Procurement processes are integral to virtually every business. Whether for sourcing rawmaterials, machinery, technology consulting services or employee training, companies rely ongoods and services from external suppliers to grow and meet their strategic objectives. Anefficient procurement life cycle helps organizations obtain the right goods and services atthe right time while minimizing unnecessary costs. This comprehensive breakdown of theprocurement life cycle and its implications can pave the way for your company’ssuccess, including the steps to take and best practices for managing procurement.
What Is the Procurement Life Cycle?
The procurement life cycle refers to all the steps involved in obtaining goods or servicesfor 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 cycleensuresthat critical goods and services can be obtained with minimal delays, which in turn reducescosts.
Another major benefit for businesses that nail their procurement life cycle is improvedcustomer relationships, because obtaining the right supplies at the right time helpscompanies reliably deliver their products to customers. For instance, major ecommercemarketplaces have built a reputation for quickly and reliably sourcing the products theircustomers need, which has helped them gain market share.
The procurement life cycle has many steps, but these steps can be grouped into five broadstages:
- Define and specify business needs.
- Invite suppliers to submit bids (a process known as “tendering”).
- Evaluate and select suppliers.
- Manage contract and deliverables.
- Assess and refine procurement processes.
Businesses may procure a wide range of goods and services, ranging from criticalmanufacturing machinery to day-to-day office supplies and consulting services. Procurementactivities are typically grouped into the following categories:
Direct procurement refers to obtaining goods or materials that are used tomake the company’s products and directly drive profit for your business. These includeraw 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 ormachinery a company uses to develop its goods or services, such as the factory robots usedby a car manufacturer.
Indirect procurement is the purchase of goods or services that are criticalto 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 cycleeven more important.
Services procurement refers to securing people-based services. These canrange 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 businesschallenge, such as an implementation partner hired to help with the challenges ofimplementing a new ERP platform. Services procurement can incorporate direct as wellas indirect procurement.
Key Takeaways
- The procurement life cycle encompasses all the steps involved in procuring goods andservices from external suppliers.
- An efficient life cycle is crucial to ensuring that the company obtains the goods andservices it needs at the right time, while minimizing cost.
- Steps in the procurement life cycle range from defining business needs and selectingproviders to managing contracts and supplier relationships.
- Supply chain andinventory management software can help companies trim time, costs and humanerror at multiple stages of the procurement life cycle.
Procurement Life Cycle Explained
The purpose of procurement is to source the goods andservices your organization needs in order to operate efficiently and serve customers as wellas possible. Effective procurement achieves these goals while minimizing unnecessary costsand delays. The balance of speed, efficiency and cost will vary from one company to thenext. For instance, a luxury goods brand cannot afford to compromise on materials if itwants to maintain customers’ trust, whereas a discount retailer might focus on speedof 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 andservices, from defining your business needs to soliciting bids, awarding contracts andmanaging supplier relationships. At many companies this is a dynamic, continuous cycle. Somesteps overlap, and some depend on other departments — for example, purchasingdecisions maybe 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 stepsare common to different businesses and industries. Some companies are able to decrease thenumber of steps once they’ve built up a reliable network of trusted suppliers,allowing them to skip some tendering and supplier validation processes. Consider, forexample, a high-end furniture company that orders its fabrics from the same short list oftextile manufacturers every time, thus eliminating the need to validate its suppliers beforeprocuring new raw materials. Here are 16 typical steps in the procurement life cycle.
Define your business needs.
Defining clear criteria will help you choose a solution that meets every one of yourcompany’s needs. It is important to involve multiple stakeholders in thisinitial request of the procurement life cycle — from the employee to whoinitiatesthe request for the item — as this helps ensure their buy-in when the timecomes tochoose a supplier in their purchase request. New business initiatives often drivenew procurement needs: A growing business may require a new technology provider tosupport increasingly complex requirements, or it might be launching a product linethat requires procurement managers to source an entirely new range of raw materialsand machinery.
Perform a market analysis.
Once your needs are clearly defined, conduct a market analysis to see what’savailable and to get an idea of costs. This exercise serves as both a validation ofyour needs and a cost-benefit analysis. Some companies may even decide to developthe goods or services in-house if the costs are prohibitive.
Create a supplier strategy.
Develop an overall strategy for acquiring what you need, taking into account marketavailability and primary types of suppliers. Leverage is a powerful force inestablishing supplier relationships. For instance, your company’s orders mightrepresent a large proportion of a small supplier’s revenue, giving youleverage to negotiate more favorable rates.
Perform pre-procurement market testing.
It can be useful to test what the market really offers by initially acquiring smallamounts of your needed supplies. This helps determine whether you should changeanything in your procurement plans. Supply chain outages, geopolitical tensions andcompetitor activity can all have a significant effect on your ability to purchasewhat you need.
Develop specifications and documentation.
Dive deeper into the details of your business’s needs to create clearspecifications for external suppliers. As with the first stage of the procurementlife cycle, it is essential to involve relevant stakeholders to ensure that thespecifications cover every aspect of the required quality, quantity andcapabilities.
Conduct an RFI.
A request for information, or RFI, is a call for suppliers to share information abouttheir business and solutions. Business details might include their history,financials and relevant case studies that demonstrate their ability to meet yourneeds. Solution details should include information such as product performance,capabilities and differentiators.
Shortlist suppliers to participate in tender.
After reviewing the RFI responses, you can create a shortlist of suppliers that meetyour requirements. Some companies even complete a preliminary ranking of suppliersat this stage, based on their capabilities. Think about your future requirements, aswell as your current needs, when creating a shortlist, as the suppliers you choosemay eventually become long-term partners. To build a strong and mutually beneficialrelationship, choose partners that are accountable, trustworthy and communicatewell, in addition to meeting your technical requirements.
