Purchase planning:

Purchase planning for either manufacturing unit or wholesale or trading unit

operation is an important process. Purchasing of the raw materials or goods is to
maintain the stock levels. Stock which is required to be maintained in the
inventory software, but overstocking or excess of the goods will have a negative
impact on the business profits. When purchasing and ordering enough stock, take
the benefits of bulk discounts, but balance the inventory and do not over stock. 

How to handle & plan work order:

Handling the Inventory and tracking of the work order is to keep track of fixed
assets, have control on the working capital. Inventory control software will help to
get the project costing and the inventory related to the said project. 

How to handle vendors:

Vendor handling is a structured process, wherein the suppliers can be managed by

the buyer’s and improve the relationship. Here the deliverables are managed with
the vendor, managing compliance, invoices and payments – a work collaboration
of the purchase department and vendor. 

How to do product mapping:

A product mapping is to reduce costing, reduce the storage needs and

streamlining the ordering process.

How to do vendor tagging:

Keep the track of inventory, which is important and able to control costs by
keeping the inventory software updated. Through the Inventory management
system, discovering any kind of discrepancies between inventory results showed
related to the vendor tagged products in the software and the physical count. 
 Procurement encompasses a range of activities involved in obtaining goods or
services. What is the purpose of procurement? In general, procurement teams
work to obtain competitively priced supplies that deliver the most value.
However, not all companies define procurement in the same way. Many
companies consider that procurement encompasses all the stages, from gathering
business requirements and sourcing suppliers to tracking the receipt of goods and
updating payment terms, while others define procurement as a narrower range of
activities, such as issuing purchase orders and making payments.

Key Takeaways
 Procurement is a vital business function. When managed efficiently and done
well, it can help increase your business’s profitability.
 It includes a range of activities involved in obtaining goods and services, including
sourcing, negotiating terms, making purchases, tracking when supplies are
received and maintaining records.
 It’s important to continuously monitor and assess the procurement process to
improve any weak spots or inefficiencies.
 Technology can reduce procurement cost and administrative overhead by
automating and tracking procurement processes.

Procurement Explained
Traditionally, some businesses have used the term procurement synonymously
with purchasing. But now, purchasing is often seen as just one stage in a larger,
more strategic procurement process. So, what exactly is procurement?

Procurement involves every activity involved in obtaining the goods and services a
company needs to support its daily operations, including sourcing, negotiating
terms, purchasing items, receiving and inspecting goods as necessary and keeping
records of all the steps in the process.

Why Is Procurement Important in Business?

 Procurement is an important step in understanding supply chains, because it
helps a company find reliable suppliers that can provide competitively priced
goods and services that match the company’s needs. That’s the case whether the
company is seeking raw materials for manufacturing, a marketing services
provider or new office supplies.

For example, if a company needs a new supplier to provide an ongoing service for
an indefinite period of time — such as an email security solution — the
procurement process helps the company choose the supplier that best meets all
of the business’s requirements at a reasonable price. It enables the business to
avoid wasting time, money and valuable resources dealing with an inadequate
supplier.

Minimizing cost is one important aspect of improving your procurement

processes. But it’s also vital to identify suppliers that provide the quality of goods
and services that the company needs and have the capacity to deliver reliably and
a track record of doing so.

Types of Procurement
Procurement can be categorized in several ways. It can be classified as direct or
indirect procurement, depending on how the company will use the items being
procured. It can also be categorized as goods or services procurement depending
on the items that are being procured.

 Direct procurement refers to obtaining anything that’s required to produce an

end-product. For a manufacturing company, this includes raw materials and
components. For a retailer, it includes any items purchased from a wholesaler for
resale to customers.
 Indirect procurement typically involves purchases of items that are essential for
day-to-day operations but don’t directly contribute to the company’s bottom line.
This can include anything from office supplies and furniture to advertising
campaigns, consulting services and equipment maintenance.
 Goods procurement largely refers to the procurement of physical items, but it
can also include items like software subscriptions. Effective goods procurement
generally relies on good supply chain management practices. It may include both
direct and indirect procurement.
 Services procurement focuses on procuring people-based services. Depending on
the company, this may include hiring individual contractors, contingent labor, law
firms or on-site security services. It may include both direct and indirect
procurement.

