Procurement Cycle Explained

The procurement cycle, also known as the procurement lifecycle or more broadly procurement process, is a fundamental aspect of any organisation, encompassing the entire process of acquiring goods and services. From identifying needs to finalising payments, procurement involves various stages that ensure efficient and effective resource allocation. A well-executed procurement cycle can significantly impact an organisation’s efficiency, cost-effectiveness and overall success.

What Is a Procurement Cycle?

A procurement cycle is a series of interconnected steps that organisations follow to obtain the necessary resources for their operations. It involves a structured approach that includes planning, sourcing, contracting and managing the procurement process. The procurement team is responsible for overseeing and managing the entire procurement cycle.

The goal of the procurement cycle is to ensure that the organisation acquires the right goods or services at the best possible price, quality and delivery time, while minimising risks and ensuring compliance with regulations.

While we’ve covered the simplified version of various stages of a procurement process in our earlier articles, it is essential to examine each phase in more detail to fully understand its nuances.

Procurement Life Cycle Stages

To make the process a bit easier to follow, we break the procurement life cycle into three phases: planning and strategy, sourcing and contracting, and contract management and close-out. The following sections outline the key steps in each phase, from defining needs and selecting suppliers to managing contracts and closing out the project.

A.  Planning & Strategy (Pre-Procurement)

The pre-procurement phase is a critical foundation for the entire procurement process. It lays the groundwork for successful procurement by ensuring that the organisation’s needs are clearly defined and aligned with its strategic objectives.

STEP 1: Needs Identification

Procurement needs are determined by considering multiple factors such as:

• Specific requirements: Define the procurement objectives and the project’s scope, outlining the specific goods or services required, including technical specifications, quality standards and performance expectations.   

• Quantities and timelines: Determine the exact quantities needed, assess the urgency of the need, and establish realistic delivery deadlines to avoid disruptions in operations.

• Budget allocation: Set a clear budget for the procurement process, considering factors such as the estimated cost of goods or services, transportation costs, potential cost fluctuations, potential risks, and contingency plans. This ensures that the organisation has sufficient funds to acquire the necessary resources.

STEP 2: Market Research

Once needs are identified, comprehensive market research becomes paramount. This involves:

• Market analysis: Conduct market analysis to understand the market dynamics, as well as analyse market trends, pricing fluctuations, quality standards, and delivery options to make informed decisions.   

• Supplier identification and shortlisting: Research potential suppliers based on pre-qualification criteria, including factors like their experience, capacity, reputation, financial stability, pricing, geographical location, references, and ability to meet the organisation’s requirements. A Request for Information (RFI) can be issued at this point to gather preliminary information from potential service providers to facilitate an effective supplier selection. This process involves applying the required measures to shortlist suppliers for further evaluation.

STEP 3: Procurement Strategy Development

An important step in this phase of the procurement process is to develop a procurement strategy to outline the approach that will be taken to acquire the desired goods or services. This includes:

• Strategic objectives alignment: Ensure that the procurement objectives that were defined earlier in the first step (needs identification) are aligned with the overall business objectives and strategic goals.

• Risk assessment: Identify potential risks associated with the procurement process, such as supply chain disruptions, quality issues, contractual risks, or cost risks,  and develop mitigation strategies.

• Evaluation criteria development: Create a comprehensive set of evaluation criteria to assess bids or proposals. These criteria should be objective, measurable and aligned with the procurement objectives.

STEP 4: Procurement Method Selection

The last step in this procurement cycle’s phase is the selection of a suitable procurement method, which is crucial for efficient and cost-effective procurement. 

By carefully assessing the purchase requirements, organisations can select a method that aligns with their needs and helps them achieve their procurement goals. This can be achieved through the following steps:

• Purchase requirements analysis: Carefully assess the nature of the purchase, urgency, complexity, and estimated value.

• Identification of suitable methods: Based on the analysis, determine the most appropriate procurement method or methods. The common procurement methods are:

  • Competitive bidding: A formal process where multiple suppliers submit bids for a specific requirement. Its types are:

    • Open bidding: Any interested supplier can submit a bid.

    • Closed bidding: Only pre-qualified suppliers can submit bids.

    • Reverse auction: The buyer sets the price, and suppliers bid down.

  • Negotiation: A more flexible approach where the buyer and seller engage in contract negotiation and discuss terms and conditions. Its types are:

    • Sole-source negotiation: When there is only one viable supplier.

    • Limited competition negotiation: When there are a few potential service providers.

  • Direct purchase: A simplified process used for low-value or frequently purchased items, emergency purchases, or when there is a sole-source supplier. The company directly buys goods or services from a specific supplier without going through a competitive bidding process like tendering or negotiation. Its types are:

    • Purchase orders: Formal documents authorising purchases, which specify the item’s description, quantity, price, delivery details, and payment terms.

