Procurement has been defined simply as, “The act of obtaining or buying goods and services.” The terms “procurement” and “purchasing” have also been used interchangeably. Yet, although the terms are similar, they are actually quite different.
Procurement is a function of business management that encompasses purchase planning, identifying and selecting vendors, establishing payment terms, standards determination, specification development, strategic vetting, value analysis, financing, selection and negotiation of contracts, purchasing, and inventory of external resources which an organization may need in order to accomplish its strategic objectives.
How will a business benefit from correct procurement procedures?
Unfortunately, many businesses either misunderstand or even disregard the importance of procurement’s role within their organization. Optimizing procurement is beneficial on many levels, adding actual value to your business, such as:
1. Reduced cost
Effective management of procurement will enable an organization to lower costs by procuring supplies, services, and contracts at the best price. Proper procurement management also enables a company to make the most of warranties or discounts that are often forgotten. Additionally, an effective purchasing process will provide an organization better visibility into the organization’s budget and how company funds are spent. This allows a business to have the option of leveraging additional cash flow by extending payment terms and helping business owners forecast for the future.
2. Greater efficiency
When a company has a fully functional procurement process, this will result in quality goods and services being delivered on time. This also helps businesses find solutions to unforeseen circumstances such as labor shortage or surplus, natural disasters, and economic instability.
An effective procurement process also enables an organization to distinguish between effective vendors and underperforming vendors. As a result, the company’s overall supply chain will be improved and there is a possibility of being compensated by underachieving vendors who fail to deliver goods and/or services within agreed upon parameters.
3. An effective procurement process can help with innovation
Due to stiff competition that businesses face, business owners seek any competitive edge they can achieve to make their products or services better. An effective procurement process allows a company to look for innovative products or services that they can offer consumers. When this happens, the business may also be able to secure exclusive deals with suppliers.
Efficient procurement practices that can help make your organization get ahead in the competition
In recent years, procurement has become recognized as an essential facilitator of business strategy and a favored means for attaining sustainable cost cutbacks. It is no longer a question of simply improving your operation. If you want your company to be ahead in the competition, or at the very least, at par with competitors, you need to transform your operation.
The following are some procurement practices that can help your business attain a higher level of success:
1. Your entire organization should have a detailed spend map which is updated every quarter.
A spend map helps you identify opportunities and risks. It helps business owners develop cost reduction proposals, increasing the value received from suppliers. A spend map also helps capture the following information and data:
- How much your organization spends
- Those who are spending and what is being purchased
- Which vendors provide the most business constituents
- Which business constituents purchase the same or similar products and services
- What percentage of your spend is with key suppliers and the number of suppliers that provide small value transactions
- How many transactions are processed by your business and how much is the associated administrative cost
Business owners who utilize a spend map for first time are generally surprised at the quantity of information garnered, and utilize their findings to assist with financial reporting and decision-making.
2. All members of your organization should take part in sustainable savings
When cost reduction programs fail, it is often due to poor management, execution, and planning. An effective cost reduction program does not involve just the procurement team when it comes to savings. The entire organization should be accountable and all departments should record, measure and report savings. The procurement team should assure that budgets and cost approximations are reduced in conformity with the organization’s financial management practices.
3. Focus on reducing costs across the value chain
Procurement cost reduction initiatives are focused mainly on reducing contract prices for businesses. However, these companies may be missing out on other opportunities to increase savings. Business owners need to view the entire value chain and determine the following:
- Demand: Are your “needs” and “wants” mismatched?
- Source: Have you been getting the best value for your money or do you have alternative service delivery approaches or contract models?
- Fulfill: Are demand and supply balanced? Are you sure that your requisition-to-pay procedures enable risk management and compliance?
- Manage: Has your business been losing value? Are you providing cost-effective services to your clientele? Are you asking your suppliers what could save them (and you) money?
One of the main reasons an organization spends more than it should is the incongruity between the “needs” and “wants” of the company and its employees. Examine what your organization’s “demand drivers” are, and based upon the information you gather, develop initiatives that increase quality and productivity, while adjusting and condensing demand in such a way that the overall delivery cost is ultimately reduced.
The following factors should be measured and reviewed when attempting to reduce your delivery cost:
- Removing demand
- Going through volume requirements
- Decreasing frequency of demand
- Considering alternatives to fill needs
- Promoting recycling
- Streamlining and/or standardizing product or service specification
- Reducing the range and complexity of your business portfolio
4. Assure value through contract and supplier relationship management frameworks
When companies fail to properly manage their contracts and suppliers, it is often due to:
- Too much effort in managing “transactional suppliers”
- Informal management of strategic suppliers
- Putting away the contract until legal issues arise and then consulting the legal department when those issues come up
- Performance management focused on time rather than cost and value
- Non-inclusion of continuous improvement as part of contract management
- Failure to converge with suppliers regarding strategic issues that affect the market
A good supplier management framework properly aligns effort, risk, and reward. It must include operational, tactical, and strategic segmentation and a clear explanation of responsibility and accountability within the organization.
If you want vendors to be effective, you should provide them with demand information. Integrating key suppliers into longer-term demand planning procedures will bring in more value to your business.
Supplier risk assessment has been observed to be poorly implemented in several businesses. Supplier risk assessment should be continuously observed and managed. Risks that should be evaluated include:
- Financial strength
- Ethical operation
- Quality control
- Technical aptitude
- Strength of skills and supply chain
5. Connect commercial and technical competence through the appropriate procurement operating model
Several procurements operate under an informal mandate. There is no clear articulation of what the procurement team’s responsibilities are. If an organization does not have a procurement capability and operating model, the procurement team is not effective.
A proper procurement operating model should include the following actions:
- Strategy: Create the vision, goals, strategies and accomplishment scorecard for your procurement team.
- Governance and Control: Explain how procurement will interact with the rest of the organization.
- Outline: Generate procurement allocations that reflect value, capability, and risk.
- Definition: Explain how risk and compliance will be evaluated and observed.
- Organization and Skills: Classify proper reporting relationships and organization design and determine suitable roles and responsibilities.
- Procurement Value Chain: Determine the key operating methods that support procurement
- Data, Information Management, and Reporting: Establish what information is needed to help improve managing third party spend and define the required reporting.
Using Procurement Software
All businesses these days use technology to ensure efficiency in operations. Procurement teams these days, use procurement software for faster and easier execution of tasks.
Procurement software “is business software that helps to automate the purchasing function of organizations.”
The following are the top three procurement software products for 2016:
1. Procurify – This software is said to be the most user-friendly procurement software in the market. It is compatible with every operating system. Many small to medium-sized businesses use this software.
2. ProcureWare – eBid Systems is the manufacturer of this software, which serves more than 300 public and private sector organizations around the world. It is described as, “powerful enough for the core procurement team and simple enough for use in a decentralized procurement organization.
3. Promena e-Sourcing – This software company created e-Sourcing, e-Auction, e-Procurement and SRM solutions with the aim of “providing high efficiency, effective control of time, labor and cost savings to its customers in their purchasing activities.”
By using applicable software and following the ideal procurement practices stated above, you can promote a more effective procurement process while achieving successful results for your organization.
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