6 popular procurement methods & tips to choose suppliers
For anyone responsible for procurement in a company, choosing the best procurement method and finding the right supplier is a huge responsibility.
After all, an average company spends $343,000 on SaaS tools alone, with the amount projected to grow year over year.
As company projects get more complex, it becomes more important than ever to use a procurement method to optimize this budget and source suppliers best suitable to provide the necessary goods and service.
In this article, we'll look at the different procurement methods and share tips to help you select reliable suppliers.
What is procurement?
Procurement refers to activities involved in obtaining the goods and services a company needs to support its daily operations. This process includes sourcing items, negotiating terms, purchasing the items, receiving and inspecting goods, and keeping records of every step of the procurement process.
Many people confuse procurement vs. purchasing, but there is a clear difference between the two terms. Here are some of the key differences:
Procurement is everything related to sourcing and carefully obtaining goods and services for a company's business operations, while purchasing is buying the said goods and services.
The scope of procurement includes sourcing, negotiating, purchasing, receiving, and recording keeping. Contrarily, purchasing is just a part of the procurement process.
Procurement focuses on getting the best value from goods and services for business profitability while purchasing focuses on getting the best price.
Purchasing is short-term and more transactional. Procurement is long-term, with the aim to build a mutually beneficial relationship with suppliers.
Procurement is a necessary element of the supply chain that helps a company identify reliable suppliers that can meet its business requirements at a reasonable price. This allows a business to avoid wasting time, money, and resources dealing with an inefficient vendor.
6 procurement methods to find reliable vendors
A company's procurement team uses different methods to source for vendors. There are six main types, but the names may vary according to the company:
1. Open tendering
Open tendering is a competitive bidding procedure a company uses to allow suppliers to bid for its contracts. Here's how it works—a company releases an invitation to tender (ITT). Prospective vendors can then respond with how they intend to fulfill the contract and persuade the company that they are the best for the job.
This method provides the most competition among suppliers and encourages new or emerging vendors to bid and obtain more work. Note that not all who bid are suitable for the contract, especially complex acquisitions, and it takes time to evaluate all the tenders to get the required standard.
2. Request for proposals
Request for proposal is an open request a company makes to announce a project and solicits qualified contractors to bid for it. This method comes in handy in the procurement world when vendors and service providers propose their goods and services to a procurement team.
Many organizations prefer this method, and governments always use them. It involves preparing a statement of work describing the needs the company wants to fulfill and the timeline for completing it. It also advises bidders on how to prepare the proposals and the desired format the bid should be presented in, like the samples here.
The vendor usually submits these requests in two separate envelopes: one for technical proposals and the other for financial proposals. The financial proposal is sealed and only opened after the technical proposal is approved or rejected. Request for proposals opens up the competition, helping companies get the best-fit supplier at the best price.
3. Two-stage tendering
Two-stage tendering is a procurement strategy where the buyer invites tender in two stages:
The first stage tender has complete information without prices from all bidders;
The second stage tender includes the price specifications from the selected bidders.
The first stage is usually for bidders to submit their proposals with their best solutions to fulfilling the request for offers, after which each proposal is carefully evaluated and scored. The vendor with the highest-ranked bid is invited to stage two, where they submit a financial proposal after discussions to reach an agreement for the proposed solution, and finally, contract negotiations.
One advantage of the two-stage tendering is that the preferred supplier is more likely to understand the requirements, potentially reducing implementation risks.
4. Request for quotations
Request for quotations, also known as invitation to quote, simplifies procuring small-value, readily available, off-the-shelf goods and services. It's fast and doesn't require a lot of paperwork, unlike the above three procurement methods.
It's a non-competitive procurement method as the procuring company chooses the contractor, supplier, or service provider to request quotations from. At least three vendors are invited to submit quotes, and the best quote is selected based on compliance with the requirements.
5. Selective tendering
In selective tendering, suppliers can only submit tenders by invitation. This method is also known as restrictive tendering as it limits the request for tenders to a select number of suppliers or service providers.
