Increasing the Strategic Value of Purchasing
We all buy things – groceries, clothes, technology, property, and so on.
And, when we make a purchase, we take time to weigh up our decision. How much time we take depends on what we're buying, its cost, and the potential risks of our choice. Deciding what to buy for lunch, for instance, is (usually!) much easier than choosing a car.
Procurement – buying the goods and services that enable your organization to operate – involves bigger decisions and higher risks. Chances are, you're spending someone else's money, so you need to be rigorous, taking all the relevant factors into account: for example, supplier relationships, contracts, and the limits to your purchasing power.
In this article, we look at how procurement management works, why it matters, and the key factors to bear in mind when you're setting up your procurement management processes.
What Is Procurement Management?
Procurement is a systematic approach to buying goods and services. It enables you to coordinate the ordering, receipt, review, and approval of items. When it's managed well, it can also drive down the prices that you pay, and protect your organization from disruption and delays.
However, when you apply it strategically, and align it with your organization's goals, it can have a wider impact, too. For example, the purchasing choices you make as a procurement manager can enable your organization to meet key objectives like cutting costs, reducing its carbon footprint, or improving customer retention.
How to Manage Procurement Effectively
Here are four ways to maximize the impact of strategic procurement management in your organization:
1. Develop a Procurement Policy
Your organization's supply needs are likely always changing, as the business grows or new projects are introduced, for example. As a result, it's difficult to define one process or set of rules that will work every time.
But, if you have a comprehensive policy that clearly defines your purchasing principles, you can use it as a guide for successful, responsible procurement in a wide range of situations.
A good procurement policy needs to cover the following points:
- Best practices for purchasing.
- The business objectives of the procurement function.
- How the procurement objectives align with your organization's mission and vision.
- Quality controls.
- What people should, and should not, buy.
- Who does what at each stage of the procurement process.
2. Use Technology to Manage Purchasing Information
Good information management is key to getting good value for money. If you don't know where money is spent, you can't manage costs effectively.
Technology gives you the power to simplify and automate your procurement procedures, and to create templates and user guides. It can also give you up-to-date (and real-time) cost information, fast access to supplier contracts and arrangements, and the ability to source goods and services online.
All of this can make the procurement process more transparent, more efficient, and easier to administer. You can compile cost reports quickly, for example, and share them with stakeholders when needed.
However, there's a wide range of procurement software on the market, so define your specific needs first, and shop around to find the best solution.
3. Manage Supplier Relationships
Get to know your suppliers as well as you know your clients or customers. After all, both are critical to your organization's success. And suppliers who have a vested interest in your success will more likely provide high-quality services and offer cost-saving deals.
It's crucial to "start off on the right foot" with your suppliers. This means protecting confidential information, and training your account managers in how to nurture good relationships. Regular contact with suppliers can reduce the risk of delays or drops in quality, but you might want to offer incentives for improved performance, too.
The most engaged and supportive suppliers can also help you to find innovative ways to meet your needs, so encourage them to collaborate and share information, and be clear that you are open to new ideas.
For more information on supplier management, and a framework for assessing each supplier's importance to your organization, read our article, Supplier Relationship Management.
4. Control Costs Proactively
One of the primary roles of procurement is to save money for your business. But procurement itself incurs costs, so it's important to be cost-efficient and to keep overheads to a minimum.
So, check your processes often, and seek out workflow improvements. Regularly review the goods and services that you buy and the suppliers that you use. And keep a watchful eye on what your clients and competitors are doing – this will help you to gauge how "current" your processes are.
Regular procurement reviews will also ensure that you can respond quickly to changing objectives in your organization.
Be sure that your bidding process is effective and streamlined, and that it's appropriate for the types of goods or services that you're buying (sourcing office supplies, for example, is very different from purchasing the services of a specialized consultant).
Pay close attention to the terms of your supplier contracts, and put any verbal agreements in writing. This can protect you if there's a dispute. And look for opportunities to consolidate your supplier base, as this can reduce administration costs and boost your purchasing power.
