Timeline
Step 1 – Identify the Need
Every procurement starts with a need. Someone needs something, they know why they need it, they know where and when they want it delivered and they have some idea about how much they can afford to pay.
There are four common kinds of business expenditure: capital expenditure (you want to build something), operating expenses (necessarily incurred to keep the business operating), purchases for resale, or material inputs to manufacturing.
Capital expenditure starts with a Business Case. This describes what is planned, gives the financial justification for it, identifies the risks related to the project, and provides an estimated or budget costs. Once the project is approved, all purchases derive from the approved detailed project plan.
Operating expenses include such things as office and factory supplies, utilities, purchased services, and labour. These are usually provided for in the annual operating budget and are typically repetitive purchases. They are often procured using an imprest system. Purchased services, such as accounting, recruitment, consulting, whilst often repetitive, are usually sourced under medium to long-term contracts
Purchases for resale are usually supported by a forecast of future sales or procured against firm customer orders. These procurements are best handled by an automated stock control system;
Purchases of material inputs to manufacturing are similar to purchases for resale, in that they derive from a forecast of future sales or firm customer orders. The primary difference is that the forecasts are translated into a manufacturing schedule which is then exploded via bills of material to yield component/raw material requirements;.
For more information on how to classify your procurement needs: Go to the Guide, Ask us for Help or Ask us to do it for you.
Step 2 – Prepare the Procurement Plan
All successful action starts with a plan. It can be explicit, such as a detailed project plan, or it can be implicit, such as an automated stock control system where the various steps and decisions are embedded in algorithms.
Before you start planning, you need to have an overall strategy for procurement within your business. This strategy starts from the question: “How important is procurement to your business?” Obviously, the more important it is, the more time and thought you need to expend in developing the strategy. A good starting point is to establish separate processes for project-related purchases and recurrent purchases.
For project-related purchases you need to establish a Procurement Plan that considers demand, the supply market, alternative options for satisfying the demand, risks and opportunities and concludes with a recommended approach. This needs to be endorsed by the project manager and approved by the business owner.
For repetitive purchases, it is usual to establish a Procurement Policy that specifies, inter alia, the approach that should be taken depending on the value of the individual procurements.
For more information on how to develop an overall Procurement Policy, and for a Procurement Plan template: Go to the Guide, Ask us for Help or Ask us to do it for you.
Step 3 – Refine the requirements
For repeat purchases of the same item, this step is very straight forward. All it requires is a knowledge of what is required, when, and how much. The requirement is rounded off to minimum order quantities and shipping multiples, any quantity price breaks considered, and the order placed with the existing preferred supplier.
If the preferred supplier is unable to meet either the time or quantity needs, the existing procurement specification is used to source the requirement from an alternative supplier.
For new items, a detailed procurement specification needs to be developed. This specification should include a full technical specification, functional requirements, any applicable standards, packaging, labelling, quality and inspection/testing required. This specification requires input from both operational and technical personnel, with the process overseen by procurement.
This step can be bypassed for branded products, where the supplier’s product code is all that is needed. However, specification of a particular brand should be avoided if possible, as inclusion of generic products provides much greater opportunity for obtaining value for money.
Procurement specifications should be kept in a well-structured database for ease of access.
For more information on how to develop a Procurement Specification, and for a Procurement Specification template: Go to the Guide, Ask us for Help or Ask us to do it for you.
Step 4 – Sourcing
Procurement is the entire range and process of activities from sourcing, purchasing, negotiating and acquisition and also includes risk management, sustainability etc. Sourcing is the component of the Procurement process that deals with supplier selection and management. Sourcing is simply the process of finding suppliers of goods or services and varies according to the nature and value of the items being sourced.
For common products and services there are usually established distributors or online marketplaces that can be utilised if you don’t already have a preferred supplier. This is usually the most cost-effective approach. However, if the quantity required is large, there may be an opportunity to buy direct from the manufacturer. Before going down this path you should allow a substantial amount of time for the process, especially if the manufacturer is located offshore. Established marketplaces like Alibaba for China and IndiaMart for India facilitate sourcing from suppliers located in the respective countries, but you should be under no illusion as to how long this will take or the difficulties you will encounter.
For less common products and services, the first step in sourcing is supply market analysis. Fortunately, thanks to the internet, this is much easier than it used to be, but it still takes time.
The step can be bypassed by early market engagement approaches. They typically involve issuing an expression of interest (EOI) with high level requirements and inviting responses. A shortlist of potential suppliers can be developed from the responses and a detailed invitation to offer subsequently issued to them. This process can also help to refine or modify the detailed requirements specification.
For more information on how to develop a sourcing strategy, and for a Sourcing Strategy template, Go to the Guide: Ask us for Help or Ask us to do it for you.
Step 5 – Go to Market
Having identified potential suppliers to satisfy the need, the next step is to approach them to see if they are interested.
