What is Procurement?
It is critical to understand what is procurement first because it will give an in-depth understanding of procurement and supply processes.Procurement is the term that is used to refer to the process or the act of sourcing or obtaining services or goods for a business. Some businesses use the term procurement only to refer to the actual buying while others refer to the entire process that leads up to the purchase as procurement.
The word procurement is used to refer to buying for a business and is customarily performed on a large scale. Procurement involves two companies; the buyer and the seller. But it is the act of buying that is labeled procurement and not the activities of the seller.
Procurement is usually a part of the input to a company that then uses the goods or services procured in the making of their own final product. This makes it a very vital function of any business. It is important to the success of the buyer’s business to procure the best quality of goods or services procured at the most competitive rates.
On the surface, procurement might come across as a simple process. But it is often highly competitive with great care and attention paid to each step. The activities that procurement entails include:
- Vendor Selection
- Payment Negotiation
- Strategic Vetting
- Final Selection
- Contract Negotiation
- Final Purchase
Difference Between Indirect, Direct And Service Procurement
Direct procurement is sourcing the goods, materials or services that serve as the input for the organization’s manufacturing process. Direct procurement is a vital process that directly impacts the company’s own output of goods or services. The direct procurement strategy has a direct impact on the quality and price of the final goods and services.
When Is Direct Procurement Used?
Direct procurement is common in manufacturing companies. The procurement team endeavors to create and sustain a good relationship with the direct procurement vendors.
The day-to-day operations of an organization also require goods and services that are procured for internal use and this process is called indirect procurement. They are usually obtained through short term contracts with suppliers.
Services procurement in IT could be for software licenses. This type of procurement is called services procurement and is usually a one-time short term contract.
Acquisition of goods, materials,and/or services manufacturing Purposes
Sourcing and purchasing materials, goods, or services for internal use
Procuring and managing contingent workforce and consulting services
Ex: Raw materials, machinery, and resale items
Ex: Utilities, facility Management, and travel
Ex: Professional services, software subscriptions, etc
Drives external profit and continuous growth in revenue
Takes care of day-to-day operations
Used to plug process and people gaps
Comprises of stock materials or parts for production
Used to buy consumables and perishables
Used to purchase external services and staff
Establish long-term collaborative supplier relationships
Resort to short-term transactional relationship with suppliers
Maintain one-off, contractual relationships with suppliers
What is the procurement process?
So what is the procurement process? The procurement process refers to the identification and implementation of certain steps by businesses to ensure they can acquire goods and services to meet their requirements and achieve their objectives. A procurement process is important because it has a direct impact on how much a business can save. When businesses assess the procurement process regularly, then it ensures their goals are being met. Changes can be made to the process when it is not working as planned or when problems crop up for the business. As the procurement’s main aim is to boost efficiency, businesses must ensure they are deriving maximum value from their process.
The procurement process isn’t the same for all businesses because it can vary according to needs. Each business has its own set of needs and so it will have a different procurement process compared to another business which has different requirements.
Procurement Process Flow
Every organization has a unique procurement process flow. However, procurement in business usually starts with identifying a requirement and creating the purchase order that details all the requirements’ specifics. In a purchase where there is already an approved supplier for the requirement, the purchase order will be sent for approval by the designated procurement or finance team. If it is rejected, it will be sent back with the reason for it being rejected. On approval, the purchase order becomes a purchase requisition.
For a purchase that does not have a pre-approved supplier or vendor, the procurement team sends out multiple RFQs (Request for Quotations) detailing the requirements as specified in the purchase order. The quotations that are received are analyzed, and a suitable vendor is selected. The procurement team then negotiates a satisfactory contract with the chosen vendor and sends a purchase order.
When the purchased items are received, the vendor’s invoice goes through a three-way matching verification. Three-way matching is the comparison and verification of the purchase order, vendor’s invoice, and the actual receipt of the goods. This step is to verify if indeed, the organization had placed the said order with the specified vendor and if the vendor has supplied and invoiced the order as per the purchase order. This is then compared with the receipt of the goods to see if the order was received as requested and as invoiced. Once the three-way verification is complete, the vendor’s invoice is authorized and the payment made to the vendor. The payment is accounted for by the financial department.
Stages of Procurement
The actual steps involved in a procurement are as follows:
- Identification of Requirement
- Determination of the Specifics of the Requirement
- Negotiation and Finalization of Price and Terms
- Purchase Requisition and Order
- Delivery of the Purchase Order
- Product/Service Supply And Inspection
- Payment Process
- Record Keeping And Review
1. Identification of Requirement
The first step in buying something is recognizing that there is a need for it. This could be identifying the need to buy a new item or reordering something when it is required or falls below a certain threshold of stock. This might involve a requisition process in most businesses. It is important that all the stakeholders be consulted at this stage to prevent issues later on in the procurement process.
