Just as it is with other business areas, experts in procurement pose an edge over the entrepreneur or small business owner who’s figuring it out as the business grows. While experts argue away about cost reduction, new market development, and risk minimization, purchasing can seem rather intimidating to the small business owner. Many entrepreneurs aren’t exposed to these topics, and realize the impact of procurement later than they should.
Businesses with an efficient procurement team often do great business and enjoy success from repeat customers.
To level the playing field, here’s a flashcard-style look at all the essential processes that modern procurement entails. This will give you clarity into the core functions that make up the bulk of procurement responsibilities. You’ll need to look for all of these in any competent procurement platform.
Checking needs and stocks
Before the procure-to-pay cycle even starts, you need to identify the need for a product or service. In a small business context, the key is estimating the validity of needs. Also, as any procurement expert will tell you, check availability. Then check it again. It’s absolutely vital that you check needs and double check availability before going to the next stage: raising purchase requests.
Raise a purchase request
Here, the team or team member who needs a specific product/service will send in a request. This can be a paper form, an electronic form, or a verbal request over the phone. If you are starting fresh, use electronic forms to aid in storage and communication. Make sure that requests are raised only after certain administrative requirements are met. This is a method to help you ensure that only valid requests get through.
Managing purchase requests
Start by assigning the crucial responsibility of approving purchase requests. Someone from the finance or the procurement team reviews each purchase request, and either approves it and issues a Purchase Order (PO) or sends it back to the requester with a reason for rejection. Once a PO is approved on your company’s behalf, it’s a good idea to complete a budget check. Do this before you send out any Requests for Proposals or Quotations (RFPs, RFQs) as required.
Another tip: you can bypass POs if a spot buy is possible. This is best for unique one-time purchases low-value goods or services, or unmanaged category buys.
Negotiations and PO approvals
Once you send your PO to the vendor, they may choose to approve it, reject it, or open negotiation talks. At this stage, you may discuss variables like delivery schedules, alternative commodities, pricing, and mode of transport. Note that a PO is a legally binding contract. Once a vendor signs one, they are required by law to provide the services or goods listed, according to the schedule specified, at the given pricing.
Receiving goods and/or products
Your vendor sends you the goods or provides the service, and presents you with an important document: the goods receipt. You sign off on it once you’ve confirmed that the requested goods (or service provided) is in order. At this stage, you also carry out a safety measure called three-way matching, which means comparing the purchase order, the packaging slip that comes with the product or service, and the vendor invoice. Once you’ve made sure they all match, and only then, should you move on to payments.
Record keeping and vendor performance
Once you’ve completed all the processes that lead from ‘procure’ all the way to ‘pay’, you take two measures to ensure consistency. The first is record keeping, and the second is analyzing vendor performance. After each payment is done, log it for a permanent record, useful for auditing and when you need to retrieve details regarding an order later. Going digital will help you store all purchasing data in an easily accessible centralized location.
Vendor performance is arguably the sole key to effective procurement. Here, you evaluate each vendor on factors like quality of goods delivered or services rendered, how well they stuck to delivery schedules and contractual obligations, and responsiveness. If you weren’t happy with any of these areas, red flag it. Analyzing vendor performance management helps you ensure that you maintain and prolong relationships with only the best-performing vendors.
Understand procurement processes, ace purchasing!
Entrepreneurs have a lot on their minds, and they shouldn’t feel like they need to become a procurement expert to make their business run smoothly. Just start with the basics and understand how proper procurement is done. Set up some automated procurement systems so that you can rest assured that they are followed the same way every time.
Don’t let a lack of knowledge stop you from competing with seasoned pros–get these basics right, and you’re already off to a good start!