Types of Procurement

Indirect
Direct Procurement Procurement Goods Procurement Services P

What is Any good or service All non- Physical items typically All people-
it? required to produce an production- held as inventory, procured, w
end product related goods or whether for direct or direct or in
services indirect procurement procureme
purposes

Examples Raw materials, Office supplies, Raw materials, wholesale Law firms,
components and parts, marketing items, office supplies contingent
machinery, items services, utilities security se
purchased for resale

How Procurement Works

The procurement process generally involves a number of steps. The business
identifies particular goods and/or services that it needs, sources the suppliers that
will help the company reach its business objectives, negotiates terms and costs
and then purchases and receives the relevant items.

A small company may have just one person handling procurement of all goods
and services. Larger companies may have a team of people specialized in dealing
with different suppliers or supporting specific internal business groups. For some
items, the team may need to gather input from several different business groups
in order to determine the company’s overall requirements.

It’s important to remember that procurement doesn’t consist of a series of

isolated acts — it’s an ongoing process. For example, businesses generally aim to
establish relationships with key suppliers to help obtain the best service and
lowest possible costs, which ultimately translate into higher profit margins.
Companies may also need to conduct regular quality assurance checks and
performance analysis to make sure suppliers consistently meet expectations.

9 Steps in the Procurement Process

Procurement processes vary greatly depending on each company’s structure and
needs, but generally include the following nine core steps:

1. Identify which goods and services the company needs. First, a business must
identify its requirements for a specific item or a service. This may be a new item
that the company hasn’t previously purchased, a restock of existing goods or a
subscription renewal. This step typically involves delving into the nitty-gritty
details of what the business needs, such as the precise technical specifications,
materials, part numbers or service characteristics. At this stage, it’s a good idea to
consult all business departments affected by the purchasing decision to ensure
the procured items accurately reflect the needs of each department.

2. Submit purchase request. When an employee or business group needs to

procure a significant quantity of new supplies or services, they make a formal
purchase request (also known as a purchase requisition). A purchase request
notifies the company that a need exists, usually via department managers,
purchasing staff or the financial team, as well as specifications such as price, time
frame needed, quantity and other important things for the purchasing team to
keep in mind. The department overseeing the purchase can then approve or deny
the purchase request. If approved, the procurement team can proceed with
selecting a vendor and making the purchase.

3. Assess and select vendors. With a clear list of requirements and an approved

purchase request, now is the time to find the best vendor and submit a request
for quote (RFQ) – this is what the purchasing team sends to potential suppliers in
order to receive a quote – it is important to be as detailed as possible so you can
compare apples to apples. Vendor assessment should focus not only on cost but
also on reputation, speed, quality and reliability. Many companies consider ethics
and social responsibility as well, since procurement is often intertwined with
corporate identity. A retailer that prides itself on sustainability would stand to
benefit from partnering with environmentally responsible suppliers, for instance.
4. Negotiate price and terms. A common best practice is to get at least three
quotes from suppliers before making a decision. Examine each quote carefully
and negotiate where possible. If you need to walk away from a deal, be sure that
you have concrete alternative options. Once you’ve agreed on final terms, be sure
to get them in writing.

5. Create a purchase order. Fill out a purchase order (PO) and send it to the
supplier. The PO should be sufficiently detailed to identify the exact services or
goods needed and to enable the supplier to fill the order.

6. Receive and inspect the delivered goods. Carefully examine deliveries for any
errors or damage. Make sure everything is delivered as specified in the PO and
that the quality meets or exceeds expectations.

7. Conduct three-way matching. Accounts payable should conduct three-way

matching by comparing the purchase order, order receipt or packing list and
invoice. The goal is to ensure the goods or services received match the purchase
order and to prevent payment for unauthorized or inaccurate invoices. Highlight
any discrepancies between the three documents and resolve issues before
arranging payment.

8. Approve the invoice and arrange payment. If the three-way match is accurate,
approve and pay the invoice. Businesses should strive to have a consistent invoice
payment process through accounts payable that checks that payments match the
invoice amount and due date. A standardized process can help make sure invoices
are always paid on time, which can prevent late fees and build good relationships
with suppliers.