2. Determination Of The Specifics Of The Requirement
When it has been identified that there is a need, the exact specifics of the product or service that is required is to be decided upon. This would include technical specifications or part numbers. If the item is not one that has been previously procured this list of specifics is generated with concurrence from all the technical people involved. Detailed specifics with proper consultation with all the departments involved will prevent expensive mistakes from happening further down the procurement process.
Once it is determined that a specific item or service is to be bought, the procurement team has to then do the research required to determine the various sources that supply it. For repeat orders, there will usually be a pre-existing vendor list. For a new item, the process of identifying and then vetting vendors is longer. It is faster to work with a pre-existing vendor who has already been determined to be a good supplier. New suppliers will need to be thoroughly investigated to determine their reputation, speed, quality, reliability, and prices.
Organizations like Beroe can help provide the necessary market intelligence data to procurement divisions during this phase to help them make informed decisions.
Next, the procurement department needs to investigate vendors, request quotes for the item needed, and then select a vendor. This is an important part of the process because reputation, cost, speed of service, and dependability all need to be investigated before making a final decision. The rule of thumb is to get at least three quotes, but that’s a best practice that will need to be determined by your organization. Approval from the relevant levels of management will have to be obtained based on the sourcing options and costs involved. If there is a bidding or tendering process involved for the order, the request for proposal, bids or tenders will have to be published.
4. Negotiation And Finalization Of Price and Terms
For direct purchases, requests for quotes will be sent to the shortlisted vendors. The usual practice is to get a minimum of at least three quotes before making a selection. The quote will be examined for price and speed competitiveness. The company to procure from will be selected not only on price but also based on their promptness, reliability, and quality.
If there is a bidding or tendering process for the procurement, the selection of the qualifying bids will be as per the terms and conditions set. The selected supplier will be chosen and announced as per the set process preferably in a highly transparent manner. Selecting from the various bidders is a process that should be fair and transparent to ensure that the buyer gets the best value and quality of supply. When the selection process is compromised, it might also compromise the value of the goods or services supplied.
At this point, the buyer has to decide between the merits of having a single high-volume supplier or choosing multiple suppliers. When choosing to have a single supplier, the higher volume of orders gives better bargaining power when negotiating rates. However, if a single supplier is unable to fulfill an order it will affect the entire manufacturing process. Having more than one supplier for an item reduces the risks while giving one less room to negotiate rates. Sometimes, multiple suppliers help to build competition with regard to rates and quality.
5. Purchase Requisition And Order
A purchase requisition generated within the company will be approved by the appropriate authority. This will then lead to the generation of a purchase order with all the specifics of the order as well as the terms and conditions. Some companies involve the buyer in the process of generating the specifics of the order so that both the buyer and seller understand the specifics of the order. The specifications have to be carefully compared with the purchase requisition as well as the supplier quote to prevent any mistakes from being made.
6. Delivery Of The Purchase Order
The shipment notice is sent to the buyer wherever applicable. The delivery of the purchase order depends on the practices of the buyer and the seller. It can be in person or by fax or email. This is also as per the specifications agreed upon by both the buyer and the seller.
This involves creating the timeline for the prompt delivery of the requested goods or services after factoring any unforeseen delays. It may also include information on the payment as well as delivery schedules.
8. Product/Service Supply And Inspection
When the product or service is ready, it is supplied to the buyer. It is the responsibility of the buyer to thoroughly inspect the supplied items and if they match the agreed upon purchase order. The buyer can either approve or reject it. Both of the options will trigger actions as per the agreed-upon terms and conditions. If the buyer takes delivery of the items it is implied that they are accepted and the payment process starts.
9. Payment Process
For the payment to be made, the documents relating to the order are studied. All the specifics of the original purchase order, receipt of items and the payment request invoice are compared. If there are any mismatches they are resolved before payment. Once payment is approved the payment is made as per the agreed-upon modes of payment.
10. Record Keeping And Review
Both the companies, the buyer and seller maintain their records for their auditing and taxation processes. The entire process should be under continual review in order to improve as well as settle any disputes that might have arisen. Reevaluation makes the procurement process more efficient and prevents the recurrence of disputes.
The steps of procurement detailed above vary from business to business but the logical flow remains the same. Efficient procurement practices keep the flow of purchased goods and services prompt and delay-free. It is also the responsibility of the people involved in the process to continually keep up with negotiations at the relevant steps to ensure that the goods and services that are procured are of the exact requirement, highest standards and most competitive price. Excellent record-keeping not only helps in the auditing of the records but also in the case of reordering the same items. The ethical selection of vendors ensures the fair supply of high-quality items.
