The external procurement process is a critical component of procurement management, involving the acquisition of goods, services, or works from external vendors or suppliers. This process ensures that an organization obtains the necessary materials, services, or resources at the best possible price, quality, and delivery time.)

In detail, a typical procurement process includes the following phases:

Identification of the requirement

This is the first stage, at which the user department (say, Maintenance, Production, Sales and distribution, administration, accounts etc.) identifies their requirements, that is what are the items they require and based upon which they create a document called as the Purchase requisition /Purchase request (PR). This document normally contains description of material, quantity, approximated cost, material requirement date, preferred or standard vendor etc.

NOTE – If we set a MRP procedure for a material in the material master, the SAP system automatically generates a purchase requisition.

Authorization of purchase requisition

Then, the PR is to be first approved by the head or the senior authority of the user department. At this stage, the authority may return the PR to the originator for modification or can approve it.

Final approval of PR / Role of inventory controller

Once the PR has been authorized by user department then it is available to the inventory controller, or the materials management department, who are responsible for handling all the materials in the organization. Inventory controller shall review the PR and shall check the open Purchase Orders (PO), any other scheduled or planned delivery for the material. If there is any planned delivery or any existing open PO then Inventory controller can return the PR or request the user department to revise the quantity of the material (if required). After the approval of Inventory controller, the approved PR is available to the Procurement department.

Procurement

After final authorization of PR, that it is found out that there is no planned delivery of such a material, it is available to procurement department. The department shall check for any existing contract for the material. If any contract exists then a call-out shall be generated and shall be sent to the existing supplier. In case no contract exists then the procurement department shall initiate supplier search and floating inquires.

Identification of suppliers

If no already contracted supplier exists, then the procurement department shall interact with the user for the possible suppliers or search on the internet or use referrals or search data base, etc. to identify the suppliers for the said material.

Floating of inquiries

Once the suppliers are identified, procurement department shall send the Request For Quotations/Proposal (RFQ/RFP) to the supplier, based upon the PR. RFQ normally contains description, technical specifications of the material, quantity of the material, term and conditions, delivery date of the material, date of submission of the RFQ, quality standards, validity of the suppliers offer, etc.

Receipt of technical quotations

After sending the RFQ/RFP to vendors, the procurement department shall receive the quotations from the suppliers. These technical quotations contain the information pertaining to the technical specifications of the material, if there are any. Normally, vendors are instructed to send their quotation in a sealed envelope, mentioning only RFQ reference number on it. Quotations are normally opened and signed by two or more persons of the procurement department.

Technical evaluations of the quotations

Quotations are sent to technical department for technical evaluations of the quotations. Here, technical department shall shortlist the quotations based on the technical specifications.

Receipt of commercial quotations

Once the technical evaluation is over, the procurement department shall send the advice to shortlisted suppliers for commercial quotations. These commercial quotation will contain details about the payment terms, discounts etc. Quotation comparison statement is prepared by the procurement department to compare all the quotations of the supplies and suppliers are short listed for negotiations.

Negotiations

Based upon the commercial quotation, the procurement department will short list the suppliers and will invite then for negotiations. The negotiation can happen on various grounds like, reduction in the prices of the materials, quantity and price breaks, delivery terms and conditions, freight charges, payment terms etc.

Selection of vendor

After negotiations with all the selected vendors, the revised quotations are prepared and vendor is finalized for award of contract based on the weightage to the commercial, technical parameters, previous performance of the vendor, delivery dates of the material, etc.

Award of contract

After the vendor is finalized, LOI (Letter of Intent) can be sent to him and he may be asked to deposit security or bank guaranty before signing the agreement. Agreement can be of Fixed or Blanket (the same can be mentioned in the RFQ).

Purchase order (PO)

The procurement department then shall raise the purchase order against the contracts and then is send to the supplier. This PO is prepared in reference of the initial document prepared in the process i.e. PR.

PO Acknowledgment

After receiving the PO the supplier sends the acknowledgement to procurement department and they record the acknowledgement. If any ERP is being used for procurement functions then supplier can remotely download purchase orders and can acknowledge the PO.

Advance shipment notifications (ASN)

The supplier sends the Advance Shipment to procurement department as soon as he ships the material to the buying organization. This note normally contains shipping date, transporter’s name, airway bill number, number of packages, weight of the packages, receiving location address, description of goods, etc.

Goods receipt ( GRN)

When the goods are received at the warehouse of the organization, the receiving staffs checks the delivery note, PO number etc and acknowledges the receipt of material. After the material is received the same is checked for quantity in case of discrepancy the same is reported to the vendor. After the quantity verification the material is kept at inspection locations and material inspector is called for inspection of material. If material is rejected by the inspector the same is sent back to the vendor or the vendor is asked for the rectification at the site. The sound material is moved to respective warehouse locations.

Invoice Recording

Vendor sends the invoice to accounts department of buying organization for claiming payment. This invoice is entered in to the system. Once the company receives the invoice, the 3-way check will happen automatically by the standard system. Here invoices will be verified with goods receipt and purchase order for quantity and price

Payment to supplier

Suppose the accounting department finds a match between the price, quantity, and terms and conditions documents. In that case, depending on the invoice due date accounting department will pay the vendor (vendor payment) as per the agreed terms. Once the vendor receives the payment, the complete process is documented, and accounting reports are created in FI.