Procurement models

E-commerce trading between organizations usually occurs as part

of the procurement process, which is part of the broader business
activities of supply chain management. ‘Procurement’ refers to all
activities involved with obtaining items from a supplier, this
includes purchasing, but also inbound logistics such as
transportation, goods-in and warehousing before the item is used.
Online this process is known as e-procurement.
Knudsen (2003) and Smart (2010) have reviewed simple
classification of different types or applications of e-procurement.
These are the main types:
E-sourcing
Finding potential new suppliers using the internet during the
information gathering step of the procurement process.
E-tendering
The process of screening suppliers and sending suppliers requests
for information (RFI) and requests for price (RFP)
E-informing
Qualification of suppliers for suitability. It doesn’t involve
transaction but instead handles information about the supplier’s
quality financial status or delivery capabilities.
E-reverse auctions
Enable the purchasing company to buy goods and services that
have the lowest price or combination of lowest price and other
conditions via internet technology.
E-MRO and web-based ERP
These involve the purchase and supply of products which are the
core of the most e-procurement applications. The software used
manages the process of creating and approving purchasing
requisitions, placing orders and receiving goods or service
ordered.
Smart (2010) also reviewed the business benefits of e-
procurement through case studies of three companies. He

1
identified five key drivers or supplier selection criteria for e-
procurement adoption related to improving:
1. Control – improving compliance, achieving centralisation,
raising standards, optimising sourcing strategy and improved
auditing data. Enhanced budgetary control is achieved through
rules to limit spending and improved reporting facilities.
2. Cost – improved buying leverage through increased supplier
competition, monitoring savings targets and transactional cost
reduction.
3. Process – rationalising and standardisation of e-procurement
process giving reduced cycle time, improved visibility of
processes for management and efficient invoice settlement.
4. Individual performance – knowledge sharing, value-added
productivity and productivity improvements.
5. Supplier management – reduced supplier numbers, supplier
management and selection and integration.
Process efficiencies result in less staff time spent in searching and
ordering products and reconciling deliveries with invoices so
potentially leading to reduced costs of employees can be
reassigned. Savings also occur due to automated validation of
pre-approved spending budgets for individuals and departments,
leading to fewer people processing each order, and in less time. It
is also possible to reduce the cost of physical materials such as
specially printed order forms and invoices.
These potential benefits of e-procurement led to massive interest
in the potential of electronic marketplaces to deliver these
benefits.

E-procurement streamlines the acquisition of goods and services through digital

technologies. It eliminates manual business processes, promotes information sharing,

2
refines data management, and enhances decision-making. As a result, it significantly
improves supply chain efficiency and effectiveness.
This article presents an overview of e-procurement, detailing the overall process, types, and
key benefits. It also discusses tools businesses can use to digitalize procurement
processes.

What is E-Procurement?
E-procurement is the sale of goods or services between businesses, businesses and
consumers, and businesses and governments through the internet or other networking
systems, including enterprise resource planning or a company’s intranet.
Modern e-procurement systems eliminate manual paper processes such as creating paper-
based purchase orders. They also automate various activities of the traditional procurement
cycle with workflows. This automation allows businesses to improve productivity and reduce
associated costs.

The E-Procurement Process

The e-procurement process corresponds with the traditional procurement cycle. There are
five main digital processes involved in e-procurement. These processes coincide with
traditional procurement cycle stages: requirement definition, sourcing, solicitation,
evaluation, contracting, and contract management.
E-informing
E-informing coincides with all stages of the traditional procurement cycle. It also overlaps
with all digital processes of e-procurement. E-informing involves a two-way exchange of
proprietary information. The exchange occurs between internal parties within the
organization and with external parties, allowing the organization to optimize its e-
procurement processes.
E-sourcing
E-sourcing is the initial phase of e-procurement, coinciding with requirement definition and
sourcing. It involves pre-qualifying potential suppliers based on the procuring company’s
requirements to shortlist vendors for the evaluation stage.
E-tendering

3
E-tendering coincides with solicitation and evaluation. It involves requesting information,
proposals, and quotations from the shortlisted vendors. This helps the procuring
organization with analyzing and assessing the suppliers. In this stage, the procuring
organization uses tools to ensure transparency during selection.
E-auctioning or E-reverse auctioning
E-auctioning or e-reverse auctioning is associated with evaluation and contracting. In this
stage, the parties involved negotiate pricing and contract terms. After reaching an
agreement, the procuring organization buys the goods or services from the vendor.
In e-auctioning, many buyers compete to contract with one supplier by offering higher prices.
However, in e-reverse auctioning, many suppliers compete to contract with one buyer by
underbidding.
E-ordering
E-ordering coincides with the contracting and contract management stages. It involves
creating and approving requisitions, placing orders, and receiving the ordered items. In this
stage, completed on-call contracts are indexed in a digital catalog. Employees can access
this catalog and place an order at any time.
Other e-procurement processes include managing vendors and catalogs,
integrating purchase orders, e-invoicing, and e-payment.