Components of Procurement
The three components of procurement are
The number of people involved in the procurement process depends on the sale of the manufacture and procurement orders. For a small company, procurement personnel are few in number. For larger companies, each stage of the procurement process has an entire team managing it. Also, when the items that are being ordered are small value, the number of approval is smaller. But for high value or very important procurements, the level of approval for the purchase requisition goes higher in the management order.
The procurement process should be well designed and organized in order for it to function efficiently. When there is a disorganized procurement department, it leads to inefficiencies and inconsistencies in the entire process that can cause delays and problems with the purchases as well as the payments for the same. Transparency in the process ensures that there is no corruption or manipulation at any stage.
3. Paperwork or Records
Record keeping at every step of the process of procurement is very important. Though almost all the steps of the process are digitized, the efficient recording of all information at each stage and the coordination and comparison of all the relevant records at each stage is important for both the buyer as well as the seller
Procurement, Purchasing and Supply Chain
Understanding Procurement, Purchasing and Supply Chain
Most organizations use the terms procurement, purchase, and supply chain interchangeably. However, the supply chain is the largest process of the three. Procurement is a step in the entire supply chain. Purchasing is, in turn, a step in the larger process of procurement.
- Procurement Vs Purchasing
What is procurement process?
Procurement is the entire process of identifying a need within the organization, obtaining the requirements and maintaining a good relationship with the vendors. When a need is confirmed, procurement research identifies likely suppliers.
Purchasing, on the other hand, is a sub-function in the process of procurement. It only deals with receiving the purchase requisition, evaluating the RFQs, making a purchase order, receiving the ordered goods/services, verifying the quality of the goods/services, and processing the payment.
While procurement and purchasing overlap in certain instances, they are often thought to be the same by many people. This is not the case because their goals, what they define, their processes, and what they focus on is entirely different from one another. Let us take a look at the key differences between procurement and purchasing.
On one hand, procurement is defined as the set of processes such as selection, identification, and acquiring of goods and services from vendors through a range of different processes. These processes for acquiring include the tendering process and direct purchase. The procurement process involves ensuring that the goods and services are received on or before time and that the correct amount of goods and services has been delivered to the business as specified in the PO. However, purchasing focuses on acquiring goods and services which are needed by an organization and doesn’t focus on the other aspects like procurement. Procurement is a larger term that encompasses purchasing. That is, purchasing is a part of procurement.
The steps involved in both of these processes differ from each other. Procurement involves first identifying the business requirement, then authorizing purchase request, approving the request, and then identifying vendors. Then making inquiries and finding out about the quotations specified by the supplier and negotiating. Procurement also involves selecting the supplier carefully and then receiving goods to ensure they are of the quality expected and storing invoices for future reference after three-way matching. Then procurement’s last stage involves paying the supplier. Purchasing is much simpler as it involves less number of steps. The steps include PO acknowledgment, receiving goods and inspecting them, invoice storing, ensuring the invoice is legitimate and paying the supplier.
Procurement is considered a strategic function whereas purchasing is called a tactical function. This is because procurement starts from the moment a need is identified by the business and ends when the supplier has been paid for the delivery of goods. It involves steps such as taking the time and evaluating the various suppliers before ordering from that supplier. Moreover, it involves ensuring the maximum value comes from the contracts that have been created. Purchasing, on the other hand, consists of only the transactional aspect because it only focuses on the purchase of the goods and services required by the business. It does not involve complexities like procurement which is thorough in its function.
The procurement function is required to fulfill the needs of a business. It involves first spotting that there is a need and then ensuring that those needs are fulfilled in the best way possible. It takes into account the entire picture from start to finish so those needs are fulfilled. Hence, procurement can be defined as a function that takes the proactive approach because it ensures that problems are avoided from the start. Purchasing is quite different in this regard because it takes a reactive approach. When there is a need then it satisfies those requirements of the business. It can be said that purchasing is about activities and tasks that are accomplished to commit expenditure for a business.
Procurement focuses on evaluating risks before they become bigger and cause problems to the supply chain and the rest of the business functions. This risk mitigation ensures that potential problems are resolved before they get worse. For example, when choosing vendors in procurement, the risks associated with the various vendors, and proper evaluation is done. Moreover, procurement involves assessing various risks such as data security risks and operational risks. Purchasing does not focus on risks or elimination of risks like procurement and so it differs from it in this area too. Purchasing takes a transactional approach and so it does not focus on risk evaluation and mitigation.
The goals of each function are different and what they accomplish is different as a result. The goal of procurement is to ensure that value is created in the process and the total cost of ownership is thought about. On the other hand, purchasing is more basic in nature because it focuses on the cost of the order and how to get the best price. It can be said that procurement is ongoing because the people associated with it focus on ensuring the proper supplier relationships are maintained and other processes are continually assessed. However, the purchase is not ongoing like procurement because once the goods and services are acquired, that is the end of procurement.
