Best Practices in Procurement

Introduction

The whitepaper examines the best practices in the industry with relation to procurement, in terms of cost and time efficiency, as well as quality assurance.

Abstract

Procurement management can either be performed by an in-house team or outsourced to procurement organizations, partially or fully. The major functions of the procurement

organization are to ensure process efficiency, cost efficiency, and develop a sourcing strategy for engaging the best-fit suppliers.

Having a centralized procurement team can ensure cost savings, while the procurement team can vary depending on the category, a general structure includes data analytics, strategic sourcing, contract management, and purchasing teams. In some cases, a separate “Vendor Management Organization” (VMO) takes care of end-to-end vendor management, working in tandem with the procurement team and reporting to the lafter. The VMO works with the procurement team for vendor management governance and assists in the vendor selection and RFX process, also ensuring business and vendor compliance.

Procurement tools are leveraged by procurement and vendor management teams during day-to-day procurement processes. The major trend is the digitalization of such tools, with companies switching to various software to aid their procurement processes. To improve the efficiency of the procurement process, most companies with robust procurement processes have been focusing on the potential for automating such processes. E-Procurement enables centralized access to information, improving transparency, and thus, minimizing risks.

Various tools aid in vendor administration, task management, vendor performance analysis, and contract negotiation as well as supplier relationship management. There is a trend toward the centralization of procurement functions.

Transparency is very important in the procurement process, required for risk mitigation and cost efficiency. Harvard has provided a matrix for determining the degree of transparency in the supply chain, which can be used by organizations spanning diverse industry categories. First, suppliers are categorized into the groups indicated by Y-Axis. Then, surveys can be conducted to quantify KPIs belonging to each category of Y-Axis. Based on the results, suppliers can be plofted in the above matrix to determine the level of transparency in the supply chain.

Optimal contract management processes involve planning how to manage contracts, implementing the plans, and continued monitoring results. A Contract Manager can be appointed for overseeing contract management, tasked with functions, such as supplier relationship management, risk management, monitoring supplier compliance, and record keeping. There should also be a central repository for all procurement contracts, to allow ease of accessibility.

To reduce the duration of a contract life cycle, it is necessary to streamline communication among departments for quick information flows. Contracts can be simplified wherever possible; alternatively, automation of most of the processes can be considered for time efficiency.

Steps in Procurement Practices 1

Procurement management can either be performed by an in-house team or outsourced to procurement organizations, partially or fully. There are five steps in the process, beginning with creating an in-house or outsourced procurement team to the final stage of supplier contract management.

Procurement Team

The first step in a procurement process is assembling a procurement team with clearly defined roles, as well as optionally considering a vendor management organization.

Procurement Tools

The next step is ensuring access to tools, which reduce operational duties and free up procurement team members for strategic roles.

Spend Transparency

This ensures accountability and reduces the inefficiency of operations and costs. Procurement organizations offer input on an efficient process to maximize cost savings.

Supplier Engagement

This involves the process of identifying potential suppliers, determining best-fit suppliers, and determining the optimal sourcing strategy.

Contract Management

This involves contracting the selected suppliers while trying to negotiate potential savings with clearly defined contractual terms and objectives.

Sources: Article from Procurement Cloud, Beroe Analysis

KEY ANALYSIS

The major functions of the procurement organization are to ensure process efficiency, cost efficiency, and develop a sourcing strategy for engaging the best-fit suppliers.

Analysis: Procurement and Vendor Management Teams 2

Procurement Team Functions 2

• Design sourcing strategies, supplier selection, due diligence, contract negotiation
• Identify cost-saving opportunities through the analysis of the industry and supply market, cost models, category spend, lead RFX
• Establish policy and processes and ensure internal stakeholders are included in vendor management processes (risk assessment, supplier diversity, vendor governance, etc.)
• May include a Contract Management Team as the first-level contract review and the single point of contact to the legal team

Procurement teams can be in-house or outsourced to procurement organizations. The general structure of the team, whether in-house or outsourced, remains similar

In-House Procurement Team Divisions (Industry Trend) 2
Data Analytics Team	Determine spend visibility and conduct spend analysis to identify cost-saving opportunities
	Analyze and determine the value addition
Strategic Sourcing Team	Set up a strategic sourcing process to ensure vendor evaluation
	Run the RFX process with the vendors and analyze RFX responses
	Liaise with contract management to review supplier contracts and reduce risk
Contract Management Team	Negotiate optimal contractual terms with the vendors
	Review vendor contracts to ensure they meet the corporate objectives
	Set up a central repository for storing all contracts to make tracking simpler
Purchasing Team	Responsible for managing the purchasing process
	Creating the purchase order and sending it to the vendor
	Ensuring timely delivery of the product

Sources: Articles from Procure Desk, Beroe Analysis

KEY ANALYSIS

Having a centralized procurement team can ensure cost savings, while the procurement team can vary depending on the category, a general structure of the team has been defined here, as per industry best practices.

