Contract management is inextricably embedded in the procurement lifecycle. Although the procurement process may differ depending on the size and type of business, a proper contract management is a must to ensure maximum efficiency. Procurement management and contract management both have the same end goal: to maximize profit and performance and minimize cost and time.
TABLE OF CONTENTS
- What is the procurement lifecycle?
- What is the link between procurement and contract management?
- What is Contract Management in Procurement?
- About Zendoc
What is the procurement lifecycle?
The procurement cycle refers to the step-by-step process in which a business purchases goods or services. Proper management of the procurement lifecycle is critical to the financial efficiency and performance of any business. Procurement management helps businesses in finding the right price for goods and services while minimizing delivery times and additional cost. It can also help in finding the best partners and suppliers for a growing business.
What are the 5 R's of purchasing?
When it comes to purchasing or procurement, businesses should always apply the Five Rights (Five Rs) for an effective procurement performance. Also known as the “key performance variables” or “procurement factors” in some literatures, the five rights include:
- Inputs of the right Quality
- Delivered at the right Quantity
- To the right Place
- At the right Time
- For the right Price.
What are the key elements of procurement?
The procurement lifecycle process involves several elements, depending on the type and size of business. Usually, the entire process is divided into eight steps. A proper understanding of each stage is the key to a smoother and more efficient procurement process.
Before the start of any procurement process, businesses should first conduct a needs recognition. In this stage, businesses determine if there is a real need for the procurement. They also sketch out an accurate plan to make sure that the purchase of goods and services is in a timely manner and at a reasonable price. After recognizing the needs for procurement, businesses then raise a purchase requisition. A purchase requisition is a written or digital document consisting of key information required in procuring the right goods, services, or works.
The official start of the procurement process happens when the purchase requisition gets approved during the review stage. Operations managers or department heads convene to check whether there is a real need for the procurement and if the company has the necessary funding available. Approved purchase requisition will become a purchase order (PO). The procurement team will then develop a solicitation plan for the PO, in which the team will request for quotation (RFQ) from vendors and compare bids.
Once the bidding or solicitation is closed, the procurement team will evaluate the RFQs and determine the best bid for the existing needs. In this stage of the procurement process is where contract management takes place. The business will negotiate with the best bidder, sign a contract, and send PO to the vendor.
Next to the contract signing is the order management. The procurement team examines the goods or services being provided by the vendor and notifies the latter if there are any issues with the order. Purchase order, packaging slip, and vendor invoice should always match with each other. When there are no discrepancies between the three documents, invoice approval is next. The vendor invoice is forwarded to the accounting department and payment is arranged for the vendor. After the payment process, businesses should always make a record of the transaction for bookkeeping and auditing. All documents from purchase request to approved invoices should be in a centralized document repository.
More on this topic: The contract management solution when working in Sales
What is the link between procurement and contract management?
When a business procures or purchases goods or services from external providers, a contract is always presented and signed. This is to make sure that both the buyer and seller have reached an agreement and know their obligations to each other. Contracts are legally binding, which means any act that violates the terms, especially when it comes to the goods or services procured, will be subjected to the court of law.
What are the types of contracts in procurement?
When dealing with procurement, the most common types of contracts used are the Fixed-price contracts, cost-reimbursable, and time and materials contract. The fixed-price contract also includes firm fixed-price, fixed-price plus incentive, and fixed price with economic price adjustment. On the other hand, cost-reimbursable contracts may come as cost plus fixed fee, cost plus award, or cost plus incentive.
What are the 4 main processes of project procurement management?
The four major processes in procurement management are:
- Planning: Planning phase includes the needs recognition, purchase requisition, and requisition review.
- Selection: The selection phase is where the solicitation, as well as the contract negotiation and signing.
- Administration: Administration phase refers to the order management and invoice approval.
- Closing: In the closing phase, records and documents involved in the whole procurement process are kept for bookkeeping and auditing.
More on this topic: How are procurement lifecycle and contracts related?
What is Contract Management in Procurement?
Contract management starts during the selection phase of the procurement process. In this phase, negotiations are made between parties. Once they have agreed on a price, quality, quantity, and delivery date, all parties involved will sign the contract. Managers will then monitor the state of the procurement and make sure that the business is receiving the goods indicated in the terms of the contract.
What are the stages of contract management?
Just like the procurement process, contract management is also divided into specific stages. A contract lifecycle usually follows planning- implementation, pre-contract- handover- contract- pre-renewal- post contract process.
Why is contract management important in procurement?
The procurement process is simply the exchange of goods, services, or work as indicated in the terms of the contract signed between the seller and the buyer. Because it involves negotiation and fulfilment of certain obligations, contract management is important in procurement because it monitors the state of the agreement. An effective contract management strategy during a procurement process can help the business ensure profitability and performance efficiency by maximizing gains while minimizing losses.
More on this topic: How are procurement lifecycle and contracts related?
About Zendoc
Zendoc is a full-service AI-powered contract automation system that not only organizes all of your agreements into a single database but keeps you up-to-date on what you need to do to extract as much value from your contracts as possible. You don’t have to worry about forgetting your obligations because you don’t have to remember them in the first place.