Procurement cycles – Everything you need to know.

What is a procurement cycle?

A procurement cycle, also referred to as a procurement lifecycle or procurement project, is the process that organizations use to acquire goods or services. In short, a procurement cycle starts with someone identifying a need for the purchase, and generally ends at the point of payment –  although we would recommend that companies go one step further and monitor supplier performance.

The specific steps, however, will differ based on the purchase itself, its value, the industry you operate in, and a number of other factors.

Understanding the different steps within each type of procurement cycle is ultimately crucial for building highly optimized and efficient procurement processes. Below, we’ve detailed what the different types are, the steps within each procurement cycle, guidance for optimizing them, and how the Vertice SaaS purchasing platform can support you in streamlining your procurement efforts.

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The different types of procurement cycles

When it comes to the procurement of goods or services, the specific requirements will differ significantly depending on what exactly it is that’s being acquired. Buying or renewing software, for example, will require a whole different approach to procurement than hiring a contractor, or even purchasing IT hardware.

Understanding the different types of procurement cycles – and knowing which to apply and when – is therefore crucial to ensuring that the purchasing process is not only cost-effective and efficient, but that it also ensures compliance, mitigates risks, and fosters good relationships with vendors and other suppliers.

So, what are the different types of procurement cycles?

In short, procurement cycles are often categorized based on the type of goods or services being procured. At the top level, this can be split by either direct procurement or indirect procurement.

• Direct procurement – Involves the sourcing of goods or services that are directly used in the production of a company’s products or services, for example raw materials.‍
• Indirect procurement – Involves the sourcing of goods or services that support the company’s operations, but that are not directly related to the production process. This could be SaaS applications, office supplies, or IT services, for example.

It’s worth noting that some companies, particularly those that are service-based, are unlikely to engage in direct procurement at all given that their product is intangible.

Regardless of whether a purchase is an example of direct or indirect procurement, the steps involved in the procurement process will be dependent on factors such as its financial value, importance, and even urgency.

The specific types of procurement cycles therefore include:

• Strategic procurement cycle – Long-term, high-value, and typically complex purchases. For direct procurement, this could refer to critical production materials, whereas for indirect procurement it could be the purchase of an ERP system.
• Tactical procurement cycle – Required for purchases that are often lower in value than the more strategic purchases, but that are still important. A tactical procurement cycle may be used when purchasing medium-value production materials (direct procurement) or IT hardware (indirect procurement).
• Operational procurement cycle – An operational procurement cycle is often used for low-value but high-volume purchases, such as spare parts or office supplies.

What type of procurement cycle would be applied to a SaaS renewal or purchase?

While SaaS purchasing is an example of indirect procurement, organizations may choose to apply either a strategic procurement cycle or a tactical procurement cycle, depending on the value of the software.

Software applications, such as ERP systems, may fall under a strategic procurement cycle given the critical role they play in business operations and the fact they’re typically higher-value contracts. Other examples that may be considered for strategic procurement include CRM systems such as Salesforce and Hubspot, cloud computing platforms such as AWS, Microsoft Azure and Google Cloud Platform, and enterprise security solutions such as Symantec and Palo Alto Networks.

Stages of the procurement process

The exact number of stages – or steps – within a procurement cycle ultimately varies based on how different companies define or categorize each step, and to some extent, whether they are strategic, tactical or operational purchases. Generally speaking though, many organizations will follow either a five stage procurement cycle or a seven stage procurement cycle, depending on the level of detail they require.

For a five stage procurement process, steps will include need identification, supplier sourcing and selection, purchase order and contracting, delivery and receipt of goods or services, and finally payment and supplier relationship management.

A more detailed seven stage procurement cycle model will include these same steps, but with the addition of requirements gathering, and a greater focus on supplier sourcing and negotiation.

At Vertice, we consider the procurement cycle to have eight distinct stages. These include:

1: Identifying company needs

The first procurement cycle stage revolves around recognizing a business need. Teams or departments must supply a detailed purchase requisition form outlining the specific requirements – i.e. the product or service type, estimated quantities, key use cases, and any other specific instructions. This provides vital foundations to the entire procurement process cycle, so it’s important that the requirements are clearly and accurately summarized.

2: Strategic procurement research and evaluation

An effective procurement process cycle involves thorough research and evaluation prior to selecting a supplier. The procurement team must leverage in-depth market research and data analysis to identify potential vendors who can meet the requirements outlined in the first step. RFIs can deliver additional information, helping to provide a more granular overview of a supplier’s services or products. Companies should also consider establishing a BATNA at this phase in the procurement cycle, in other words a best alternative to a negotiated agreement, which is a recommended strategy for strengthening contract negotiations.

Ready to optimize your procurement process cycle? Schedule a demo with Vertice today.

3: Standardizing a procurement plan  

Standardizing a procurement cycle blueprint is essential before diving into solicitation and contract negotiation. The plan should outline the entire procurement process flow, including timelines for each stage, vendor communication protocols, and decision-making criteria for supplier selection. This ensures consistent and efficient purchasing decisions throughout an organization. It also empowers the procurement team to negotiate using a calculated strategy.

4: Solicitation and contract negotiation

In most cases, a business will have a shortlist of potential procurement options after initial research and evaluation. Solicitation via request for quote (RFQ) is an optimal solution at this stage of the procurement cycle, enabling businesses to get formal bids from potential suppliers, indicating pricing structures, delivery timelines, and other relevant information. Consequently, data-driven side-by-side analysis can give a better insight into the perfect choice.

