Goods ordered, delivered and paid for: It might be easy for private individuals, but it can pose a challenge for companies. Procurement processes in the B2B sector offer solutions, and e-procurement provides the right tools. Find out everything you need to know about procurement management here. Read here how you can regain control when procuring goods, ensure transparent procedures and significantly reduce costs in the process.
Definition: Procurement processes made quick and simple
The procurement process includes all steps that a company must take to acquire goods and services from external suppliers. Procurement processes ensure the needs-based planning and logistics of purchases within the company. The correct procurement objects (goods, products, services) must be on hand in the right quality and quantity at the right time at the desired point of delivery. An efficient procurement process helps to reduce costs, optimize processes and secure the supply chain.
Types of procurement processes
Procurement processes vary depending on a company’s specific requirements and strategies. Here is an overview of three types of procurement processes that companies use to optimize their strategies for procurement objects, making them more streamlined and efficient.
Individual procurement
Whenever goods or services are only procured on a one-off basis, it is called individual procurement. Procurement only takes place as soon as there is a specific need or order. This method is used to minimize storage costs and ensure that only the materials or products actually required are purchased.
Stock procurement
Stock procurement means that companies keep large quantities of goods in stock. This ensures that there is always enough material available for current and future orders. The advantages are avoiding supply bottlenecks and taking advantage of volume discounts.
Just-in-time procurement
Just-in-time procurement means that goods are delivered exactly when they are needed. This minimizes storage costs and reduces the risk of excess stock, which can increase costs. Companies only order what they need in the immediate future in order to operate more efficiently.
Steps of the procurement process
Efficient procurement processes consist of several clearly defined stages. In general, there are six basic steps. These steps help companies to plan, execute and monitor their purchases.
Identifying a need
It all starts with a need. Something is missing and has to be ordered. In a traditional, paper-based procurement process, the situation is usually as follows: Employees from a given department submit the purchase requisition to colleagues in Purchasing via various means. The first problem begins already here: Purchase requisitions may arrive verbally, by email, telephone or fax, etc. Right at the outset, there is no way to ensure that the procurement process is transparent from any location. It is even worse if the needs are not handled centrally by the Purchasing department, but the departments simply place their orders independently and generally without much coordination. This type of “wild purchasing” often results in less advantageous terms. Economies of scale achievable through supplier agreements are also not taken advantage of.
Purchase requisition
An electronic purchase requisition prevents this problem. User roles/rights are clearly assigned upon logging in to the procurement system, and purchase requisitions can be submitted conveniently. The efficiency gains begin with bundling the needs and associated orders within a central purchasing system. This allows economies of scale to be created through volume discounts. This makes purchase requisition an integral part of an e-procurement system.
Supplier selection
Another benefit of an e-procurement system is the digital integration of external suppliers: Purchasing employees receive access to the digital supplier catalog. The process of selecting goods or products then resembles an online purchase. It is also worth noting that company-specific purchasing conditions are usually already saved in the catalog. This alone reduces many sources of error and difficulties that might not be noticed until later phases of the procurement process.
Order and order confirmation
Once the purchase requisition has been approved, the Purchasing department places the order with the selected supplier. As a result, the order is executed under the best possible conditions negotiated in advance in the contract.
This means you can benefit from the advantages of integrated contract management right from the purchasing stage. At the same time, the automated procurement process assigns the correct cost center to the purchase requisition, ensuring an optimally efficient procurement process. Digital procurement processes via e-procurement systems provide Purchasing staff with a comprehensive overview of who has placed which order with which seller and when. The same goes for the negotiated purchasing conditions and the agreed terms of delivery. Once the order has been placed, the seller sends an order confirmation. Thanks to the order history stored in the e-procurement system, employees can very easily verify whether the right goods and merchandise in the required quantities and quality are ready for dispatch by the seller.
Goods receipt
Goods receipt is a part of the procurement process that frequently involves manual steps. A paper-based incoming goods inspection often gives rise to difficulties. The following aspects must be checked in the incoming goods department on the basis of the delivery bill:
- Were the correct goods delivered?
- Have the goods arrived at the correct point of delivery?
- Is the delivery date correct?
- Are the goods complete and do they have the necessary quality?
This requires an order comparison. In traditional procurement, the first delay comes here.
Modern procurement processes always come with easy-to-use solutions for conducting incoming goods inspections with digital assistance. The delivery bill is scanned and automatically compared with the order and order confirmation. The employees in the incoming goods department still have to carry out spot checks to inspect goods, but it does simplify things.
