Gone are the days when procurement functions were limited to simple tactical activity and the negotiation of low-cost contracts. Nowadays, supply chain efficiency
is all about investing in the right kind of procurement process that allows businesses to maintain cost efficiency.
What was earlier considered a simple business add-on service is now a part of strategic conversations in order for the supply chain to yield the highest returns.
Before moving onto understanding what constitutes the successful management of procurement and its subsequent processes, let’s first talk about what procurement is all about in the first place.
What is Procurement?
When businesses must source goods and services from a third party, such as external vendors or suppliers, it is referred to as procurement. The act of procurement itself should be done in a manner such that the goods and sources that have been bought are of superior quality while also keeping in mind that the costs incurred are reasonable.
Furthermore, procurement management dictates that organizations find vendors that are ideal for their company and its specific needs. As such, it is incumbent upon procurement managers to strike deals with the best of suppliers at the best price so as to boost company profits.
Since procurement is essential for the proper functioning and growth of a business as it is something many companies from a variety of industry niches require in order to sustain themselves, it is a crucial part of a business’s corporate strategy.
What is a Procurement Process?
Now that we know what procurement is, let’s move on to expounding on the procurement process at large.
In the simplest of terms, the procurement process involves understanding, identifying, and consequently following a series of steps specific to a company, in order to acquire goods and services to fulfil business objectives and goals.
Customarily, the procurement process starts off when employees within a company make a purchase request. Following this, procurement officers will begin to identify suitable vendors, start negotiations for better pricing, make approvals for invoices -- the procedure finally ending with the company acquiring the actual product and/or service.
When companies set up a procurement process, several factors come into play, which includes and are not limited to an organization’s business model, the size of a company, and the geographical location of a business.
It also depends on factors like company structure, how an organization manages its budgeting and spending, and lastly on whether the procurement duties are handled by procurement officers or other designated employees.
The 3 Ps’ of Procurement
As mentioned earlier, procurement processes are specific to a company’s requirements. Nevertheless, there are a few procurement functions that businesses have in common, which essentially ensures that your company’s procurement management is one that serves the organization well. These functions also make room for key aspects of the company, such as its growth, increase of capital, and so forth.
Listed below are the 3 P’s of procurement that businesses need to keep in mind before setting up a procurement process.
Ease of procurement and a long-lasting relationship with your vendors requires companies to follow a specific set of rules that allows them to successfully manage procurement functions.
These include pursuing certain guidelines while ordering, reviewing, acquiring, and recompensing for the goods and services needed by the company. With the complexity of each purchase, the steps, and subsequent checkpoints within the process will naturally increase.
Involving the right people to complete procurement functions is critical to its success. As such, businesses need to keep stakeholders in the loop while assigning specific roles for the completion of a procurement cycle.
Since stakeholders are responsible for initiation as well as the authorization of procurement functions at every stage of the cycle, it is incumbent to involve people that add value to a purchase. Moreover, organizations must keep in mind that the risks attached to certain purchases would be reduced by gaining the approval of key stakeholders as well.
Without proper documentation, the filing, and the organization of all the paperwork involved, companies would be wasting a lot of time, effort, and labor to sort things out.
As such, all files related to the procurement process workflow need to be collected and stored in a manner wherein referencing said documents, especially for auditing reasons, would become easy and seamless.
Procurement Process Workflow
To ensure the effective functioning and management of procurement functions from initiation to the approval stage, businesses need to establish a procurement process workflow that is not only ethical, cost-effective, and transparent but also well-organized and methodical in its application.
Despite the fact that every organization has its own customized and authorized system when it comes to procurement and purchase orders
as a whole, a typical flowchart (as shown below) that constitutes the basic flow of a process is crucial to understanding the steps to set one up yourself.
Steps Involved in Procurement Process Workflow
In order to ensure that a business’s procurement strategy is effective, useful, and ultimately something that establishes a company’s hold in the market, organizations must ensure that certain steps are put in place.
Beginning from identifying what kind of goods and services a business needs, its quality, and price to maintaining a record of all the mandatory documents and files, a constructive and functional procurement process workflow is the answer to all these requirements. Now let’s look at the steps in detail.
