Ernesto Garbarino
The Procurement Process
An overview of the procurement process in IT.
- Overview
- Need Determination
- Need Communication
- Need Assignment
- Supplier Search
- Supplier Bidding or Negotiation
- Supplier Selection
- Commitment Formalisation
- Follow-Up
- Closing-out
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:
- 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.
- Need Communication: the formalisation of the need by placing a requisition with the procurement department.
- Need Assignment: the assignment of the requisition to the most adequate purchasing agent.
- Supplier Search: the identification of suitable suppliers in the marketplace.
- 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.
- Supplier Selection: the process of examining the supplier’s responses and vetting the suppliers.
- Commitment Formalisation: the process of capturing the agreement in writing by observing applicable laws and using protective terms and conditions.
- Follow-up: the process of measuring suppliers’ performance throughout the contract and engaging in expediting in cases of extreme urgency.
- 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:
- Input materials: the need for input goods and materials to produce a product. For example, a telecommunications cabinet requires UTP cables, screws, network elements from different manufacturers and so on.
- Capital: the need for tools and machinery to reduce the quantity of workers required to accomplish a task and/or to maximise their productivity. For example, a finance system that reduces the amount of required Excel-based accountants to 3 from 10.
- Skills: the need for improving workers’ performance or conferring them with new capabilities. Example, training in SOX compliance.
- Services: the need to perform a task that cannot be provided by the organisation’s workers and/or it is not within the organisation’s capabilities. For example, migration to a new CRM platform.
- Outsourcing: The need to perform a task that cannot be provided as efficiently and/or economically as the organisation. For example, 24/7 L1/L2/L3 support for customer-care applications.
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
- A need: an initial hypothesis pointing to a need or requirement.
- A candidate budget: a budget the requester believes matches their need.
In-Process Activities
- Drafting
Outputs
- A defined budget: that the requester is authorised to use.
- A Specification: for example, UML deployment diagrams depicting a desired server farm.
- A SOW
Success Scenario
- The communication process starts
Failure Scenario
- Lack of sufficient information: it is impossible to define the needs in a sufficiently formal fashion in order for the procurement department to process the request.
- No candidate budget: this is not the case of lack of funding but the lack of a type of product or service that is supported by established budgets. For instance, a telecommunications business may not have a budget to buy textiles in the wholesale market as a clothing retailer would do.
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: what a requisition is.
- Attached documents: the documents that are typically attached to a requisitions such as specifications and SoWs.
- Compliance: the compliance aspects that are considered in a requisition
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:
- 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.
- 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.
- 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
- Receiving and accounting departments who is requesting the purchase
- Who is authorising the purchase
- Which account is being charged
External
- What is needed
- How much
- Where to deliver it
Common fields
- User’s name
- Approver’s signature
- Description of the goods and/or services
- Unit of measure: e.g. “ea” for each, “cs” for case.
- Quantity
- The data that the goods or services are required
- The price estimate
- Suggested supplier
- The departmental account or budget to which charges should be applied
- The location where goods should be shipped or services performed
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:
- Specifications or SoWs: when the space on the requisition is not adequate to comprehensibly describe the product or service.
- No-Bid Justification: when policy requires competitive bidding unless there is a documented, technical reason to award an order to a single supplier.
- 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:
- Proper Authority: the guarantee that only authorised agents make purchases on behalf of the organisation.
- Approval Limits: a cap on the amount of money that a purchasing position may spend without supervisor’s signature.
- Social Responsibility Goals: a priority given to businesses that fit a specific criteria: for example, they are owned locally, by minorities, etc.
- 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:
- Loss of control over outgoing payments
- Use of unqualified vendors
- Absence of proper approvals
- Contract “leakage” - the failure to maximise the volume of goods and services purchased under existing contracts.
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:
- Those owned locally
- Those owned by minorities and women.
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
- A user’s requisition
- Attached document(s): for example, a specification or SoW—if the need is complex.
In-Process Activities
- Verification: all standard requisition’s fields, budget, required approvals and compliance aspects.
Outputs
- An approved requisition
Success Scenario
- The Need Assignment process starts
Failure Scenario
- Incomplete/inaccurate requisition: users need to modify it and submit it again.
- Lack of compliance: the requisition is non-compliant.
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:
- By category of product or service: this is an effective method when the specialist buyers have more technical knowledge to buy a specific product or service category.
- By supplier: this is used when the organisation works very collaboratively with its suppliers and/or the amount of transactions that a supplier produces requires one or more specialist buyers.
- By requisitioning department: In this case, it is the department from which the requisition originates will determine the selected buyer.
- By workload of the buyers: this scheme works best when any buyer from a pool of buyers can buy any product.
Advantages and Disadvantages Based on Routing Criteria
Category of Product or Service
- Advantages: Buyers can develop specialised knowledge about a narrow set of products and services.
- Disadvantages: Both suppliers and internal customers may have multiple points of contact within the purchasing department.
Supplier
- Advantages: A more collaborative one-on-one relationship.