Payment processing
Payment processing is a fundamental part of the procurement process. As a rule, the ordering company pays after receiving the goods delivered. Exceptions prove the rule: Other payment modalities are also possible, such as installment payments as well as advance payments or payments within a certain timeframe. After all, sellers want to be paid on time and correctly, which helps to maintain good business relationships.
Successful payment processing basically relies on proven technologies from incoming invoice management. The inspection and approval process may be somewhat more extensive here, but it is also more reliable. A modern e-procurement system checks invoices for purchase order reference, completeness of items and compliance with contracts. A three-way match is a common concept. Only after a positive check can the invoice be approved and transferred to an ERP system as a booking proposal.
Optimizing procurement processes with e-procurement
It is not difficult to see that the procurement process is conceived as a multi-layered process to begin with. The upstream and downstream process stages are interconnected and interdependent. Such processes must be carefully crafted – and definitely not based on paper or half-heartedly designed software solutions. This is where e-procurement systems really shine, as they are purpose-built for processes of this kind.
Electronic procurement: What is e-procurement?
E-procurement is the use of digital systems to handle the entire procurement process electronically. This includes:
- identifying the need,
- issuing purchase requisitions,
- selecting suppliers,
- placing the order,
- inspecting the incoming goods,
- verifying the invoice and processing payment.
These e-procurement systems transform manual procurement into electronic procurement. The advantage: The processes are more efficient, transparent and cost-effective thanks to the automation of manual steps and digital communication with sellers.
Difference between e-procurement and purchasing
In a nutshell: Purchasing is only one part of the procurement process, albeit a central one. “Procurement processes,” on the other hand, is a comprehensive term that includes all activities involved in supplying a company with goods and services. The term procurement processes has long been used in business literature and dates back to the pre-internet era.
E-procurement is short for electronic procurement and the related processes in the corporate context, i.e. B2B. In contrast, e-commerce refers to electronic commerce, i.e. the purchase and sale of goods and services via the internet, making it more B2C-oriented.
Advantages of e-procurement
- Efficiency: Automated processes save time and reduce manual effort.
- Reduced costs: Better price comparisons and optimized orders from suppliers reduce costs.
- Transparency: All processes are digitally traceable, making it easier to keep an eye on everything.
- Fewer errors: Automation reduces human error and improves data quality in e-procurement systems
- Better supplier relationships: More efficient communication and collaboration with suppliers.
- Real-time information: Up-to-date data and reports from procurement processes are available at all times.
- Sustainability: Digital processes reduce paper consumption and protect the environment.
Difficulties and challenges
You will certainly be familiar with the disadvantages of traditional, paper-based procurement. These types of problems are already known from other processes:
- Media discontinuities along the procurement process chain. The manual entry of information, e.g. from a delivery bill into a digital medium, is an example of media discontinuity and poses the risk of losing information.
- Lack of transparency in procurement as a result of paper-based processes, especially for companies with multiple locations.
- Lack of context: If one of these paper documents goes missing, the context linking the purchase requisition, order and invoice, which is essential for the entire procurement process, is completely lost.
- Extra work in the procurement process when employees must search for documents.
- Loss of cash discounts and payment of late fees due to time-consuming checking and approval procedures
- Missed deadlines in the procurement process
But modern e-procurement also has its challenges.
- Technical integration: The seamless integration of e-procurement systems into existing IT infrastructures can be complex and time-consuming.
- High implementation costs: The introduction of e-procurement systems can be costly, both in terms of software and the necessary hardware.
- Training and acceptance: Employees need to be trained in the use of new systems, which requires time and resources. There may also be initial resistance to change.
- Dependence on technology: A strong dependence on digital systems can be problematic if technical faults or failures occur.
- Supplier integration: Not all suppliers may be willing or able to switch to e-procurement systems, which can make collaboration more difficult.
- Continuous maintenance and updates: E-procurement systems require regular maintenance and updates in order to function smoothly and remain secure.
What types of electronic procurement are there?
E-procurement improves the way companies procure their goods and services. Various approaches and systems for electronic procurement are now available: some are auction-oriented, others utilize online marketplaces, etc. Depending on the company’s procurement strategy, there are a variety of options to consider. Here is a brief overview:
- E-tendering: Electronic processing of tenders in which bids from suppliers are submitted and evaluated digitally.
- E-ordering: Electronic ordering of goods and services via online catalogs and ordering systems.
- E-sourcing: Electronic tools to assist in identifying and selecting merchants, such as tenders and auctions.
- E-marketplaces: Online platforms where buyers and sellers meet to trade goods and services.
Each of these approaches offers advantages and poses challenges that need to be understood to find the best solution for a company’s individual requirements.