Here, the competition is confined to a certain number of vendors who are vetted based on their track record for a specific contract. Companies can ensure their requirements are met and satisfied more effectively and increase the quality of work.
6. Single source
Single source is a non-competitive procurement method where goods and services are acquired from a sole vendor. The management conducts a strict approval process before using this method.
Single source procurement is only used under exceptional circumstances like:
When only one vendor is qualified to fulfill the requirements,
Where there is a continuation of previous work which another vendor cannot do due to patent rights,
The procurement of related items is only available from a specific source
Where there is a clear advantage of using this method over other competitive methods
6 best practices for choosing suppliers
Choosing suppliers is often tricky—but that's mostly because companies are unclear on how to do it right. To avoid assessing proposals from unfit suppliers, here are a few best practices to follow:
1. Treat vendors as vetted partners
Taking a partnership approach to your vendor relationships means looking beyond the mechanics of purchase agreements and contracts.
Consider supplier relationships as people management, with the added value that human interactions bring to a business. For example, send out online invitations to your hosted events and team bonding activities. When you make vendors feel like they're a part of your team, they'll be more likely to help you manage savings and risks and give valuable products for your company.
2. Carry out a needs assessment
Needs assessment helps you scope the need for procurement, explore potential solutions, and prepare the vendor community to deliver. It includes identifying what purchases are required, which department needs them, and the allocated budget.
Let’s say a company’s paid advertising team is looking to improve their ad management to better personalize their ads. It’s important for them to go through a software needs assessment that takes into account the integrations, advertising platforms, support, and data offered by the various platforms. Other teams, such as analytics and marketing operations, need to be looped in to provide a more comprehensive assessment.
Develop a procurement planning process that identifies the need for goods and services from different departments in the company to ensure smooth business operations.
3. Select suppliers with care
Of course, cost is always a consideration. Companies need to select suppliers that make sense from a return on investment perspective. For example, if selecting vendors for your marketing tech stack, you must always pay attention to how it impacts the customer acquisition cost.
If you’re buying a large physical product, location will be important – shipping fees might be more expensive from long distance vendors compared to local vendors. You might also want to consider a vendor’s engineering talent: a top team will be consistently and proactively improving their product.
Other factors include customer recommendations, industry reputation, and their tangential service offerings. Be sure to consider these factors when choosing your suppliers and ensure they fulfill your requirements.
4. Make negotiations as detailed as possible
Flesh out important details related to procurement like responsibilities, financing, payment schedules, and delivery dates before signing a contract to ensure both parties are committed to honoring the agreement.
This keeps you and the supplier on the same page, reducing misunderstanding and keeping the project on schedule.
5. Digitize procurement systems
Procurement systems are getting digitized in today's data-driven company culture. This is helpful and makes procuring complex tools more efficient. For example, your company might need a data pipeline tool to streamline its data workflows as its tech stack gets more and more complex.
It's too useful to be ignored, and procuring it is different from other company activities than, say, vetting and hiring freelance writers, which can be done manually.
Take advantage of technology to manage and track your procurement processes efficiently.
6. Streamline payment systems and authorization process
Keep records of receipts and track relevant metrics such as invoice cycle time and the average cost per invoice with accounts payable.
We recommend using a payment authorization process to compare documents like the invoice, purchase order, and receipt. This will also help you uncover details that don't align in the papers.
Use a spend management platform to control company expenses
Spend analysis in procurement has gone beyond interpreting expenditures. To achieve cost-efficiency, you need to coordinate people, products, and sourcing methods and track how your suppliers fulfill their obligations.
Carrying out this process manually is complicated as you must track various market information from multiple external sources. Using a spend management software tool like Spendesk makes the most sense as it helps your business gain spend control quickly and conveniently.
This will also make you confident you chose the right procurement method and supplier—or give you a reason to look for a different vendor to get better results.