In some cases, a separate “VMO” takes care of end-to-end vendor management, working in tandem with the procurement team and reporting to the lafter.

VMO 3
Roles	Activities within the Scope of the VMO
Director, Category Sourcing & Vendor Management	Responsible for sourcing and managing the category vendor ecosystem
Associate Director – Vendor Management	Advance the strategic vendor management plan and drive global, complex, cross-functional process, and productivity improvement projects for devel- opment operations
Senior Manager, Category Vendor Management	Lead vendor management strategy for key service providers Areas of focus include vendor segmentation, governance, performance management, and development Collaborate with vendor and business stakeholders to ensure the overall effectiveness of vendor services and other initiatives
Associate Category Vendor Manager	Responsible for a combination of contract, performance, financial, and relationship management roles with category vendors Manage the entire contract life cycle, which includes partnering with corpo- rate purchasing on the negotiating of terms and conditions from a category perspective, changes and modifications, compliance and enforcement of performance clauses

Source: Beroe Knowledge Base (Industry Expert Input)

KEY ANALYSIS

The VMO works with the procurement team for vendor management governance and assists in the vendor selection and RFX process, also ensuring ensure business and vendor compliance.

Assessment of Procurement Tools 3,4

Procurement tools are leveraged by procurement and vendor management teams during day-to-day procurement processes.

The major trend is the digitalization of such tools, with companies switching to various software to aid their procurement processes3. While many companies still use manual procurement, e-procurement is slowly becoming more popular.

Demand Drivers Causing Industry Shift from Manual to eProcurement 3

• Manual procurement involves repetitive tasks, such as approval of internal procurement documents, generating PRS and POs, and negotiating terms with the suppliers

• If procurement is manual, it is vulnerable to human errors, such as biases, delays, and boftlenecks

• Since the procurement process spans a large pool of procurement team employees, end-users, and suppliers, performing this manually results in lesser transparency and visibility, thus increasing risk

• Manual creation and validation of reports in the procurement process is time-consuming and could be characterized by a lack of standardization in documenting and reporting

Source: Article from cflow

KEY ANALYSIS

To improve the efficiency of the procurement process, most companies with robust procurement processes have been focusing on the potential for automating such processes. E-Procurement enables centralized access to information, improving transparency, and thus, minimizing risks.

While the tools available for e-procurement are diverse and vary based on industry categories, some of the more overarching tools for general procurement practices spanning most industry categories have been described below

Common eProcurement Tools in the Industry 4
Software	Description	Est. Degree of Application in Industry (Beroe Analysis)
Procurement Workflow and Request Wizard	A standard requisition form is filled out to trigger a form review process This determines if the request should involve a bid or if an existing contract can be used or if a new purchase order is needed Source-to-contract management software tool can answer dynamic questions to determine the type of RFX needed A request record can be drafted, which can be edited, revised, and reviewed throughout the contract workflow	MEDIUM
Intelligent Request Generation and Online Bid Advertisement	These software tools assist in creating timely, formal, comprehensive, and accurate request documents They merge request record data fields with pre-approved library templates for quick document generation Bids can be advertised publicly or by invite-only from the organization’s procurement and contract management software platform	MEDIUM
User-Friendly Q&A/Vendor Scoring and Rating	Question-and-answer tools with leading-edge procurement software can be used, whereby vendors submit questions regarding procurement needs before a fixed due date Reputable eProcurement software systems also offer vendor scorecards and rating tools	HIGH
Quick Contract Creation	Within a contract management software system, a new record is created or an existing contract record is synced with the procurement record Contract management AI can also be used by organizations to import contacts into their system	HIGH

Sources: Cobblestone Software Press Release, Beroe Analysis

KEY ANALYSIS

The above-mentioned tools aid in vendor administration, task management, vendor performance analysis, and contract negotiation as well as supplier relationship management. There is a trend toward centralization of procurement functions.