Step 1 - Need Recognition
Before companies start the process of procuring goods and services, they must first identify and recognize the need for specific products in all aspects of their business.
As the first stage of the procurement cycle, this is when organizations must strategize and consequently come up with an effective plan regarding what goods and services they should acquire from an external supplier.
Business units within a company will also have to draw up a plan of how much they are willing to pay for products, at what date and time they would require said products, and so forth.
Another point to keep in mind at this step of the cycle is to ensure that all key stakeholders are informed of the goings-on so as to avoid conflicts at a later stage of the process.
Step 2 - Purchase Requisition
Once an employee within a company submits a procurement request or customers seek the aid of the marketing team to acquire a specific product, a purchase requisition process is set in place.
As such, purchase requisitions are simply documents (digitized ones in this day and age) that allow companies to gather data on what sort of products the organization would need to procure, when these goods and services need to be acquired, how many of the products the company would need (demand and supply) and so on.
Step 3 - Requisition Review
The purchasing process officially begins at this step of the procurement cycle.
It is only after a purchase requisition is verified, approved, and reviewed for budget reasons by either the procurement managers, financial controllers, or individuals responsible for procurement within an organization that a purchase order can be made.
Essentially, at this stage, the procurement team combs through a requisition package and verifies whether there is a legitimate need for the goods or service. Employees also take measures to understand and evaluate the specifications of the product, such as the numbers required, the technicalities of said product, while also ensuring whether the company has sufficient funds to make the purchase.
The procurement team must also take the necessary precautions to ensure that all the departments involved in the purchase are informed of the goings-on so that no errors that may prove to be costly later on are made.
Step 4 - Solicitation Process
Soon after a purchase requisition is approved by the procurement team and the subsequent purchase order has been placed, the company sets out to create a specific and detailed procurement plan with an interrelated solicitation process.
The team will determine the direction of the procurement plan based on the complexity of the requirement.
Once the procurement personnel has established the budget they would need to make the purchase, they will go on to place Requests For Quotation (RFQ) to a number of external suppliers.
While some companies have an authorized supplier catalog that comprises a list of vendors who have already passed the selection criteria, others still need to determine which vendors they can solicit for their current demand by comparing the bids submitted by suppliers.
Step 5 - Evaluation and Selection
With the solicitation process complete, financial controllers alongside the evaluation committee can move on to reviewing and evaluating the quotations submitted by vendors. It is at this stage of the procurement workflow that businesses are able to decide on which vendor is best suited for their current demand.
Businesses also evaluate other aspects of a supplier’s worth in order to determine their compatibility with the company.
If the purchase order is simply a repeat of previous orders, organizations would already have a supplier list handy. As such, businesses would not have to worry about whether the supply is of premium quality. Companies would also be saving much time since they do not have to vet the suppliers.
But if a purchase order is fairly new, with new items on the list, businesses would have to invest time and effort in investigating suppliers to conclude whether the supplier can be banked on for their quality and pricing and whether their reputation and speed of service can be relied upon.
Other traits companies look for in a supplier include accountability, ease of communication, capabilities of production, ethicality, and how they prioritize the building and maintaining of relationships.
Step 6 - Negotiating the Contract and Finalizing the Price and Terms
In this step of the cycle, financial controllers and procurement teams zero in on their choice of supplier for the existing requirement. Typically, companies chose a vendor based on the quotations submitted by at least three of them.
Once the quote has been thoroughly examined on the grounds of cost-effectiveness, product quality, speed of delivery, and so forth, businesses take the final call.
If the company has opened a bidding process in order to find a supplier, the vendor will be chosen according to the terms and specifications that were previously set for the bid. This selection process is open and transparent in nature in order for companies to get vendors who supply products that are of the highest quality with the best possible price.
Once businesses have finalized and negotiated the terms of the contracts, taking into account timelines for delivery and the like, companies can go ahead and sign the contract. Soon after which a copy of the purchase order is provided to the supplier.
After a vendor accepts and acknowledges a purchase order, they immediately activate a legally binding contract
with their buyers.
Step 7 - Order Management
Order management essentially takes place when a supplier delivers the required goods and services within the specified timeline agreed upon by both parties.