Types of E-Procurement Tools

Online tools and platforms
Modern online tools and platforms are commonly used to support e-procurement. These
applications replace the traditional procurement process.
Online procurement tools and platforms may support some or all of the main processes
involved in e-procurement. That is, e-sourcing, e-tendering, e-auctioning, e-ordering, and e-
informing. They may offer additional functionalities and customization to ensure a seamless
e-procurement process.
Organizations may also use other internet tools to support the traditional procurement
process. These tools include electronic mail (e-mail), Extensible Markup Language (XML),
and the World Wide Web (WWW).
Electronic systems

4
Various electronic systems are built to support the traditional procurement process. These
include Electronic Data Interchange (EDI) and Enterprise Resource Planning (ERP).
EDIs support information exchange between organizations electronically through computer
programs. The messages are typically about orders, confirmations, invoicing, and so on.
These applications operate on an intranet, which is a closed network, rather than the
internet, which is an open network.
ERP systems integrate supply chain functions and other business activities. This includes
sales, delivery, billing, production, procurement, inventory management, and accounting.
As part of their functionality, ERP systems assist with managing procurement processes.
They allow businesses to create purchase requisitions, approve purchases, place orders,
and more. These systems also provide feedback mechanisms throughout the procure-to-
pay process to improve efficiency.

What are the Benefits of E-Procurement?

Reduced costs
Digital procurement processes eliminate errors associated with handling paperwork and
manual orders. The procurement department can focus more on strategic sourcing and less
on redundant tasks like processing purchase orders and invoices. Eprocurement results in
lower administrative costs and overhead for the procuring organization. It also enables
competitive sourcing and increases cost savings.
E procurement lets businesses match online invoices with purchase orders (2-way
matching), and also receiving reports (3-way matching), if applicable to the purchase
transaction. This saves significant payables time and reduces costs.
Enhanced spending control
E-procurement lets businesses more effectively track spending, purchasing budgets, and
incoming deliveries. E-procurement solutions usually provide dashboards that track these
metrics in real-time. Companies reduce maverick spending (tail spend) and improve spend
management. These systems also generate purchase reports that help businesses lower
supplier fraud.
Improved transparency and visibility

5
E-procurement improves transparency and visibility across all procurement processes by
enhancing information sharing.

Companies can decentralize procurement processes (sourcing and approval, purchase

requisition and order, delivery and receipt, and invoice verification and payment) and
centralize their strategic procurement processes (product specification, procurement
planning, supplier selection, request for quotation, assessment of quotes, and negotiation) to
significantly improve supply chain efficiency.
Saved time
E-procurement platforms automate redundant activities such as purchase order tracking,
supplier evaluation, invoice processing and matching, and requests for documents such as
proposals and quotations. Employees can access and browse online catalogs of the
company’s approved preferred suppliers from anywhere. As a result, approvers can
authorize purchase orders at any moment, reducing turnaround time.
Improved internal and external relations
E-procurement software improves information sharing across internal departments and with
external stakeholders. It provides an information repository to store vendor details, purchase
reports, transaction history, supplier contracts, etc. End users can more easily identify and
prioritize products based on their requirements and compare items from several suppliers
simultaneously with e-purchasing.
Online supplier portals are ideal for information sharing, from onboarding supplier contact
information to contracts, purchase orders, delivery, and payment status. Sharing information
more effectively improves relationships with suppliers and enhances efficiency throughout
the supply chain, resulting in better supply chain management.

6
What Is the Procurement Life Cycle?
The procurement life cycle refers to all the steps involved in obtaining goods
or services for your business. When designing the procurement life
cycle, procurement management aims for efficiency — in terms of both speed
and cost-effectiveness. An efficient procurement life cycle ensures that critical
goods and services can be obtained with minimal delays, which in turn
reduces costs.
Another major benefit for businesses that nail their procurement life cycle is
improved customer relationships, because obtaining the right supplies at the
right time helps companies reliably deliver their products to customers. For
instance, major ecommerce marketplaces have built a reputation for quickly
and reliably sourcing the products their customers need, which has helped
them gain market share.
The procurement life cycle has many steps, but these steps can be grouped
into five broad stages:
1. Define and specify business needs.
2. Invite suppliers to submit bids (a process known as “tendering”).
3. Evaluate and select suppliers.
4. Manage contract and deliverables.
5. Assess and refine procurement processes.

