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Procurement and Supply Cycle

 

The Procurement cycle is the cyclical process of key steps when procuring goods or services, from identification of a need and conducting market analysis through to the process of selecting the supplier, managing their performance and reviewing lessons learnt.

 

This interactive tool has been developed to guide members through the procurement process with links to relevant knowledge, guidance and insights to keep you up to date with new thinking and current guidelines.  Mapped against relevant books, events, tools and templates to provide you with the knowledge you need  to support you every step of the way through the procurement cycle.

 

Hover and click on the procurement cycle to review the topic summary with links to the practical knowledge and resources to support your day to day activities whether studying or operating in an organisation.

Tap the procurement cycle to review the topic summary with links to the practical knowledge and resources to support your day to day activities whether studying or operating in an organisation.

Understand need and develop a high level spec

The first stage of the procurement process is to understand and define the business needs. By involving cross functional stakeholders in this process and utilising their expertise you can develop a high level specification. Engaging stakeholders at this early stage can support the change process where stakeholder buy in is required. 

Market/Commodity and options (inc make or buy assessment)

Once the business needs are outlined and a high level specification developed the next stage is to research the options available in the marketplace. By scoping out your spend and current positioning and dynamics of the marketplace you can start to identify potential suppliers and degree of competition in the marketplace. 

At this stage analysis can be conducted on whether to make or buy the product or outsource the service.

Develop strategy / plan

Once you have developed the specification, and outlined the business requirements and assessed the marketplace, the next stage is to develop the strategy and plan and should consider. The potential impact of the external environment should also be taken into account.

It may be the organisation’s policy to use small local suppliers or it maybe to move to a global source. If there is competition, and you are well positioned to leverage the market, you may decide to conduct a competitive tender. If however you are reliant on one sole source of supply your strategy may be to develop competition in the marketplace or bring this in house. If for example your volume represents 50% of your supplier’s total turnover your procurement power will be greater, however also presents risks. All of these considerations should be incorporated within your analysis.

Pre procurement / market test and market engagement

Market development identifies both stakeholder and business needs and the changes required in order to implement the procurement strategy to meet those needs flexibly. Testing the market or strategy will help to identify if it is the right time to go into the marketplace and other factors to consider such as crop cycles, what your competitors are doing, suppliers end of financial year or new legislation.

Develop documentation, PPQ / detailed spec / combine with 1

Time should be spent in developing the tender documents including a detailed breakdown of the volumes, service level agreement and terms and conditions along with a detailed specification to ensure consistency on pricing, product quality, operational functionality and that products are fit for purpose in order to reduce the financial impact of the wrong specification further down the line. When developing specifications it is important to distinguish between product requirements and product preferences and build in tolerances for suppliers to adhere to, not restricting the supply and build cost into a product. You may decide to include technical, engineering or operations in this process.

The specification will form part of the tender documentation issued to suppliers to quote on a like for like basis. 

Supplier selection to participate in ITT / RFQ / negotiation

Conducting a Request for Information (RFI) at this stage in the procurement cycle will help to gain insights into suppliers, size, capabilities, financials, strengths and weaknesses before assessing whether they should be included in the tender process.

Ranking the performance qualifiers against the business needs with key stakeholders is a useful exercise at this stage before reviewing the RFI against the selection criteria in order to select whom to invite to participate in the tender process.

Issue ITT/RFQ

Once you have selected the companies to participate a formal Invitation to Tender (ITT) and Request for quotation (RFQ) is sent out to participants, items to be included are specification and documentation developed around the business requirements along with clear timescales to respond.

Bid/Tender Evaluation and validation

Once the tenders are submitted, bids must be evaluated and validated in order to select the preferred supplier. Whether tendering contracts for the supply of goods or services, tender evaluation should be carried out in a structured, disciplined and transparent manner. Most evaluations explore price comparisons alongside technical capability, capacity, quality of service and financial health.

At this stage a post tender negotiation often takes place, along with checking of references and credit checks or carrying out supplier visit, technical audit, product sampling or a trial.

Whole life costs should also be considered including the decommissioning, removal or disposal costs.