Procurement focuses on the supplier relationships whereas purchasing doesn’t do that. In short, procurement is about the long-term while purchasing focuses on the short-term. Maintaining proper supplier relationships is vital for any business because it can ensure long term savings and benefits for the business. Procurement places emphasis on ensuring care is taken to find the best suppliers who can meet those requirements and when a relationship is built, procurement emphasizes ensuring it is maintained. The purchasing function deals with the supplier base that already exists in a business. Hence, procurement delves deeper into ensuring they are dealing with the right suppliers who provide excellent services and deliver goods on time.
- Procurement Vs Sourcing
Procurement is the entire end-to-end process of identifying a need, identifying the best supplier, placing an order, receiving it, paying for it and then documenting it. Since it needs to identify the need for an item, it also includes a part of inventory and storage. It involves the negotiation and planning that are required to make sure that the buyer gets the best deal.
Ideally, procurement should also include relationship management with the vendors to ensure that they continue to maintain quality supply at preferential rates and terms. It includes a lot of follow up to confirm and ensure that each stage of the procurement process is as per the schedule and the requirement specification. Once the material is dispatched and received, the buyer checks if it satisfies the requirement before approving it and then releasing payment. The record-keeping process of the entire purchase right from the requisition request and through to the release of payment is a part of procurement.
Procurement is also the first stage in the entire supply chain as it is usually the procured items that are used by the business to manufacture the items that they, in turn, sell to others. It is a vital process in every manufacturing company as a shortage or delay in procurement can bring the entire operations of the company to a grinding halt. If the items procured by the company are not of the correct specification or of poor quality it will in turn, have a detrimental effect on the quality of their own manufacturing process. So, the quality and time-bound manufacture of any good in a company are very sensitive to any irregularities in the procurement process.
Sourcing, on the other hand, is just one step in the overall process of procurement. Sourcing is the process by which the buyer company does its research through experts and market reports to determine probable sources of what they require to buy. If the items that are being procured are repeat orders, it is simple enough to place an order with a vetted supplier. But it always pays for the buyer to stay informed as to any new entrants into the market. Awareness gives the buyer opportunities to take advantage of any changes in the market dynamics.
A business should not become over-reliant on a single supplier in case unforeseen circumstances cause the procurement to be disrupted. It is always advisable to have more than one supplier to ensure that there is always a pre-approved supplier in place. The monopoly of one supplier also makes it harder to negotiate for competitive rates.
When the item that is required by the buyer is new, the sourcing process is much longer. At the outset, it has to be determined if there are suppliers for the item that is requested. If there are no existing suppliers for the exact item, businesses that take custom orders have to be identified. Once the probable sources for the item have been identified they have to be thoroughly investigated and vetted. Once a few businesses have been identified and shortlisted, they have to be contacted with specifics of the requirement.
The next most important step in sourcing is the negotiation of the rate at which the item is to be supplied without compromising on the quality. If one buys the cheapest items available with no regard for the quality, it will cause the product from which the raw material is manufactured from to be of poor quality. However, if the cost of procurement is too high, it will eat into the profit margin of the buyer who will be manufacturing goods from the procured items. If the procurement is at a price that is too high, it will make the final goods manufactured cost more, thereby impacting their price competitiveness.
So, sourcing has to maintain the fine balance between keeping the procured items at the best possible quality while also being at the lowest possible cost. Every small saving that is made when buying raw material has a positive impact on the profit margins of the company. The high standard of every manufacturing company is also dependent on the quality of the raw materials that are used.
Reliability is another important factor in choosing a source of raw material. Delays by the supplier can delay or even stop the entire manufacturing process. Sometimes, suppliers are chosen even if they cost a little more on account of their reliability and promptness in supply. Mitigating the risk is worth the extra cost when the item that is being sourced is vital to the manufacturing process.
- Procurement Vs Supply Chain
Procurement is the process that starts from the identification of the need to purchase the item right up to the actual purchase, delivery, and payment for the same. It does not extend beyond obtaining and paying for the items received. The supply chain starts with procurement as the first process. However, it extends beyond the step of procuring raw materials right through the manufacture and supply of the finished goods all the way up to the final step when it reaches the end customer or consumer. The supply chain encompasses the entire cycle of the manufacture right up to the retail sale of an item.
The steps that are involved in the supply chain are
- The procurement of the raw material
- Various stages of manufacture
- Transportation to wholesalers
- Distribution to retail sales points, and
- Sale to the consumer
At each stage, there is quality control as well as logistics. So, procurement is only the first step in the long process of the entire supply chain.
Principles of Procurement
Procurement is one of the most important steps in the supply chain of any goods. The profit margins of a company, as well as the quality of its raw materials, are dependent on this activity. Ideally, every procurement department will keep 5 principles of procurement in mind at every stage. Adhering to these five pillars of procurement will ensure that the company’s procurement process is as efficient and economical as possible.