Once the products are in the hands of the buyer, the company does a thorough inspection of the order and informs the supplier of any discrepancies they might come across in the process.
While doing so, businesses ensure that they have the purchase order, packaging slips, and supplier invoices (the three-way matching system) with them so as to make the order management an easy, simple, and seamless process.
Step 8 - Invoice Approval and Disputes
Once companies have accepted the order and the fact that its subsequent examination has satisfied the buyer, businesses will then move on to approving the invoice and reviewing documents related to the purchase.
Soon after an enterprise is satisfied with the specifications of the purchase and content with the receipt of items and payment request invoices, the documents are reviewed and compared for discrepancies.
If the company is satisfied with the fact that there are no inconsistencies, the invoice is approved, and the payment is made according to pre-existing terms.
Step 9 - Record-Keeping and Review
In order to simplify things for taxation, the auditing process, as well as bookkeeping, businesses maintain a complete record of all the relevant documents. Such is the case after the payment process of a purchase order is complete.
These documents would include purchase requests, order receipts, invoices that were previously approved that are all stored in a centralized location.
Since the maintenance of records is a continuous function, these documents are constantly reviewed in order to smoothen disputes that may arise between a company and its supplier.
A thorough evaluation and review of records may also prevent businesses and vendors from making the same mistakes, thereby allowing them to be more efficient in the process.
The use of accounting automation
is a great way to refine the process and collect and store crucial financial information.
Difference Between Procurement, Purchasing, & Sourcing
Although people are in the habit of using the terms procurement, purchasing and sourcing reciprocally, each of these functions has a specific yet unique role in the supply chain management process. Let’s look at the differences between each of these roles to understand their significance in the supply chain cycle.
As previously established, there are multiple ways in which enterprises can procure goods and services. These approaches, also termed procurement models, are key to running your business optimally, transparently, and most importantly, in a cost-effective manner.
Moreover, depending on the strategy or approach you chose to employ, it could contribute significantly to increasing your business’s bottom line while also ensuring that it gives you an edge over your competition.
As such, it is incumbent on companies to understand how all procurement models work in order to deploy what works best for your business.
Local Procurement Model
As per the ‘local’ procurement model, all business activity, the making of key decisions, and control are allotted to authorities at the departmental level of an organization. Consequently, this model is completely autonomous and local in nature.
This means that regional departments, as well as divisions, have full control over procurement-related decisions and functions. One of the main reasons for the existence of this model is the understanding that it is typically the local management that has a complete purview of the local department’s needs, specifications, and demands.
This particular procurement model makes the procurement process agile, simple, and easy since there is a lesser number of bureaucratic roles attached to the supply chain cycle. As a result, companies would be able to prevent maverick spending since a central body is not making decisions for the organization as a whole.
Central Procurement Model
As the name suggests, with the central procurement model, all procurement-related activity and crucial decisions are centralized. The central management has complete control over decisions regarding procurement activities at the local level as well.
With this kind of procurement model in place, key aspects of a business such as the general budget, and expenditure of the company are kept in mind while making purchase-related decisions. As a consequence, all purchase-based negotiations are made by the workforce that is most experienced in this field.
An added bonus of working around a central procurement model is the fact that since procurements are made in bulk, it is cost-effective. There are greater chances of receiving goods and services at a cheaper rate as a result.
The downside to this model is the risk of not being able to meet the specific demands of local bodies when it comes to purchasing since local departments typically have requirements unique to them. As such, the multiple layers of bureaucracy in the procurement cycle become more of a problem rather than a boon.
Hybrid Procurement Model
Also known as the ‘federal model’, the hybrid procurement model is a combination of the local and centralized ways of procuring goods and services. While some functions of procurement are controlled in a local manner, other functions rely on centralized control. Generally, the centre gives autonomy to local bodies in certain matters of supply chain management in order for businesses to run as smoothly as possible.
Types of Procurement
Direct, indirect, and service procurement provide different functions as part of the procurement process.
Because each of these subsidiaries of the procurement cycle has unique approaches and systems afforded to them, business executives, especially stakeholders, need to understand the similarities and differences between the three in order to aid organizations in managing an efficient and cost-effective supply chain cycle.