There are two common approaches: for relatively simple requirements with established suppliers, a Request for Quote (RFQ) is usually issued. This can be issued to a predetermined list of suppliers (restricted offer process) or the requirement can be published on an internet marketplace (open market process).
The documentation for an RFQ is usually fairly simple. It includes a description of the requirement (what, how many, where, and when), criteria by which offers will be evaluated, any rules pertaining to the offer process, terms and conditions for supply, and a response schedule for the offeror to complete and return. For one-off purchases, the main evaluation criterion is price; for ongoing requirements the criteria may also include capacity and capability and non-price criteria.
For complex, or high value requirements an Invitation to Offer (ITO) or a Request for Proposal (RFP) is issued. The documentation is much more detailed, particularly around the requirements, and offerors are asked to respond to numerous questions designed to determine the offeror’s capacity and capability, and the fitness for purpose of their offer. Criteria are usually designated as Mandatory (failure to comply means the offer won’t be considered unless an acceptable alternative is offered), Highly-desirable and Desirable. Non-mandatory criteria are usually given a weighting that reflects their importance in the final decision. A draft contract is often included with the ITO documents. This can expedite the later contract negotiations, and also may provide grounds for excluding certain suppliers.
An Evaluation Plan is usually developed, based on a standard template, and signed off by the internal customer and finance. An open market process is usually preferred unless an EOI has previously been issued to determine a shortlist of suppliers to invite to offer.
For more information on how to develop an RFQ or an ITO and their associated Evaluation Plan, and for templates for each: Go to the Guide, Ask us for Help or Ask us to do it for you.
Step 6 – Evaluate Responses
Evaluation of responses is straightforward and lots of different guidelines have been developed for different industries and different products/services.
A team is selected to evaluate the responses, usually with a minimum membership of three: the customer or their representative, a technical representative, and a representative of procurement. The role of the procurement representative is to ensure the Evaluation Plan is followed, due process and probity considerations are observed, and to offer advice on any requested deviations from the desired terms and conditions. For simple requirements of low value, the evaluation may be performed just by the procurement person.
Each offeror’s responses to the individual criteria are evaluated on a three, five, or ten point scale, weighted according to their predetermined importance, and an overall value for money calculated. The results are then summarised, a recommended supplier or shortlist of suppliers determined, and a report presented for approval.
For more information on how to evaluate an RFQ or an ITO and for templates for each part of the process: Go to the Guide, Ask us for Help or Ask us to do it for you.
Step 7 – Negotiate the Contract
There is an old saying “you don’t get what you deserve in life – you only get what you negotiate” (but don’t try saying that to your partner!) and for many procurements, this is the most critical part of the process.
There have been numerous books written about negotiations and many organisations offer training in the subject, so there is no excuse for not doing well at it. We won’t attempt to cover it any detail here, but the following are key points to understand before you enter into any negotiation:
Prepare thoroughly;
Document your plan;
Always negotiate face-to-face if possible;
Always leave something on the table unless you never want to do business with the supplier again.
Things that can usually be negotiated include:
For more information on how to negotiate in different circumstances and for a Procurement Plan template: Go to the Guide, Ask us for Help or Ask us to do it for you.
Step 8 – Execute the Contract
This should be a simple process for most purchases, particularly if a draft contract has been included in the ITO documents issued to potential offerors.
A commercial contract consists of four main sections:
An Offer to supply from the offeror and Acceptance of the offer by the customer;
Consideration for the contract – something of value to both parties;
Terms and Conditions governing the behaviour of both parties for the life of the contract;
Execution of the Contract by both parties.
Nowadays, for RFQs, the contract usually consists of a Purchase Order (PO) issued either electronically or in hardcopy with an acknowledgement transmitted back by the supplier.
For ITOs, the contract is a much more formal document prepared and reviewed by the commercial and legal representatives of each party.
It is important to understand that a contract is not designed to make the process run smoothly – that is the role of the project manager on your side and the account manager on the supplier’s side – it is designed to handle situations where things don’t go according to plan.
There are so many different possibilities it is not possible to have a single contract covering all situations, but most industries have proforma contracts that can provide a good starting point. Similarly, with KPIs.
One area particularly fraught with difficulty are contracts for the procurement of information technology equipment, software and services. You should ensure that you get specialist legal advice before you enter into any significant value contracts in this area.
It is beyond the intent or capacity of this site to offer legal advice and you should always seek professional legal advice whenever you are uncertain as to how to proceed. However, for information on typical contract inclusions and KPIs: Go to the Guide, Ask us for Help or Ask us to do it for you.
Step 9 – PO Followup and Expedite
It is not good enough to place a purchase order and wait for it to arrive. If the supplier does not provide the information, the procurement person responsible for raising the PO should request the following:
For long lead time products, especially components in a manufacturing plant, changes in the forecast or production plan, or unplanned losses may necessitate bringing the order in ahead of the originally agreed delivery date. If the supplier is unable to accommodate the change, it may be necessary to place a fill-in order with an alternate supplier.