7
Businesses may procure a wide range of goods and services, ranging from
critical manufacturing machinery to day-to-day office supplies and consulting
services. Procurement activities are typically grouped into the following
categories:
Direct procurement refers to obtaining goods or materials that are used to
make the company’s products and directly drive profit for your business.
These include raw materials for manufacturing, such as the silicon wafers
used by a semiconductor company. It also includes the purchase of products
for resale, as well as the technologies or machinery a company uses to
develop its goods or services, such as the factory robots used by a car
manufacturer.
Indirect procurement is the purchase of goods or services that are critical to
your company’s daily operations but do not directly contribute to its bottom
line. In fact, many of these costs, like maintenance fees, office overhead and
travel expenses, eat into the bottom line, which makes the efficiency of the
indirect procurement life cycle even more important.

8
 Services procurement refers to securing people-based services. These can
range from third-party contact centers to on-site contingent labor or security
services. Another example: hiring someone with the specific expertise needed
for a major business challenge, such as an implementation partner hired to
help with the challenges of implementing a new ERP platform. Services
procurement can incorporate direct as well as indirect procurement.

Key Takeaways
 The procurement life cycle encompasses all the steps involved in procuring
goods and services from external suppliers.
 An efficient life cycle is crucial to ensuring that the company obtains the goods
and services it needs at the right time, while minimizing cost.
 Steps in the procurement life cycle range from defining business needs and
selecting providers to managing contracts and supplier relationships.
 Supply chain and inventory management software can help companies trim
time, costs and human error at multiple stages of the procurement life cycle.

Procurement Life Cycle Explained

The purpose of procurement is to source the goods and services your
organization needs in order to operate efficiently and serve customers as well
as possible. Effective procurement achieves these goals while minimizing
unnecessary costs and delays. The balance of speed, efficiency and cost will
vary from one company to the next. For instance, a luxury goods brand cannot
afford to compromise on materials if it wants to maintain customers’ trust,
whereas a discount retailer might focus on speed of product delivery to
customers in lieu of quality when faced with time pressures.
The procurement life cycle encompasses all the steps involved in obtaining
goods and services, from defining your business needs to soliciting bids,

9
awarding contracts and managing supplier relationships. At many companies
this is a dynamic, continuous cycle. Some steps overlap, and some depend
on other departments — for example, purchasing decisions may be
determined by budgeting priorities dictated by finance teams.

16 Steps in the Procurement Life Cycle

Though details of the procurement life cycle vary from company to company,
many of the steps are common to different businesses and industries. Some
companies are able to decrease the number of steps once they’ve built up a
reliable network of trusted suppliers, allowing them to skip some tendering
and supplier validation processes. Consider, for example, a high-end furniture
company that orders its fabrics from the same short list of textile
manufacturers every time, thus eliminating the need to validate its suppliers
before procuring new raw materials. Here are 16 typical steps in the
procurement life cycle.
1. Define your business needs.
Defining clear criteria will help you choose a solution that meets every
one of your company’s needs. It is important to involve multiple
stakeholders in this initial request of the procurement life cycle — from
the employee to who initiates the request for the item — as this helps
ensure their buy-in when the time comes to choose a supplier in their
purchase request. New business initiatives often drive new procurement
needs: A growing business may require a new technology provider to
support increasingly complex requirements, or it might be launching a
product line that requires procurement managers to source an entirely
new range of raw materials and machinery.
2. Perform a market analysis.

10
 Once your needs are clearly defined, conduct a market analysis to see
what’s available and to get an idea of costs. This exercise serves as
both a validation of your needs and a cost-benefit analysis. Some
companies may even decide to develop the goods or services in-house
if the costs are prohibitive.
3. Create a supplier strategy.
Develop an overall strategy for acquiring what you need, taking into
account market availability and primary types of suppliers. Leverage is a
powerful force in establishing supplier relationships. For instance, your
company’s orders might represent a large proportion of a small
supplier’s revenue, giving you leverage to negotiate more favorable
rates.
4. Perform pre-procurement market testing.
It can be useful to test what the market really offers by initially acquiring
small amounts of your needed supplies. This helps determine whether
you should change anything in your procurement plans. Supply chain
outages, geopolitical tensions and competitor activity can all have a
significant effect on your ability to purchase what you need.
5. Develop specifications and documentation.
Dive deeper into the details of your business’s needs to create clear
specifications for external suppliers. As with the first stage of the
procurement life cycle, it is essential to involve relevant stakeholders to
ensure that the specifications cover every aspect of the required quality,
quantity and capabilities.
6. Conduct an RFI.
A request for information, or RFI, is a call for suppliers to share
information about their business and solutions. Business details might

