Beginner’s Guide to the Procurement Cycle
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Procurement isn’t a household topic, but it is a ubiquitous process in the business world, nonetheless. Let’s break down the concept to make it more accessible.
At first glance, procurement might seem daunting to the unfamiliar; the behind-the-scenes process can be dizzying. While there’s a lot of meat on the procurement bone, it can be broken down and more easily understood by dissecting the pieces that make up the process. You see, procurement isn’t just one set-in-stone idea or methodology, and it’s also not something that can be done overnight. It’s a dynamic process that can take any number of forms. It’s facilitated by the individuals or entities that play a role in its operation and the factors that couple and interact with each other throughout all the steps.
Today we’re going to introduce fundamental topics about the procurement cycle, including:
- The difference between purchasing and procurement
- An overview of the procurement cycle
- Steps of the procurement cycle
Procurement in a Nutshell
So in an attempt to break down barriers of procurement, it might help to clarify what it is. It’s a hybridization of “purchasing” and “securing.”
In many cases, goods are being bought for a company’s need and usage, but also it can be seen as securing rights or intellectual property. While an IP, for example, doesn’t directly give a business a resource to use for its day-to-day, it becomes an asset that can eventually be monetized or increase valuations of the purchasing business.
We mentioned this already, but procurement isn’t something that happens in one sitting. There’s an elaborate process that goes with it, and it behaves like a machine with several moving parts. In an attempt to get all the pieces working in unison and streamline the acquisition of needed resources, the cycle usually features a general, cyclical framework.
Understanding the Procurement Cycle
While there isn’t any set way to create this cycle, many of the styles implemented by companies feature at least a handful of major principles that help set the groundwork for an effective method. There’s not one standardized procurement cycle that breaks down the process step-by-step perfectly every time.
Each time a cycle is used, it should be approached with a certain amount of open-mindedness and adaptability, an ability to roll with the punches. There are many facets that go into procuring and the “how” can often vary on a case-by-case basis.
Image courtesy blueoceanacademy.com
Demystifying the Procurement Process
In the above illustration, the first step in this instance is Procurement Planning. This an umbrella term that can cover many sub-steps. Planning can also be described in other ways: preparation, question, recognition or requirement.
Whatever the first step is labeled, it typically requires a business to prepare for a purchasing hunt locally or internally before initiating contact with appropriate contractors or purveyors of a service or product.
Step one is identifying the problem, gap or missing piece that would require an organization to look externally to address it. An initial study or review may be conducted to ensure that the capability or item does not exist in house; if the gap is confirmed, there’s a multitude of considerations that should be made before moving forward to the procurement phase.
For instance, what is the nature of the item or solution required? Is it something that other organizations need, which would make it a commercially available item? Or is it something that is custom to an organizational process or item (for instance, a unique component for a customized manufacturing line). What types of companies sell the items, and where can I find them? These types of questions will help the organization understand what they are buying and how they are going to buy it as part of the procurement plan that informs the strategy for soliciting proposals and evaluating them.
The second step in the procurement lifecycle is Requirement Definition, when the customer, technical expert and end user come together to collaborate on a document that summarizes exactly what is needed and why. At least in theory. Many procurement experts consider the requirements definition phase to be one of the most important steps of the procurement cycle, but it is not always done with the collaboration of all parties.
Basically, this step results in the “what to buy” document (often called a statement of work) that vendors receive in the solicitation, and against which they propose their product or service. A poorly defined requirement will result in proposals and solutions that do not address the core problem or customer need, which ultimately results in a lot of wasted time and effort from the procurement team and a procurement outcome that does not add value for the organization.
The next step, according to our illustration, is Tendering, also called solicitation or sourcing. Just prior to this stage, the procurement team has assembled the requirements document into a solicitation that includes terms, conditions, delivery schedules and instructions to offerors wishing to propose (among other things).
It is during this stage when prospective contractors will review, analyze and respond to the organization’s tender with a quotation or proposal (depending on what is decided during the procurement planning process). There’s somewhat of an art to tendering; it requires the calibration of cost- and time-efficiency while also making sure the needs are met optimally and within the constraints of an organization’s internal policies and procedures. There is never a one-size-fits-all approach, and it is almost always dictated by the needs of the customer, the characteristics of the item and the organization’s procurement culture.
Evaluation & Selection
Once reasonable options have been found, the Evaluation & Selection stage begins. This stage is much like a job-hunt scenario, where Company A is looking for a new employee and begins searching for likely candidates. There’s a job description, and those who are interested can apply with hopes that their resume will showcase enough to warrant their hiring.
It’s not a bad analogy for procurement. The solicitation contains all of the criteria that a prospective offeror must accommodate and honor in order to be considered for award. Typically, the solicitation includes the evaluation method so that offerors understand what matters most to the procurement organization, along with instructions for how the offeror should structure their solution. Not including this information would result in procurement professionals receiving any manner of proposals, and would not make for an easy evaluation and selection phase!
The next step is the Contract Award. This occurs once the organization has reviewed the offers they received and made a decision on a contractor whose proposal best meets their requirements and selection criteria. This stage is the culmination of all the prior steps in the process, and the efficiency and effectiveness of this stage is also a direct result of the diligence with which the procurement professional followed the best practices for those prior stages.
Sometimes, the organization needs more information from an offeror, or seeks clarification on the proposal. In this case, selected groups will enter negotiations with the organization so that additional details can be hashed out and a final award made.
Then, the work really begins, as the procurement organization prepares for the final (and often under-appreciated) phase of the cycle, Contract Management!
After a contractor is hired, the work doesn’t stop! Responsible procurement professionals will have a plan for managing the contract to ensure that deliverables are met, items delivered on time, and services rendered under budget. It is during this Contract Management stage that diligence in the pre-award activities pays dividends.
A well-written, thoughtful contract will address a majority of potential events that may occur during performance so that questions about performance or disputes about cost can be answered simply by referencing the contract. In instances where a special circumstance arises, the contract may need to be modified, which can be done unilaterally (at the total discretion of the organization) or bilaterally (at the mutual agreement of the organization and the contractor).
A poorly written contract may get to this contract management phase quicker, but it will almost inevitably result in more headaches with an increased potential for failure. So it’s important for procurement professionals to consider the management phase while they are executing their duties during the planning and pre-award phases.
Keep in mind, this is just a basic breakdown of a procurement process. Organizations — public and private — have their own nuances, with unique standards and procedures that reflect their culture and their bias. Part of the beauty of the procurement process, conceptually, is that each one is a little different and it could be different from the next time for the same product or service, or it could even turn on a dime while in the middle of the process.
It’s important to realize that these are flexible processes that will bend and have to shapeshift in some cases. While procurement is the name of the game, the method for which businesses get from point A to point B can take hundreds, if not thousands, of various paths to get there.
How do you find the right procurement technology and vendor for your company? Spend Matters’ new 5-step “Procurement Technology Buyer’s Guide” can help — with how-to documents, checklist templates and other tips.