Direct procurement involves acquiring goods and/or services for the purposes of production.
Typically purchased in bulk, these products are obtained from multiple vendors keeping in mind that the goods and/or services have been bought at the best possible price. Businesses must also ensure that the quality, durability, and reliability of the product are exceptional at the time of purchase.
Direct procurement of goods and services could include raw materials, machinery, resale items, and so forth.
Often, these purchases are a regular and continuous aspect of company processes since it aids organizations in making an external profit and increases revenue growth in a steady and uninterrupted manner. This form of procurement also allows businesses to establish a long-lasting and trusting relationship with their respective vendors.
Indirect procurement is the act of sourcing and purchasing materials, goods, or services for internal use only. It is what companies require to keep their day-to-day operations running. As such, indirect procurement doesn’t necessarily add to an organization’s bottom line.
Items such as office supplies, repairing equipment, facility management equipment, and other utilities, including travel, come under this type of procurement.
Indirect procurement may also include perishable as well as non-perishable goods and services.
Since the goods acquired by companies in indirect procurement are, as listed above, the relationship they have with vendors is one that is transactional and short-lived in nature.
The last type of procurement function, known as services procurement, is one where service providers arrange people-based services for enterprises.
Suppliers are responsible for not only managing the contingent workforce but also providing consulting services for businesses as well. These include software subscriptions and other professional services such as technical consulting, maintenance services, and so on.
Services procurement is limited to external services as well third-party staff. Typically, this type of procurement function is a contractual relationship between a supplier and a subsequent company seeking its service. Services procurement can also be outsourced on a per-project basis.
Importance of Demand Planning & Demand Forecasting
Although the phrases ‘demand planning’ and ‘demand forecasting’ are typically used synonymously, they do not hold the same meaning or functions in the supply chain management process. Granted, the two are linked in the way they aid the procurement process; nevertheless, one (demand forecasting) is essentially a crucial function of the other (demand planning).
Meeting a customer’s expectations or demands before the fact is something that businesses go above and beyond to achieve, as customer satisfaction would equal customer loyalty, company growth, greater sales, etc.
This is where a process such as demand planning allows businesses to create an operational strategy
that they can execute across the supply chain cycle.
With an efficient and effective demand planning process in place, companies can predict or rather forecast the demand for a specific product in order to ensure that said goods and services are delivered to the customer on time.
In the course of demand planning, enterprises must ensure that the inventory levels are satisfactory to the point that they could be made available to customers as and when they need it. Companies should also take steps to make sure that there isn’t a surplus or wastage of existing products as well.
Lastly, organizations should keep in mind that a number of defining factors such as labor force charges, shifts in the economy, natural disasters, and global crises can impact demand.
Now let’s look at the many ways in which demand planning can aid the procurement process.
Crucial to Businesses
If done right, demand planning allows company leaders to stay abreast of shifts in the market, make decisions based on insight, data and research, all the while ensuring that they are mindful of the needs of their customers.
Proper Supply Chain Management
- Because demand planning is a function that ensures that all planning is done in advance, it enables organizations to run every one of their operations with respect to the supply chain, in a seamless manner.
- It allows businesses to sustain a higher rate of production.
- Since stakeholders, CEOs, and key industry leaders are well-informed of the goings-on and are ever-ready should a crisis take over, the entire process will most likely run in a smooth fashion.
- Because the negotiation of terms and costs will happen beforehand, there is a greater chance of transparency and reliability existing between suppliers and buyers.
Proper Cash Flow Management
- Since organizations need to predict demand patterns as part of the demand planning process, the management of cash flow is improved to a great degree.
- Companies would not have to worry about getting rid of surplus stock or an unsold inventory gathering dust.
- If dedicated teams are constantly on the lookout for a cash slump, businesses can plan ahead on how to regain credit.
Proper Production and Labour Management
Since the demand planning process requires businesses to make all sorts of arrangements in advance, this also includes the recruitment of an adequate workforce and labor. As such, companies would never fall short of staff, especially in times of emergency.
