Research Document: An Overview of Basic Procurement Practices
Page 1: Introduction to Procurement
1. Defining Procurement
Procurement, in its broadest sense, refers to the overarching process of acquiring goods,
services, or works from an external source. It encompasses the entire lifecycle from identifying
needs and sourcing suppliers to managing contracts and supplier relationships after the
purchase. While often used interchangeably with "purchasing," procurement is strategically
broader. Purchasing typically focuses on the transactional aspect of placing an order and
receiving goods/services, whereas procurement involves strategic planning, sourcing,
negotiation, and management to ensure the organization obtains the best possible value.
2. The Importance of Procurement in Organizations
Effective procurement is critical to the success and sustainability of any organization, regardless
of size or sector (public or private). Its importance stems from several key contributions:
Cost Management and Savings: Procurement directly impacts the bottom line. By
strategically sourcing suppliers, negotiating favorable terms, and optimizing purchasing
processes, procurement departments can achieve significant cost reductions and avoid
unnecessary expenditures. This contributes directly to profitability.
Ensuring Quality and Availability: Procurement is responsible for sourcing goods and
services that meet the organization's quality standards and operational requirements. It
ensures that necessary materials, components, and services are available when needed,
preventing disruptions to operations, manufacturing, or service delivery.
Risk Management: Procurement plays a vital role in identifying and mitigating supply
chain risks. This includes risks related to supplier failure, price volatility, quality issues,
geopolitical instability, and non-compliance with regulations. Proper due diligence
during supplier selection and robust contract management help protect the
organization.
Efficiency and Process Optimization: A well-defined procurement process streamlines
the acquisition of goods and services, reducing administrative burden, shortening lead
times, and improving internal stakeholder satisfaction.
Innovation and Competitive Advantage: Strategic procurement can identify innovative
suppliers and technologies, bringing new capabilities into the organization and
potentially providing a competitive edge.
Compliance and Ethics: Procurement ensures that purchasing activities adhere to legal
regulations, industry standards, and the organization's own ethical guidelines and
policies, protecting the company's reputation.
3. Scope of this Document
This document focuses on the basic practices and fundamental steps involved in the
procurement cycle. It aims to provide a foundational understanding of the key activities and
principles necessary for executing procurement effectively, particularly for those new to the
field or working in smaller organizations where procurement functions may be less formalized.
It will cover the core stages from need identification through to payment and basic supplier
management.
Page 2: The Procurement Cycle - Part 1: Need Identification to Sourcing
The procurement process is often described as a cycle, starting with recognizing a need and
potentially looping back through performance evaluation and future sourcing decisions. The
initial stages are crucial for setting the foundation for a successful purchase.
4. Need Identification and Specification
The process begins when a department or individual within the organization identifies a need
for a specific good or service.
Requirement Definition: The first step is to clearly define what is needed. This involves
detailing the functional and technical requirements, quantity, desired delivery timeline,
and any specific standards or regulations that must be met. Poorly defined needs lead to
incorrect purchases, delays, and wasted resources.
Specification Development: Based on the requirements, a clear and unambiguous
specification is developed. Specifications can be:
o Performance-based: Focusing on the desired outcome or function (e.g., "a
system capable of processing 1000 transactions per hour").
o Technical/Design-based: Detailing exact characteristics, materials, dimensions,
etc. (e.g., "Grade 316 stainless steel bolts, M12 x 50mm").
o Brand Name or Equivalent: Specifying a particular brand but allowing for
alternatives that meet the same standard.
o Clear specifications are vital for suppliers to understand the requirement and
provide accurate quotes or proposals, and for evaluating offers fairly.
Make-or-Buy Analysis (Basic): In some cases, especially for services or components, a
simple analysis might be done to determine if it's more cost-effective or strategically
sound to produce the item/service internally ("make") or procure it externally ("buy").
5. Supplier Sourcing and Qualification
Once the need is clearly defined, the next step is to identify potential suppliers capable of
meeting the requirement.
Market Research: This involves exploring the market to find potential suppliers.
Methods include:
o Using existing supplier databases or approved vendor lists.
o Searching online directories and industry publications.
o Attending trade shows and industry events.
o Seeking recommendations from other organizations or internal stakeholders.
o Issuing a Request for Information (RFI) to gather general information about
supplier capabilities without seeking specific pricing.
