In industry 4.0, procurement activity will be digitalized. Organisations must understand and adapt the changes. In the digital era, it is critical for organisations to adapt their procurement operation to Digital Procurement and ride on the rapid changes that are transforming industry.
Contrasting Terminologies of Procurement versus Purchasing
Purchasing has been described as the process of ordering and receiving goods and services. Procurement, however, has been described as those activities to acquire goods and services.
These terminologies of Procurement vs Purchasing can perhaps be best explained using the PP Organogram, as shown in the diagram below. This article will focus on the terminology of Procurement, instead of Purchasing.
Contrasting Processes of Conventional and Digital Procurement
The starting point is to study the process of a typical conventional procurement system, and compare this with that of the digital procurement evolution. We will also explore the key benefits of transiting from conventional to a digital procurement system.
The diagram below compares the processes involving a typical conventional and digital procurement system.
Conventional Procurement Process
Step 1 – Need Recognition
This is a seemingly obvious step, but one that needs to be mentioned. A business owner (or procurement department) must recognize a product is needed in order to purchase it. That product can be either a brand new item, or one that is being re-ordered.
Step 2 – Specific Need
Does your industry have specific requirements for various products. If that is the case in your industry, be sure you are up-to-date on those requirements and order accordingly.
Step 3 – Source/Examine Supplier Options
It’s compulsory for every business to determine where to get the source of goods / parts. Comparing the price with an official quotation is necessary, the cheapest might not be the best. Lead time, delivery, design, after sales support (i.e. warranty), payment term will have to be taken into consideration during supplier selection. Some companies have practice to have an approved vendor’s list (this is a recommended practice) while others are still trying to determine who the best suppliers are. Once a supplier is chosen, companies should stick with that relationship and try to establish preferred pricing.
Step 4 – Price and Terms
Once a supplier is selected, companies should stick with that relationship and try to establish preferred pricing and specific terms (i.e. lead time, delivery, design, after sales support (i.e. warranty), payment term).
Step 5 – Purchase Order
The purchase order is the formal contract used to buy the product. The purchase order outlines the price, description, quantity, specific requirement, shipping / delivery term, lead time, currency, payment term and other terms & conditions. Once purchase order go through the internal approval process, , purchase order can be sent via fax, mail or email.
Step 6 – Acknowledgement
The transfer of the purchase order via email, mail or fax (email is highly recommended). There is necessary to get vendor acknowledgement to ensure they have received the purchase order and agree the details listed on the purchase order. Once vendor accepted the purchase order, this is a legally binding contract is formed between the two parties.
Step 7 – Expediting
This stage addresses the timeliness of the service or materials delivered. Punctuality is important is every business. Delay will cause bad impact & affect the company trust. The purchase order will have expected delivery date information. Vendor acknowledgement will also have to indicate confirm delivery / shipping date.
Step 8 – Receipt and inspection
Once goods delivered, the receiving company inspect quantity, quality; subsequently, accepts or rejects the product. Rejection is almost always due to a damaged product. Vendor will have to make up the quantity for shortage of quantity.
Step 9 – Invoice Approval and Payment
When Invoice submitted to Finance department, original invoice, receiving document (usually is delivery order) and original purchase order, this three documents must match when the seller when Finance department post it in the system. This is known as three-way matching. Once it has posted in the system, it will run and arrange pay based on the agreement payment term. If there is a discrepancy, it must be resolved before payment is made.
Step 10 – Record Keeping
The receiving (buying) company must keep good records. This means saving all relevant documents for every completed purchase. This is for easy tracking purpose for future order.
The diagram above shows a typical conventional procurement process.
Digital Procurement Process
Step 1 – Requisitioning
Procurement system must allow electronic goods and service requisitions. The functionality must be accessible to all individuals in the enterprise authorized to make purchases.
Step 2 – Approval Routing and Workflow
Procurement system contain workflow capabilities and ability to set up automatic approval routing by good, service, dollar value.
Step 3 – E-Purchase Orders
Raise electronic purchase order using procurement software via mobile devices.
Step 4 – E-Receipts
Procurement system to automatically produce and deliver goods and services receipts upon delivery completed. To enable this function, the system need to integrate with barcode or RFID scanners to allow for automatic recognition of delivered goods.
Step 5 – E-Invoicing
Procurement system to accept and process electronic invoices. For supplier who do not have system that automatically generate electronic invoices, there’s an easy online creation through a supplier portal or document scanning.
Step 6 – Automatic Reconciliation
System that capturing purchase order, receipts and invoices automatically must also be capable of linking and reconciling.
Step 7 – E-Payment Options
Payment options of purchasing cards, electronics funds, electronic cheque and automatic cheque printing.
Step 8 – Reclamation of Taxes
Procurement system will understand the relevant taxation codes and linking into suitable tax tables to allow buyer to accurately compute tax, reconcile taxes charged by suppliers, and determine any exemptions the organization is eligible for.
Step 9 – Digital Analytics
Analysis is needed after the procurement cycles completed. There should be significantly reduce cycle time.
The diagram above shows the digital procurement platform.
Key Benefits of Transiting into a Digital Procurement System
Reducing Cost
To reduce cost by leveraging volume. Having structured supplier relationship and by using system improvements to reduce external spend while improving quality and supplier performance.
Visibility of Spend
Centralized tracking of transactions enables full reporting on requisitions, item purchases, order process and payment made. The advantages extend to ensuring compliance with existing and established contracts.
Controls
Standardized approval processes and formal workflows ensure that the correct level of authorization is applied to each transaction and that spend is directed to draw off existing contracts.
Compliance to policy is improved as users can quickly locate products and services from preferred suppliers and are unable to create maverick purchases.
Technology
Digital procurement advantages can only be fully realized when the systems and processes to manage it are in place. Software tools are needed to create the standard procurement documentation: electronic requests for information (e-RFI), requests for proposal (e-RFP) and requests for quotation (e-RFQ).
Productivity
Internal customers can obtain the items they want from a catalogue of approved items through an on-line requisition and ordering system.
Procurement staff can be released from processing orders and handling low value transactions to concentrate on strategic sourcing and improving supplier relationships.
References:
Poh, Philip (1988), “Defining and Clarifying the use of Terminologies”, International Federation of Purchasing and Materials Management conference, Brisbane.
http://www.esourcingwiki.com/index.php/An_e-Procurement_Primer#Core_Capabilities
https://blog.procurify.com/2014/09/16/stages-procurement-process/
https://blog.procurify.com/2013/09/23/all-you-ever-needed-to-know-about-purchase-orders/
http://www.purchasing-procurement-center.com/e-procurement-advantages.html