As discussed earlier, demand forecasting is the process of predicting the demand for specific products or even predicting the sales of certain goods and services. With an effective, efficient, and accurate demand forecasting process in place, businesses can aid demand planning functions and, subsequently, the supply chain management process.
Why is demand forecasting important for businesses? Since demand forecasting is a crucial function of demand planning, the process works best when it is proactive in nature. The problem arises only when demand forecasting becomes reactive to changes in demand.
As such, it is incumbent upon businesses to forecast demand accurately, and efficiently predict the rise and fall of demand in the market so as to adjust the procurement process and subsequently the supply chain cycle accordingly.
This way, companies can make full use of their capital as well as other resources available to them. In order to properly forecast demand, organizations must keep the following points in mind.
- Being mindful of historic demand-related data and all the research attached to it.
- Awareness of existing market demands, the market environment, and key elements that could impact it.
- Factors such as natural disasters, global crises, current events, political issues could influence forecast and demand.
- The efficient gathering of data and accurate analysis of acquired information is crucial to understanding demand forecasts.
- Companies must begin to rely on automated processes to become precise and cost-effective.
One of the essential foundations of successful supply chain management is being able to negotiate the best deal for a purchase order. Procurement professionals must be competent and experienced enough to contract an agreement that is amenable to both parties.
While preparation is key to negotiation, procurement teams must also ensure that they develop an appropriate strategy and corresponding techniques to arrive at the best possible price for products, with the desired quantity and within a time frame that is best-suited to both supplier and buyer.
Now let’s look at some of the ideal negotiation strategies procurement professionals can employ in order to aid the supply chain cycle.
- Preparation: As established earlier, preparation is essential to the success of the negotiation of terms and contracts. Procurement officers must also keep in mind that a thorough knowledge of the product and its market, & important information regarding the supplier’s company and its executives is incumbent to make the negotiation a success.
- Agenda: In order to save much time and effort for both parties, establishing an agenda before a meeting could yield positive results and ensure that the vendor and buyer are thinking along the same lines.
- Look into the company’s history: If you want to prepare yourself well before negotiation takes place, knowing everything about the history of a vendor’s establishment will allow you to anticipate their negotiation tactics. Furthermore, this technique ensures that even if you choose to make compromises, it would not hurt your business if a vendor’s reputation is found to be exceptional.
- Choose team members wisely: A good rapport, communication, and understanding between the members of a team are crucial to pulling off an advantageous negotiation of terms. As such, discussing the strategy, goal, and plan, ahead of time will greatly aid team members in being prepared and boosting their confidence levels.
- People make an organization: If you want your negotiation to lead to an understanding between both parties, the members within your team must rely on establishing a good rapport with people on the other team. Things would then become naturally favourable to both parties.
- Summarise clearly: The ideal way to end negotiation meetings is to summarise everything that was agreed upon by both teams. This way, there is little room for confusion or error moving forward.
Common Negotiation Mistakes
- Not preparing well in advance: Without adequate preparation and planning, the procurement team will only end up lengthening the negotiation process. It is important for businesses to understand their position (what it absolutely needs, what it can do without, ideal alternatives, and so on) in order to come to an agreement that is favourable to both parties.
- Aggression: Before beginning the negotiating process, procurement professionals must keep in mind not to enter a ‘win-or-lose zone' since such a thought process would only lead to aggression and a negative outlook towards the other party. Instead, negotiators could try and understand the situation from the vendor’s perspective, be transparent yet cordial, and arrive at a solution with that in mind.
- Not focussing on Details: Forming an agreement based on superficial or inadequate information would result in the establishment of terms that are not exactly ideal for either party. As such, businesses should focus on combing through all the necessary details so as to avoid errors and loopholes.
- Letting emotions get in the way: Recent studies prove that negotiations that begin with confrontation or anger lead to negative outcomes. These kinds of emotions would affect both sides in the long run as the other team would also begin to develop the same emotions if they are not curbed on time. As such, reining in the emotions of all team members before starting negotiations would be ideal.
- Ethics: Poor ethics such as lying, withholding information, and deception will only discredit the credibility and reputation of a negotiator. Furthermore, such tactics could even harm your negotiations with future suppliers should your reputation precede you.