5: Supplier selection and finalizing contract terms

After evaluating proposals, negotiating contracts, and liaising with other departments to ensure the optimal solution, the procurement team can select a supplier and begin finalizing terms. We’ll go into more detail later, but Vertice’s white-glove procurement solution is a brilliant way to leverage unique pricing benchmarks obtained from our industry insights to negotiate cheaper prices.  

Take a look at the full list of terms and clauses that can be negotiated within a SaaS contract.

6: Issuing an official purchase order

Once payment terms and a formal contract have been agreed, the procurement team will issue an official purchase order. This is a legally binding document confirming the agreement and details like the specific items or service ordered, quantities, agreed price, delivery timelines, and more.

7: Onboarding and payment

This stage of the procurement cycle focuses on onboarding the new supplier, a particularly important step for IT procurement. Meanwhile, the finance team must establish a smooth payment process.

8: Continuous monitoring and optimization

An effective procurement cycle doesn’t stop at onboarding and payment. The final procurement cycle stage essentially revolves around managing the vendor relationship. Organizations must constantly monitor supplier performance throughout the contract lifecycle using KPIs and in-depth metrics. Leveraging management software and enterprise resource planning (ERP) systems generates valuable data and analytics to identify cost savings and optimize the entire procure-to-pay process.

The stages of the procurement cycle start again

The procurement cycle is a fundamentally endless process, as organizations must consistently evaluate supplier performance via spend analysis, KPIs, and other relevant metrics. A well-managed cycle is advantageous at all levels, fostering strong vendor relationships, minimizing risks, and optimizing cost-effectiveness for anything from office supplies to SaaS vendors.

How do procurement process cycles differ between industries?

While the above steps are some of the typical stages of procurement, specific procurement activities will differ significantly between industries, influencing timelines, raw materials, contractual obligations, and the overall procurement plan.

Heavily regulated industries such as healthcare and banking, for example, have stronger compliance requirements, which in turn may extend the evaluation and supplier selection stage. On the other hand, fast-paced environments will prioritize speed – picture a video editing application startup requiring cloud storage on a tight deadline.

Supplier specifications can also vary wildly depending on the industry.

A construction project must ensure precise technical specifications for something like pre-cut timber, requiring more focus on formalizing the official PO. Conversely, a restaurant specializing in seasonal menus has far more leeway regarding the exact product specifications, as this would be influenced more by specific produce availability.

Optimized procurement management must consider these fluctuations regarding the specific stages of the procurement cycle and potential areas for extra concern. Doing so drives a more efficient, cost-effective, and risk-managed approach to procurement – everything you need to maximize ROI and positively impact your bottom line.

How you can optimize your procurement cycle

In order to improve efficiency, reduce costs, minimize risks, and enhance the quality of the goods or services being obtained, procurement leaders must look to optimize the procurement cycle, and more specifically streamline each stage of the process.

Below, we’ve outlined some of the key steps for achieving this:

• Identify bottlenecks and inefficiencies

Without a streamlined process, procurement teams are often faced with a multitude of bottlenecks and inefficiencies. A common example is at the point of requisition. When teams, or even individual employees, don’t have a standardized process to follow, purchase requests can have varying levels of detail which can cause delays and confusion in the approval process.

• Implement automation to speed up processes such as approvals

When companies rely on a manual approach to approvals, the process can quickly become slow, convoluted, and prone to human error. In turn, this leads to delays in purchasing, slower times to implementation, weakened supplier relationships, and even increased operational costs.

By automating the process with an approval engine, you not only speed up procurement – saving the team as much as 400 hours a year – but you also ensure compliance, create an audit trail, and prevent unauthorized purchases from being approved.

Having a solid understanding of the different types of procurement cycles is also important for streamlining approvals, as it ensures you’re avoiding unnecessary layers of authorization – as an example, the legal team should rarely be involved in operational procurement cycles.

See for yourself how one company achieved 30% faster approval workflows with Vertice’s Intelligent Workflows platform.

• Foster closer relationships with suppliers to improve response times

Slow negotiation times can be another bottleneck for procurement teams, which is why it’s important to develop strong relationships with strategic suppliers.

The challenge for many organizations is that they simply don’t have the time to achieve this – especially across all 130+ tools within the average tech stack – which is why it can be beneficial to partner with an intermediary who can not only negotiate on your behalf, saving you valuable time, but that will understand the intricacies of each vendor and have strong relationships that can ultimately be leveraged.

Find out how procurement partners can benefit both parties.

• Ensure visibility of procurement spend

Without full visibility of how and where money is being spent, organizations risk wastage, inefficiencies, and missed opportunities for savings.

In software spending alone, as much as $1.3million is wasted every year by organizations with 400-749 employees. For those with headcounts exceeding 2,000, it’s as high as $4.5million.

Having total oversight of procurement spend not only helps procurement leaders tackle this issue, but it also puts you in a better position to identify and eliminate inefficiencies in spending, negotiate better terms with suppliers, and prevent rogue spending.

By implementing a Spend Optimization Platform such as Vertice, you not only gain a unified view of your SaaS and cloud spend, but you can track every purchase allowing you to keep on top of renewals, requests and tail spend.

Find out how one company achieved savings of as much as $100K on a single contract, simply by using Vertice to manage their tech stack of more than 170 tools.

Vertice in action

See for yourself how we recently helped a vacation rentals company speed up their procurement process by as much as 55%.