9. Recordkeeping. It’s important to maintain records for the entire procurement

process, from purchase requests to price negotiations, invoices, receipts and
everything in between. These records may be useful for multiple reasons. They
help the company reorder goods at the right price in the future, as well as assist
with auditing processes and calculating taxes. Clear, accurate records can also
help resolve any potential disputes.
Stages of Procurement
The nine major steps of the procurement process can also be thought of in three
distinct stages: the sourcing stage, the purchasing stage and the receiving stage.
 Sourcing stage: This covers the initial steps in which the business identifies its
needs, creates a purchase request and assesses vendors. Even after the initial
sourcing steps are complete, it’s a good practice to build a strong relationships
with suppliers. They can establish grounds for suppliers to learn from partners,
improve products and processes and develop trust.
 Purchasing stage: This stage includes negotiating terms, creating orders and
receiving and inspecting goods and services.
 Payment stage: Accounts payable conducts three-way matching to ensure order
and invoice accuracy. The invoice can then be approved and the payment is
arranged. Records of all invoices, orders and payments should be kept and
carefully maintained.
Procurement Life Cycle
Organizations commonly think of steps in the procurement process as a life cycle.
This perspective provides a reminder that all the tasks and stages in the
procurement process overlap and rely on each other and that the process is
 continuous. A carefully thought-out procurement life cycle also recognizes the
integration between the process and the business as a whole, including the need
to align with existing company rules and procedures covering areas such as
budgeting. The process is not always linear, and sometimes adjustments need to
be made to account for a dynamic digital supply chain with shifting suppliers,
availabilities and costs.

Three Components of Procurement

Three key components work together to make the procurement process happen:
people, process and paperwork.

 People: People generally are responsible for initiating or authorizing every step of

the procurement process. In addition to procurement specialists, the people
involved include other stakeholders, such as accounts payable and the business
groups that request the goods and services. The number of people involved often
depends on the value of the goods and services; more stakeholders may be
involved in specifying and approving high-value purchases.
 Process: An effective procurement process can help a company succeed by
keeping costs down and ensuring supplies arrive when the business needs them.
A well-designed and methodical process helps to promote accuracy and
timeliness because every person involved knows exactly what they need to
accomplish and how long they have to complete the tasks. In contrast, a
disorganized procurement process results in inefficiencies and potentially costly
errors. Overpayments, for example, can impact the bottom line, while late
payments negatively affect relationships with suppliers.
 Paperwork: It’s important to maintain records for every stage of the procurement
process and ensure they are easily accessible. These records act as a store of
organizational knowledge about payment terms and supplier performance,
helping the business maintain an efficient procurement process — even if the
procurement staff changes over time. In the case of an audit or a dispute, a
business must be easily able to follow the paper or electronic trail through each
stage of the procurement process.
 Procurement, Purchasing and Supply Chain:
What’s the Difference?
The terms procurement, purchasing, sourcing and supply chain are often used
interchangeably. However, there are important distinctions between them.

 Procurement vs. purchasing: If procurement involves purchasing, you might be

wondering: What’s the difference between purchasing and procurement? The
answer is that purchasing is essentially transactional, focusing on managing
specific orders to meet company needs. Procurement is a much broader and
more complex set of processes, including establishing and maintaining supplier
relationships. Another way to think about the difference between purchasing and
procurement is that procurement takes a proactive approach that starts with
analyzing the company’s needs, whereas purchasing is a reactive approach —
simply focusing on obtaining what the company has already decided it needs.
 Procurement vs. sourcing: Sourcing, like purchasing, is only part of the overall
procurement process. Sourcing is an early stage of the procurement cycle. It
encompasses activities such as identifying and assessing potential suppliers of
goods or services, negotiating terms and selecting the vendors that best meet the
company’s needs.
 Procurement vs. supply chain: Procurement covers one aspect of supply chain
management. Procurement includes sourcing, obtaining and paying for goods and
services. Supply chain management also covers the logistics involved in obtaining
goods, such as shipping and warehouse management, as well as transforming the
procured goods into products and distributing them to customers.

Procurement Purchasing Sourcing Supply Chain Management

Definition All activities related to Buying goods and Selecting and vetting Managing the coordinated
carefully sourcing and services vendors to provide network of companies,
obtaining goods and goods and/or services facilities and business
services needed to activities involved in
support business sourcing, developing,
operations manufacturing and
delivering products

Scope Includes sourcing, Part of the  Part of the  Includes the entire
negotiation, procurement procurement process procurement process
purchasing, receiving process
and recordkeeping
 Procurement Purchasing Sourcing Supply Chain Management

Focus Ensuring the company Usually focuses on Establishing good, Cutting costs while getting
gets the most value getting a good long-term goods to the customer as
from goods or services price relationships with quickly as possible, without
to increase the suppliers sacrificing quality or
business’s profitability accuracy

Procurement, Purchasing and Supply Chain: What’s the Difference?