Negotiation Tips for Small and Medium Enterprises (SMEs)
- Research is key: Conducting the necessary due diligence on vendors will definitely aid both small and medium scale enterprises in carrying out a successful negotiation process.
- Plan ahead about what is non-negotiable for you: By listing out all the terms that are not amenable to the company, negotiators could avoid putting the rest of the team in an uncomfortable position. As such, informing them of the conditions in advance would save the company a lot of trouble since negotiators would not have to be forced into agreeing to something that is unfavourable.
- Don’t talk about the price: One of the tactics businesses employ while drawing up the terms of the contract is to let the suppliers quote the price first so that you know what you’re getting into. So that once you receive a quotation, you have time to plan and strategize before you begin negotiating.
- Put it in writing: Small and medium scale enterprises have much to lose in terms of costs incurred, time, and effort involved, if they do not resort to drawing up an official contract of all the terms and conditions.
5 Steps to Improve Your Procurement Process
In this ever-evolving, competitive and aggressive environment, businesses have to be on top of their game if they want to continue increasing their revenue and grow. An efficient procurement process, therefore, with updated functions and systems that can keep up with this increasingly demanding digitized world is the need of the hour.
As such, here’s a look at the 5 ways you can improve your company’s procurement process.
Making Use of the Latest Automated Processes
If you haven’t already invested in a purchasing system that automates tasks that essentially improves the cost-effectiveness and productivity of your procurement process, this is the time to do so. With such software, you can make full use of a paperless process system wherein all documents are approved digitally, thereby making tasks simple, quick, and competent.
Updated Vendor Management
With an automated vendor management system in place, businesses need no longer worry about accessing all the supplier-related documents such as purchase orders, invoices, and price quotations at one go. Through the aid of an e-procurement solution, companies can access these documents from one centralized location.
Vendor management software also allows businesses to screen and onboard suppliers who they’re working with, for the first time. You can even monitor the performance of your procurement process and get rid of problems pertaining to payment or the receipt of goods and services.
Keeping Tabs on Company Spending
With the introduction of a digitized tool, businesses don’t have to depend on exhaustive spreadsheets or dispatching information across numerous systems when it comes to budgeting. Instead, companies can set up an online procurement management system that lets employees set limits to the budget, oversee spending and lay restrictions wherever necessary.
Such software typically comes with features that even allow businesses to review their spending on the procurement of goods and services over a period of time by accessing automated reports.
By upgrading your business’s compliance functions with the right kind of software, you can be reassured of the fact that your products are being sourced through processes that are accurate, efficient, and free of errors. Consequently, with this kind of software, your organization can maintain consistency across all integrated platforms.
A legitimate and dependable procurement software system can also assemble, arrange and manage all relevant data onto a dashboard that is easy to comprehend and follow.
As such, employees can get a complete idea of the purchasing performance, keep up with deadlines, maintain quality standards and ensure that all policy and legal compliance standards are being adhered to as well.
Better Reporting Features
With an automated procurement management system, employees can gain access to a plethora of information and relevant data that is able to accurately review, analyze and compare the performance of suppliers. Such tools can also identify areas that may pose a risk to the procurement process and even determine the areas that require improvement.
5 Procurement Processes That Need to be Digitized
In an effort to make the procurement process even more productive, dynamic and powerful, a number of its functions and subfunctions should be digitized.
Consequently, businesses can acquire financial success, minimize manual labor, reduce costs incurred and save much time with the introduction of automated procurement process tools. Here’s a look at 5 of the most important ones.
With an automated purchase requisition tool, businesses don’t have to worry about gathering data manually whenever an employee or a customer raises a request for requisition. Instead, the software does the work of suggesting vendors, listing company preferences (from previous purchase orders), and essentially directs procurement officials towards an agreeable outcome. Purchase requisition software also:
- Reduces errors since mistakes and inaccurate information are spotted in real-time.
- Has electronic data capture as a function.
- Offers routing and approvals in order to aid businesses in keeping requisition documents consistent.
Businesses previously relied on manual purchase orders that were paper-based, wherein the re-entering of data was done manually. With procurement processing software, purchasing order functions are all digitized.