11
 include their history, financials and relevant case studies that
demonstrate their ability to meet your needs. Solution details should
include information such as product performance, capabilities and
differentiators.
7. Shortlist suppliers to participate in tender.
After reviewing the RFI responses, you can create a shortlist of
suppliers that meet your requirements. Some companies even complete
a preliminary ranking of suppliers at this stage, based on their
capabilities. Think about your future requirements, as well as your
current needs, when creating a shortlist, as the suppliers you choose
may eventually become long-term partners. To build a strong and
mutually beneficial relationship, choose partners that are accountable,
trustworthy and communicate well, in addition to meeting your technical
requirements.
8. Issue tender documentation (RFQ or ITT).
The time has come to get specific proposals from relevant suppliers,
using a request for quote (RFQ) or invitation to tender (ITT). An RFQ is
a document sent to a shortlist of suppliers in order to solicit bids.
Companies that have not previously defined a shortlist can instead put
out an ITT, which is an open call for quotes from any supplier that can
meet their needs.
9. Evaluate bids.
Thoroughly evaluate the bids received from suppliers. A typical goal is
selecting the bid that delivers the greatest value and leads to a
dependable supplier relationship. Reliable suppliers are more likely to
submit quotes that are clear and structured, and reflect an honest
assessment of their strengths.

12
10. Validate contenders.
It may be tempting to evaluate quotes based on cost alone, but it is just
as important to evaluate suppliers to make sure they can credibly
deliver what they promise. Look for feedback on their previous projects
from other customers and ask for product samples, if relevant, to
validate quality.
11. Award contracts.
Having chosen and validated your preferred supplier, draw up a contract
laying out the terms. Be methodical and comprehensive when defining
these terms, because the contract will become the foundation of the
supplier relationship. The contract should include key performance
metrics, timescales, provisions for a wide range of possible disruptions
and the obligations of both parties.
12. Begin work.
Once the contract is signed, the supplier’s work begins. The supplier
begins to manufacture and deliver the goods or services and continues
to do so until the contract is completed.
13. Manage receipt and warehouse logistics.
When procuring physical goods, especially on a large scale, it makes
sense to set clear terms for their delivery so you can effectively manage
warehouse operations and inventory. These provisions can help the
business accept deliveries efficiently, with minimal disruption to
operations. In some cases, the terms may even cover the spacing and
placement of delivered goods.
14. Review contract performance.
Supplier relationships are dynamic by nature and will evolve over time
as both parties learn to work together, or when new conditions arise. To

13
 stay on top of any changes, conduct regular reviews of your contract
terms and supplier relationships, identify any pain points and adjust
tactics to maintain a high level of performance.
15. Establish continuous supplier relationship
management.
No two suppliers are the same, so every supplier relationship may need
to be managed differently. That’s why it’s important for companies to
constantly analyze each relationship to be sure they are getting the
most out of their vendors.
16. Conduct asset management.
Rigorous asset management helps the company track when it needs to
replace or upgrade equipment or infrastructure, necessitating
procurement of new items.

14
The procurement life cycle has 16 steps.

How to Manage the Procurement Life Cycle

The key to smooth operation of a complex procurement cycle is ensuring that
you can effectively manage many moving parts. This is especially true for
steps that require validation from multiple stakeholders, such as when defining
business needs in the early stages of procurement. Failure to manage the
procurement life cycle can lead to supply delays and added operating costs,
potentially jeopardizing relationships with key suppliers and compromising
your ability to serve customers. Here are five best practices for optimizing the
procurement life cycle.

15
 Automate administrative tasks. The administrative burden of manually
managing procurement amid shifting market conditions can be enormous.
Automating elements of the procurement life cycle, such as reordering and
invoice payment and automating the approval process, can save considerable
time and cost while reducing the risk of human error.
 Structure your processes. Structure is the foundation of an efficient
procurement life cycle. Laying out each step in detail, assigning ownership
and defining best practices can help procurement operate smoothly.
 Champion visibility. Visibility and transparency are essential for effective
procurement life cycle management when factors such as supply chain
bottlenecks can force companies to reshape plans overnight. When every
stakeholder has access to data and updates throughout the procurement
process, they are well equipped to fulfill their role and manage last-minute
adjustments when circumstances change.
 Give back to your supplier network. The best supplier relationships are mutually
beneficial. Your company gets a trusted partner that reliably provides the
goods and services you need, while your supplier gets a regular source of
income and a case study to help them grow their own business. A healthy
relationship also breeds healthy communication. For instance, by warning
suppliers of potential future risks, you can make sure they are not caught off
guard in the event of a crisis. In return, suppliers that are transparent about
issues that may affect their delivery down the line can help you manage
possible bottlenecks before they have knock-on effects for your customers.
 Optimize inventory management. Efficient inventory management is critical for
companies seeking to procure the right quantities of new supplies at the right
time. That is why many businesses rely on cloud-based inventory
management systems to strike the right balance between inventory capacity
and costs. Inventory management systems can provide real-time visibility into
16
inventory levels, help companies predict demand and automatically alert
purchasing staff when it’s time to replenish inventory.

