The Procurement Process

An overview of the procurement process in IT.

Posted on December 1, 2014 by Ernesto Garbarino

Overview

An IT/Business transformation rarely takes place without the aid of vendors, be it for the provision of products or services. The procurement process is sometimes intimidating especially when the organisation’s procurement capability is not mature enough.

The fact that the purchase of IT products and services involves complex specifications may sometimes unnecessarily contribute to the perception that the procurement process in itself is of an entangled nature.

In order to bust the described myth we present a simple 9-step procurement process that covers, at a high-level, the key phases that are worth considering:

  1. Need Determination: the realisation that a need cannot be satisfied internally and must be obtained from the market place. This involves capturing the need using a specification or SoW.
  2. Need Communication: the formalisation of the need by placing a requisition with the procurement department.
  3. Need Assignment: the assignment of the requisition to the most adequate purchasing agent.
  4. Supplier Search: the identification of suitable suppliers in the marketplace.
  5. Supplier Bidding or Negotiation: the choice between bidding or negotiation as the most convenient manner to engage the supplier(s). The use of an adequate solicitation document (e.g. RFI, RFQ, RFP) in the case of bidding.
  6. Supplier Selection: the process of examining the supplier’s responses and vetting the suppliers.
  7. Commitment Formalisation: the process of capturing the agreement in writing by observing applicable laws and using protective terms and conditions.
  8. Follow-up: the process of measuring suppliers’ performance throughout the contract and engaging in expediting in cases of extreme urgency.
  9. Closing-out: the process of finishing the transaction with the supplier in an orderly fashion; for example, making sure that their invoices are paid on time.

Need Determination

Need determination is the first step in the procurement process. Products and services are bought to fulfil a need. Such needs typically emerge from the various functional areas in a business rather than from the procurement department per se. For example:

In general, buying a good or service enables an organisation to function and/or it helps improving its performance.

Process Overview

This is a general illustration. This process must be customised to fit the circumstances of your organisation.

Prerequisites

In-Process Activities

Outputs

Success Scenario

Failure Scenario

Need Communication

Need communication is the process that users initiate to convey to the procurement department their wants. The larger process involving the communication of a new requirement and its review is called requisitioning.

We will now look at the following:

Requisition

A Requisition is the document that users employ to convey to the procurement department their wants, needs and parameters. Requisitions are classified as follows:

  1. Standard and electronic: departments create a requisition to indicate to the purchasing staff what products or services they need, how many of them they need, and when they need them.
  2. Bill of materials (BOM) a BOM lists the materials, components, and subassemblies required to manufacture a product or perform a service. Such a list is provided by technical representatives so that orders may be created.
  3. Automatic: created automatically based on inventory levels, pre-arranged conditions, etc.

Requisitions must contain certain information to formalise a purchase from both internal and external perspectives.

Internal

External

Common fields

Example:

Field Value
Quantity 3
Description Windows 7 PC
Unit of measure ea
Estimated Unit Price £1000
Estimated Extended Price £3000
Date Needed 09/12/2013
Requestor’s Name Ernie
Department IT
Address 171 Buckhurst Way
Approver’s Name Pika
Approver’s Signature xxxxxxx
Account # 01-111
Suggested Supplier(s) Dell, HP, Lenovo

Attached Documents

Certain documents are sometimes attached to requisitions:

  1. Specifications or SoWs: when the space on the requisition is not adequate to comprehensibly describe the product or service.
  2. No-Bid Justification: when policy requires competitive bidding unless there is a documented, technical reason to award an order to a single supplier.
  3. Internal cost estimates: when the value of a product or service is not known in advance of bidding.

Compliance

When developing a requisition process, purchasing departments seek to ensure compliance with several aspects of corporate policy:

  1. Proper Authority: the guarantee that only authorised agents make purchases on behalf of the organisation.
  2. Approval Limits: a cap on the amount of money that a purchasing position may spend without supervisor’s signature.
  3. Social Responsibility Goals: a priority given to businesses that fit a specific criteria: for example, they are owned locally, by minorities, etc.
  4. Green buying: environmentally conscious purchase decisions.

Proper Authority

In most organisations only the purchasing department and its staff are the only “agents” who are authorised to make purchases on behalf of the organisation.

If an agent of the organisation commits to a purchase with a vendor without the involvement of an authorised agent, unauthorised purchasing (maverick buying / rogue purchasing) has occurred.

Risks:

Approval Limits

Organisations may have written policies delineating the maximum amount of money each purchasing position may spend without a supervisor’s signature.

This hierarchy is called limits of authority or commitment authority.