Issue tender documentation (RFQ or ITT).
The time has come to get specific proposals from relevant suppliers, using a requestfor quote (RFQ) or invitation to tender (ITT). An RFQ is a document sent to ashortlist of suppliers in order to solicit bids. Companies that have not previouslydefined a shortlist can instead put out an ITT, which is an open call for quotesfrom any supplier that can meet their needs.
Evaluate bids.
Thoroughly evaluate the bids received from suppliers. A typical goal is selecting thebid that delivers the greatest value and leads to a dependable supplierrelationship. Reliable suppliers are more likely to submit quotes that are clear andstructured, and reflect an honest assessment of their strengths.
Validate contenders.
It may be tempting to evaluate quotes based on cost alone, but it is just asimportant to evaluate suppliers to make sure they can credibly deliver what theypromise. Look for feedback on their previous projects from other customers and askfor product samples, if relevant, to validate quality.
Award contracts.
Having chosen and validated your preferred supplier, draw up a contract laying outthe terms. Be methodical and comprehensive when defining these terms, because thecontract will become the foundation of the supplier relationship. The contractshould include key performance metrics, timescales, provisions for a wide range ofpossible disruptions and the obligations of both parties.
Begin work.
Once the contract is signed, the supplier’s work begins. The supplier begins tomanufacture and deliver the goods or services and continues to do so until thecontract is completed.
Manage receipt and warehouse logistics.
When procuring physical goods, especially on a large scale, it makes sense to setclear terms for their delivery so you can effectively managewarehouse operations and inventory. These provisions can help the businessaccept deliveries efficiently, with minimal disruption to operations. In some cases,the terms may even cover the spacing and placement of delivered goods.
Review contract performance.
Supplier relationships are dynamic by nature and will evolve over time as bothparties learn to work together, or when new conditions arise. To stay on top of anychanges, conduct regular reviews of your contract terms and supplier relationships,identify any pain points and adjust tactics to maintain a high level of performance.
Establish continuous supplier relationship management.
No two suppliers are the same, so every supplier relationship may need to be manageddifferently. That’s why it’s important for companies to constantlyanalyze each relationship to be sure they are getting the most out of their vendors.
Conduct asset management.
Rigorous asset management helps the company track when it needs to replace or upgradeequipment or infrastructure, necessitating procurement of new items.
How to Manage the Procurement Life Cycle
The key to smooth operation of a complex procurement cycle is ensuring that you caneffectively manage many moving parts. This is especially true for steps that requirevalidation from multiple stakeholders, such as when defining business needs in the earlystages of procurement. Failure to manage the procurement life cycle can lead to supplydelays and added operating costs, potentially jeopardizing relationships with key suppliersand compromising your ability to serve customers. Here are five best practices foroptimizing the procurement life cycle.
- Automate administrative tasks. The administrative burden of manuallymanaging procurement amid shifting market conditions can be enormous. Automatingelements of the procurement life cycle, such as reordering and invoice payment andautomating the approval process, can save considerable time and cost while reducing therisk of human error.
- Structure your processes. Structure is the foundation of an efficientprocurement life cycle. Laying out each step in detail, assigning ownership and definingbest practices can help procurement operate smoothly.
- Champion visibility. Visibility and transparency are essential foreffective procurement life cycle management when factors such as supply chainbottlenecks can force companies to reshape plans overnight. When everystakeholder has access to data and updates throughout the procurement process, they arewell equipped to fulfill their role and manage last-minute adjustments whencirc*mstances change.
- Give back to your supplier network. The best supplier relationships aremutually beneficial. Your company gets a trusted partner that reliably provides thegoods and services you need, while your supplier gets a regular source of income and acase study to help them grow their own business. A healthy relationship also breedshealthy communication. For instance, by warning suppliers of potential future risks, youcan 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 linecan help you manage possible bottlenecks before they have knock-on effects for yourcustomers.
- Optimize inventory management. Efficient inventorymanagement is critical for companies seeking to procure the right quantities ofnew supplies at the right time. That is why many businesses rely on cloud-basedinventory management systems to strike the right balance between inventory capacity andcosts. Inventory management systems can provide real-time visibility into inventorylevels, help companies predict demand and automatically alert purchasing staff whenit’s time to replenish inventory.
Clarify Your Inventory Needs With Forecasting
Now you know how to procure what you need when youneed it. Here’s how to simplify the next step of figuring out how much youneed.
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Improve Your Procurement Life Cycle With Software
Managing complex procurement processes and supply chains requires complete control over yourbusiness data. NetSuite Procurement Management records and updatesyour production data, financial reports, inventory and outstanding orders in real time, sothat critical supply chain managementsystems will be up to date and operating on the same information. This helpscompanies control costs associated with planning and executing supply chain processes.Supply-planning features analyze demand, determine replenishment needs and create orders asneeded. NetSuite procurement capabilities automate communication with suppliers and ensureaccuracy throughout the procurement life cycle.
A well-oiled procurement life cycle helps your company secure the critical goods and servicesit needs to maintain operations and serve customers, while minimizing costs. With the rightsoftware, businesses can better coordinate and automate procurement processes, forecastdemand and reduce burdensome administration.
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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 tofinish. By clearly defining your business’s needs, taking a methodical approach to theselection and validation of suppliers and taking care to draft a comprehensive contract, youwill not only secure the best supplier for your immediate needs but may also build a strongand 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 especiallytrue in today’s service-based economy, where companies in every industry rely onexternal consultants, cloud-based software and other services, in addition to the rawmaterials 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 servicesfor 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 supplierrelationships, delivery of goods and services, and assessment and refinement of procurementprocesses.
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 aclear 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 requirementwhile keeping costs to a minimum.