The five pillars of procurement on a national scale, fosters free and fair trade that helps grow the economy. On a smaller scale, it offers equal opportunities for vendors to be given business based on their merits.
5 Pillars of Procurement
The lowest price is not always the best option for a supplier. The procurement process should be driven by value. The buyer should aim to get the best possible product that offers value for money. When a buyer compromises on the quality of the input based on the lowest cost, it has a cascading effect on the company’s finished goods or services. Value for money should be the uppermost factor for the selection of a supplier.
Creating a process of vendor selection that is bias-free and transparent, ensures a level playing field for all suppliers. This open competition is to the benefit of the buyer who can get the best value for money.
Ethics and Transparency
The selection process for a vendor whether it is through direct purchase, tenders or bids is very vulnerable to corruption. Any unethical practices that are followed to skew the process of vendor selection will compromise the quality and value of the items being purchased.
Accountability and Record-Keeping
Every person at each stage of procurement should be accountable for the decision making and process. Excellent record-keeping practices make it easier to trace the steps of procurement.
Ensuring a fair and uniform procurement process across all industries provides all the players with equal and fair opportunities to flourish.
A procurement model is a series of steps that an organization or business follows in order to procure items or services. Procurement models also define the levels of hierarchy, control, and decision making with regard to procurement. The finer details of a procurement model are often unique to each company and the business environment that they operate in.
In large organizations, there are many departments and divisions that may or may not be spread out across geographical boundaries. Management decisions can be centralized or localized. Procurement models can be classified based on where the control over the procurement process lies.
Local Procurement Model:
This procurement model is not centralized and the control and decision making is made at the local or departmental level. The local department or division would enjoy complete control over procurement decisions. The logic behind this model is that it is the local management that would better understand the exact needs of the department. It makes the procurement model agile and with fewer levels of bureaucracy. There is always the risk of maverick spending decisions without taking a larger perspective into consideration.
Centralized Procurement Model:
In the centralized procurement model, absolute control over the procurement decisions lies with central management. There is a centralized approval process for all procurement and the central rules apply to all the decisions at the local level. The purpose of such a procurement model is to have the overall budget and spending of the business or organization in mind when making purchase decisions. Purchase negotiations are made by personnel who are experienced and dedicated to it. There is also a greater price advantage when procurement is in bulk. However, there is a risk of not meeting the exact requirements that are unique to each local level. There are many layers of bureaucracy that make the process cumbersome.
Some organizations use a hybrid procurement model that has a combination of localized and central procurement. In this model, some purchases are centralized while others are local. This model has the advantages of both the models and gives all the local departments a measure of autonomy within the organizational control. It may also be referred to as a center-led model of procurement.
Types Of Procurement
Direct procurement is the purchase of the input that a business requires in order to manufacture its end product. This is the raw material that is required usually for a manufacturing-related business. The input cost and efficiency of direct procurement is a vital factor in the profitability and performance of the company. When there is a block in the process of direct procurement, it impacts the ability of the company to manufacture its product.
Indirect procurement is the procurement of the services or input that are not directly used in the manufacture of the company’s product but are essential for the day-to-day operations. It could include office supplies or maintenance services for the equipment that is being used for manufacturing. Blocks in indirect procurement affect the operation of the business.
Procurement Life Cycle
The steps that are a part of a company’s procurement life cycle are usually tailored to the unique needs of the company. The steps in the procurement life cycle might be merged in some companies while others might have more sub-categorization of steps.
Need Analysis and Profile Category
In this stage of procurement, the company has to first clearly identify the need and the specifics of what has to be procured. The actual business need, budget allocation for the expenditure and other information should be determined from within the company. The company would then perform external market research and obtain information on the cost and other general specifics of the item. All the data that is gathered both internally and externally at this stage becomes the base for the overall procurement strategy that will be implemented. This stage in the procurement life cycle usually involves people at all levels of hierarchy as well as information from external sources.
Procurement and Sourcing Strategy
The data collected in the first step of the procurement process is used to create a sourcing strategy. If there is an existing policy that has been used, it can be adapted to better suit the current need and eliminate previous problems and inefficiencies.
Assess Suppliers and Create Supplier Portfolio
The data that was gathered in the initial market research can be processed to create a list of criteria for suppliers. Some organizations have a pre-approved supplier portfolio with a list of suppliers who are chosen after negotiations with them. The advantage of having a pre-approved supplier list is that the company can work to build a good relationship with a group of suppliers in order to get the best price and value. It also saves the time that would be spent negotiating with new prospective suppliers whenever there is a procurement need.
RFP and Selection
A Request For Proposal (RFP) template and criteria could be created or modified from an existing RFP for the procurement. The selection process rules are stated and set out.