Improve Your Procurement Life Cycle With

Software
Managing complex procurement processes and supply chains requires
complete control over your business data. NetSuite Procurement
Management records and updates your production data, financial reports,
inventory and outstanding orders in real time, so that critical supply chain
management systems will be up to date and operating on the same
information. This helps companies control costs associated with planning and
executing supply chain processes. Supply-planning features analyze demand,
determine replenishment needs and create orders as needed. NetSuite
procurement capabilities automate communication with suppliers and ensure
accuracy throughout the procurement life cycle.
A well-oiled procurement life cycle helps your company secure the critical
goods and services it needs to maintain operations and serve customers,
while minimizing costs. With the right software, businesses can better
coordinate and automate procurement processes, forecast demand and
reduce burdensome administration.

Procurement Life Cycle FAQs

Why should businesses follow all the procurement life cycle
steps?
Effective procurement depends on managing the entire procurement life cycle,
from start to finish. By clearly defining your business’s needs, taking a
methodical approach to the selection and validation of suppliers and taking

17
care to draft a comprehensive contract, you will not only secure the best
supplier for your immediate needs but may also build a strong and mutually
beneficial relationship that helps your company succeed in the long term.
What types of businesses use the procurement life cycle?
Virtually every business can benefit from a procurement life cycle. That’s
especially true in today’s service-based economy, where companies in every
industry rely on external consultants, cloud-based software and other
services, in addition to the raw materials and machinery they need to
manufacture goods.
What is a procurement life cycle?
The procurement life cycle refers to all the steps involved in securing goods
and services for your company, from defining requirements and soliciting bids
to vendor management.
What are the five stages in a procurement cycle?
The procurement cycle consists of many steps, which can be grouped into five
broad stages: definition of business needs, supplier evaluation and selection,
management of supplier relationships, delivery of goods and services, and
assessment and refinement of procurement processes.
What is the first step in the procurement life cycle?
The first step in the procurement life cycle is to define your business’s needs.
With a clear set of specific needs and buy-in from relevant stakeholders
across the organization, procurement managers are better able to select the
best suppliers to meet every requirement while keeping costs to a minimum.

18
Question 1
Multiple Choice
4.9 / 5
★★★★★
(19)
Review LaterAdd Note
Which of the following is a principle of public procurement?

A) Value for money.

B) Transparency.
C) Efficiency.
D) Competitive tendering.

Question 4
Multiple Choice
4.7 / 5
★★★★★
(10)
Review LaterAdd Note
Which of the following disciplines is involved in public procurement?

A) Psychology
B) Biology
C) Public finance
D) Chemistry
Question 5
Multiple Choice
4.8 / 5
★★★★★
(17)
Review LaterAdd Note
Which of the following disciplines is involved in public procurement?

A) Economics.
B) Sociology.
C) Psychology.
D) Biology.
Question 6
Multiple Choice
4.9 / 5
★★★★★
(18)
Review LaterAdd Note
Which of the following is a principle of public procurement?

19
A) Value for money.
B) Competitive tendering.
C) Efficiency.
D) Non-discrimination.

Question 12
Multiple Choice
4.9 / 5
★★★★★
(15)
Review LaterAdd Note
Which of the following best explains 'a framework agreement'?

A) An agreement to establish contractual payments.

B) An agreement to establish contractual terms such as the quantities
envisaged.
C) Purchaser rights.
D) Supplier obligations.
Question 15
Multiple Choice
4.9 / 5
★★★★★
(18)
Review LaterAdd Note
Which of the following best explains 'threshold values'?

A) An agreement to establish contractual payments.

B) Minimal contractual terms such as the quantities envisaged.
C) Minimum order quantities for public procurement.
D) Purchasing volumes beyond which public institutions are obliged to follow
European legislation when making purchasing decisions.
Question 17
Multiple Choice
4.8 / 5
★★★★★
(19)
Review LaterAdd Note
Which of the following does not constitute a 'formal agreement'?

A) A contract.
B) A purchase order.

20
C) An invoice.
D) A verbal agreement.

21