Closed, semi-open or open systems
The systems used in procurement differ according to the type of e-procurement integration into a company’s existing IT infrastructure, in this case based on accessibility and supplier involvement.
- Closed systems only use interconnected and authorized companies (sellers and purchasing companies).
- Semi-open systems: These offer flexibility and scalability to sellers by making them available to a larger number of companies.
- Open systems usually bundle the catalogs of various sellers and make them available to registered companies.
By procurement model: Sell-side, buy-side and marketplace
These models help companies organize their procurement processes. The terms sell-side, buy-side and marketplace are understood in the context of the various e-procurement approaches. They describe the procurement process from the perspective of the participants (seller, purchasing company).
1. Sell-side model
Suppliers operate the platform and offer their products and services directly to the purchasing companies. This enables sellers to control their offerings and manage customer relationships directly.
2. Buy-side model
Buyers operate the platform and invite sellers to offer their products and services. This could take the form of a supplier portal, for example. Buyers have control over the procurement process and are able to compare multiple offers and negotiate better terms.
3. Marketplace Model
Independent third parties operate the platform and bring various buyers and sellers together. This creates an open marketplace where different sellers can offer their products and services, giving purchasing companies the opportunity to compare a wide range of offers.
Summary
Conclusion – Electronic procurement processes
There are many types of electronic procurement processes. They all aim to make procurement simpler, more efficient and more transparent for companies. Let’s summarize: E-procurement is the overarching term for the entire electronic procurement process. This ranges from identifying needs to purchasing and payment processing. Only complete e-procurement systems cover all phases of the procurement process. They also have functions for monitoring, analysis and reporting based on typical key performance indicators (KPIs) for procurement. In contrast, e-sourcing and e-tendering each refer to specific parts of the overall e-procurement process. The same applies to “open vs. closed systems” and the sell-side/buy-side/marketplace model: Open and closed systems control the access and inclusion of suppliers and purchasing companies, while sell-side, buy-side and marketplace models emphasize the perspective of the buyer, supplier or a third party.
The introduction of an e-procurement system therefore requires the entire electronic procurement process to be well thought out and harmonize with the company’s requirements. So a thorough analysis of existing procurement processes must be made ahead of time. The aim here is to identify weak points and inefficient processes. There is also the question of whether an e-procurement system alone will improve this, or whether the concept of the procurement process needs to be changed at the appropriate points. If you don’t ask yourself this question, you run the risk of digitizing a suboptimal process. And you really don’t want that:
“If you digitize a shitty process, then you just get a shitty process that’s digital.”
(2015, Thorsten Dirks, CEO Telefónica Germany)
FAQ
Frequently asked questions about traditional and electronic procurement processes
What is a procurement process?
Procurement is part of the operational activities of a company. It deals with the purchasing and logistics of materials for further processing (manufacturing companies) or goods for resale (commerce). The processes that make this happen are called procurement processes.
How do procurement processes work?
The procurement process begins with the identification of a need and the purchase requisition. This is followed by supplier selection and ordering. The final step is goods receipt and payment processing.
What does e-procurement mean?
Electronic procurement is the process of purchasing goods and services via the internet within a company. It involves the use of IT systems to automate and optimize the entire procurement process. These can include electronic marketplaces, online auction platforms or special e-procurement suites, etc.
What is the difference between e-commerce and e-procurement?
Both refer to electronic purchasing. The difference lies in the groups which are participating. E-commerce takes place in the everyday lives of private individuals, so it is business-to-consumer-oriented. E-procurement, on the other hand, is aimed at companies that order goods, merchandise or other services from sellers electronically.
What kind of e-procurement systems are there?
- System perspective:
- Supplier management systems (buy-side approach)
- Catalog management systems (sell-side approach)
- Electronic marketplaces (many-to-many)
- Access perspective:
- Closed
- Semi-open
- Open e-procurement systems
What to look out for when introducing e-procurement in a company?
Understand the situation: What procurement strategies does the company pursue and what are the resulting requirements for the entire procurement process? This must be clarified first.
- Process optimization: Review and optimize existing procurement processes.
- Requirements analysis: Identify the specific requirements and objectives
- Identify needs: Which goods/services are needed on a regular basis?
- Define goals: Reduce costs, speed up processes or increase transparency?
- Determine the current status: How does the procurement process currently work and where is there potential for improvement?
- Involve the relevant departments: Ensure that all relevant departments contribute their requirements and expectations.
- Supplier selection: Choose reliable and compatible sellers.
- System integration: Ensure that the e-procurement system is seamlessly integrated into existing IT infrastructures.
- Training: Offer comprehensive training for all users.
- Data security: Ensure high security standards to protect sensitive data.