Measuring Spend Transparency in Procurement Process 5

Transparency is very important in the procurement process since it is critical for ensuring there is no duplication of orders, assessing potential risks in the supply chain and determines if all supply chain partners adhere to regulatory, ethical, and sustainable requirements. Thus, it is required for risk mitigation and cost efficiency.

Harvard has provided a matrix for determining the degree of transparency in the supply chain, which can be used by organizations spanning diverse industry categories.

Transparency Assessment Survey

The above matrix can be used for assessing spend transparency in a supply chain. First, suppliers are categorized into the groups indicated by Y-Axis. Then, surveys can be conducted to quantify KPIs belonging to each

category of Y-Axis. Based on the results, suppliers can be plofted in the above matrix to determine the level of transparency in the supply chain.

Source: Harvard Business Review

KEY ANALYSIS

It is likely for most companies that the bulk of their suppliers fall in the “Majority” and “Early Majority” categories, with their facilities are regularly audited for code of conduct as well as standards. The target would be to increase the proportion of suppliers in the “Early Adopters” and “Innovators” categories.

Best Practices for Supplier Engagement 6

STEP 1: Manage Incumbent Suppliers

• Incumbent suppliers who are at the end of the contract period should be engaged with for renewal or termination
• Factors, such as quality of services, the competitiveness of prices, and adherence to code of conduct, can aid in decision-making
• Contracts, which have high value, can be retained regardless to prevent high switching

STEP 2: New Supplier Selection

• While shortlisting new suppliers, their geographical presence, years of experience, company size, service portfolio, competitive pricing, and other parameters are to be considered
• Determine whether a single supplier sourcing is adequate, or if multi-supplier sourcing is needed, due to a range of services or for competitive prices
• For multi-supplier sourcing in some cases, the company’s procurement team can appoint a multi-source agency that handles third-tier suppliers for a variety of functions

STEP 3: Supplier Engagement

• New suppliers, who meet the KPIs used in decision-making, can be engaged, in addition to incumbent suppliers, who can also be given contracts in new geographical locations if required
• A boftom-to-top approach with potential suppliers from existing supply base is ideal

Engagement	Description
Incentivize	Communicate the requisite objectives and standards to suppliers through marketing, informing, lobbying (for sustainable practices), and other means. A soft agreement can be reached with both incumbent and new suppliers.
Induce Competition	Perform a comparative assessment of supplier standards, quality of services, experience, prices offered, and other parameters. Diversifying supplier base improves the competitiveness of prices.
Enforce Targets	Set minimum requirements and milestones for suppliers, including code of conduct, process and product objectives/targets, and degree of collaboration. These factors can be included in the contractual terms.

Sources: Article from Reuters, Beroe Knowledge Base

KEY ANALYSIS

The supplier engagement process consists of terminating or renewing with old suppliers, identifying and engaging new suppliers, as well as contract discussions. Suppliers must be assessed using general KPIs for their commitment, service quality, and competitiveness before decision- making.

Best Practices in Contract Management 7,8

Optimal contract management processes involve planning how to manage contracts, implementing the plans, and continued monitoring of results. These practices vary greatly depending on the category, but some overarching practices are to be followed in general.

Contract Management Plan

Identify the level and type of contract management based on the scale of the project, the required objectives, value of contract, complexity of service, and other factors

Cost Estimators

• Define the payment terms in the contract and the price for goods or services, since inaccurate cost estimates can lead to loss
• The mode of payment, as well as the time of payment (weekly, monthly, etc.), must also be clearly defined in the contract

Supplier Performance Management

• Assess supplier performance using the agreed contractual terms and conditions
• This consists of supplier performance monitoring, evaluating compliance to contract objectives, standards, and sustainability
• Corrective action can be taken in case of breaches, which can also be specified in the contract

Communication and Documentation

• The procurement team must have a clear line of communication with suppliers, as well as transparency up and down the supplier chain
• All correspondences, as well as potential amendments in the contract should be documented

Type of Contract Management	Description
In-House	All functions are undertaken by the company’s procurement or contract management team. This can be done if staff possess adequate experience in handling complex contracts.
Outsourced	A specialist contract management agency can manage contract implementation, in the event of a lack of in-house expertise. The agency works with the procurement team to execute supply agreements, master agreements, statements of work, and NDAs.
Limited Out- sourcing	The contract is mainly managed by internal teams with additional support from external experts, contracted as required. This is an optimal approach for large companies with sufficient in-house expertise, dealing with complex contracts.