Negotiation And Selection
At this stage in the procurement process, a vendor is selected and the best price and terms for the purchase are negotiated.
Integrate And Optimise The Supplier
When the process for sourcing from a new supplier is in place, the supplier is integrated into the overall process of the organization. Any issues will be managed and tweaked to optimize the supply for maximum efficiency and value.
Review And Benchmark
After completion of the procurement life cycle, it should be reviewed periodically to optimize the entire process. Standouts in terms of the performance or failure of the procurement process with the supplier should be observed. These lessons should be implemented in the next procurement lifecycle. Being open to feedback from the supplier and other stakeholders in the process can help in identifying the scope for improvements if any.
Customer satisfaction depends on not only meeting customer expectations with regard to the product. It also depends on being able to meet the demand on time without compromising on quality. Demand planning is the process by which an organization is able to accurately predict and plan for future fluctuations in demand. In order to do this, there has to be an awareness of all the factors that can affect demand.
When demand planning goes wrong there is either a shortfall of goods to meet the demand or an overstocked inventory that lies unsold. Both of these scenarios impact the organization financially. Demand planning helps the organization match the rise and fall in demand to increase profitability and customer satisfaction.
Demand planning is truly useful to an organization when it is proactive and not reactive to demand changes. When an organization accurately forecasts the rise and fall in demand and adjusts the procurement and supply chain accordingly, there is the optimum use of finances and other resources.
To properly forecast demand historic demand-related data is as important as being aware of the current market environment and factors that could influence it. These factors could include current events, natural events or other political issues. Proper data gathering and analysis is the key to accurate demand planning. This process is being automated as technology advances.
Advantages Of Demand Planning
Proper Supply Chain Management
Demand planning enables an organization to better estimate the spikes in demand. It ensures that their supply chain is capable of sustaining a higher rate of production. The planning of all steps in the supply chain is done in advance to ensure smooth operations during high demand. When all the stakeholders from the procurement suppliers, production line to the end buyer are in readiness, the entire process is more likely to be smooth. If there is a likelihood of delays due to demand spikes, advance notice will ensure fewer customer complaints. Negotiating in advance with all people involved will ensure better terms and more transparency. If there are any maintenance or service activities to be scheduled they can be better planned according to the demand forecast.
Proper Production and Labor Management
Planning ahead for highs and lows in demand will ensure that there is always the optimum number of staff members. Too many staff when there is a fall in demand is a waste of money. Too few staff during a demand spike can derail the production line. Demand planning helps to plan ahead for temporary additional labor to manage increased production. When all the aspects of production match the demand, it enhances capacity management, resource management, and production efficiency.
Proper Cash Flow Management
Predicting the demand pattern enables an organization to better manage the cash flow. It prevents the scenario of having cash locked in unsold inventory or raw material. Predicting a slump in demand also enables financial planners to arrange for additional credit to bridge the shortfall.
Demand Forecasting in Logistics
Demand forecasting has an important role to play in the planning of logistics. Ill-planned logistics can affect the supply chain in two ways; incoming and outgoing. Logistic insufficiencies can block procured materials as well as the movement of finished goods. If the logistics for the incoming materials are insufficient, it can bring production to a halt. When the outgoing transport of finished inventory does not perform well, it results in unfulfilled orders and unhappy customers. Ideally, demand forecasting should allow for the planning of added logistics support during predicted spikes in demand. General surges in demand across the market put logistics suppliers under pressure. To circumvent difficulties in such a situation, one would have to plan for added warehousing to stock incoming supplies in foreseeing the demand. One would also have to factor logistic lags into order fulfillment schedules.
The skill of negotiation is critical to the process of procurement. The motivation of every procurement professional is to negotiate the best deal for their team. Negotiation is an art as well as a science that requires that both parties to arrive at an agreement that is favorable to their own interests and also satisfies both sides. A successful procurement negotiation secures the supply of the requirement at the best possible price in the exact quantity, quality and time frame that is desired.
The tried and tested strategies to procurement negotiation are:
Research and Understanding:
Familiarity with all the relevant details enables the negotiator to better understand where there is room for negotiation. Knowing all the drivers that motivate the supplier as well as one’s own business gives one a better grasp of all the factors involved in the negotiation. Research and understanding of the technical and business aspects of the procurement item help one negotiate a favorable deal.
It is better to negotiate a clearly stated lowest price rather than agree to a range of prices. When the pricing is clearly stated and agreed upon it prevents future disputes. An agreement to a range of prices might result in the higher price being charged which is disadvantageous to the negotiator. There should be absolute clarity and precision in stating and agreeing upon the technical and other aspects of an agreement so that there is no room for misunderstanding.