Principles of Procurement
In public-sector organizations, the procurement process is generally similar to the
process in private-sector organizations — but with a few important differences.
Because the people involved handle public funds, they generally must follow
rigorous principles during the procurement process. These principles can be
regarded as an ethical code of conduct that holds public servants accountable for
their purchases. Some of the principles may also be beneficial to private-sector
organizations.

The principles vary somewhat depending on the organization. Here are seven of
the most common procurement principles:

1. Value for money: The organization must manage funds efficiently and

economically when procuring goods and services. This may include
conducting cost-benefit analyses and risk assessments. It’s worth noting
that low cost does not necessarily equate to greater value; characteristics
such as quality and durability also factor into determining whether the
purchase represents value for money.
2. Fairness: Procurement should not provide preferential treatment to
individuals or suppliers. All bids should be assessed objectively, based on
how well they meet the organization’s needs.
3. Competition: Organizations should seek competitive bids from multiple
suppliers, unless there are specific reasons not to do so, such as a sole-
source provider where the good or service is only available from a single
vendor.
 4. Efficiency: Procurement processes must be carried out efficiently to help
maximize value and avoid delays.
5. Transparency: Organizations should make relevant procurement
information available to everyone, including the public as well as suppliers.
Information should be kept confidential only when there are legal or other
valid reasons to do so.
6. Integrity: Those who practice public procurement should always strive to
be perceived as trustworthy, reliable, honest and responsible. Funds must
be used for their intended purpose and in the public interest.
7. Accountability: People involved in the procurement process are
accountable for their actions and decisions. They are required to report
procurement activities accurately, including any errors.

Procurement & Finance

In many companies, procurement and finance teams operate as separate
departments. Historically, they have sometimes been at odds for one major
reason: Procurement spends money, while finance focuses on profitability, which
sometimes means finding ways to spend less.

However, a strategic partnership between the two groups can benefit the
business as a whole, partly because each group can provide unique insights into
the business’s operations. For example, a well-run procurement team may have a
deep understanding of how carefully sourced goods and services can help
business groups maximize profitability. This helps the finance group get a better
overall picture of company spending and how it affects the bottom line.
Integrated supply chain management software that can connect information from
across the business, including finance, is an important tool to bridge the
traditional divide and help teams work together to advance business objectives.
Supply chain management software can also help you track progress toward goals
by providing the information you need for key performance indicators (KPIs) in a
simple-to-understand format for your procurement team.

Procurement KPIs
By monitoring procurement KPIs, businesses can boost the efficiency of their
procurement process, track progress toward business objectives and identify
areas for improvement. Here are some commonly measured procurement KPIs:

Purchase order cycle time: Monitor the average number of hours or days it takes
to process requisitions and send purchase orders to suppliers.

Purchase order cycle time = # of hours or days it takes to process requisitions and
send purchase orders to suppliers / # of purchase orders sent to suppliers

Supplier lead time: The average number of days it takes for suppliers to send
items after they receive a purchase order.

Supplier lead time = # of days it takes for item(s) to arrive after supplier receives
purchase order / total # of purchase orders sent to supplier

Number of suppliers: Having more suppliers gives the company more options but
also increases administrative work. Many procurement groups monitor the
number of vendors in their supplier networks and periodically remove little-used
suppliers to increase efficiency.

Supplier defect rate: An important measure of supplier quality, this is usually

measured as the number of defective parts divided by the total number of parts
supplied.

Supplier defect rate = # of defective parts from vendor / total # of parts from
same vendor
Supplier availability: This measures each supplier’s ability to respond to last-
minute or emergency demands.

Supplier availability = # of times supplier fulfilled business orders / # of orders

sent to supplier

Fulfillment accuracy: This measures the percentage of orders that suppliers fill

accurately and match the purchase order exactly.

Fulfillment accuracy = # of accurate orders from supplier / total # of orders from
same supplier

Total ROI of procurement process: This measures the value a business’s

procurement strategy delivers to the organization. It’s the ratio of the annual
savings generated by the procurement group to the total annual amount spent on
procurement.