- Disadvantages: Internal customers may have multiple points of contact. Buyers may need to gain specialised knowledge.
Requisitioning Department
- Requisitioning Department: Internal customers know exactly who to call when they need purchasing support.
- Disadvantages: Suppliers have multiple points of contact within the purchasing department. Buyers may not have the opportunity to develop specialised skills.
Workload of the buyers
- Workload of the buyers: Workload is distributed more evenly.
- Disadvantages: Suppliers and internal customers have multiple points of contact within the purchasing department. Buyers may not have the opportunity to develop specialised skills.
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:
- First come, first served
- Arranged by date required
- Rush/emergency orders first
- Most important orders first
- Longest lead time first
- 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
- An approved requisition: with any required attachments.
In-Process Activities
- Routing: to the selected party.
Success Scenario
- The Supplier Search process starts
Failure Scenario
- No party is available to process the requisition: it is sent back to the originator.
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.
Failed Search
If a suitable supplier is not found, these are some of the most typical reasons:
- 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.
- 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.
- 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
- An approved requisition: with any required attachments.
- An adequate purchasing agent: who understand the specification.
In-Process Activities
- Search: on internal lists or the marketplace.
Success Scenario
- The Supplier Bidding or Negotiation process starts
Failure Scenario
- No suitable supplier is found: the specification is discussed with their originators to adapt it to a kind of service or product that can be provided by the marketplace.
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:
- Buy the product from an established supplier without seeking better terms (lower price or higher quality).
- Negotiate terms with one or more suppliers.
- 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:
- Market competitiveness: there are many suppliers in the same product/service sector craving for more business.
- No urgency: there is enough time to prepare a bid package run the end-to-end process, including evaluation.
- Purchase value: the burden imposed by the bidding process is compensated by the expected savings.
- Contract type: specification allows suppliers to provide a fixed-price offer.
- Specification’s structural clarity: it is structured in such a way that supplier offers can be evaluated on a level-playing field.
- Specification’s stability: specifications are expected to remain unchanged throughout the process.
- Selection procedure’s clarity: the supplier benchmarking process is formal and clearly defined. It does not rely on subjective factors.
- 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
- A list of candidate suppliers: unless one single supplier has been found.
In-Process Activities
- Bidding or Negotiation: in the case of bidding, using a specific bidding format alongside a solicitation document.
Outputs
- A solicitation document’s response: in the case of bidding.
Success Scenario
- The Supplier Selection process starts
Failure Scenario
- No suitable supplier is found: the specification is discussed with their originators to adapt it to a kind of service or product that can be provided by the marketplace.
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:
- The date and time is recorded.
- 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:
- Adherence to the response’s requirements: those provided in the solicitation document.
- Adherence to the specification: whether the response follows the provided specification.
- Substitutions: whether an expected specified product or service has been substituted by one of lesser quality.
- Terms and Conditions Exceptions: whether violated terms need to be renegotiated.
Broad Selection Criteria
- Cost: both the cost paid to the supplier and those that the buying organisation has to incur for engaging in business with the supplier.
- Quality: regarding the aggregate quality of each product’s sub-component and service.
- Punctuality: whether product and service delivery occurs at the time required by the buying organisation.
- Responsiveness: whether the supplier is prompt in response to the buying organisation’s queries both from a procurement perspective and from that of the functional areas that will benefit from the suppliers’ products and services in question.
Financial Evaluation
This evaluation step examines the the financial aspect of doing business with the supplier:
- Price analysis: the comparison of a supplier’s price with a benchmark price.
- Cost Analysis: the breakdown of the supplier’s price
- 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
- Suppliers’ responses: in connection with the original solicitation document.
In-Process Activities
- Financial analysis
- Supplier vetting
Outputs
- Financial analysis reports
- Supplier vetting reports
Success Scenario
- The Commitment formalisation process starts
Failure Scenario
- No supplier is selected: all of the suppliers have failed to pass the minimum requirements for the supplier vetting process and/or the TCO is too high the for purchasing organisation.
Commitment Formalisation
Commitment Formalisation is the process of establishing an agreement in writing with the selected supplier. It involves to aspects:
- The use of a commitment instrument with terms and conditions: for example, a fixed-price contract.
- The observation of applicable laws: for example, the CISG for international trade or the Common Law and the UCC in the United States.
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
- A selected supplier
In-Process Activities
- Contract writing and signing
Outputs
- Signed contracts and agreements
Success Scenario
- The Follow-Up process starts
Failure Scenario
- The supplier does not accept the terms: in this case, it is likely that the solicitation document was not detailed enough. Therefore, a negotiation process must be triggered.
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’s measurable performance: it rates supplier’s performance against the parameters specified in the agreement and informs the relevant internal customers.
- Compliance: it ensures that the purchasing organisation adheres to the agreed terms and conditions to minimise risk.
- Conflict resolution: between the supplier, the procurement department and its supporting functions (e.g. Finance), and the internal customers from the concerned functional areas.
