The procurement life cycle is a series of stages crucial for acquiring goods and services efficiently and cost-effectively. Understanding these stages is essential for organisations that want to optimise their procurement process, ensure compliance and achieve strategic objectives.
The cycle begins with identifying the need and planning, followed by supplier selection contract negotiations and order placement. Subsequently, it includes order fulfilment, performance evaluation, and supplier relationship management. Each stage plays a pivotal role in ensuring that procurement activities align with organisational goals, drive value, and mitigate risks.
In this blog, we’ll see all of that in detail.
What is Procurement in Supply Chain?
The procurement life cycle, also known as the purchasing cycle, is a systematic process that a company follows to acquire the software they need for efficient operations.
The cycle starts with regular contract negotiations, followed by a bid evaluation, at which time the vendor will deliver. If they fail to perform as per expectations, the decision can change and changes may need to be implemented accordingly.
This cycle is more than purchasing the right tools for your company. It requires a thorough understanding of the requirements for your company’s business units that will result in an effective procurement life cycle process.
Let’s see the steps.
12 Stages of the Procurement Life Cycle
Here are the procurement process steps that will help you to choose the right vendor and manage your supply chain process:
1. Define the Need
Understanding what your business needs and when it needs it- is what starts this cycle. Usually, procurement teams rely on incoming requests across the organisation to help identify these needs, such requests are known as purchase requisitions.
Having standardised purchase requests saves time and ensures everyone is on the same page. This is especially important when requests come through various channels, like forms or emails.
A standardised form makes it easy for everyone to provide the necessary details. This includes getting approval from the purchasing manager or department leader, a typical step in the process.
The key takeaway is the more information you provide upfront, the smoother the process goes. Clear details ensure the procurement team finds exactly what you need.
In the case of purchasing requests, the more detail the better.
2. Conduct Market Analysis
Your market analysis is the research that will help you to make an informed purchase. The research will make you look more closely at the needs of the customers, the available options, and the estimated costs to meet the needs.
For that, you need to conduct a needs assessment. that represents the second stage within the procurement life cycle.
While conducting the assessment, organisations take into consideration operational demands, technological advancements, and stakeholder expectations. As a part of the process, most organisations conduct feasibility studies, engage with end-users and seek expert opinions.
A manufacturing company enhances production efficiency by assessing needs and implementing an ERP system. It evaluates processes, identifies pain points, and determines necessary functionalities like inventory management, production planning, and financial integration.
Onto the next step of the procurement life cycle.
3. Fix the Budget and Funding
Determining the budget is one of the critical stages in this lifecycle. It involves assessing the financial resources for procurement activities and finalising the allocated budget. Companies take into account factors like project scope, expected deliverables, and available funds to determine the economic parameters for the procurement.
For instance, a company may allocate a budget for IT infrastructure procurement after considering the cost of software, hardware and implementation services.
Next in the procurement life cycle, comes the time when you “procure” the product. For that, you need a strategy.
4. Procurement Strategy
This step sees the organisations establish a comprehensive plan for procurement activities. They usually take a strategic approach that aligns with the organisation’s goals. Then they maximise value and mitigate risks. Organisations can optimise their procurement processes by considering the market conditions, supplier relationships and their capabilities.
Let’s see an example. A construction company wants to implement a procurement life cycle strategy for its infrastructure projects. They do market research to identify potential suppliers, evaluate their capabilities and develop long-term relationships. Not just that, they also analyse project requirements, determine key performance indicators and establish guidelines for cost control.
At any step of the supply chain process, you have to know the market. So, thoroughly evaluate the market.
5. Market Research
Market research is very important as you need to gather information about potential suppliers. It gives you an idea about their offerings, prices and market trends. With this, you can create reports and have information on supplier databases and online platforms to gain insights into the market landscape.
For instance, a retail company should conduct research to identify potential clothing suppliers, examine their quality and pricing and understand current fashion trends before they make any purchasing decisions.
Once you find the perfect supplier, the next step of the procurement life cycle is to quote them a price. Let’s see what that does.
6. Issue Request for Quotation
Issuing a request for proposal (RFP) or request for quotation (RFQ) is a crucial step in the procurement process. It allows organisations to effectively communicate their needs to potential suppliers. This is done by outlining the specifications of the required product or service, along with the desired timelines for completion.
An important part of this procurement life cycle is establishing evaluation criteria. This helps to ensure a fair and objective selection of the most suitable vendor. Once the criteria are set, suppliers can submit their proposals or quotations in response to the RFP or RFQ.
7. Choose the Suppliers
Companies narrow down the suppliers that meet their procurement requirements and offer favourable deals. The companies will choose suppliers that meet the procurement requirements the best. This process can be quite challenging, as there are multiple factors related to this selection process. Factors like pricing, quality, reliability and supplier reputation.
For instance, a hospitality chain can select a preferred food supplier based on food quality. Pricing and how they meet delivery schedules.
8. Negotiate Terms and Conditions
This is a significant process as it can assess the convenience of the vendor relationship. Organisations engage in discussions with the preferred suppliers to make a final call on the contractual agreements. This includes negotiations on pricing, payment terms, delivery schedules, warranties and other contractual clauses.
9. Finalise Contracts
A contract in the procurement life cycle formalises the terms and conditions of the procurement through a legal method. The contract details the rights, responsibilities and obligations of the two parties.
10. Monitor Supplier Performance
This is a continuous process that ensures organisations have control over quality, time limits and adhering to contract terms. Companies carry out periodic evaluations, track key performance indicators and address the issues.
11. Make Payments
Once the invoice is approved, the buyer will finalise the payment. Usually, the terms and conditions of the purchase are also for discounts if the customer makes an early payment. Other terms may also include late fees and other penalties if payment is to be delayed.
12. Maintain Vendor Relationship
If the procurement team decides to work with vendors, they will mention if the vendor is a preferred partner and maintain contact with them in anticipation. If the procurement team is not pleased with the vendor’s performance or the quality of the goods.
FAQs: Understanding the Stages of Procurement life Cycle
What are some procurement examples?
Some of them include sourcing raw materials for manufacturing, acquiring office supplies, contracting IT services, purchasing machinery, and buying marketing services
How to improve to procure to pay cycle?
The best way to enhance the procure-to-pay cycle is by automating processes, enhancing supplier collaborations, streamlining approvals, using data analytics and implementing e-procurement systems.
What are the types of procurement?
These are forward procurement (raw materials), backward procurement (office stationery), strategic procurement (long-term planning) and tactical procurement (short-term needs)
Conclusion
The procurement life cycle is crucial for organisations that want to streamline a process, achieve strategic goals or just stay on the right side of the law. It is by making sure these processes work continuously and that procurement is aligned with strategic goals, that value can be driven and risks can be minimised.
For expert solutions and to further streamline your procurement process, partner with Qodenext.