Expediting is a concept in purchasing and project management for securing the quality and timely delivery of goods and components. The procurement department or an external expeditor controls the progress of manufacturing at the supplier concerning quality, packing, conformity with standards and set timelines. Thus, the expeditor makes sure that the required goods arrive at the appointed date in the agreed quality at the agreed location.
For more information on how to use expediting to improve customer service or supplier delivery performance: Go to the Guide, Ask us for Help or Ask us to do it for you.
Step 10 – Contract Management
Contract management covers the administration, performance monitoring and support of contracts entered into with suppliers. Contract management, especially for projects, is best performed by the contract owner with the active support of the procurement person who negotiated the contract.
The Contract Management Plan is derived from the contract and typically includes contact details for both parties, performance reporting by the supplier against the contractual requirements, meetings between the stakeholders, and escalation procedures.
Contract management was traditionally performed face to face, but the advent of modern collaboration systems, many regular contract management meetings are now conducted remotely.
Contract administration covers the administrative aspects of delivery and acceptance, passing invoices for payment, and executing renewals, extensions and variations to existing contacts.
For more information on how to use effective contract management to improve your bottom line, or for a Contract Management template: Go to the Guide, Ask us for Help or Ask us to do it for you.
Step 11 – Vendor Management
Contract management relates to the day to day management of individual contracts with a supplier. Vendor management is a more strategic role, responsible for the management of all contracts with a supplier.
The Vendor Manager is responsible for managing relationships with key suppliers including staying informed of their product development roadmap.
The Vendor Manager you should also stay informed of developments in the supply marketplace including mergers and acquisitions, market shares and new entrants. In this role they can assist procurement with the sourcing of suppliers for RFQs and ITOs.
There is a considerable overlap between the responsibilities of procurement, category management, contract management and vendor management..
For more information on how to use effective Vendor management to improve your bottom line, or for a Vendor Management template: Go to the Guide, Ask us for Help or Ask us to do it for you.
Step 12 – Get feedback
It is a widely held tenet in business that you can’t manage what you don’t measure. The financial management system of a business usually does a pretty god job of measuring financial performance and can usually be easily expanded to cover operational efficiency, but it doesn’t cover stakeholder satisfaction levels.
With the increased emphasis on the customer experience, most successful businesses are regularly monitoring customer satisfaction levels via routine online questionnaires subsequent to purchase, or service delivery promise compliance, or customer complaint volumes. But most customers protest with their feet – not their mouth. Faced with poor product or service performance, they simply resolve to not buy from you again, The ones who do ring up are doing you a favour as it helps you to improve your performance.
Less regularly, internal service departments do the same with their internal customers. If you don’t do this already, Survey Monkey provides a cheap easy to use way to do so. But you may need some help from a customer experience specialist to design the questions.
Very rarely do businesses seek feedback from one of their most important stakeholders – the suppliers to the business. Without suppliers you don’t have a business, and the better your suppliers, the more profitable your business will be.
There are lots of Supplier Scorecards available which quantitatively measure supplier performance, but they are typically from your perspective. One of the tasks of the Vendor Manager, or the Contract Managers if you have no Vendor Manager, should be to regularly solicit feedback from all your key suppliers, and report on the feedback received.
For more information on how to use effective feedback to improve your bottom line, or for a Supplier Scorecard template, or a template for a procurement internal customer feedback questionnaire: Go to the Guide, Ask us for Help or Ask us to do it for you.
Step 13 – Manage change
We live in an era of continuous improvement. If you are not improving, then you are probably going backwards relative to your competitors and sooner or later your existing customers will start to leave, and you will find it harder to attract new customers.
There are three kinds of change that are really important:
Most organisations do the first one fairly well, driven by feedback from their sales and marketing people, and their product engineers. Increasingly, businesses are changing their organisation structures to become more customer-centric. Fewer are actively addressing internal processes, mainly due to the cost and risk involved in changing IT systems.
But with an increasing number of large businesses embracing robotic process automation (RPA) and artificial intelligence (AI) and achieving substantial productivity improvements (read – headcount reduction), you will soon need to consider that as well.
For more information on how to set up a continuous improvement culture, or how to use the new process improvement technologies: Go to the Guide, Ask us for Help or Ask us to do it for you.
Step 14 – Governance
Good governance is important for all important contracts, but especially so for IT contracts. Governance is one of the main reasons why IT managed outsourcing contracts succeed or fail. Good contract governance is about the delivery of business benefits, well managed services, and a strong customer-supplier relationship. Poor contract governance, on the other hand, often results in poor service delivery to the customer and an unprofitable contract to the supplier. What do you need to do to get contract governance right? There are 10 steps to good contact governance:
For more information on how to set up good contract governance: Go to the Guide, Ask us for Help or Ask us to do it for you.