
Establish selection criteria to find the right vendors. In this section, you should also specify who will make the final decision. You can also establish a small selection committee whose purpose is to evaluate and select vendors.
7. Select a Contract Type
Vendor contracts or vendor agreements are legally binding agreements in which both parties agree to exchange goods or services for compensation.
However, there are different types of contracts that you can use. Common vendor contracts include:
- Fixed price contract: An agreement in which the buyer and seller agree to a fixed price regardless of other factors.
- Fixed price plus incentive contract: An agreement in which you agree to pay a fixed price and an extra bonus if the seller delivers earlier than expected.
- Cost-reimbursable contract: An agreement in which a contractor receives a standard fee and reimbursements for any costs they incur on the job.
- Time and materials (T&M) contract: An agreement in which your company pays a contractor for their time and the materials used. These contracts are typically used in instances when you can’t estimate the size of a project upfront.
When preparing a procurement plan for any purchases, make sure that you select the right type of contract and get it signed.
8. Determine Payment Terms and Methods
This section of the procurement plan details the payment terms that you and a vendor have agreed upon.
- Total costs
- Expected deliveries
- Due dates
- Payment methods
Some vendors may require advance payment, while others may offer more generous terms like net 30 or net 60. If you’re making stage payments over a period of time, make sure to specify exact payment dates to avoid any confusion.
9. Identify Potential Risks
There’s always a degree of risk when working with external suppliers. In this section of the procurement plan, identify any risks and outline specific strategies to mitigate them.
For example, let’s say that a contractor fails to meet their deadlines. What impact would it have on your project timeline? In this case, you could either extend the deadline (and risk upsetting your customers) or hire an alternate contractor.
Follow the steps above to put together a procurement plan that you can use.
Automate Your Procurement Process With frevvo
With procurement software like frevvo, you can automate business processes like purchase requisitions, purchase orders, invoicing, and more.
The software includes pre-built templates and drag-and-drop tools, so you can easily customize your forms and workflows — without writing a single line of code.
Of course, any forms that you create for your purchasing processes will typically have to go through multiple parties for approval.
With the no-code workflow builder, you can incorporate dynamic routing into your workflows and ensure that your forms reach the right approvers.
Here’s an example of an automated purchase order workflow:
Once an employee creates and submits a purchase order, the system automatically routes it to their manager for further review.
Your forms and workflows are mobile-friendly out of the box, so your purchasing managers will be able to approve documents like contracts either from the office or on the go from a mobile device.
Start Automating Your Procurement Processes Today
Procurement plays a critical role for any business.
However, purchasing the goods and services that your company needs to operate is a complex process. Missing any key information can result in delayed projects.
Creating a procurement plan can help you manage the purchasing process, from outlining roles and responsibilities to establishing vendor selection criteria and more.
It can also make your purchasing process more efficient. If a vendor goes bankrupt, you won’t have to start from scratch to find an alternate vendor. You can simply pull up a procurement plan you’ve already created to speed up the process.
Of course, creating a procurement plan is only one aspect of purchasing. There are numerous steps involved between issuing a request for proposal and making a payment. Performing these steps manually will only slow down your purchasing process.
Fortunately, automation tools like frevvo make it easy for you to automate your purchasing processes. You don’t need a large budget or a team of developers either. The software is fully visual, so you can create your own automated workflows without coding.
Ready to get started? Sign up for a free 30-day trial to try frevvo’s procurement automation software for yourself.