Procurement is the process of purchasing goods and services for business use from an external source. It is the very initial stage where companies source raw materials so that the business can manufacture its final goods.
This reason makes procurement a very crucial function as the quality and cost of the raw materials will decide on the same of the final goods. Individual businesses have their procurement departments that have set business policies while choosing suppliers and determining the quality of the purchase.
Below are the steps involved in this process:
Identification – The process starts when the department gets a request to procure a particular product or service. The request could be a simple one like a software license purchase or a big one like raw materials for new building construction.
Vendor Selection – The department looks out for suppliers, requests quotes, does bidding, and finally selects a supplier. This step is a crucial one as reputation, cost, dependability, and speed of service all need to be investigated.
Submit Purchase Requisition – The department needs to get purchase permission from the department responsible for purchases. Information like the party requesting the item or service, quantity and description of the item/service, vendor information, and price form a significant part of the request.
Generation of Purchase Order – Once the purchase request is approved, the finance department issues a purchase order. After which, they submit the order to the vendor.
Invoice and Order – Upon receiving the purchase order, the vendor issues an invoice to the buyer. The invoice details the price and the date by which they must pay. The invoice also details the penalties for not making timely payments. The vendor also issues order details so that the buyer can check the same, in case of any changes.
Payment – Once the vendor delivers the goods and services, it is time to pay the vendor. It is essential to check that the quality of the delivered goods and services is as agreed upon before making the purchase.
Components of Procurement
There are three components of procurement, as discussed below:
People – One needs to consider the time schedules and complexities of the approvers when it comes to procurement approvals. If the CFO is on leave for two weeks, it may impact the approval cycle. People involved in the approvals process may include the manager of the requesting department, HR, finance, purchasing, legal, and operations.
Process – One needs to make sure to follow the organization’s policies to complete the process. If this is not taken care of, there might be delays in purchases, vendors not getting paid in time, the organization’s reputation going down or the bottom line at stake.
Paperwork – Needless to say, this is more about recordkeeping in the systems these days. Companies must ensure to document everything.
Shaping procurement policies in an organization
While businesses are usually more concerned about the quality, price, and timeliness of the procured goods, these factors are not their only concerns. Customers gravitate towards organizations that are fair in their activities; therefore, businesses must display values that attract their prospective customers.
Fairness in dealings, promoting healthy competition and business integrity are the central values that companies should follow. Below are a few points that the businesses can take into account while framing their procurement policies:
Green procurement – Preserving the environment is a significant concern for businesses these days. Companies should make their policies in such a way that there is the least damage to the environment.
Reduction of waste, using renewable energy, lowering greenhouse gas emissions, avoiding pollution, using recyclable materials, and conservation of energy, water, soil are a few points to include in their policies.
Ethical sourcing – Ethical sourcing of goods is something that has gained attention in recent years, given that the production of the majority of products is in third world countries that do not enforce ethical labor standards.
Activists have exposed abusive labor practices in the garment manufacturing industries in Bangladesh, Vietnam, China, and Indonesia, which have damaged the reputation of companies like Nike and Walmart.
In response, Walmart adopted an ethical sourcing policy, and Nike helped establish the Fair Labor Association (FLA). This non-profitable group is committed to improving standards of employment for workers across the world.
Participating companies can get listed with the FLA by enforcing FLA labor standards. Worker safety, fair wage, reasonable work hours, and no child labor are a few of the mandates in the FLA policy.
Procurement frauds – By nature, the process is prone to white-collar crimes. Bribery and bid-rigging are common forms of procurement fraud. Policies need to include factors like only allowing designated, trusted people to place orders, not accepting orders from unknown suppliers, checking for low-quality supplies, etc.
The procurement process can become a nightmare if not managed properly. It could lead to inflated costs, inefficient management, and financial losses. But with regulated policies, the process could become a seamless one that ensures good relations with vendors, reduced costs, satisfied customers, and happier stakeholders.