Procurement as a process is a bit more complicated than just buying office supplies as it may involve many stakeholders. Procurement teams must carefully balance the needs of the departments they serve with budget constraints. They must also manage external vendor relationships and ensure contracts comply with requirements and regulations.
In this article, we will thoroughly explore this critical component of corporate strategy. From what the process entails, the many ways to approach and adopt it, to related business concepts, you will learn how to leverage and improve these processes to achieve your business goals.
What is procurement management, and why is it so important?
Procurement management is the process of identifying, procuring, and managing the goods, services, and suppliers that are essential to an organization's operations. It involves acquiring quality goods and services from selected vendors within a set budget, on or before the deadline. This process requires vendor sourcing, requisitioning, ordering, an inspection of orders, and reconciliation.
The procurement process can be complex, given the number of steps and stakeholders involved. This is why effective management is so important. Efficient procurement management helps organizations control costs and successfully complete their projects, leading to more productive and profitable operations. In addition, procurement management helps a business obtain the products and services it needs and from the right suppliers to meet sales forecasts or production plans.
Types of Procurement
Procurement can be broadly divided into two main types:
Direct procurement refers to the purchase of inputs (such as raw materials) that a firm needs to produce its final product. Input costs and procurement efficiencies directly impact business profitability and performance. So when there are obstacles in the direct procurement process, it affects the company's ability to produce its products.
Indirect procurement refers to the procurement of services or inputs that are not directly used in producing a company's products but are essential to their day-to-day operations. This may include providing office or maintenance services for equipment used for manufacturing.
Automated procurement vs. manual procurement
Manual procurement management is fraught with high processing costs, missing or misplaced documents, slow approval cycles, missed discounts, and uncontrollable costs. In addition, supplier relationships take a hit due to late payments, poor vendor management, inefficient dispute resolution, and more.
On the other hand, digitizing procurement management can transform a painstakingly slow process into an internationally competitive purchasing strategy. For example, you can benefit from automated workflows across all your procurement activities. This means performing smarter procedures with purchase requisitions, purchase orders, and invoices, making them easy to track as they are automatically sent to appropriate reviewers and authorized quickly and accurately.
Furthermore, you can easily ensure your processes are legal and compliant and benefit from co-working spaces to collaborate with your suppliers efficiently. In addition, with high-level spending views across all supplier relationships, procurement management teams can better control their spending and stay on budget. For instance, if the company's manufacturing process is delayed due to shipping issues with overseas vendors, the procurement officer may delay the start of other related vendor contracts to minimize overall costs.
Functions of procurement management
While there are many functions in procurement, here are the top five functions that need to be automated to save time, manual labor, and costs.
1. Purchase requisition
A purchase requisition is a document submitted by internal users/customers who request assistance from the procurement team to meet their needs. It consists of the critical information needed to get the right goods, services, or jobs. An automated purchase requisition offer requesters a guided requisitioning experience. From listing preferences or frequent purchases to suggesting the best vendors, these policies embed purchasing policies in the process and guide applicants the right way.
Since policies are enforced in real-time and missing or misleading information in purchase requests is immediately apparent, there is no room for error or inaccuracy. ScaleOcean Procurement, for example, offers electronic data retrieval, routing, and approval that can help organizations maintain a consistent demand experience over time.
2. Purchase order
A purchase order (PO) is a document that specifies the goods or services and the quantities of each to be purchased and shipped. Each PO includes the tracking number for the purchase, a description of the item ordered, and the relevant quantity.
With a procurement management system, there is no need for manual paper-based purchase orders or data re-entry. Instead, purchase requisitions are automatically converted to as many purchase orders as needed (depending on the number of line items).
Since procurement software offers full transparency into the process, stakeholders can easily find out where the PO is in the purchase order approval chain at any given point in time. The procurement management system will ensure that purchase orders include every important detail that stakeholders need to quickly make effective decisions and process POs.
3. Invoice approval
Invoice approval is the process of reviewing and approving vendor invoices before paying them. This process can be made more efficient and more accurate with the help of procurement automation.
Whenever a vendor sends an invoice, the procurement management system will process it and cross-check it with available information, such as supplier name, PO limit, and contract payments.
In case of discrepancy, the invoice approval system will prevent the invoice from being paid and decide what to do based on predefined rules. However, the procurement management system will automatically forward the invoice to the desired human operator for approval and final payment if everything is in order.
