The 10 Steps of the Procurement Cycle
Management in any company must understand the art of obtaining products
and services. The procurement cycle follows specific steps for identifying a
requirement or need of the company through the final step of the award of the
product or contract. Responsible management of public and corporate funds is
vital when handling this necessary process, whether in strong or weak economic
markets. Following a proven step-by-step technique will help management
successfully achieve its goals.
Step 1: Need Recognition
The business must know it needs a new product, whether from internal or
external sources. The product may be one that needs to be reordered, or it may
be a new item for the company.
Step 2: Specific Need
The right product is critical for the company. Some industries have
standards to help determine specifications. Part numbers help identify these
for some businesses. Other industries have no point of reference. The company
may have ordered the product in the past. If not, then the business must
specify the necessary product by using identifiers such as color or weight.
Step 3: Source Options
The business needs to determine where to obtain the product. The company
might have an approved vendor list. If not, the business will need to search
for a supplier using purchase orders or research a variety of other sources
such as magazines, the Internet or sales representatives. The company will
qualify the suppliers to determine the best product for the business.
Step 4: Price and Terms
The business will investigate all relevant information to determine the
best price and terms for the product. This will depend on if the company needs
commodities (readily available products) or specialized materials. Usually the
business will look into three suppliers before it makes a final decision.
Step 5: Purchase Order
The purchase order is used to buy materials between a buyer and seller.
It specifically defines the price, specifications and terms and conditions of
the product or service and any additional obligations.
Step 6: Delivery
The purchase order must be delivered, usually by fax, mail, personally,
email or other electronic means. Sometimes the specific delivery method is
specified in the purchasing documents. The recipient then acknowledges receipt
of the purchase order. Both parties keep a copy on file.
Step 7: Expediting
Expedition of the purchase order addresses the timeliness of the service
or materials delivered. It becomes especially important if there are any
delays. The issues most often noted include payment dates, delivery times and
work completion.
Step 8: Receipt and Inspection of Purchases
Once the sending company delivers the product, the recipient accepts or
rejects the items. Acceptance of the items obligates the company to pay for
them.
Step 9: Invoice Approval and Payment
Three documents must match when an invoice requests payment – the
invoice itself, the receiving document and the original purchase order. The
agreement of these documents provides confirmation from both the receiver and
supplier. Any discrepancies must be resolved before the recipient pays the
bill. Usually, payment is made in the form of cash, check, bank transfers,
credit letters or other types of electronic transfers.
Step 10: Record Maintenance
In the case of audits, the company must maintain proper records. These
include purchase records to verify any tax information and purchase orders to
confirm warranty information. Purchase records reference future purchases as
well.
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