Be Prepared For Long Drawn Out Negotiations:
Negotiations are rarely a one-meeting agreement. Sometimes it takes several rounds of negotiation until both stakeholders are satisfied with all the terms. If you know that there is room for negotiation, being persistent can give good results. But, it takes an experienced negotiator to know exactly when to walk away from negotiations in order to turn the tide in one’s favor.
Have Concrete Alternatives:
When the negotiations are not going in the direction desired, showing the other party that you have alternatives is a good strategy. This should however not be an empty threat and is more effective when backed by evidence.
An technique that is regularly used in negotiation is that the negotiator states that the terms would have to be agreed upon by a higher authority. This then creates a roadblock to lowering the rates or getting more favorable terms. Clearly stating that negotiations will only be done with the decision making authority prevents the use of this tactic.
Be Prepared To Compromise:
Compromise on both sides of negotiation results in a mutually satisfactory agreement. Being inflexible leaves no room for compromise. One must keep in mind the non-negotiable factors and be willing to compromise on other factors if required. When there are benefits to both the parties involved, the likelihood of a long and successful relationship is higher.
Successful procurement negotiation techniques follow the same logic as negotiation strategies.
- Preparation: There cannot be enough emphasis on the importance of preparation for the success of any negotiation. Adequate preparation and a thorough knowledge of all the factors involved on both sides of the negotiation speed up the process. The negotiating team should agree upon a procurement strategy so that negotiations will not be stalled by repeated internal consultations. Some negotiators take this one step further and try and find out as much as they can about the company as well as the executives that they are going to negotiate with.
- Agenda: It is a great time saver for both the negotiating teams to finalize an agenda for the meeting so that they are on the same page. Knowing the agenda of the other team ensures that you are well prepared with relevant data and answers.
- Look into Company’s History: It pays to look into the track record of the company you are negotiating with. It will help you anticipate their trademark tactics. And if the company has a very good record for efficiency and quality, you will know that even if you make compromises securing a reputed and reliable supplier is worth it.
- Choose Team Members Wisely: It is important that all members of a negotiation team have good communication with each other and agree upon the negotiation strategy and goal. The team should agree on what and how much they are willing to compromise. When there is a lack of agreement within the team, it will negatively impact the negotiation outcomes. It also pays to review the negotiation strategy and agree upon non-verbal ways of communicating within the team.
- People Make an Organization: Do not underestimate the power of people skills. At the end of the day, every company is represented by a person. Making an effort to build rapport with the other team is a good idea.
- Summarise Clearly: At the end of the negotiation summarise all the agreed-upon points clearly so that all the negotiators are in no doubt as to what the other has understood. This prevents misunderstandings and the need to renegotiate. Put everything in writing as soon as possible.
- Common Negotiation Mistakes
Making mistakes in negotiation can cost a company dearly.
- Insufficient Preparation: Not preparing well enough can result in negotiations that keep getting stalled or unnecessary rounds of re-negotiation.
- Aggression: The ideal result of a negotiation should be a win-win for both parties. This fosters long and mutually beneficial relationships. However, when one negotiator is too aggressive and unwilling to compromise on anything, it sours the entire relationship.
- Details: Not paying enough attention to all the details might result in an agreement that looks good superficially but has many loopholes and details that will hurt the company in the longer run.
- Emotions: Since negotiations between companies are ultimately between teams of people it is easy to let emotions overrule other considerations. When talks get heated, take a break.
- Ethics: It pays to be ethical in all dealings. Sometimes it is very tempting to take an obvious shortcut but it can impact the relationship between the companies. It will soil the reputation of the negotiator when it gets revealed.
- Negotiation Tips For SMEs
- Research: Whether you are a small or large business, it is very important to do your research. SMEs should be especially careful not to get caught on the backfoot in a negotiation.
- Know your non-negotiable factors: Identify the factors within your team that you are not willing to compromise on so that you do not get coerced into accepting unfavorable terms.
- Don't mention price first: Let the other side mention price first and then negotiate.
- Put it in writing: It pays to put all the agreed-upon terms in writing as soon as possible.
Qualitative and Quantitative KPIs
The performance of a procurement process should be evaluated on a qualitative and quantitative basis. Quantitative KPIs are by definition those that can be represented by a number. Qualitative KPIs are those that deal with factors that are not numerical such as ease of business or customer satisfaction.
Essential KPIs To Monitor
There are numerous KPIs that a company can decide to monitor. The most important KPIs that give a clear picture of procurement performance are:
Purchase Order KPIs
- Order Cycle Time: How long or short is the turn around time of one order cycle. This will help evaluate which supplier is better for urgent supplies.
- Cost of Each Purchase: The cost that is incurred to process each purchase and helps to keep track of internal costs incurred.
- Lead Time: The time that it takes from the order to supply.
- Supplier Availability: How available and responsive is the supplier to sudden queries and emergency orders.
