Procurement comprises all activities and processes involved in acquiring needed goods and services from external parties. This may include everything from office supplies, furniture, and facilities to heavy equipment, consulting services, and testing and training.
Procurement management follows a logical order. First, you plan what you need to contract; then you plan how you’ll do it. Next, you send out your contract requirements to sellers. They bid for the chance to work with you. You pick the best one, and then you sign the contract with them. Once the work begins, you monitor it to make sure that the contract is being followed. When the work is done, you close out the contract and fill out all the paperwork. Properly managing all procurement activities not only keeps business operations running smoothly; it also saves money, time, and resources. Procurement management ensures that all items and services are properly acquired so that projects and processes can proceed efficiently and successfully.
Maintaining good relationships with your suppliers and staying organized throughout every step of the procurement process are both crucial to ensure the success of all business operations, allowing you to meet your specific goals while easily meeting all stakeholder expectations. In establishing smart procurement processes, companies can avoid costly downtime while boosting their bottom lines.
As technology continues to advance, digital procurement management techniques are becoming increasingly popular, cutting down on delays and errors while helping skilled buyers do their jobs more efficiently. Low-cost computing and data storage systems are reshaping the way companies handle purchasing and procurement, allowing for more advanced cloud and mobile capabilities, while the Internet of Things (IoT) is rapidly changing the way all company operations are conducted.
Builiding effective procurement straegy
The term procurement strategy refers to a long-term plan to cost-effectively acquire the necessary supplies from a list of efficient vendors who will deliver quality goods on time, abiding by the purchasing terms. Typically, a procurement strategy depends on a number of factors like purchase timeline, the available budget, the total cost of ownership (TCO), possible risks, and more. Procurement strategies often focus on options like reducing costs, mitigating risks, and expanding organically. Few common types of procurement strategies are: Cost reduction
Risk management, Supplier management and optimization, Green purchasing, Global sourcing and Total quality managemen
An effective procurement strategy is a financial plan to manage your budget, workflow, and production timelines and keep everything aligned with company objectives. Every organization’s procurement strategy should be uniquely tailored to meet the needs of the business. The strategy you create should consider the company’s current status and protocols, stakeholder buy-in of procurement strategy, market conditions, and company goals, initiatives, and objectives.
The goals of procurement strategy is to Minimize error and lost savings opportunities; Identify authorized buyers; Eliminate maverick spend;
Align purchasing with company objectives; Increase efficiency with timely deliveries; Ensure purchasing complies with federal and state regulations and Leverage supplier relationships for more favorable contracts.
An effective procurement strategy should provide these noticeable benefits: Order quality is consistent throughout goods and services, meeting expectations; Budgets are never exceed, and effective use of allocated funds are easily confirmed; Inventory stock levels are balanced, avoiding over and under stocking of key items; Total cost of ownership is noticeably reduced for all purchased goods and services and Staff are motivated and able to complete their workflows clearly and efficiently.
The first step of creating a procurement strategy is to determine the most efficient and sustainable procurement methods and tools to use. Selecting procurement methods to use based on available resources and the operational needs of the company is critical when developing an effective procurement strategy.
Assess the current state of the business is now
It’s important to know how the business is doing before moving forward. If you have a strategy in place, determine whether it meets your needs and how it will scale up to meet upcoming challenges. Identify any potential weak areas for improvement, and look for areas where money might be wasted.
The first step of developing a procurement strategy is to analyze the existing spend culture of your organization. In order to do this, you need to obtain data from internal stakeholders, suppliers, and all other parties who are involved in the procurement process. The data obtained on this step will not only serve as a knowledge base within your organization, but also function as the foundation of the procurement strategy. Tools like total cost of ownership (TCO) can be used to identify and analyze the often overlooked or unknown costs that an item/service incurs in addition to its initial purchase price.
Define company needs and goals.
To design a robust procurement strategy that provides the best results, it is essential to understand your organization’s needs clearly. This fact-based analysis will help you align and prioritize your procurement strategy across other functions and business goals. A simple ‘what if’ discussion that challenges the status quo and questions the obvious will reveal a lot more savings opportunities. Tools like a category positioning matrix can help organizations identify the key business requirements that will go into the development of your procurement strategy.
Although the end goal of every business is “make more money,” strategic goals should far more detailed. A well-defined goal includes a specific target to shoot for and a plan to achieve it. Goals might include increasing sales or revenue by a some percentage, increased production, higher sales, lower costs, or anything else your company measures.
Keep SMART principles in mind while goal-setting:
- Specific – Set detailed goals.
- Measurable – Decide how you will define and measure success.
- Assignable – Define who is responsible for each achievement.
- Realistic – Make sure goals are achievable and realistic.
- Time-related – Set a timeline to meet each goal, with checkpoints and an end date.
Assess market conditions
Once the internal analysis of determining the business needs is complete, the next obvious step is to look at the external side of things: supply markets and their conditions. Here, the necessary data needs to be collected from suppliers and potential suppliers. To ensure relevancy, organizations need to make sure that the collected data stays up-to-date over time. A number of methodologies such as Porter’s five forces and SCOPE analysis will come in handy during this analysis.