Social Responsibility Goals

Some organisations strive to place a certain percentage of their orders with special classifications of business, for example:

These businesses are some times referred to as Disadvantaged Business Enterprises DBE’s, diverse suppliers or diversity suppliers.

Green Buying

These are environmentally conscious purchase decisions. The most environmentally friendly organisations integrate an environmentally-friendly ideology from the design of a product or process right through the disposal of the product or conclusion of the service.

Process Overview

This is a general illustration. This process must be customised to fit the circumstances of your organisation.

Prerequisites

In-Process Activities

Outputs

Success Scenario

Failure Scenario

Need Assignment

Need Assignment is the process of determining who will process a requisition. When requisitions arrive in the purchasing department, they are generally distributed to specific buyers for further processing.

There is generally a scheme to determine which buyer gets which requisition. Here are some of the most common schemes:

Advantages and Disadvantages Based on Routing Criteria

Category of Product or Service

Supplier

Requisitioning Department

Workload of the buyers

In cases where an electronic requisitioning process is used, the logic of the requisition assignment scheme is built into the system. Therefore, the requisitions are routed accordingly, without human intervention.

Order of Processing

This is an example of the order of processing that may be used by a purchasing department:

  1. First come, first served
  2. Arranged by date required
  3. Rush/emergency orders first
  4. Most important orders first
  5. Longest lead time first
  6. Lowest schedule margin first (amount time between the estimated delivery date—based on quoted lead time—and the need date).

Process Overview

This is a general illustration. This process must be customised to fit the circumstances of your organisation.

Prerequisites

In-Process Activities

Success Scenario

Failure Scenario

Supplier Search

Supplier Search is the process of finding suitable potential suppliers for the requisition’s specification at hand. Suppliers that are already known to the purchasing organisation will benefit from a Supplier Classification scheme. If no suitable supplier is known, then one needs to be found through B2B directories, trade shows, chambers of commerce, peers and so on.

If a suitable supplier is not found, these are some of the most typical reasons:

  1. Specification complexity: the specification describes a complex product or service that no supplier in the marketplace can provide on its own. Therefore the specification needs to be broken down into more specific products and services that match the marketplace’s availability.
  2. Unrealistic expectations: for example, to roll out an e-commerce portal in three weeks that requires integration with three different systems. Most suppliers have a tolerance threshold in terms of the amount of losses they are willing to incur to win a new customer.
  3. Novel requirement: in this case, maybe the only valid approach is building rather than buying.

Process Overview

This is a general illustration. This process must be customised to fit the circumstances of your organisation.

Prerequisites

In-Process Activities

Success Scenario

Failure Scenario

Supplier Bidding or Negotiation

Supplier Bidding or Negotiation is the process of determining the most adequate approach to engage a supplier. Once at least one supplier has been identified, these are the most common following steps:

  1. Buy the product from an established supplier without seeking better terms (lower price or higher quality).
  2. Negotiate terms with one or more suppliers.
  3. Set up a process to achieve competitive bidding.

Competitive Bidding versus Negotiation

These are the factors to be considered when choosing competitive bidding over negotiation as the preferred course of action:

  1. Market competitiveness: there are many suppliers in the same product/service sector craving for more business.
  2. No urgency: there is enough time to prepare a bid package run the end-to-end process, including evaluation.
  3. Purchase value: the burden imposed by the bidding process is compensated by the expected savings.
  4. Contract type: specification allows suppliers to provide a fixed-price offer.
  5. Specification’s structural clarity: it is structured in such a way that supplier offers can be evaluated on a level-playing field.
  6. Specification’s stability: specifications are expected to remain unchanged throughout the process.
  7. Selection procedure’s clarity: the supplier benchmarking process is formal and clearly defined. It does not rely on subjective factors.
  8. Ramp-up Costs: All suppliers will incur relativity equal expenditures to provide the product or service. If one of the suppliers has already made an investment of this kind, which is a prerequisite to meet the specification, then a negotiation may be the most reasonable approach.

Process Overview

This is a general illustration. This process must be customised to fit the circumstances of your organisation.

Prerequisites

In-Process Activities

Outputs

Success Scenario

Failure Scenario

Supplier Selection

Supplier Selection is the process of selecting a supplier. This phase is only applicable when a bidding process has been applied and there are two or more suppliers from which to choose.

Receiving the Response

When a response arrives, assuming a manual processes, these are the steps:

  1. The date and time is recorded.
  2. The response’s documents are filed alongside the correspondent solicitation document.