- Number Of Suppliers: This will tell you if you are overdependent on a small number of suppliers
- Quality, Accuracy, And Compliance: Know if the supplier is maintaining quality and compliance with the requirements. Too many defects and mistakes cost more and waste time.
- Supplier Capacity: This is important to identify the suppliers who can process large orders.
Return On Investment KPIs
- Savings And Cost Avoidance: The savings that the company makes through the procurement process. When a particular procurement process helps avoid certain costs altogether it is a saving.
- Total ROI: The return on investment of the entire procurement process
Types of KPIs
- Inventory KPI
The efficiency of a procurement cycle is highly dependent on how well inventory is managed. Good warehouse and inventory management avoids bottlenecks in the entire process. Key inventory KPIs are:
- Stock Accuracy: How well the books actually reflect what is in the inventory and how accurate stock lists are.
- Fulfillment Accuracy: The rate of how correctly one is able to get the right item in the right quantity from the stock. The rate of inaccurate requests or orders being returned also reflects the accuracy of fulfillment.
- Timeline: The time that is taken by inventory to respond and have items ready to go
- Back Order Rate: How often does the inventory run out of stock and wait for supply.
- Deadstock: How much dead stock is taking up inventory.
- Turnover: How quickly is the inventory used.
- Employee Learning and Growth KPI
A procurement process can only perform when the manpower involved is highly productive. When evaluating a procurement process, it is important to include the following employee-related KPIs.
- Training effectiveness
- Training cost
- Number of trainees
- Attrition rate
- Turnover rate of high performers
- Rate of internal promotions
- Percentage of below-par performers
- Delivery KPI
An important aspect of procurement is the efficiency of the delivery process. KPIs that help evaluate delivery are:
- Lead Time
- Purchase Order Cycle Time
- Percentage Of Emergency Orders and Deliveries
- Supplier Availability
- Quality KPI
The quality of procurement can be measured by:
- Quality And Defect Rate
- Compliance Rate
- Cost KPI
The cost aspect of procurement can be measured by:
- Cost Per Order and Invoice
- Authorized Spends
- Price Competition Between Suppliers
Procurement Best Practices
- Have a proper hierarchy for decision making and preferably a high-level team for major decisions.
- Use the feedback of all stakeholders in procurement to keep refining and improving the process.
- Digitize wisely. A software solution that is chosen for procurement management should serve to make the entire process quicker and more efficient.
- Give attention and importance to relationship management with suppliers.
- Pay attention to the human resources chosen to implement supply chain strategies
- The cheapest supplier is not always the best. Price is not the only decision making factor in choosing suppliers. Make decisions based on the TOC or the total cost of ownership.
- Manage contracts properly. When disputes arise it is the contract that enables a favorable solution.
- Efficient inventory management is the key to managing costs.
- Review and refine the procurement process continually.
- Have the highest standards of ethics and social responsibility.
What Is Procurement In Business?
Procurement definition:Procurement is the activity or process by which a business or organization sources or procures the goods or services that it requires. It is the act of buying services and goods on a large scale. Since the procured items or services are usually the input for manufacturing the company’s product, procurement becomes a vital process.
The very first step is to determine what the exact product or service requirement is. The procurement researchprocess identifies likely suppliers and sends them a Request for Quotation (RFQ). A vendor is selected either through negotiation or an auction or tendering process. After identifying a vendor, the procurement department negotiates the rates and terms with the chosen vendor, and they enter into a contract. The required products or services are then ordered and received. The procurement department performs quality assurance checks on the received goods and services. The procurement team continually reviews and monitors the entire process for efficiency, quality and cost-effectiveness.
What Next? The Future Of Procurement
Procurement is continually evolving with the changes in the market. With organizations and businesses growing beyond geographical borders, the management of procurement is continually undergoing many improvements.
The implementation of eProcurement tools and software has reduced the cost of each step in the procurement cycle while increasing efficiency. The UI or user interfaces of these systems are becoming more user-friendly by the day. The implementation of apps to manage the entire procurement lifecycle has enabled seamless realtime data flow across all the levels of management. The digitization of procurement has made it easier than ever to enforce best practices and transparency across the board. Machine learning, Big Data, and AI have made data analysis, demand forecasting, and procurement management more of a science than a gamble. Cloud-based technology has made the eProcurement system easily accessible.
The global nature of procurement was clearly displayed when the Covid-19 or novel Coronavirus/Coronavirus outbreak in China brought supply chains to a halt. With countries implementing lockdowns the entire world was thrown into a crisis. Companies having a diverse network of suppliers from different geographies were better enabled to quickly leverage access to alternate suppliers. This crisis has illustrated the importance of planning and implementing proper supplier risk management policies. Agile and responsive procurement systems are better equipped to mitigate the fallout from such disasters. The digital transformation of procurement has made it easier to make and implement emergency sourcing decisions.
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