Set clear objectives and Define priorities.
Once the business needs are identified, it is time to come up with a clear vision of what needs to be achieved. The data collected in the previous steps can be used to determine the niggles in your procurement process. Once those are determined, sort them in descending order of the impact each has on your organization’s bottom line. Tools like a SWOT analysis can be used to identify the current state of your procurement functions. For instance, if you need to reduce maverick spend, you need to implement procurement software that make the process transparent.
With the input of stakeholders in hand and company goals in mind, determine how to prioritize purchases. Your priorities depend on your business. Building contractors need to schedule purchase deliveries in line with construction deadlines, while retailers need to coordinate with marketing to determine which goods will be pushed and when. Get input from everyone who might be involved, and make them understand that the goals of an efficient procurement process are to speed turnaround and production time, lighten the workload, reduce paperwork errors, and eliminate time-consuming bottlenecks for significant cost savings.
Define Procurement Policies
Now that you know what needs to be addressed, it is time to create a list of procurement best practices that will eliminate the existing inefficiencies. You can start the process by modifying your procurement policy to address risks identified during the SWOT analysis. When you’re in the process of sketching out a procurement policy for your business, it would be best to avoid starting from scratch. Instead, you can adapt existing procurement policy templates to fit around your organization’s business needs. Ideally, procurement policies need to offer guidance on fair practice for everyone involved in the process, as well as remedies for possible violations.
Outline a procurement strategy
With the help of the data and information you’ve obtained, draft a procurement strategy. This needs to list down the desired goals, and the tactics that will be used to achieve them. The goals have to be measurable, time-sensitive, and realistic. The tactical plan will list down the methods that will be used to achieve the pre-defined goals. A procurement strategy can also incorporate a ‘big idea’ that will eventually push the boundaries of possibility.
Define success metrics
Once the plan is executed, the new procurement process should be evaluated based on metrics that determine success. What will successful implementation look like and how will you measure it? Common metrics include decreased costs due to reduction of errors, more efficient delivery schedules, and more favorable contract terms. Adjust strategy as necessary to enhance efficiency as the business grows. Procurement strategy should be a comprehensive roadmap for company spend and a tool to maximize budget and minimize errors, late or duplicate payments, maverick spend, and poorly-timed deliveries. Following an efficient strategy ensures consistent cash flow and a healthier bottom line.
Digital procurement strategy
With the help of the data and information obtained from the previous steps, you need to draft a digital procurement strategy. In this step, the organizations need to revamp your procurement technology, strategy, process, talent, skill set, and supporting systems. Implementing a digital procurement strategy should be considered a priority, since it enables organizations to spend more time with suppliers and the strategic part of procurement, rather on administrative tasks and transactions. A digital procurement strategy will help businesses deploy the resources they need to obtain outsized gains and make their procurement process agile.
E-procurement is the management of procurement processes through dedicated procurement software tools. The goal of e-procurement is to reduce the amount of company resources needed to execute the procurement strategy.
To implement this method, consider these questions:
- How long will it take to implement an e-procurement system?
- Will the cost of implementation provide a good return on investment?
- Does the system meet all of the requirements outlined in the procurement strategy?
- What benefits does e-procurement provide over other methods?
A procurement management system will track the procure-to-pay process end to end. Every step of the procurement process, from identifying sourcing needs to completing payment, will be streamlined. The best-in-class features of a procurement software will spot and address process gaps and enforce purchasing policy without any manual intervention.
Businesses that do not integrate procurement software are likely to lose money due to errors, delays, and overpayments. Procurement software increases productivity and minimizes errors by reducing data entry and redundancy. Procurement software tracks purchases from purchase order to payment, eliminates approval bottlenecks, and ensures that purchasing meets approval standards before ordering. Invoice payments can be flagged for early payments where advantageous to take advantage of discounts.
Execute, manage, and refine the strategy
Once a digital strategy is created, the next step is to execute it. As the strategy is executed, it will demand involvement from other business functions (HR, admin, sales, finance). After executing the digital procurement strategy, you’ll need to track and measure the progress and success of implementation. Kissflow’s procurement cloud to presents a tools and a simplified approach to procurement, and an easy you’ll find this a painless way to go digital
Fine tune sourcing strategy.
Typically, a company in search of new suppliers will take bids from at least three companies. An efficient strategic sourcing policy must specify the criteria used to determine which suppliers are chosen. Criteria usually includes supply quality, price, delivery times, service, compliance with regulations or company objectives, or any combination of factors.
Establish preferred vendor list by evaluating suppliers based on selection criteria. If the business has compliance regulations, include all factors that may influence purchasing decisions.
Spend Control / Spend Management
Spend control and management refer to the method of ensuring that costs do not exceed financial limits, and that money is not wasted on unnecessary or unapproved purchases.