As such, once companies receive purchase requisitions, they are automatically converted to a number of individual purchase orders depending on how many the organization requires. Other functions of a purchasing order are as mentioned below:
- The entire process is transparent in nature since stakeholders and industry leaders can easily access a purchase order approval from wherever it is located, thanks to the software.
- Stakeholders also have the luxury of accessing said information at whatever time they wish.
- Every little detail included in the purchase order is listed out for stakeholders to access so that they can take appropriate actions and make decisions quickly and seamlessly.
By setting up an efficient procurement automation software, businesses can digitize much of the tasks related to invoice approval. With such a system in place, the chances of accuracy, productivity, and performance in invoice management increase manyfold.
An invoice approval tool lets businesses automate paper invoices by digitizing them soon after receiving them from a supplier. Procurement management solutions will also verify and cross-check invoices with the data stored in the system (with respect to vendor information such as the name of the supplier, the purchase order limit of the company, and contract payouts).
Typically, when it comes to selecting and managing suppliers and maintaining a long-lasting relationship with them, the task is drawn out and tedious. Not only are these functions repetitive in nature but it is time-consuming as well.
With an efficient vendor management system, organizations can automate a number of functions such as background checks, Supplier Request For Quotation Review, and follow-up procedures (when the information provided is insufficient).
Instead of processing and approving contracts manually (which generally takes a long time to complete), companies can choose to invest in a procurement management system that allows the digitization of contracts. As such, businesses can manage, store, approve and access contracts at any given time in a secure and quick manner.
Moreover, automated contract approval functions involve reviewing and comparing contracts digitally, essentially allowing companies to detect errors, flaws in the terms and conditions, and so on.
8 Procurement Process KPIs to Measure
KPIs in terms of procurement processes are key performance indicators that aid businesses in understanding how powerful, effective, and efficient a procurement strategy is to an organization’s supply chain cycle. KPIs also measure the standard of performance with respect to company objectives.
Purchase Order KPIs
Purchase order KPIs or purchase order cycle time is the amount of time a company takes to place a purchase order. Businesses that have been in the game for a long time and are experienced enough to deal with all the tasks involved in a PO take about 5 hours to send a purchase order to their suppliers, whereas burgeoning businesses take about 15 hours to place a PO. In order for a company to run an effective and efficient procurement operation, they must ensure that their purchase orders reach vendors in the shortest time possible.
Other aspects of the purchase order include the amount of time it takes for a supplier to complete an order and deliver the products to enterprises.
This key performance indicator measures all things related to supply and suppliers. As such, it takes into consideration supplier availability and whether a vendor is responsive to a sudden request for orders and queries raised by buyers.
Supply KPI is also responsible for ensuring whether the products sent by vendors are of premium quality, whether the suppliers are compliant with regards to company requests and if the products have any errors or defects.
Return on Investment KPI
The Return on Investment KPI was established to study and review how much a business is able to save as a result of its procurement process. If a specific function within the procurement process is able to cut costs in any way, it is considered a saving.
This KPI also measures the total Return on Investment of the procurement management process as a whole.
All aspects of inventory management within the supply chain cycle fall under this KPI. Essentially, with the help of inventory KPI, businesses can avoid bottlenecks and other hiccups that companies might encounter while managing inventory.
Aspects such as the turnover time of an inventory, the existence of deadstock (and its number), and the accuracy at which stocks compare to the lists in an inventory are all part of this KPI.
Employee Learning and Growth KPI
Metrics and evaluation in relation to employee growth are critical to understanding the productivity levels of a company.
As such, the Employee Learning and Growth KPI takes into consideration the effectiveness of employee training and its expenses, the number of trainees involved, what the turnover rate is for high-performing staff, and what the percentage of underperforming employees is.
The efficiency of the delivery process within the supply chain cycle is measured via the Delivery KPI.
These indicators include an understanding and review of lead time, the purchase order cycle time, measuring the percentage of emergency orders as well as deliveries, and finally, the KPI for measuring the availability of suppliers.
The quality of goods and services acquired by procurement professionals are measured in terms of the quality and defect rates of products, the compliance rates of goods as well as the rate of quality accuracy.