Verifying the Response

After this, the verification process starts. This is what ought to be verified:

  1. Adherence to the response’s requirements: those provided in the solicitation document.
  2. Adherence to the specification: whether the response follows the provided specification.
  3. Substitutions: whether an expected specified product or service has been substituted by one of lesser quality.
  4. Terms and Conditions Exceptions: whether violated terms need to be renegotiated.

Broad Selection Criteria

Financial Evaluation

This evaluation step examines the the financial aspect of doing business with the supplier:

  1. Price analysis: the comparison of a supplier’s price with a benchmark price.
  2. Cost Analysis: the breakdown of the supplier’s price
  3. Total Cost of Ownership Analysis (TCO): the in-depth analysis of cost taking into account the costs incurred by the purchasing organisation itself.

Functional and Operational Evaluation

This evaluation step examines the functional and operational impact of doing business with the supplier. The Supplier Vetting process serves this purpose.

Process Overview

This is a general illustration. This process must be customised to fit the circumstances of your organisation.

Prerequisites

In-Process Activities

Outputs

Success Scenario

Failure Scenario

Commitment Formalisation

Commitment Formalisation is the process of establishing an agreement in writing with the selected supplier. It involves to aspects:

In a bidding process, the suppliers that have not been selected are typically debriefed.

Process Overview

This is a general illustration. This process must be customised to fit the circumstances of your organisation.

Prerequisites

In-Process Activities

Outputs

Success Scenario

Failure Scenario

Follow-Up

Follow-up is the process of monitoring suppliers’ performance. It may also be called “contract administration”. The focus is on the following aspects:

Supplier Failure

The purchasing organisation’s rights and course of action in the case of supplier failure are covered explicitly by the contract’s terms and conditions (especially in the liability section) and implicitly by the applicable law (e.g. UCC, Common Law, CISG).

In the “best case” failure scenarios, cover damages or liquidated damages allow the customer to recover some of the investment made in the failed supplier. In the worst case scenario, the contract may be completely terminated, resulting in the cancellation of all obligations of all the parties involved.

Expediting

Expediting is the process of rushing orders in extreme conditions of urgency. This process may be triggered at any given time but it often occurs within an ongoing contract. Since expediting does not add value, it must be only invoked in extreme conditions. These are some of the reasons that normally trigger it:

Organisational Structure

The expediting process may be handled by different individuals. Each arrangement comes with advantages and disadvantages:

Process Overview

This is a general illustration. This process must be customised to fit the circumstances of your organisation.

Prerequisites

In-Process Activities

Success Scenario

Failure Scenario

Closing-out

Closing-out is the process of finishing a transaction with a supplier in an orderly fashion. It includes the following elements:

  1. Acknowledging the receipt of goods or the completion of services
  2. Paying for the goods or services.
  3. Satisfactory life cycle of the product or service according to KPIs set by the internal consumers.

Receipt of goods or the completion of services

This element aims to perform the following checks:

Goods

  1. PO’s number in the packaging slip.
  2. PO’s supplier name on the packaging slip.
  3. PO’s ship location and actual location of delivery. For example, maybe the blades where destined for the backup data centre rather than the one to which they have been delivered.
  4. PO’s associated specification and actual items in the package.
  5. PO’s quantity and actual quantity of items in the package.
  6. Damage and/or missing subcomponents. For example, laptops’ batteries which may not have been specified as separate units.
  7. Additional Inspection/Quality Assurance tests.

Services

  1. PO’s code and timesheets in the case of professional services using a Cost-based (Time & Materials) contract and signature of the beneficiary internal consumer.
  2. PO’s allocated number of days and days in timesheets allowing for holidays, sick days and extra hours/days.
  3. Statement of satisfaction from the internal consumer in regards to the rendered services.

A failure in some of the checks usually leads to a receiving discrepancy which must be settled between the consumer and the supplier.

Paying for the goods or services

These are the checks typically performed by the accounts payable department upon receiving an invoice from the supplier:

  1. PO’s number
  2. PO’s supplier name
  3. PO’s goods and services description
  4. PO’s goods and services quantity
  5. PO’s price
  6. PO’s associated supplier’s receipt.

A failure in one of the checks normally leads to an invoice discrepancy that must be settled between the customer and the supplier.

A failure to pay a supplier may result in the following:

  1. Deterioration of the customer–supplier relationship, leading to decreased performance and/or the lifting of existing discounts and advantages.
  2. Refusal to ship new orders and/or render further services.
  3. The placement of a Lien against the organisation’s property.

Satisfactory life cycle and KPIs

This element covers cases in which procurement’s involvement is required following the regular close of a transaction.

For example:

Process Overview

This is a general illustration. This process must be customised to fit the circumstances of your organisation.

Prerequisites

In-Process Activities

Success Scenario

Failure Scenario