4. Vendor management
Vendor management is the process of finding suppliers, monitoring and tracking vendor performance, obtaining quotes, negotiating contracts and timelines, and making payments. This process is often manual, iterative, and lengthy.
Fortunately, various tasks can be automated with a procurement management system, including background checks, supplier RFQ reviews, and follow-up in case of missing information or documents. Moreover, advanced procurement software can improve collaboration by allowing vendors to submit quotations through an online portal so that requesters can review, compare, and select in no time.
5. Contract management
Contract management includes all the processes involved in managing vendor agreements, from contract creation to execution. The goal is to ensure vendors meet their requirements while reducing contractual or regulatory risk to the business.
With ScaleOcean Procurement, you can review contracts, compare them with predefined templates, and point out fluctuations in terms and conditions. It allows you to monitor contracts from time to time for non-compliance, termination of contracts, and other issues that could lead to disputes if left unanswered.
7 ways to improve efficiency in your procurement management
While procurement plans will vary according to business project specifications and vendor relationships, most can follow seven basic steps:
1. Define roles and responsibilities
Before developing a plan, the first step is to define all parties involved in the procurement management process, including their roles and responsibilities. This may include internal stakeholders, individual vendors, and members of the procurement team responsible for the project.
Alternatively, you can choose to outsource your procurement functions. This can increase the productivity and value of internal staff by handing over the tasks that could be done faster or more effectively by a third party. According to Deloitte, more than a quarter of chief procurement officers (CPOs) want to increase outsourcing for operational purchasing, and 12 percent plan to do so for strategic sourcing and category management. In addition, enlisting the help of a consultant can result in a long-term ROI for the company as these experts offer an impartial but knowledgeable perspective on the changes that must be made to increase profits.
2. Leverage automation
Outdated procurement impacts employee productivity and organizational profits. Meanwhile, an automated procurement system gives your procurement team total control (and visibility into) the purchase order cycle and the ability to quickly convert employee requests into purchase orders.
You can benefit from paperless approvals, meaning all documents related to the procurement process are digitally validated for maximum speed and efficiency. In addition, you can also communicate with your vendors in real-time using the procurement system, allowing you to deal with issues that could potentially cause bottlenecks in the process.
3. Establish clear expectations
Miscommunication and lack of transparency between buyers and suppliers can be a huge waste of time. Be sure to set clear expectations and conduct regular performance reviews to ensure both parties are working towards a common goal. This can prevent production and delivery delays and ensure that products and services are delivered to the required standards.
4. Identify and mitigate risk
Every contractual relationship comes with some level of risk, be it financial, regulatory, or otherwise. So, preparation is vital. By identifying possible risks and creating a mitigation plan in advance — such as securing a backup supplier or using a vendor with multiple locations worldwide — the procurement team is better positioned to establish favorable contract terms and minimize subsequent disputes.
5. Centralize all purchases
Implementing centralized procurement can improve procurement performance. One central department is responsible for overseeing all purchasing activities within the organization and at all locations.
There are several advantages to having centralized procurement. Among these advantages are increased purchasing volumes, use of advanced technology through automation, improved process organization, and enhanced buyer-supplier relationships.
6. Set an approval workflow
All stakeholders must sign all requests and submissions of contracts, revisions, and final approvals. Approval workflows ensure these are completed in a timely, consistent and lawful manner. With ScaleOcean, you can easily set multiple approval levels and specify users responsible for approval on each level.
7. Educate your workforce
Curbing overspending and encouraging buyers to shop with preferred suppliers is best accomplished by educating the workforce, in addition to using automation. When employees understand the purpose behind the procurement process and how to navigate it easily, compliance will naturally improve. As a result, the procurement team will spend less time managing conflicts or pursuing contracts, suppliers, and invoices and, instead, focus on value-adding activities.
Now that you have learned what procurement covers, its types, and how to improve procurement functions, you are better prepared for a smoother, more efficient purchasing process.
With the growing trend of digitization, there are more ways to streamline procurement. Not only can you develop new techniques to gain access to all the goods and services needed to run your business, but you can also do it in a more precise and cost-effective way. Procurement software ends up being an excellent solution for automating manual processes, reducing time spent, and saving costs.