Disruptions, shortages, and out-of-stock situations impact your uptime and ability to meet customer expectations. Creating a procurement process for your small business can increase supply chain visibility and resiliency while reducing financial and operational risks.

Explore procurement basics to learn how an effective policy can save money and why you must measure performance to continually improve your procurement strategy. Follow this step-by-step guide to develop a procurement process suitable for your business goals and needs. 

1. Assess your needs, goals, and budget.

Procurement cycles differ by company; small and medium businesses (SMBs) should refrain from trying to create a one-size-fits-all plan. Instead, complete an internal review to learn what goods and services each department requires. Categorize these as direct (raw materials or services for production) or indirect (supports business activities). Then, break them into goods or services. Remember to include pricing and quantities to understand the spend for each group.

This step aims to see how much your business spends on direct and indirect goods and services. These figures will give you an idea of how procurement can benefit your company and how a strategy can help you overcome supply chain challenges. 

2. Establish metrics to measure your procurement performance.

Procurement key performance indicators (KPIs) track your company’s efficiency and process goals. Monitoring metrics increases visibility into your supply chain and shows where you’re improving or need further action. You should set small business KPIs before beginning any new process.

Consider tracking the following metrics:

  • Rate of emergency purchases.
  • Procurement return on investment (ROI) and benefits.
  • Purchase order (PO) and invoice accuracy.
  • Compliance rate.
  • Vendor availability.
  • PO cycle time.
  • Cost per invoice and PO.
  • Procurement ROI and benefits.
  • Spend under management.

3. Consider current and new procurement technologies.

See if your current software supports your procurement process. The most effective systems place vendor and contract data alongside collaboration tools and approval workflows. While many growing businesses prefer specialized procurement applications, smaller teams can organize purchasing tasks in project management software or use customer relationship management (CRM) tools for vendor information.

Regardless of the platform, look for opportunities to automate tasks using supply chain tech. Doing so can decrease errors and save time, allowing your procurement team to focus on high-value activities instead of data entry.

Procurement software solutions fall into the following categories (and several tools cover multiple areas):

4. Find and evaluate suppliers based on your sourcing strategy.

Identify vendors for each good, electronic component, service, raw material, or service your business requires. Improve your selection process by focusing on a sourcing strategy. This approach considers your business goals and the procurement process outcomes you desire. Rather than the lowest price, your strategy may prioritize vendors according to risk or total cost of ownership.

Obtain supply market intelligence using free resources from the U.S. Small Business Administration and the U.S. Census Bureau. Also, consider paid services, such as IBIS World, Crain’s, Bloomberg, and Gartner. Consider each vendor’s cost structure, market information, past performance, and commodity profile.

This prescreening process is enough to move to the next stage for some services and goods (office supplies or standard maintenance items like grease). However, you should further evaluate complex parts and essential production components when the products substantially impact your budget and production capacity. The more risk that’s involved, the more time you should dedicate to the vetting process.

Consider criteria such as:

  • Location: Review the geographic stability, distance from your company, and supply chain infrastructure.
  • Cultural and language differences: Determine if barriers will cause communication issues during the process.
  • Working conditions: Focus on health and safety practices, child labor usage, and general working conditions.
  • Employee capabilities: See if there is a history of labor disputes or strikes, the turnover rate, and the workforce skill level.
  • Cost structure: Go over the total costs, including production, marketing, material, administrative, and supply chain expenses.
  • Technological capabilities: Consider the company’s approach to technology in design, equipment, processes, methods, and any current or future investments in research and development.
  • Quality control: Look at what system they use and record to ensure consistency for current and anticipated demand.
Creating a procurement process for your small business can increase supply chain visibility and resiliency while reducing financial and operational risks.

5. Map procurement steps and procedures.

Document the steps in your procurement process and determine what situations require an RFP or a request for quote (RFQ). Many businesses use RFP or RFQ forms when considering vendors for complex projects or large recurring purchases. An RFP solicits bids from suppliers. It should outline your project, including the delivery requirements, financial terms, pricing structure, and product or service details. Alternatively, a company uses an RFQ when it needs a price quote or wants to vet vendor qualifications.

Define the tasks, people involved, and processes for each of the following procurement steps:

  • Request goods or services: Companies often require individuals to complete a purchase requisition (PR). This form details the purchase specifications.
  • Review and approve purchase: Move the purchase request through an approval workflow. 
  • Choose a supplier: After approving a purchase, your procurement team must select a supplier from a preapproved list or research and vet new vendors.
  • Agree on terms with the vendor: Negotiate vendor contracts, including the scope of work, delivery dates, budget, contract duration, legalities, terms, and conditions.
  • Generate a PO: This document goes to the supplier and details the services or goods and the negotiated terms and conditions. 
  • Inspect shipment: Check out your first shipment to ensure everything is in good condition and the correct quantity. Also, note if the supplier met the delivery schedule and satisfied the services outlined in the contract. If you have any concerns, contact the vendor for a meeting.
  • Create an invoice and pay the vendor: Use the three-way matching method to compare the purchase order, invoice, and itemized list for accuracy. From there (depending on your payment terms), your financial department will process the payment and send it to the supplier.

6. Finalize documents and keep records.

Small businesses should keep all records on file, whether those records are paper files or digital forms. Doing so helps show your overall ROI and can support you when negotiating future vendor payment terms. Moreover, it’s essential for business tax and audit purposes.

Store the following documents:

  • Supplier invoices.
  • Delivery reports.
  • Company policies.
  • Invoices.
  • Purchase orders.
  • Packing lists.
  • Payments.
  • RFPs and RFQs.
  • Procurement budget approvals.
  • Contracts.
  • Goods received note.