Sources: Article from Trackado and from the World Bank

KEY ANALYSIS

A contract manager can be appointed for overseeing contract management, tasked with functions, such as supplier relationship management, risk management, monitoring supplier compliance, and record keeping. There should also be a central repository for all procurement contracts, to allow ease of accessibility.

Contract Cycles and Management 9,10

Contract cycles refer to the life of a contract from request to creation, approval, negotiation, signature, and onboarding (or put-away). All businesses have “contract cycle times” for new customers, renewing existing contracts, or invoicing. It is necessary to reduce the time of the contract cycle, which enables cost efficiency, also free up time from activities of low importance to an increased focus on core business activities.

Factor	Description	Methods to Improve Contract Cycle Times
Complexity of Contract	The contract cycle time increases with the complexity of the contract since some contracts could require input from different departments or outside legal counsel.	Ensure internal policies are in place for swift decision-making with preparedness for all types of contracts.
Involved Parties	The larger the number of parties involved, the greater would be the duration of a contract; for example, a multi-supplier engagement would take longer than a single-supplier engagement.	Companies can try to limit the number of suppliers or use the “Hub and Spoke” model, whereby a single overarching third-party vendor is hired to oversee the engagement of other vendors.
Prior Agreements	In the case of new contracts with incumbent suppliers, changing established timelines and processes could increase contract cycle duration.	Companies can discuss previous agreements with suppliers and try to reach an agreement on the new processes quickly.
Review and Approval	Approvals for contracts vary depending on the contract terms and commitments, which can lengthen the contract cycle.	Clearly outlining the approval requirements and workflow will make the process more efficient. Automated approval workflows, such as e-mail reminders and escalations can be helpful in time efficiency.
Signature and Onboarding	Slow onboarding process for contracts can lengthen the contract life cycle. The administrator needs to scan, OCR, or create a data record for the final paper contract with signatures.	e-signatures can be employed to cut down on the contract process. In addition, an automated contract management system reduces the need for manual activity around signatures. After using auto-reminders and escalations, the contract is automatically placed in a repository. Follow-up tasks ensure timely deliverables and invoicing.

Sources: Articles from Contract365 and Parley Pro

KEY ANALYSIS

To reduce the duration of a contract life cycle, it is necessary to streamline communication among departments for quick information flows. Contracts can be simplified wherever possible; alternatively, automation of most of the processes can be considered for time efficiency.

Conclusion

While procurement strategies are diverse and vary greatly by category, there are some general principles and best practices aimed at the objectives of cost and time efficiency, as well as quality assurance. The main aspects of ensuring a good procurement structure are to hire experienced personnel in key positions, become updated with the latest procurement tools and assess the transparency of spend

throughout the supply chain. In addition, it is necessary to develop a rigorous engagement model with suppliers, using both general and process-relevant KPIs to assess their suitability.

All this leads to the contract management aspect of procurement, where the lifecycle of a contract is monitored using a contract management team.

Industry Speak/Acknowledgement

Expert on Procurement Best Practices

Independent Consultant on Contract Management with 15+ years’ experience

Focus Area

Sourcing Opportunity	Supplier Intelligence	Technology	Substitute Opportunity
Supply Chain Risk	Input Cost	Price Outlook	Sustainability

References

https://kissflow.com/procurement/procurement-best-practices/

https://www.procuredesk.com/building-procurement-team/

https://www.cflowapps.com/procurement-tools/

https://www.cobblestonesoftware.com/blog/the-top-7-procurement-tools-for-2021

https://hbr.org/2019/08/what-supply-chain-transparency-really-means

https://www.reutersevents.com/sustainability/seven-best-practices-sustainable-supplier-engagement

https://www.trackado.com/blog/procurement-contract-management/

https://thedocs.worldbank.org/en/doc/277011537214902995-0290022018/original/ProcurementContractManagementGuidance.pdf

https://www.contracts365.com/blog/contract-cycle-times-and-their-impact-on-the-sales-process

https://parleypro.com/blog/how-to-reduce-your-contract-cycle-time/

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