Procurement Cycle
Your guide to the procurement cycle
Effective procurement and vendor management are essential to an optimized SaaS stack. This page is a vital expert-led resource for the procurement cycle and its surrounding ecosystem.
What is a procurement cycle?
A procurement cycle – also known as a procurement process or procurement lifecycle – relates to the overall system businesses use to acquire goods and services. Understanding this cycle is crucial for optimal operations, impacting cost-effectiveness, profitability, supply chain management, resource allocation, supplier relationships, delivery times, risk management, and more.
An optimized procurement cycle has several clearly defined stages. Typically, a department or team will begin by identifying specific business needs. This is communicated via a purchase requisition, providing a template for the exact service or physical product requirement.
A procurement team subsequently takes the reins, although establishing strong cross-functional departmental relations is key to avoiding miscommunication and an inefficient purchase order (PO). Undergoing qualified market research and using requests for information (RFIs) are central tenets to an effective scouting stage of the procurement cycle.
Strategic sourcing can also include requests for proposals (RFPs), giving organizations a more concrete idea of a contractual cost from potential suppliers. This is key to making cost savings as the procurement team can leverage precise data to optimize financial and functional decision-making.
Once a selected supplier has been identified – ideally by all relevant stakeholders, not just the procurement team – the procurement cycle moves into the fulfillment stage. Contract negotiation and formalization precede an onboarding process before the focus turns to managing the vendor relationship. This involves monitoring delivery times, verifying quality via three-way matching, and more.
The procurement cycle is a fundamentally endless process, as organizations must consistently evaluate supplier performance via spend analysis, KPIs, and other relevant metrics. A well-managed cycle is advantageous at all levels, fostering strong vendor relationships, minimizing risks, and optimizing cost-effectiveness for anything from office supplies to SaaS vendors.
The result? A positively impacted bottom line and greater ROI on a range of services and goods. We’ll go into greater detail regarding each stage of the procurement process and how the Vertice SaaS Purchasing Platform can be an indispensable piece of procurement software further down the page.
The eight stages of the procurement cycle
Procurement cycle optimization is impossible without a defined understanding of the overall process. Check the steps below for a focussed breakdown of each stage of the procurement cycle:
1: Identify company needs
The procurement cycle begins by recognizing a business need. Supplier selection without understanding the actual requirement is more or less impossible. Teams or departments must supply a detailed purchase requisition form outlining the specific requirements – i.e. the product or service type, estimated quantities, key use cases, and any special instructions. This provides vital foundations to the entire procurement cycle, so ensure the requirements are clearly and accurately summarized.
2: Strategic procurement research and evaluation
Effective procurement involves thorough research and evaluation before selecting a supplier. The procurement team must leverage in-depth market research and data analysis to identify potential vendors who can meet the requirements outlined in the first step. RFIs can deliver additional information on top of commercially available websites, providing a granular overview of a specific target’s complete services or products.
3: Standardize a procurement plan
Standardizing a procurement cycle blueprint is essential before diving into solicitation and contract negotiation. The plan will outline the entire procurement process flow, including timelines for each stage, vendor communication protocols, and decision-making criteria for supplier selection. This ensures consistent and efficient purchasing decisions throughout an organization. It also empowers the procurement team to negotiate using a calculated strategy rather than spontaneously.
4: Solicitation and contract negotiation
In most cases, a business will have a shortlist of potential procurement options after initial research and evaluation. Solicitation via request for quote (RFQ) is an optimal solution at this stage of the procurement cycle, enabling businesses to get formal bids from potential suppliers, indicating pricing structures, delivery timelines, and other relevant information. Consequently, data-driven side-by-side analysis can give a better insight into the perfect choice.
5: Select a new supplier and finalize contract terms
After evaluating proposals, negotiating contracts, and liaising with other departments to ensure the optimal solution, the procurement team can select a supplier and begin finalizing terms. We’ll go into more detail later, but Vertice’s white-glove procurement solution is a brilliant way to leverage unique pricing benchmarks obtained from our industry insights to negotiate cheaper prices.
6: Issue an official purchase order
Once payment terms and a formal contract have been agreed, the procurement team will issue an official purchase order. This is a legally binding document confirming the agreement and details like the specific items or service ordered, quantities, agreed price, delivery timelines, and more.
7: Onboarding and payment
This stage of the procurement cycle focuses on onboarding the new supplier, a particularly important step for IT procurement. Meanwhile, the finance team must establish a smooth payment process by streamlining workflows like three-way matching with automation.
8: Continuous monitoring and optimization
An effective procurement cycle doesn’t stop at onboarding and payment. Organizations must constantly monitor supplier performance throughout the contract lifecycle using KPIs and in-depth metrics. Leveraging management software and enterprise resource planning (ERP) systems generates valuable data and analytics to identify cost savings and optimize the entire procure-to-pay process.
How do procurement cycles differ between industries?
Specific procurement activities can differ significantly between industries, influencing timelines, raw materials, contractual obligations, and the overall procurement plan. Industry regulations, product complexity, risk tolerance, cost pressures, and supply chain differences are all catalysts for differing procurement cycles depending on the organization.
Heavily regulated industries like healthcare or banking have stronger compliance requirements, for example, extending the evaluation and supplier selection stage. On the other hand, fast-paced environments will prioritize speed – picture a video editing application startup requiring cloud storage on a tight deadline.
Supplier specifications can also vary wildly depending on the industry. A construction project must ensure precise technical specifications for something like pre-cut timber, requiring more focus on formalizing the official PO. Conversely, a restaurant specializing in seasonal menus has far more leeway regarding the exact product specifications, as this would be influenced more by specific produce availability.
Optimized procurement management must consider these fluctuations regarding specific stages of the procurement cycle and potential areas for extra concern. Doing so drives a more efficient, cost-effective, and risk-managed approach to procurement – everything you need to maximize ROI and positively impact your bottom line.
How Vertice fits into the IT procurement cycle
What does the IT procurement cycle have to do with Vertice?
Our white-glove solution helps organizations procure SaaS solutions with maximum efficiency, using pricing benchmarks derived from what other businesses are paying for similar subscriptions to help you get the best price.
The Vertice platform is also a sophisticated cloud cost optimization (CCO) solution, leveraging automation and granular data processing to visualize your entire cloud environment with easily understood dashboards. This consequently allows our customers to optimize vendor partnerships, usage, and cost allocation.
Here is a bit more information:
- SaaS Purchasing – Vertice helps negotiate the best price, streamlines contract renewals, offers regular diligence insights for compliance and security, tracks usage, and more.
- Cloud Cost Optimization – Our cloud cost optimization can cut cloud costs by up to 25% with granular insights, automated savings, streamlined integration, and additional helpful tools.
Vertice’s unified approach to cloud and SaaS management is directly aligned with Cloud FinOps principles, helping organizations optimize their IT procurement cycles from top to bottom.
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