Supplier Qualification (Pre-qualification): Before inviting suppliers to bid, a basic
assessment is often conducted to ensure they are suitable potential partners. This might
involve evaluating:
o Capability: Do they have the technical expertise and resources to meet the
specification?
o Capacity: Can they handle the required volume and meet the delivery schedule?
o Financial Stability: Are they financially sound to avoid disruption during the
contract? (Basic checks might include credit reports or financial statements if
appropriate for the purchase value).
o Reputation and Past Performance: Do they have a good track record? References
might be checked.
o Compliance: Do they meet necessary legal, ethical, and regulatory requirements
(e.g., certifications, licenses)?
Creating a Shortlist: Based on the sourcing and qualification process, a shortlist of
suitable suppliers is created who will be invited to submit quotes or proposals.
Page 3: The Procurement Cycle - Part 2: Solicitation, Negotiation & Selection
With a clear need and a list of potential suppliers, the process moves to formal solicitation and
evaluation.
6. Solicitation Methods
The method used to request offers from suppliers depends on the complexity and value of the
purchase:
Request for Quotation (RFQ): Used for standard, clearly specified goods or services
where price is the primary deciding factor. Suppliers provide price quotes based on the
exact specification.
Request for Proposal (RFP): Used for more complex requirements, often services or
solutions, where factors beyond price (e.g., approach, methodology, technical solution,
experience) are important. Suppliers submit detailed proposals outlining how they will
meet the need, along with pricing.
Request for Tender (RFT) / Invitation to Tender (ITT): Often used in public sector or for
large, formal projects (like construction). It's a highly structured process with detailed
specifications and strict evaluation criteria.
The solicitation document (RFQ, RFP, etc.) must clearly state the requirements, specifications,
evaluation criteria, submission deadline, contract terms, and any other relevant information.
7. Supplier Evaluation and Selection
Once offers (quotes or proposals) are received, they must be evaluated systematically and fairly
against the pre-defined criteria outlined in the solicitation document.
Evaluation Criteria: Common criteria include:
o Price/Cost: Total cost of ownership (including purchase price, delivery,
installation, maintenance, etc.).
o Quality: Compliance with specifications, performance standards, warranties.
o Delivery: Lead time, reliability, adherence to schedule.
o Technical Capability: Expertise, proposed solution (especially for RFPs).
o Supplier Capability & Stability: Financial health, capacity, experience, references.
o Compliance: Adherence to legal, ethical, and policy requirements.
Evaluation Process: For simple RFQs, selection might be based purely on the lowest
compliant bid. For RFPs, a scoring system might be used, weighting different criteria
according to their importance. An evaluation committee may be formed for significant
purchases. The goal is to select the supplier offering the best overall value, not
necessarily just the lowest price.
8. Negotiation
Negotiation may be necessary, especially after an RFP process or for significant purchases, even
if initial prices were submitted.
Objectives: To reach a mutually agreeable outcome on price, delivery schedules,
payment terms, warranties, service levels, and other contract terms.
Preparation: Understanding the requirement, the market price range, the supplier's
position, and defining the desired outcome and acceptable alternatives (Best Alternative
To a Negotiated Agreement - BATNA).
Process: Professional and ethical communication, focusing on interests rather than
positions, aiming for a "win-win" outcome where both parties feel the agreement is fair
and sustainable. Basic negotiation focuses on clarifying terms and potentially seeking
modest price improvements or better payment terms.
Page 4: The Procurement Cycle - Part 3: Contracting, Ordering & Receiving
Following selection and negotiation, the agreement needs to be formalized and executed.
9. Contract Award and Management
Once a supplier is selected and terms are agreed upon, a formal contract or purchase order is
created.
Contract/Purchase Order (PO): For simpler purchases, a Purchase Order may serve as
the contract. For complex or high-value acquisitions, a formal signed contract document
is essential.
Key Elements: The contract or PO must clearly document:
o Names and addresses of buyer and seller.
o Detailed description of goods/services (referencing specifications).
o Quantity.
o Agreed price(s).
o Delivery terms (schedule, location, Incoterms if applicable).
o Payment terms (e.g., Net 30 days).
o Warranties and guarantees.
o Any specific terms and conditions (e.g., confidentiality, liability limits).
Contract Administration (Basic): Ensuring both parties understand and adhere to the
terms throughout the contract period. This involves monitoring key dates, deliverables,
and obligations.