    • Blanket orders: Long-term purchase agreements with pre-approved terms that are used for recurring purchases.

• Cost-benefit analysis: Evaluate the potential costs and benefits of each method to determine the most advantageous option.

• Stakeholder involvement: Involve relevant departments such as the finance team, health and safety team and legal, to ensure alignment and support.

• Consideration of organisational policies: Ensure the chosen method aligns with organisational policies and procedures.

B.  Sourcing & Contracting (During Procurement)

STEP 5: Procurement Execution

The procurement execution phase is where the procurement process is put into action. Depending on the chosen procurement method (competitive bidding, negotiation, or direct purchase), specific steps will be followed.

This section outlines the key activities involved in each method, ensuring a smooth and efficient execution of the procurement process.

• Tender process (applicable to competitive bidding method)

  • Prepare and issue tender documents: Prepare comprehensive tender documents or Request for Proposal (RFP) clearly outlining requirements, detailed specification, evaluation criteria, and submission deadlines, and invite suppliers to participate.

  • Evaluate bids: Perform tender evaluation and assess received quotations against the evaluation criteria, considering factors such as service or product quality, price, delivery terms, and technical capabilities.

  • Negotiate and form a contract: Conduct negotiations with the preferred supplier to finalise contract terms and conditions, including price, payment terms, delivery schedules, and warranty provisions. Ensure that the contract aligns with the project’s requirements and protects the organisation’s interests.

  • Award the contract: Issue a Notification of Award to the selected supplier based on the evaluation process. A formal contract is signed to outline the rights and obligations of both parties.

• Negotiation process

  • Identify potential suppliers: Collect market data or leverage existing supplier relationships.

  • Prepare negotiation strategies: Develop a clear plan outlining key objectives, potential concessions, and fallback positions.

  • Conduct negotiations: Engage in discussions with suppliers to reach mutually agreeable terms.

  • Form a contract: Draft and finalise a contract that reflects the negotiated terms.

  • Award the contract: Formalise the procurement process by awarding the contract to the selected supplier or contractor.

• Direct purchase process

  • Identify needs: Identify and document the need for goods or services.

  • Select supplier: Choose a suitable supplier based on factors such as reputation, past performance, price, and delivery terms. Supplier selection can be made through previous projects, referrals, or researching the market.

  • Create purchase order: Prepare a purchase order or blanket order detailing the items to be purchased, quantity, price, delivery terms, and payment conditions.

  • Obtain supplier approval: Send the purchase order or blanket order to the supplier for review and acceptance, indicating their agreement to the terms and conditions.

C.  Contract Management & Close-Out (Post-Procurement)

STEP 6: Contract Execution and Fulfilment

• Order placement and order management: Ensure the order is placed correctly and managed throughout its lifecycle.

• Goods/Services receipt and inspection: Upon delivery, inspect the goods or services to verify that they meet the specified requirements. Report any discrepancies or defects to the supplier for resolution.

• Invoice processing and payment: Process the invoices from the supplier and verify for accuracy. Make payments according to the agreed-upon terms.

STEP 7: Contract Administration and Evaluation

• Contract management: Oversee the contract to ensure compliance and address any issues. This includes tracking performance, resolving disputes, and making necessary variations.

• Post-contract evaluation: Assess the supplier’s performance and the effectiveness of the procurement process. Provide feedback to the supplier on their performance and document lessons learned from the project for future reference.

STEP 8: Project Completion and Closure

• Project completion: Finalise the project, ensure all deliverables are met, and issue a completion certificate to the supplier.

• Disposal management: Handle the disposal or recycling of any surplus materials or equipment associated with the project in accordance with the relevant regulations.

• Record-keeping: Maintain accurate records of the procurement process, including contracts, Purchase Orders, invoices, and inspection reports, for future reference and audits.

Tools and Technologies

To streamline and optimise the purchasing cycle, various tools and technologies are used:

Choosing the Right Tools

The best tools for every organisation will depend on its specific needs, budget, and team’s expertise. Different factors can be considered:

• Integration with existing systems: To ensure the chosen tools can integrate with the organisation ERP, CRM, and other systems.

• Scalability: To choose the tools that can grow with the organisation.

• Ease of use: To ensure the tools are user-friendly and easy to adopt.

• Cost: To consider the total cost of ownership, including licencing fees, implementation costs, and ongoing maintenance.

By leveraging the right tools and integrating forward-looking technologies, organisations can streamline their procurement processes, reduce costs, improve supplier relationships, and enhance procurement efficiency overall.

Conclusion

The procurement cycle is a critical component of any organisation’s operations. By effectively managing the various stages of the procurement process, businesses can optimise their purchasing activities, reduce costs, and ensure that their needs are met efficiently.

Understanding the procurement cycle and leveraging appropriate tools and technologies is essential for successful procurement outcomes and overall business success.