Finally, invest in recruiting, developing, and retaining a strong procurement team. This will help to minimize potentially costly errors, and to ensure that decisons are made in line with your policy.
Procurement Management Plan Checklist
When you set up a new procurement management plan, or adapt an existing one, it's important to cover all the bases.
You can use the seven-stage checklist below to make sure that you don't miss key steps, and to help you to schedule each activity. Pick and choose the elements you need, depending on the scale of procurement that you're engaged in.
Stage One: Identify Your Needs
- Define the materials required.
- Evaluate which products or services you'll buy in, and those you'll source in-house (you may want to review this later in the process.)
- Identify potential alternate and/or substitute products and services.
- Identify the maximum lead times you need between ordering and delivery.
- Identify the batch sizes required. (You may get discounts for bulk orders, but do you have enough storage capacity?)
- Identify payment terms that you are prepared and able to meet.
Stage Two: Plan the Procedure
- Create a timeline for researching and coordinating the procurement process.
- Coordinate procurement needs with other parts of the project or business.
- Identify constraints, restrictions and assumptions that may impact the procurement plan.
- Determine who has authority for what, and identify processes to follow if you need to change the plan.
- Write the Request for Proposal (RFP) and other specification documents.
Stage Three: Research Suppliers
- Identify potential suppliers.
- Investigate contract possibilities.
- Assess the external environment to determine how it affects your procurement plan.
- Determine your organization's purchasing power, and consider ways to increase the relative strength of your position.
- Recommend changes to the plan to address any risks that you've identified.
Stage Four: Source Suppliers
- Develop terms, conditions and other provisions for the bidding process.
- Pre-qualify suppliers. Determine which ones potentially have the capacity and ability to meet your needs.
- Begin the bidding process. Document all inquiries, and provide more information to suppliers as required.
- Negotiate terms with suppliers using the principles of your strategic procurement process.
- Document the process you use and the decision you make, in case there's a dispute later.
Stage Five: Analyze Suppliers
- Review all official bids. Use decision-making frameworks like Decision Matrix Analysis and Paired Comparison Analysis to analyze the proposals you've received.
- Review your decision to outsource supply. Could this item or service be sourced more cost-effectively in-house? (Be cautious – things are often more complex and difficult to provide than you expect!)
- Consult with stakeholders, and recommend the supplier you want.
Stage Six: Award the Contract
- Contact the successful supplier, and inform stakeholders of the decision.
- Contact unsuccessful bidders, and debrief as appropriate.
- Establish a process with the chosen supplier to develop and maintain the contract or statement of work.
- Clarify expectations, and develop performance monitoring procedures. Ensure that billing and scheduling expectations are clear and acceptable.
Stage Seven: Manage the Contract
- Determine procurement metrics to manage and evaluate the contract and the supplier.
- Determine how you'll manage requests for changes.
- Document how you'll handle performance disputes. (Use After Action Reviews to record what happened, and the lessons learned.)
- Maintain a supplier file to help colleagues evaluate suppliers in the future.
The level of detail you need in your procurement management plan depends on the complexity of your requirements. For simple procurements, such as replacing the carpets in a small office, getting quotes from three suppliers might be an adequate process. But an auto manufacturer would use a far more comprehensive procurement management plan for its relationships with a windshield supplier.
When you're deciding on the level of detail in your plan, consider the size of the supply contract, the duration of the supply relationship, the risk to your organization of supply problems, and the cost and impact of changing your supplier.
Purchasing goods and services is a basic business operation, and it's not always seen as a strategic process. But, by looking at procurement management from a strategic perspective, you can gain significant advantages and cost savings, and maximize the value that you receive from suppliers.
To manage procurement effectively, you can develop a procurement policy, use technology to manage information, manage your supplier relationships, and proactively control costs. This can increase the overall success of your projects and operations.