What Is Procurement?
Procurement is the process of agreeing to obtain terms and to acquire goods, services, or work from an external source, usually through a tender or competitive bidding process.
Procurement involves making purchasing decisions under shortages. When large volumes of data are available, it is a good practice to use economic analysis methods such as cost-benefit analysis or cost-utility analysis. Procurement also involves the use to ensure that the buyer receives goods, services, or works at the best price when factors such as quality, quantity, time, and place are compared. Companies and community organizations often define procedures that aim to promote fair and open competition for their business while minimizing risks such as exposure to corruption, mergers, and collusion.
Procurement Fact: Procurement as a service’s market size is expected to grow from USD 5.4 billion in 2019 to a staggering USD 9 Billion by 2025. That too at a Compound Annual Growth Rate (CAGR) of 7.6% during the forecast tenure.
What Is The Process Of Procurement?
Procurement is a complex process. But it can be made easy by taking a step – by – step approach.
And that is what you’re going to read today. A systematic step – by – step procurement process.
We have compiled a 6 – step comprehensive procurement process exclusively for you.
Let’s get started.
The 6 Steps To Procurement
- Finding projects/ Receiving ITBs (Invitation To Bid)
- Quantity Take-off/ Estimation
- Preparing Quotation
- Receiving Purchase Order
- Receiving Payment
1. Invitation To Bid (ITB)
ITB allows the company to provide written information in detail including all the necessary terms and conditions for the work of a particular project or projects it wants to undertake/work on. Companies can submit invitations to bid orally or in writing.
What does an ITB contain?
An invitation to bid or a request for proposal ideally contains many of the following details:
- Scope of work
- Pre-visit / visit meeting
- Questions and agenda
- General conditions
- Low requirements
Image Source: http://www.batzerconstruction.com/tag/call-for-bids/
2. Quantity Takeoff
The first and one of the crucial steps in the early stages of both the procurement process and the project and in building an effective quotation is quantity takeoff or estimation. As the term suggests, quantity estimation is literally estimating the quantity of the physical materials/type of materials needed for that project. Professional quantity estimators draft the desired quantity required.
What does Quantity Takeoff include?
Quantity estimation is at the heart of the proposal. The invitation to bid includes a set of drawings or architectural drawings.
These drawings contain the project layout.
These include the floor plan of the project as well as the project schedule.
The floor plan of the project contains the 2D overview of the top view of the project.
The estimator analyses the floor plan of the project and then knows where the rooms are, what the dimension is, what is the area of each room. The floor plan is very important for estimation
The next important piece of documentation in the list of drawings is the schedule – the schedule is a tabulated document that ideally contains all the minute details of the project necessary for quantity estimation.
Some of the details that are included in a typical schedule are:
- ROOM: NAME TO ROOM: NAME
- SPECIAL RATINGS ( IF ANY)
- GLAZING TYPE
- DETAIL/SHEET NUMBER
The estimator refers to both the floor plan and the schedule in parallel and tabulates the quantity of the fixture(s) required. After analyzing and totaling the quantity, this estimation is passed on to the pricing estimator.
After the quantity has been calculated, it is time for the calculation of the pricing. Pricing is different for every project-wise/ depends on the project. Important parameters in deciding the pricing include the cost of the unit, shipping charges, import-export duty, and tariffs.
What all is included in the pricing?
The quantity after being estimated is passed on to the pricing team.
Pricing plays an integral role in many of the ITBs. Companies look for high “value for money” in the bids.
The pricing team analyses the cost of one unit room for each room type/ structure type and multiplies it with the quantity
Various factors are taken into consideration when deciding the pricing.
Firstly, the base price of the unit is calculated. After the base price has been taken care of, next is the transportation/ shipping cost. Whether you’re outsourcing or procuring locally, items/ products have to be transported from one place to another. And that is the shipping cost.
After the shipping cost has been looked upon, it’s time to add in the tax. The taxation or tariffs depend upon the location. If the products have been procured globally / outsourced then the pricing team adds in the import-export duty and certain additional tariffs. These costs generally depend on the countries/ states involved and can vary from one place to another.
4. Preparing Quotation
The most important part of deciding the fate of the project is the quotation. Now that the pricing has been decided, it’s time for submitting the final proposal/bid to the client. The proposal includes all of the requirements that have been mentioned in the client’s bidding instruction manual.
After including all the required details, it’s time to send the proposal to the client.
After receiving the ITB, estimating the quantity required and the pricing for the same, a draft of the quotation is prepared to enlist all the details mentioned in the ITB instruction manual.
Large quotations often include an introduction about the company, its vision, its team details – the experience, and in short the portfolio of the company.
Then the quantity along with the pricing is tabulated into the proposal.
Additional details included are the addresses of the sender and buyer.
5. Receiving the PO
The proposal upon being accepted by the client transcends into success for the bidder. The confirmation comes in the form of a PURCHASE ORDER (PO) which reiterates the decision of the client to provide their consent in giving the project to the bidder.
After the proposal has been bidden upon, the client decides the most efficient and convenient bidder and gives the project to that company.
In the procurement industry, this is validated by a purchase order affirming the client’s approval.
Why a purchase order?
A purchase order is essentially or basically a legal piece of official proof/document that states that the buyer has agreed to buy and accept the bid and the products procured by the company.
A purchase order has many benefits:
- You have proof of the exchange.
- Easier for the accounting and finance team to keep track
- Easier for supply chain executives.
And a lot more of such benefits.
What all does the PO include?
A typical purchase order usually includes:
- PO number
- Purchase order date
- Billing address of the company and its name
- Shipping address of the client (buyer) and its name
- Contact and emails of the point of contact. Additional contact information from both sides
- Delivery date
- Shipping Details
- Shipping mode/method
- Item details
- Item name
- The item description and technical information
- Item quantity
- Item unit cost
- Taxation and tariffs
- Total price
- Payment terms and conditions
- Payment mode
6. Receiving Payment
The last step in the steps of a successful procurement is receiving the payment. At the time of the PO, the client as per the agreement also sends an advance deposit irrespective of the channel. The remaining amount is transferred as per the terms and conditions Based upon the details in the purchase order, the value remaining is wired by the client to the company depending on the contract signed by both parties.
Procurement plays an important role in numerous industry sectors, as it helps in minimizing capital and operational expenses and increasing return on investment (ROI), thereby generating market demand.
Additionally, procurement solutions include a variety of modules to accomplish different tasks, which support enterprises to grow and take risks by enhancing and streamlining their process and thus their performance.