What is Procurement Lifecycle Management?
For any organization to work effectively, it must purchase a large number of goods. These might be office supplies or computer equipment, or they may be products that you then assemble or sell to customers. The process in which these goods are obtained is called the procurement lifecycle, and the closer you manage this process the more effectively and cost-efficiently you can obtain the goods you need.
Understanding Procurement Lifecycle Management
Procurement is the act of obtaining something. When your business needs supplies, component parts, or products to sell, you must procure those items from one or more suppliers.
Procurement is not a single task, however; it doesn't happen in one sitting. Instead, procurement is a multi-step process—what we call the procurement lifecycle.
The procurement lifecycle contains ten individual steps. It starts when you identify something you need, flows through finding the right supplier and negotiating the best price, and ends when the product is delivered and you file all the records. Depending on what you're procuring and from where, it may take a few hours, a few days, or a few months to complete the entire cycle.
The procurement lifecycle can be complex. If, like most companies, you're constantly procuring multiple products from multiple suppliers, you or your staff are juggling multiple procurement processes at the same time. It can quickly become quite difficult to manage.
The management of multiple procurement processes is called procurement lifecycle management, or PLM. PLM is an end-to-end approach, typically facilitated by specific PLM software, that you can use to manage multiple suppliers, multiple contracts, and multiple product orders. PLM software ensures that you order the products you need at the price you want to pay—and have them delivered when you need them. For most companies, PLM is essential to keeping the business running smoothly and efficiently.
10 Steps of the Procurement Lifecycle
The procurement lifecycle consists of ten distinct steps. PLM helps you manage and streamline all of these steps.
1. Identifying the Need
The first step of the procurement lifestyle is for your purchasing department to identify the need for a given part, product, or service. This is a simple process if you're reordering office supplies but more complex if you're manufacturing or distributing a new product that needs to be signed off on by multiple levels of management.
2. Specifying the Product
Step one identifies a general need; step two details the specific item you need to order. Depending on what you're ordering, this specification can include size, dimensions, weight, color, materials, and other defining characteristics. For complete products, you might be tasked with ordering a specific product number from a specific manufacturer, or perhaps something equivalent to an existing item.
It's important to be as detailed as possible in your specifications. If you're seeking bids from multiple suppliers, it's essential that they all are bidding on an equivalent product. It's easy for one supplier to come in with a lower bid with an inferior product if the requirements are not highly specified in advance.
3. Identifying Suppliers
Once the item to purchase has been specified, you need to identify one or more sources who can supply the item. You may already have a preferred vendor list that staff is approved to order from, or you may need to seek out new suppliers, especially for products new to your mix. New suppliers can be found from Internet searches, social media, advertisements, and referrals from other businesses. Potential suppliers need to be shortlisted so that you're choosing from a manageable number who match your criteria. (Many companies like to create a shortlist of three suppliers to bid on each contract.)
4. Negotiating Price and Terms
The next step is the most important in terms of minimizing your costs and ensuring adequate quality. If you've selected a single supplier, you need to negotiate the price and other terms with that supplier. If you've created a shortlist of potential suppliers, you need to submit to them details about the product you need and have them bid on the contract. You can then select the final supplier based on pricing, quality, delivery times, and other terms.
5. Finalizing the Contract or Purchase Order
Once you've decided on the supplier, you need to finalize the contract or create a purchase order, depending on what exactly you're purchasing. Contracts are typically used for more expensive items, larger orders, and specialized items.Purchase orders are used for common items regularly ordered from established suppliers. Contracts and purchase orders both define key details of the order—the item price, specifications, quantity, delivery date, and other terms and conditions.
6. Delivering the Purchase Order
Once the purchase order has been created, it needs to be delivered to the supplier. In previous times, it might be couriered or delivered via postal mail. Today, most purchase orders are delivered electronically, via email or other means. Upon receipt, the supplier acknowledges receiving the purchase order. Both parties keep a copy of the purchase order—either physical or electronic—in their records.
7. Expediting the Order
The expedition stage of the process concerns the delivery times for the items ordered. Any delays in delivery need to be addressed before the due date arrives.
8. Receiving and Inspecting the Purchase
When the supplier fulfills the order, you take receipt of the merchandise. It's important that the delivery be fully inspected; anything missing should be noted and pointed out to the supply. Defective or damaged items should be refused, for the supplier to replace as soon as possible. Acceptance of the order obligates you to initiate payment to the supplier.
9. Approving Invoice and Payment
When a supplier delivers items as ordered, that supplier typically issues an invoice to you for that order. The invoice can be physically or electronically delivered. The invoice confirms order details originally specified in the contract or purchase order—in particular, the amount due and the payment terms. Some suppliers require payment on delivery (POD); others offer terms of several days, weeks, or months.
You are now obligated to pay the supplier according to the agreed-upon terms. If the invoice is POD, you need to arrange payment immediately on receipt. If the supplier specifies 90-day terms, you have up to 90 days after receipt to pay the supplier. Payment can be via check, letter of credit, bank transfer, or, in some cases, corporate credit card.
10. Maintaining Records
Receiving and paying for the items ordered does not end the procurement lifecycle. After all the payment and paperwork is finalized, the details of the transaction need to be entered into your company's records.
In years past this involved filing a paper copy of the invoice (typically marked "paid") in a filing cabinet somewhere. Today, however, records are most often maintained electronically. Electronic invoices and emails are digitally archived on your company's server. Paper documents are scanned to digital files and likewise digitally archived. This digital storage is important for your accounting department in case your records are audited in the future. Archived purchase orders and invoices are also important when items need to be reordered—which starts the procurement cycle anew again.
6 Key Benefits of PLM Software
Procurement lifecycle management is most often enabled by PLM software. This software, such as ContractAI by App Orchid, manages and automates all aspects of the procurement process, providing multiple benefits to your business.
PLM software automatically documents every step of the procurement process, reducing errors and ensuring that all contracts, purchase orders, and invoices are accurate.
Streamlines the Procurement Process
PLM automates and streamlines all steps of the procurement process. This shortens both ordering and delivery times—and gets you what you need that much faster.
Improves Access to Past POs and Invoices
Trying to track paper copies of all of your purchase orders and invoices is a hopeless task. Storing all important documents digitally not only saves physical space but also makes it easier to search for and access historical data.
When you have an item that you frequently reorder from the same supplier, PLM software can automatically generate new purchase orders based on historical usage patterns or triggered by specific stock levels.
With PLM, you don't have to reinvent the wheel with every new purchase order. You can create templates for specific types of POs and reuse them for future ordering. PLM also ensures that POs issued by different departments all meet the same basic criteria, use the same language, and contain the same terms and conditions.
McKinsey & Company estimates that most organizations waste between 3% and 4% of their procurement spending on inefficiency and excessive transaction costs. By automating the process of creating and fulfilling purchase orders and contracts, PLM can reduce this waste—and bring the savings directly to your bottom line.
Equally important, the AI technology used in most PLM software also ensures that you always choose the best supplier based on cost and other specified criteria. You make more intelligent decisions, which lets you save money on almost every order.
Why PLM Software is Right for Your Business
When procurement becomes overwhelming, you need PLM software, such as ContractAI from App Orchid. PLM software will speed up the procurement process, reduce your costs, and generally make your life easier.