7. Review and adjust your procurement strategy.

All business strategies are living documents. Nothing, including contracts, is set in stone. 

Your procurement KPIs will highlight opportunities for improvement and areas where you could save money by adjusting your process or negotiating better contract terms.

Likewise, you may realize inefficient processes are driving up administrative costs. In this case, automated spend management software or vendor management tools can boost productivity while reducing errors and ensuring policy compliance.

How to create a procurement policy and approval workflow

A procurement policy is the formal document that explains how your small business purchases goods or services. It covers high-level strategies and goals as well as individual steps, tasks, and responsibilities. The policy sets standards and ensures accountability for everyone involved in your procurement process.

Creating policy and approval documents can help your business scale and score contracts with larger organizations. Depending on your organization’s size, you may meet a few times to review and polish the standards before finalizing them.

The key components of a procurement policy include:

  • Scope and purpose: This section defines the policy’s goals, activities, and participants. 
  • Roles and responsibilities: This part explains who can request purchases, approve spending, and manage vendor relationships. 
  • Procurement process: A step-by-step account of each stage in plain language so anyone can follow the steps to complete the purchase lifecycle. 
  • Vendor management: Guidelines for bidding processes, steps for finding and assessing vendors, and how to set them up in your system, measure performance, and address issues. 
  • Financial: This section covers spending limits, approval triggers, budget restrictions, and payment terms. It also explains how to request exceptions. 
  • Compliance and legal: List any laws, industry standards, or regulations that apply to your policy.
  • Monitoring and adjustment: This part sets metrics, reporting requirements, and frequency. It should outline the steps for adjusting the procurement process. 

Building approval workflows for procurement

The approval process is your policy in action. You must document the request, review, and approval steps. These workflows confirm whether spending meets policy guidelines and should catch problems before any purchase. When set up correctly, you should have a clear audit trail showing who approved what at each step and the information used to inform their decision.

Small businesses might have multistep approval workflows for large quantities or riskier orders and simpler processes for small-dollar purchases or reorders. Start by setting rules for what triggers an approval process, then list who must sign off at each stage.

Map the process using flow charts or diagramming tools in your project management or office suite software. After reviewing the flow and eliminating bottlenecks or otherwise unnecessary steps, finalize the approval system.

Common procurement risks and how to avoid them

Procurement risks for small businesses stem from inefficient processes and limited supplier diversity. Problems with vendors and overall procurement management can disrupt operations, harming customer relationships and your bottom line. Identifying and managing procurement risks can protect your reputation and budget.

Here are the top risks associated with procurement and ways to mitigate them:

  • Weak supply chain design: Relying on a single vendor or sourcing materials from the same region is risky. Develop a supply chain backup plan and know how to activate it.  
  • Scattered documentation or manual workflows: Outdated procurement systems increase the risk of errors and bottlenecks. Eliminate paper forms and reduce reliance on email, then centralize data in a single system and set up online approval processes.
  • Unclear purchasing processes: Costs rise when your business orders the wrong materials or quantities. Set clear requirements and methods for all internal teams. 
  • Inadequate planning and forecasting: Using outdated sales or inventory data for your e-commerce or Amazon store can cause stock and cash flow issues. Consider accounting and forecasting tools that automatically pull the latest numbers.
  • Insufficient vendor oversight: To improve supply chain security, you must regularly review suppliers to assess financial stability, cybersecurity vulnerabilities, and quality issues. 
  • Ineffective contract management: Fine print is overlooked, leading to unexpected fee hikes and missed opportunities to negotiate before contract renewals. Agreements should be in a central, searchable database.
  • Poor communication: Proactive communication from vendors and within your business can help you convey supply chain issues to your customers sooner.

Supplier scorecards: How to track cost, quality, and delivery over time

Supplier scorecards track vendor performance across core metrics. Use the data to negotiate contracts and assess risks. Choose metrics that matter most to your company and apply them consistently across vendors.

Common supplier metrics include:

  • Delivery and lead times: The number of on-time shipments divided by total shipments or quoted vs. actual delivery times, and the average time between placing and receiving orders.
  • Order accuracy: The quantity you ordered vs. what you received or the rate of errors per order.
  • Product or service quality: The number of defective items, consistency level, or customer satisfaction ratings.
  • Costs and invoice accuracy: The rate of discrepancies, adherence to payment terms, total cost of ownership over time, or price variations.

Setting up a vendor scorecard system

Iron out the details and set up scorecards so you have a system you can repeat with each new supplier. Vendor management systems keep information in one system, but you can also create a template in a spreadsheet or project management software.

Follow these steps to implement a simple scorecard system:

  • Select metrics and measurement methods: Choose KPIs and decide how and when you will collect data. 
  • Set targets for each metric: Document the standards you want, like 95% on-time delivery or 99% invoice accuracy.
  • Establish a reporting time frame: Choose a regular cadence, whether monthly, quarterly, or yearly.
  • Create supplier scorecards: Give each vendor a scorecard with their contact and, if relevant, contract details.
  • Gather data: Use data from accounting and inventory software or other sources, such as customer surveys.
  • Evaluate and share with suppliers: Review scorecards during review periods and consider discussing them with vendors to encourage better performance.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.

Brought to you by
The Smarter Way to Find Business Services.
Real reviews. Verified expertise. Whether you're researching or ready to hire, Clutch helps you find the right partner faster.
Get Matched
a group of people around a table looking at a laptop
Published