The cost KPI of the procurement process is measured by taking into consideration the cost per order and per invoice, the return on investment rate, authorized spending by the company, and finally, the price competition between vendors.
The Future of Procurement Processes
In this age of consumerization, disruptive innovation, and the changing face of technological advancement, procurement processes have much to contribute as well. Automation technology, Artificial Intelligence, and machine learning have augmented the future of procurement process management to the extent that competition is at its height.
A number of enterprises are constantly coming up with various category innovations, software that focuses on customer-centricity, and other management systems that are designed to attune to supplier centricity.
If procurement processing systems and software is to move forward from here, the scope for innovation would center around seamlessly integrating businesses with their vendors, and establishing and setting up digital platforms to further growth.
Additionally, enterprises and software providers could include extreme analytics, strategizing and planning for the betterment of workforce capabilities, and an effective procurement operating model as part of the future and improvement of the supply chain management cycle.
Why You Should Look to Automate The Procurement Process
Through the length of this article, we’ve come to understand how an efficient procurement process makes life things easier, economical, and quicker for businesses as well as procurement professionals..
With automation in the picture, companies need no longer worry about all those functions of the supply chain cycle that was previously carried out manually. As such, let’s look at some of the biggest reasons to automate your business’s procurement process.
Automation Speeds up the Procurement Process
The most obvious change that will occur when businesses switch from a manual to a digitized procurement process is how much faster all various functions and tasks will become.
The added burden of manual data entry, waiting for approval from stakeholders, and the slowing down of the general workflow
itself is incentive enough for companies to invest in an automation procurement process.
Furthermore, through automation, companies can auto-populate and auto-validate forms that were previously paper-based -- When it comes to bulk purchase orders and businesses belonging to the manufacturing and production industry, automation simplifies all these sub-functions.
Another advantage of digitization is the software's ability to route forms so that employees no longer need to submit paper-based forms manually.
Digitized Procurement Processes are Cost-Effective
As established earlier, a lack of automation in the procurement process forces businesses to rely on manual work for many of the procurement functions. This also includes the hours of manual data entry that employees have to sit through in order to complete filling up all the forms. Essentially, this results in revenue being spent on such tasks.
The workforce will also have to put up with correcting errors manually, which is a tedious enough business, at best. Moreover, staff have to go after procurement officers or stakeholders to gain approval for orders, invoices, and so on.
As such, a majority of enterprises believe that cost-effectiveness is the biggest advantage of investing in procurement process management software
procurement process management software.
Manage Procurement Risks
With paper-based procurement processing, businesses would have to be careful about losing important documents, and invoices and contracts not reaching contractors on time.
In other cases, companies have to worry about purchase orders not being delivered at the stipulated date, receiving incorrect products and services, non-compliance, and so forth.
By automating the procurement process workflow, all these risks can be completely avoided. Businesses can also review and refer to a thorough, accessible, and accurate auditing trail should they choose to digitize the supply chain cycle.
Get Rid of Transactional Disputes
An automated procurement processing system allows stakeholders, arbitrators, procurement officers, finance officials, the evaluation committee, and vendors one central access point-- wherein they can gain access to tasks specific to their role in the organization. With such a measure in place, there won’t be any cause for transactional disputes.
How Breakout Can Help You Automate Procurement for Your Business
So far, we’ve discussed everything a business would need to know should they decide to invest in procurement process management software. We’ve also talked about how different a manual and paper-based procurement process is when compared to an automated tool. Lastly, we have understood the planning and organization that goes into developing an operational strategy in order to establish a successful procurement process.
Now let’s look at the ways in which automation software such as the one provided by Breakout can aid your business since the platform is the go-to place for companies looking for all kinds of digitized tools and automated functions.
With the automation processes offered by Breakout
, your enterprise can make the best out of the following features:
- Decrease spend and cut costs
- Streamline your company’s procurement workflow
- Increase your business’s chances of saving revenue
- Greater transparency, accuracy, and efficiency
- Minimize the use of manual labor and reduce manual tasks
- Improves a business’s relationship with its suppliers and increases supplier performance
- Enhances supplier accountability
- Improves collaboration with multiple external parties, including vendors
- Purchase order systems become more streamlined
- Document management improves