Procurement Policy 101

Procurement policy provides fundamental guidance to the business on best practices in conducting procurement for goods and services. Its purpose is to establish procedures for the business for procurement of all goods and services. Procurement policy also ensures that all goods and services procured are obtained for the best possible prices, at the required specifications and quality, and are delivered in time. Adhering to procurement policy can support your company to make good decisions and achieve rational outcomes.

Procurement Policies and Procedures

Procurement policies and procedures are critical documents for any business because they establish policies and standards and define the procedures that staff members need to follow.

A procurement policy has to outline the overarching principles and standards used to set direction and influence decisions. Its purpose is to guide employee decision-making under a specific set of circumstances within the framework of objectives and goals that were established by senior management.

But this policy is not prescriptive about how to go about performing the procurement process. You need to develop procurement procedures that will define the “how” of implementing your procurement policies. A proper procurement procedure consists of steps employees will follow in a consistent and repetitive approach or cycle.

Every organization has a unique procurement process flow, let’s take a closer look at the fundamental steps.

Identify Required Goods or Services

The procurement cycle starts when any business unit in a company needs to obtain goods or services from an external supplier. During the first step of the procurement process, you need to identify and consolidate the requirements of all business units in your company. This provides visibility into the spend areas and categories and allows you to identify areas for cost savings through spend analysis.

Consider a List of Suppliers

This stage involves sourcing suppliers and determining their ability to provide the best quality and value for goods or services. Selecting the right vendors is critical, so you need to perform a thorough vendor risk assessment. This process is arduous and time-consuming, so you should consider using vendor risk management software like START.

Negotiate Contract Terms with Selected Vendors

After you’ve decided which supplier to work with, you need to negotiate your contract terms with them. This stage is crucial because you want to agree on a price that’s fair for both parties. You should also consider the scope of the whole project, including such areas as terms, conditions, and timeliness of delivery. Before you enter any negotiations, you should analyze your previous contracts with vendors and suppliers to identify opportunities that will enable you to streamline costs and save money.

Finalize the Purchase Order

When both parties are happy with the contract, you need to prepare, finalize, and send purchase orders. These are documents that specify:

  • A description of the goods or service
  • Total costs and payment terms
  • Quantity
  • Approval of workflow

After the purchase order has been approved, the finance team releases the details to the supplier, giving them access to the critical information they need. A purchase order contains an additional agreement between the two parties and is typically sent by email.

Receive Invoice and Process Payment

The supplier will send you an invoice detailing the agreed price and instructions on how to pay. Depending on what’s outlined in the contract, you’ll have a certain amount of days to make the payment. Many businesses offer a thirty-day credit notice (referred to as Net 30), which gives you leeway to make the payment if you cannot fulfill it at the time of the order.

Delivery and Audit

Depending on the specific terms that you’ve agreed in your contract, your delivery will arrive soon after your purchase order has been sent in. You should make a record of when the order has arrived as well as double-check the order contents. If you notice something is missing, you need to contact your supplier as quickly as possible to rectify the problem and reduce potential downtime.

Keep Your Records

You need to keep a record of all your invoices and payment records for internal and external audits. These documents can help you precisely calculate what you’ve spent throughout the contract and identify areas where you can further analyze your spending. Excellent record-keeping helps in auditing the records and in the case of reordering the same items.

Procurement Policy Template

A procurement policy helps you establish and communicate a standard procurement process for your company. But this document is not just for your employees because it provides standard guidelines for your vendors and suppliers on how to engage with your company.

A procurement policy template might include such sections as:

  • Objective
  • Purpose
  • Scope
  • Procurement policy application and responsibility
  • Code of conduct
  • Procurement methods
  • Procurement guidelines
  • Procurement by tenders
  • Specific goods and services procurement procedures
  • Generating purchase requisition forms
  • Storage and inventory control of consumables

Procurement Best Practices

No matter the size of your company, procurement processes have a significant impact on operational and competitive health. Establishing and enforcing procurement best practices can help your business achieve the optimization you need to succeed.

Here are some of the most impactful ways to improve your procurement cycle and guarantee that everything will run smoothly:

  • Use the feedback of all stakeholders in procurement to keep improving the policies and process
  • Automate procurement processes to save time, reduce human error, and decrease processing costs
  • Treat suppliers as strategic partners, ensure collaboration and open communication with vendors
  • Monitor vendor compliance and performance with KPIs
  • Take control of inventory management to provide better transparency; use analytics to control inventory planning
  • Conduct periodic assessments of your procurement cycle and your suppliers
  • Establish a unified core for data that will allow making decisions based on shared knowledge.

Procurement Practices: Final Thoughts

A procurement process is essential for every business because it ensures that its purchasing is competitive, fair, and well-priced for the market. Formal procurement policies and procedures provide greater efficiency and hopefully lead to better profitability for the company.

Although procurement decisions about selecting suppliers and products are based on prices, the more significant aspect is that the product or service must meet certain minimum specifications. Other essential factors are the reliability of suppliers and vendors and business relationships with them, so you need to develop a comprehensive vendor risk management policy and use tools like START to automate your processes.

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