Thursday, 28 April 2016

Procurement Process

Every organization acquires material or services to complete its business needs. The process of buying materials and obtaining services from vendors or dealers is procurement. Procurement process should be done in such a way that it is ordered in correct quantity, with a proper value at the proper time. It is subdivided into following parts:
  • Basic Procurement
  • Special Procurement

Basic Procurement

It is a process of acquiring goods or services in the right amount, at the right price at the right time. So the method of getting services, supplies, and equipment from a vendor (seller), at the right price at the right time in right amount is termed as Procurement. The quality of procurement is attempting to “get the right balance”, consider the following example:
  • Organizations try and keep inventory levels at a minimum due to the prices associated with high levels of inventory; however at identical time it is very expensive to prevent production due to shortages in raw materials.
  • Getting the minimum price for a product or service is often necessary, however the balance between product availability, quality, and vendor (seller) relations is also necessary.

Procurement Lifecycle

Most modern organizations procurement follow some sequential steps which are described below:

Requirement and Information Gathering

Procurement process starts with gathering information about product and its quantity. Then for required products and services, it is necessary to look for suppliers who can satisfy the requirements.

Supplier Contact

After gathering requirements one will look for the suppliers who can fulfill the requirements. Based on that quotation request or information request can be made to suppliers or direct contact can be made with them.

Background Review

Once the supplier is known product/service quality is checked, and any necessities for services such as installation, warranty and its maintenance are investigated. Some samples of the products can be obtained for quality examination.


Some negotiations with suppliers is made regarding price, availability and delivery schedule of the products/services. After this a contract is signed that is a binding legal document between supplier and ordering party. A contract will include all necessary information like price and quantity of material, delivery date, etc.

Order fulfillment

Ordered material will be shipped, delivered to the ordering party and supplier is paid accordingly. Training and Installation of product or services may also be included.

Consumption, Maintenance and Disposal

As the products/service is consumed the performance of the products or services is evaluated and any follow up service support if required is analyzed.

Contract Renewal

Once the product or services are consumed or contract expires and needs to be renewed, or the product or service is to be re-ordered, company experience with vendors and service provider is reviewed. If the products or services are to be re-ordered, the company decides whether to order from previous supplier or think about new suppliers.

Basic Procurement Activities

Basic Procurement activities flow is given in the following image:
SAP Basic Procurement
A brief introduction of Procurement activities is given below:
Procurement ActivitiesDescription
Determination of requirementIt is the logical subdivision where it is determined that what material or services are required to company, and which supplier can fulfill the requirement.
Creating Purchase RequisitionIt is the phase in which purchasing department is informed about the requirement of items or services required for business purpose. A requisition is a internal document.
Creating Purchase OrderIt is the phase when order is created from requisition and it is approved and assigned to a supplier.
Goods receipt/ Invoice ReceivedIt is the phase in which the material is received by the company and the condition and quality are verified. In this phase Invoice is received from the vendor (seller).
Invoice verification/ Vendor PaymentIt is the phase in which the vendor (seller) is paid from the company and reconciliation of the invoice and PO is accomplished.

Type of Basic Procurement

There are 2 types of Basic procurement which are shown below:
  • Procurement for Stock vs Consumption
  • External vs Internal Procurement

Procurement for Stock vs Consumption

The following points show the difference of Procurement for Stock vs. Consumption:
  • Procurement for Stock - A stock material is a material that is kept in stock. These materials are kept in stock once received from the vendor. The stock of this material keeps on increasing or decreasing based on amount of the quantity received or issued. To order a material for stock, the material must have a master record within the system.
  • Procurement for Direct Consumption - When procurement is for direct consumption i.e. it will be consumed as soon as it is received, the user should specify the consumption purpose. To order a material for consumption, the material may have a master record within the system.

External vs Internal Procurement

The following points show the difference of External vs Internal Procurement:
  • External procurement - It is the process of procuring goods or services from external vendors. There are 3 basic forms of external procurement generally supported by the Purchasing component of IT system.
    One time orders are generally used for material and services that are ordered irregularly.
    Longer-term contracts with the subsequent issue of release orders - For materials that are being ordered regularly and in large quantities, we can negotiate deal with the vendor (seller) for pricing or conditions & record then in a contract. In a contract you also specify the validity date.
    Longer-term scheduling agreements and delivery schedules - If a material is ordered on an everyday basis and is to be delivered according to an exact time schedule, then you set up a scheduling agreement.
  • Internal Procurement - Large corporate organizations may own multiple separate businesses or companies. Internal Procurement is process of getting material and services from among identical company. So, each of these companies maintains a complete bookkeeping system with separate Balance, Profit & Loss Statements so that when trade occurs between them it will be recorded.

Special Procurement

Special stocks are stocks that are managed differently as these stocks did not belong to company and these are being kept at some particular location. Special procurement and special stocks types are divided into the subsequent areas.

Consignment Stocks

Material that is available at our store premises, however it still belongs to the vendor (seller)/Owner of the material. If you utilize the material from consignment stocks, then you have to pay to the vendor.

Third-party processing

In third-party processing, a company passes on a sales order to associate external vendor (seller) who sends the goods directly to the customer. The sales order is not processed by your company, however by the vendor (seller). Third-party items can be entered in purchase requisitions, purchase orders and sales orders.

Pipeline handling

In pipeline handling, the company needs not to order or store the material involved. It is obtainable as and when required via a pipeline (for example, oil or water), or another style of cable (such as electricity). The material that is consumed is settled with the vendor (seller) on a regular basis.

Returnable Transport Stock

The company orders goods from a vendor (seller). The goods are delivered with returnable transport packaging (pallets, containers) that belongs to the vendor (seller) and is stored on the customer premises until they return it to the company.


The vendor (the subcontractor) receives components from the ordering party with the help of which it produces a product. The product is ordered by your company through a purchase order. The components required by the vendor (seller) to manufacture the ordered product are listed in the purchase order and provided to the subcontractor.

Stock transfer using stock transport order

Goods are procured and supplied within a company. One plant order the goods internally from another plant (receiving plant/issuing plant). The goods are procured with a special type of purchase order - the stock transport order. You'll be able to request and monitor the transfer of goods with a stock transport order.


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