10. Purchase Order (PO) Creation and Issuance
The PO is a formal document issued by the buyer to the supplier, authorizing the purchase.
Purpose: It confirms the details of the purchase (items, quantity, price, delivery, terms)
and becomes legally binding once accepted by the supplier (often through
acknowledgement or shipment of goods).
Internal Control: POs are crucial for internal control, budgeting, and tracking
expenditures. They provide an audit trail and ensure purchases are properly authorized.
Key Information: Includes PO number, supplier details, delivery address, item
descriptions, quantities, unit prices, total price, required delivery date, payment terms,
and references to any relevant contract.
11. Receiving and Inspection
When the goods arrive or services are completed, they must be formally received and checked.
Verification: The receiving department (or end-user) checks the delivered goods against
the Purchase Order and the delivery note/packing slip provided by the supplier. Key
checks include:
o Quantity: Is the amount received correct?
o Identity: Are the items received the ones that were ordered?
o Condition: Are the goods damaged?
Quality Inspection: Depending on the item, a more thorough quality inspection might
be performed to ensure compliance with specifications. This could range from a simple
visual check to detailed technical testing.
Goods Receipt Note (GRN): A document is typically created (often electronically in
modern systems) to record the receipt of goods. The GRN confirms what was received,
the quantity, date, and condition.
Handling Discrepancies: Any issues (shortages, damages, wrong items, quality defects)
must be documented immediately and communicated to the supplier and the
procurement department to arrange for returns, replacements, or other corrective
actions as per the contract terms.
Page 5: Post-Purchase Activities & Core Principles
The procurement cycle doesn't end with receiving the goods; crucial back-end processes and
overarching principles remain.
12. Invoice Processing and Payment
After successful delivery and acceptance, the supplier will issue an invoice requesting payment.
Invoice Verification: The accounts payable department (or procurement, in smaller
organizations) verifies the invoice details.
Three-Way Matching: This is a critical control step. The details on the supplier's Invoice
are matched against the Purchase Order (what was ordered) and the Goods Receipt
Note (what was received). If all three documents align in terms of items, quantity, and
price, the invoice is approved for payment. Discrepancies must be investigated and
resolved before payment.
Payment Processing: Once approved, the payment is processed according to the agreed
payment terms (e.g., within 30 days of the invoice date). Timely payment is crucial for
maintaining good supplier relationships.
13. Supplier Relationship Management (SRM) - Basic Level
While complex SRM is a discipline in itself, basic relationship management is part of good
procurement practice.
Communication: Maintaining open lines of communication with key suppliers.
Performance Monitoring: Tracking supplier performance against key metrics like on-
time delivery, quality conformance, and responsiveness. This data informs future
sourcing decisions.
Feedback: Providing constructive feedback to suppliers on their performance (both
positive and negative).
Record Keeping: Maintaining accurate records of purchases, contracts, performance,
and communications for future reference and audits.
14. Core Principles of Basic Procurement
Underpinning the entire procurement cycle are several fundamental principles:
Ethics and Transparency: Conducting all procurement activities with integrity, fairness,
and honesty. Avoiding conflicts of interest, bribery, and favouritism. Processes should be
open and documented where appropriate (especially in the public sector).
Value for Money (VfM): Aiming to achieve the optimal combination of whole-life cost
and quality to meet the user's requirement. This does not always mean the lowest price
but the best overall economic outcome.
Risk Management: Identifying and mitigating potential risks throughout the supply chain
(supplier failure, price increases, quality issues, delivery delays).
Compliance: Adhering to all applicable laws, regulations, internal policies, and
procedures.
Fair Competition: Providing qualified suppliers with an equal opportunity to bid for
business, where appropriate and practical.
15. Conclusion
Basic procurement practices provide a necessary structure for acquiring goods and services
efficiently, effectively, and ethically. Following a defined cycle – from clearly identifying needs
and carefully selecting suppliers to managing contracts and ensuring timely payment – helps
organizations control costs, maintain quality, mitigate risks, and build reliable supply chains.
Even in smaller organizations, implementing these fundamental steps fosters discipline,
improves financial outcomes, ensures operational continuity, and builds a foundation for more
strategic procurement as the organization grows. Mastering these basics is essential for anyone
involved in the purchasing function.