Contract award and implementation

Once the supplier has been selected a contract is typically developed which allows both parties to fully understand their obligations and key success criteria as part of the agreement. This forms the foundation to manage the contract and relationship effectively. The agreed terms and conditions help to minimise contractual risks and exposure when doing business.

Once the contract and terms are agreed then the communication and implementation process can begin with clear timescales and parameters set out on both sides, including relevant stakeholder groups to manage the implementation effectively.

Warehouse logistics and receipt

The warehouse operations need to be considered in terms of the product coding and classification, space, layout and racking, frequency of deliveries, order processing and booking in procedures to ensure an efficient process, along with any other business requirements.

Contract performance review and continuous improvement

There should be periodic reviews of performance against Key Performance Indicators (KPI’s) set out in the contract along with discussions on how the relationship is working and resolve any conflicts that have arisen. At this stage discussions and plans can be set for continuous improvement along with the next review date.

SRM and SC management and development

SRM is an important part of SCM as it reviews the portfolio of suppliers and helps to arrange resources in order to devote the right level of input to the relationship in order to achieve specific objectives. How much time devoted depends on the strategy, type of purchase and length of contract and marketplace.

SRM helps to create the right relationship and environment in which to work on new developments and evaluate the option of streamlining processes. The ultimate goal is to realise efficiencies which will add value and increase the organisations profitability. Having the right relationship with a supplier may be the difference between being first to market with a new concept or in a difficult supply market ensuring you have continuity of supply and reducing your risk.

Asset management / end of life and lessons learnt

Over time assessments will be carried out on whether the business requirements have changed, whether the agreement is still required and fit for purpose, what can be learnt from the process and how this can be incorporated to improve the process next time. This cycle then begins again.

End of life costs should also be calculated to consider decommissioning, removal or disposal processes. See tools – whole life costing model.

Procurement Organisation

As an organisation, procurement structures vary depending on the culture and structure of the organisation.

The structure of the team whether this be centralised, decentralised or hybrid structure on a local and/or global level, should be aligned to deliver both the procurement and organisation strategy. This structure will enable the procurement process to run effectively.

External Environment

A business does not exist in isolation and can be influenced by other factors outside of their control; this is typically referred to as their ‘external environment’.

The external environment consists of competitors, the economic, social, monetary system and the political/legal system and affects all parts of the procurement cycle.

eCommerce/systems

eCommerce systems including E-Sourcing and E-Procurement are widely used by organisations to buy and sell products and can utilise technologies such as mobile commerce, electronic funds transfer, supply chain management, Internet marketing, online transaction processing, electronic data interchange (EDI), inventory management systems and automated data collection systems.

Stakeholder engagement

In any activity an organisation undertakes, whether strategic, operational or tactical, the activity can only be successful with the input, commitment and support of its key stakeholders. Gaining and maintaining the support and commitment of stakeholders requires a continuous process of engaging the right stakeholders at the right time, understanding and managing their expectations.

Sustainability/CSR/Ethics Security

In addition to traditional economic criteria such as price and quality items such as social, economic and environmental factors should be considered to ensure a sustainable solution when procuring products and services.

Sustainable procurement helps organisations to eliminate waste, become more energy efficient and inevitably save money. Corporate Social Responsibility is a way of ensuring that the business monitors its compliance with the law and industry standards and how business processes can be managed to provide a positive impact on society.

Risk Assessment/Mitigation

During various stages of the procurement cycle you should understand the risks that can impact an organisation and implement strategies to mitigate and manage those risks effectively.

Continuous improvement

Continuous Improvement also known as 'Kaizen' means 'change for the better' and encompasses all people, products, services and processes in an organisation.

Continuous Improvement consists of making continual small improvements rather than big changes at irregular intervals, requiring close monitoring and control and ideally inbuilt into the organisations culture.

People and skills

People are a key asset and arguable the most important resource in an organisation, translating other resources into added value. Therefore ensuring you have the right skill set within the team will help to achieve the organisations objectives. There is a diverse skill set required as you progress through the purchase order cycle in order to manage relationships and influence stakeholders and suppliers, along with analytical skills, financial analysis, through to leadership and change management skills. Therefore it is important to periodically review and support training opportunities where necessary to ensure people feel valued and the business retains the right skill set.