Deconstructing your procurement process
Traditional procurement process requires enormous overhead. Purchase orders, long approval processes, and never ending emails can all be automated with the right software.
When a company reaches a certain size, it needs a procurement process. Buying office supplies or contracting vendors ad hoc, without a system in place, can waste time and cause inefficiencies which impede growth. Procurement must become centralized so that it can scale with the business.
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Unfortunately, while many high-growth startups are looking for agile ways to scale, they often default to adopting old-school procurement processes that slow them down, instead of helping them grow. In this article, we’re going to deconstruct this traditional approach to procurement and introduce a new way of doing things that will scale with your business needs.
In this guide to procurement management you’ll learn:
- Why finance teams need a procurement process
- How the traditional procurement cycle works
- The problems with this procurement strategy
- The new school approach to procurement and how to implement it
Why finance teams need a procurement process
Companies, and more specifically their finance teams, need a procurement process to formalize purchasing. Procurement is the official way to obtain services, raw materials for manufacturing, supplies, etc.
Rather than employees making purchases any which way, a procurement strategy makes the process uniform and centralized, resulting in optimal efficiency and fewer errors. While this process is meant to streamline purchasing, it ends up being time-consuming and bureaucratic.
The old-school procurement process
Your finance team's procurement process may currently work like this:
- Step 1: You or someone from your procurement team identifies a need to buy something.
- Step 2: You get approval to procure the item(s) or service(s).
- Step 3: You research vendors to make the purchase from.
- Step 4: If you’re considering multiple vendors, you’ll send them an RFQ (request for quote) to ask them how much they’d charge for their products or services. If you know who you want to purchase from immediately, you skip to the next step.
- Step 5: Now you negotiate a purchase order (PO) with the vendor. You nail down details like terms and prices.
- Step 6: You send the vendor a PO. The vendor can accept or reject it.
- Step 7: If the vendor approves the PO, you sign the contract and move forward. If they reject it, you renegotiate terms or look for a new vendor.
- Step 8: After the contract is signed (usually via electronic signature), the vendor must provide the products or services outlined in the contract by the deadline.
- Step 9: When your company receives the products or services, you must complete a quality check of the items or services procured.
- Step 10: Next, you conduct three-way matching to avoid PO fraud. You have to make sure that services and products that have been paid for are received by checking the invoice, PO, and receipt.
- Step 11: The vendor sends you their invoice.
- Step 12: You process the invoice and fulfill it.
- Step 13: You track the payment in your bookkeeping and accounting activities.
Problems with the traditional strategy
There are many problems with this traditional approach to procurement activities.
First, it requires a lot of back and forth communication and documentation, which is time-intensive and can produce errors. With paperwork being sent between internal and external stakeholders, it’s only a matter of time before a document is lost, mismanaged or an expensive mistake is made. The need for manual data entry only increases the chance for errors.
Second, this system is not scalable. The more your business grows, the more purchases it needs to make. And with the old-school process, more purchases means you’ll need a larger workforce to manage supplier relationships, the supply chain, and contract management.
Third, this approach is overly bureaucratic and lacks control and transparency. It relies too much on individuals to manually comply with each step and doesn't allow stakeholders’ visibility into the process.
The old-school procurement process is flawed and hinders growth.
The new approach to procurement
The new approach to the procurement process involves embracing procurement software to automate most of the steps in the traditional approach, including:
- Step 6: Acceptance and rejection of POs, and contract logistics, become automated with the use of procurement software. After you create a PO, it automatically gets sent to the vendor. After the vendor approves the PO, a contract is automatically generated. This saves you from sending numerous back-and-forth emails and waiting several days for action.
- Step 10: When one software handles the entire procurement process, three-way matching can be automated, which greatly reduces fraud and expensive mistakes.
- Step 12: Procurement software can also automate the invoicing process. You can save yourself several steps in approving and fulfilling invoices. And, when you pay your vendors faster, you’ll be able to take advantage of early payment discounts and avoid late payment fees.
- Step 13: The new-school approach to purchasing automates recordkeeping. When your procurement software integrates with your accounting software, records of your purchases are instantly sent to your books.
Abandoning your traditional procurement process in place of procurement software can help your business grow leaps and bounds. You’ll save money and time, no longer having to correct expensive mistakes. You’ll also free your finance team from working on repetitive, administrative tasks so that they can work on projects that really move the needle. And with documentation all on one platform, you’ll never lose track of crucial records ever again.
Getting the right technology in place to streamline your procurement process is more crucial than ever. The 2019 Gartner Sourcing and Procurement Report predicts that by 2025, over half of procurement automation efforts will fail because of outdated, legacy ERP and finance applications. Automation of procurement processes will require a full stack of technology solutions to support mass, real-time processing of transactions—otherwise, companies will risk falling behind their competitors.