- Accounting and auditing: ensuring that all documentation and records are maintained.
- Contract change management: negotiation of any changes to the agreement. For example, if the delivery of an application has been delayed, determining whether it was the supplier’s fault or the customer’s fault so that an extension can be negotiated in the most beneficial terms.
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:
- Delivery of late orders and back orders: for example, a hardware vendor has delivered all of the blades included in the order to the data centre but the SAN units have not arrived yet since they vendor had to ship them from a different location. As such, procurement needs to push the vendor to delivery the SAN units as soon as possible because the blades are useless without them.
- Proactive monitoring of long-lead open orders: orders with a long lead carry a bigger risk so procurement needs to be proactive in their monitoring efforts and understand some of the steps in the manufacture and logistics of delivering the product. For instance, a supplier that sells a custom telecommunications cabinet needs to buy racks from other third party suppliers such as Nokia, Ericsson, Huawei, etc. Then, the cabinet must be shipped and comply with regulations at customs, for instance, those imposed by the FCC in America, and the BREC in Europe. If the lead time is eight months, any problems in any of said steps may cause delays.
- Order tracking: identification of unfulfilled open orders with a given supplier.
- Early delivery burden: a good or service that is delivered prior to the agreed time may cause problems. For example, hardware that has been delivered before the data centre is completed must be safely stored somewhere else. Services are no different. For example, a team of consultants that arrive before desk space has been arranged for them.
Organisational Structure
The expediting process may be handled by different individuals. Each arrangement comes with advantages and disadvantages:
- Buyers: by the same individuals who place the order. The advantage is that it provides more insight to determine whether the distress-causing suppliers may be selected in the future or whether new conditions need to be negotiated. However, since expediting is a no-value “fire fighting” activity it consumes time that could have been used for more strategic purposes.
- Dedicated expediters: by full-time “fire fighters / chasers”. This approach frees the procurement personnel from the such activities. The advantage is that a combination of senior procurement personnel and dedicated expediters provides better value for the organisation. The disadvantage is that if communication is not good, the senior buyers may not have sufficient insight into the suppliers’ performance.
- Internal customers: by the functional areas that benefit from the supplier’s goods and services. The advantage here is a more fluid technical communication and mutual understanding of expectations. The disadvantage is the limitation in the internal customer’s understanding of legal purchasing aspects. For example, the internal customer may inadvertently provide price information to a supplier from a different supplier.
Process Overview
This is a general illustration. This process must be customised to fit the circumstances of your organisation.
Prerequisites
- The relationship with the supplier(s) has begun
- Performance KPIs: criteria for determining acceptable supplier performance.
- Delivery schedule: the specific dates at which products and services will be delivered.
- Payment schedule: the dates at which payments will be issued, which will be typically be subjected to a predefined milestone acceptance criteria.
- Terms and conditions: applicable both to the supplier and the consumer. For example, the discounts that apply if delivery dates are not met.
- Change Management Process: the methodology used to authorise, process and document changes, both contractual-wise and in terms of the way the internal customers from functional areas are affected by changes in service provision and the delivery of goods.
In-Process Activities
- Monitoring
- Change management: as required.
- Expediting: in cases of extreme urgency.
Success Scenario
- The Closing-Out process starts
Failure Scenario
- The supplier does not meet its obligations: some of the damage-related terms in the contract will be used in order for the purchasing organisation to recover some of their investment.
Closing-out
Closing-out is the process of finishing a transaction with a supplier in an orderly fashion. It includes the following elements:
- Acknowledging the receipt of goods or the completion of services
- Paying for the goods or services.
- 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
- PO’s number in the packaging slip.
- PO’s supplier name on the packaging slip.
- 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.
- PO’s associated specification and actual items in the package.
- PO’s quantity and actual quantity of items in the package.
- Damage and/or missing subcomponents. For example, laptops’ batteries which may not have been specified as separate units.
- Additional Inspection/Quality Assurance tests.
Services
- 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.
- PO’s allocated number of days and days in timesheets allowing for holidays, sick days and extra hours/days.
- 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:
- PO’s number
- PO’s supplier name
- PO’s goods and services description
- PO’s goods and services quantity
- PO’s price
- 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:
- Deterioration of the customer–supplier relationship, leading to decreased performance and/or the lifting of existing discounts and advantages.
- Refusal to ship new orders and/or render further services.
- 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:
- Product failure: when the product is under warranty and it can be repaired, it can be replaced or a refund may be obtained.
- Below-standards service quality: for example, an appliance was deemed to scale to 1000 concurrent users but it only does it up to 50.
Process Overview
This is a general illustration. This process must be customised to fit the circumstances of your organisation.
Prerequisites
- Service/product delivery has occurred
In-Process Activities
- Acknowledging the receipt of goods and services
- Paying the suppliers
- Capturing supplier’s conformance according to the needs of internal customers
Success Scenario
- Internals customers are satisfied and suppliers are paid
Failure Scenario
- Internal customers are not satisfied
- The purchasing organisation has failed to produce timely payments