Procurement Management: A Comprehensive Overview for Business Success

It is important for companies to ensure smooth processes within their business functions. In today’s business landscape, the role of procurement function extends beyond purchasing goods for the company. Procurement is the process of sourcing and purchasing goods for the company. Procurement management is essential for a company to function smoothly. Failure to do so can affect both finances and supply chain of the company. 

What is procurement management?

Procurement management is the process of carefully sourcing and purchasing goods for a company. It is a part of the company’s source-to-pay function and encompasses functions like market analysis, vendor selection, contract negotiations, purchase requisition management, purchase order generation and vendor management and payment.

The entire process is handled by the procurement department of the company. The sourcing and purchasing departments might share the functions above in larger companies. It is the job of the procurement department to ensure that a lack of inventory does not hinder the company’s supply and that good-quality goods are obtained within the company’s budget. 

Why is procurement management important?

Procurement management is at the heart of almost every function of the company. If a company fails to procure good quality goods at the right time or quantity, the company’s supply chain will be disrupted leading to low output. Over purchasing goods and services can also lead to depreciation of goods’ quality and increased inventory management costs. Going over-budget when making a purchase can also lead to depleting funds and affect the financial performance of the company. 

To ensure smooth running of the company, the procurement department needs to carefully manage these purchases. 

Benefits of procurement management

Procurement management is not only extremely important to your company, but it also helps improve your company’s processes. Here are some common benefits of procurement management: 

Cost reduction

Effectively managing and analyzing purchases and vendors and negotiating a favorable contract can help companies significantly reduce costs and save on non-payroll spend. This frees up the company’s funds which can be used to increase profitability and generate revenue. 

Maintaining supply chain

Maintaining enough inventory to ensure smooth supply chain operations will also help companies fulfill their demands and generate more revenue. Effective supply chain management can also allow your company to scale and expand geographically. 

Avoid risks and fraud

Smart procurement management can also save you from vendor and invoice fraud. Detecting internal or external frauds has become a challenging task nowadays with the rise of technology. Keeping track of your ongoing and completed purchases can act as a safety barrier between your company and a fraudster. 

Improve visibility and transparency

Good and effective procurement management allows companies to actively monitor and analyze their spend according to department and purchases. This ensures complete transparency and visibility into where your funds are going and can help you strategize future plans. 

Steps in procurement management

Procurement management is a part of the entire source-to-pay process of a company. 

Identifying and specifying the needs

The procurement process starts by identifying the need to buy goods and services for your company. The department that requires the purchase fills out a purchase requisition form, which the procurement team collects. The department needs to specify the type of goods they want to purchase in detail, such as the size and material of goods required and whether it is a recurring purchase.

Procurement teams can choose to plan a contract with the vendors in case of a recurring purchase to lock prices. 

Sourcing and vendor selection

The procurement team then selects the right vendor for the purchase based on factors such as the quality of the goods, reviews, the vendor's production capability, expected delivery time, ethical procedures, and logistics as required. A company can also choose to source products from more than one vendor to ensure supply chain continuity due to disruptions or scale. 

The procurement team then requests vendor quotations to analyze how they would fit with the company's budget or gauge the availability options.

Negotiation and contract creation

The procurement team negotiates the prices and contract terms with the vendors, ensuring the terms favor both parties. Having unfavorable payment terms can hurt your company’s cash flow. Consecutively having terms that are unfavorable to the vendor can lead to bad vendor relationships.

Procurement teams must ensure that the contract strikes a balance between economical prices and payment terms and good quality of supplies. 

PO creation

The company then creates and sends a purchase order to the selected vendor. The purchase order contains details such as the type and quantity of items required, a tentative delivery date and sometimes pricing. The vendor uses the purchase order as a reference to deliver the goods. 

The PO is an important document when it comes to processing invoices. PO and non-PO invoices are processed differently in the accounts payable function. 

Order confirmation and delivery

The vendor confirms the order of goods and delivers them according to the contract or purchase order. The goods are delivered to the company along with a receiving receipt stating the quantity and type of goods delivered. 

Ensuring delivery and inspection

The procurement team confirms the delivery and inspects the goods, issuing an inspection slip. They inform the vendor of any below-par quantity goods, which the vendor either replaces in the required time frame or is discounted for. 

Invoice processing and payment

The vendor sends an invoice to the company's accounts payable department after the goods have been delivered. The accounts payable department enters the invoice into the accounting system and performs invoice matching with the purchase order and other documents. The AP team can then send the invoice for approval and process payment. Any discounts or late payment fees are adjusted in the payment, and vendor invoices with discrepancies are withheld and raised to the vendor.

Ensuring accuracy of records

The procurement team must ensure all vendor transactions are diligently noted and accounted for in the general ledger as journal entries. These records act as an audit trail for future audits and reporting. 

The procurement department is also responsible for monitoring vendor performance with the company and looking to change a vendor in case of late deliveries or other problems. They also maintain healthy communication and relationships with the vendors to foster mutually beneficial relationships. 

Best practices in procurement management

Maintain good relationships with vendors

Maintaining a good relationship with vendors is essential to get favored as a customer in case of low production or supply chain disruptions. Ensuring the contract terms are favorable for the vendor, making timely payments, and keeping them in the loop can ensure the vendors remain happy and build trust. 

Negotiate favorable terms

The contract terms should not only be favorable to your vendors, but also to your company. Ensuring a more lenient payment term can help free cash flow that can be used to generate more income for the company. Setting up a long-term contract with fixed pricing can also help budget for future expenses easily. 

Centralize processes

For larger companies with multiple locations across the globe, centralizing procurement processes especially for service-related purchases can save money and get better deals. If two locations within a company have purchased two licenses for the same software, a central location purchasing multiple licenses can help get discounts and manage usage better. 

Invest in automation

Automating procurement and accounts payable processes can also hugely help companies ensure vendor performance is up to mark and pay them on time. AP automation software like ClearTech help companies automatically create payment runs based on invoice due dates to ensure timely payments. ClearTech also provides approval TATs and other AP metrics in a smart dashboard, as well as reminds approvers with the help of email notifications. 

Conclusion

• Procurement is the process of strategically sourcing and purchasing goods for a company.
• Procurement management is essential to ensure smooth running of financial and supply chain functions of a company. 
• The procurement process consists of identifying company needs, selecting vendors, negotiating contracts, sending POs, ensuring delivery and timely payments to suppliers and vendor management. 
• Procurement management helps reduce costs for the company, as well as safeguards it from fraud. 
• Maintaining good relationships with vendors, negotiating favorable terms, centralizing processes across multiple entities or locations and investing in procurement and AP automation are some best practices of procurement management.