Why You Need a Procurement Approval System

A critical component of any successful procurement department is a solid, well-designed and well-communicated procurement approval system.

Yes, an organization’s procurement function must ensure purchasing costs are kept low and all requisite goods/products are on hand at all times. But purchasing, particularly in large corporations, is a nuanced, layered process: staff members are located in far-flung locations and they all need their goods immediately.

Business depends on it.

But to keep such a situation operating smoothly (and, frankly, businesses with simple organizational structures), a procurement approval system is critical.

What is a procurement approval system? In simple terms, it is a system that governs the procurement/purchasing process – an outline of the steps from requisition to approval to purchase to receipt of goods (I’ve deliberately boiled down the process here to only four important steps…there can be more).

Here a shrewd definition of a procurement approval system from the Chartered Institute of Purchasing & Supply:

“Procurement governance (i.e. procurement approval system) encompasses control and direction for an organization’s procurement function via a framework of formal structures, mandates, policies, operating procedures, delegations and other decision ­rights. Procurement governance is essential in building procurement capability and ensuring the benefits from strategic procurement activities are maximized corporately, as well as keeping the auditors at a distance.”

So, what does a procurement approval system look like? Well, each organization will have a slightly different take, depending on the structure of that particular organization.

That said, there are some basic rules one should follow when designing a procurement approval system. The rules, again, come courtesy of the Chartered Institute of Purchasing & Supply.

The framework:

• Procurement is responsible for all addressable external spend.
• Procurement policies that are simple, based on a compelling business case, and consistent with the corporate culture are operative.
• A clear, company-wide mandate to comply with procurement policies and business plan activities is operative.
• Effective change management has resulted in the corporate culture supporting the procurement governance framework.
• Corporate systems have appropriate controls embedded which support the procurement governance model throughout the organization.
• Procurement personnel are empowered to make decisions on behalf of the company in accordance with the policies.
• A formal approval framework specifies the authorization process for procurement spend.
• Procurement actions are based on ethical principles including probity, fairness, impartiality, accountability and transparency.
• Procurement processes, systems, tools and techniques are documented, referenced and maintained as operating procedures, consistent with the corporate standards.

The details:

• Procurement dealings are only conducted with approved suppliers.
• No goods or services are obtained without a valid purchase order.
• Market engagement processes promote effective competition between potential suppliers.
• Formal contracts are operative for high spend or high-risk categories.
• Formal authority levels are in place for procurement spend and system generated to optimize processing.
• Confidential procurement information and/or intellectual property are safeguarded.
• Conflicts of interest are minimized and effectively managed.
• Liabilities are provided for and procurement commitments reported.
• Ethical standards are promoted.

How can e-procurement help?

An e-procurement solution has a very large role to play in the design/creation/implementation of a procurement approval system. In fact, good e-procurement systems are designed with a procurement approval system in mind.

For example, an e-procurement solution will allow a user (typically a manager) to program which users will be approvers and which users will only be requesters. Such a scenario ensures all requisitions must pass by a manager before they become purchases.

Furthermore, e-procurement software will also allow a user (again, typically a manager) to program preferred vendors for all goods, ensuring that the company takes advantage of relationships/contracts procurement has established with specific vendors.

Finally, e-procurement software will electronically generate/send/catalog all purchase orders created, which allows an organization to review all purchases either yearly/quarterly/monthly. Being able to review all purchases is critical for financial forecasting.