To develop and apply this method, consider these questions:
What is the total amount of available funding?
Who is involved in the purchasing process, and how are approvals managed?
How will expenditure be tracked and reported on?
How will budgets be adjusted and improved?
Supplier Relationship Management (SRM)
Supplier relationship management refers to the method used for ensuring that the purchase of goods and services is channeled through a list of approved suppliers, and that this list is optimised and updated on a regular basis.
To implement this method, consider these questions:
- How will supplier selection be managed?
- How will supplier performance and quality be evaluated?
- How will your list of suppliers be categorised?
- How will transaction histories be recorded for review?
Item and Inventory Management
Item management refers to categorising purchases to best determine which purchasing process certain goods and services should use. This usually requires an understanding of the operational needs of the company.
To determine the value of this method for your company, consider these questions:
What items need to be purchased?
When or how often do these items need to be purchased?
Where will the items be ordered from?
How will the items be paid for and tracked?
Contract management refers to establishing ongoing purchasing arrangements with suppliers. Despite the existence of many types of contracts, the end goal of any contract is to secure cost reductions through effective agreements.
To establish an effective approach to using this method, consider these questions:
How will service contracts be initiated and managed?
Would establishing a contract make sense for these regularly purchased items?
How will purchase orders be kept on-contract?
Do established contracts need to be renewed or renegotiated regularly?
The Purchase-to-Pay Process
This term refers to the completion of a procurement cycle (also referred to as Procure-to-Pay or abbreviated “P2P”). It can be understood as the moment something needs to be “purchased” or “procured” through to the moment it is “paid” for. Payment in a business environment is often handled through a submitted “purchase” order, and “payment” is then handled by a received supplier invoice.
In many procurement processes, an internal form, known as a “purchase requisition order” (or simply “requisition”) is used by someone who doesn’t have purchasing authority to indicate that something needs to be ordered.
Consider which steps will be involved in your purchase to pay process:
Will requisition orders be placed?
Will purchase order placement be centralised or decentralised?
How will delivery receiving be tracked?
How will invoices be processed and 3-way matches confirmed?
The Strategic Sourcing Process
Strategic sourcing, also sometimes referred to as Source-to-Pay, or abbreviated as “S2P”, can be understood as a negotiation process between a business (the buyer), and one or more vendors (the seller) in order to secure the best value from a purchase. Different types of “sourcing events” exist, including auctioning and tendering – each with their own unique process quirks. In some cases, a purchase for a single order of goods or services may also be “multi-sourced”, meaning that the order will be fulfilled from more than one vendor source.
Categories of Sourcing: Reactive, Tactical And Strategic
Reactive sourcing is defined as as being the procurement approach where no proactive sourcing strategies have been put in place and so the purchasing and supply management function has an entirely reactive role e.g. responding to requisitions or other unexpected requirements from the business. Some organisations still operate entirely on the basis of unexpected demand responding to individual needs as and when they arise.
Strategic sourcing is a core activity in purchasing and supply management. It is a complex commercial process requiring extensive knowledge and competence. It can be defined as ‘satisfying business needs from markets via the proactive and planned analysis of supply markets and the selection of suppliers with the objective of delivering solutions to meet pre-determined and agreed business needs’.
Developing the strategic sourcing strategy is a fundamental part of the purchasing and supply management process.
Tactical sourcing is to some extent reactive as it covers those business requirements that cannot be planned in advance, but are provided within a framework of strategic sourcing. It is however, proactively managed and so resources and processes are set aside to manage it within the purchasing and supply management strategy. An example of tactical sourcing is working with colleagues in Marketing and Sales, providing a bid support activity within fast-moving technology areas.
Each organisation should as a priority develop an overall sourcing strategy, of which strategic sourcing should be seen as a key element. Strategic sourcing is a logical process involving the application of tools by skilled, competent and knowledgeable people; however – developing and implementing strategic sourcing is a functional process.
Once the preferred strategic sourcing options are agreed, these are developed into ‘sourcing plans’ which should be innovative and creative solutions to the organisation’s requirements in support of the organisation’s mission and objectives. Strategic sourcing plans should generate workstreams i.e. clear milestones to be achieved with resources e.g. project teams allocated appropriately
Identifying New Suppliers
Traditionally, sourcing has been perceived as the identification of new or alternative suppliers e.g. sources of supply. Methods of identifying suppliers have included:
• Internet e.g. suppliers’ own pages and B2B trade bulletin boards
• trade associations and trade directories ·business
The Expense Tracking Process
While not as involved as the purchase-to-pay or strategic sourcing processes, expense tracking is an important consideration for tracking business spending that takes place outside of purchase orders.
Do business expenses such as travel or food occur regularly in your business?
How will receipts recorded and processed?
How will reimbursements to employees be documented?
How will credit notes from suppliers be documented?
Not all business expenses require a purchase order to be raised.
In fact, the operational cost of raising and a single purchase order can range anywhere from $60 to $750 – making expense tracking a valuable part of the procurement strategy.