13 ways sustainable sourcing and procurement drive ESG efforts
The strategic sourcing process is a cycle, so it cannot be done once and forgotten about. A cycle approach to […]
Procurement 101
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Written by
Majdi Sleimen
“Did I get the best value?”Individuals ask this question every time they buy something.
On a personal level, buying something is as simple as swiping a credit card (or using saved payment details online).
For businesses, the purchasing process is more complicated. This is why many companies place an emphasis on the importance of planning out a procurement strategy.A procurement strategy is established by first determining the most efficient methods and processes that can be sustained by a company. Procurement management plans for individual branches, departments, projects, and item types are then created from these established methods and processes.This approach towards creating a procurement strategy ensures that objectives are well aligned with the capacity of a company’s operational workforce, and can be accomplished by following a 3-step planning process.Jump To:
(Back to Top)Procurement methods are used to add structure to the way procedures and processes operate in a purchasing workflow.The first step of creating a procurement strategy is to determine the most efficient and sustainable procurement methods and tools to use.To adopt every method of procurement that exists is beyond the scope of many businesses, due to the time required to implement each method and the individual requirements of every business.Because of this, selecting procurement methods to use based on available resources and the operational needs of the company is critical when developing an effective procurement strategy.Procurement is a profession for a reason. The unique methods of procurement used by some companies are very detailed because of their industry’s specific requirements, but here’s a shortlist of some commonly used methods:
Spend control and management refer to the method of ensuring that costs do not exceed financial limits, and that money is not wasted on unnecessary or unapproved purchases.To develop and apply this method, consider these questions:
Budgets have the potential to harm, rather than help a company. Be sure to know the difference between good and bad budgets when establishing your spend control method.
Supplier relationship management refers to the method used for ensuring that the purchase of goods and services is channeled through a list of approved suppliers, and that this list is optimised and updated on a regular basis.To implement this method, consider these questions:
Routine checkups can secure discounts and verify that due diligence is upheld. More reading is available about maintaining good supplier relationships.
Item management refers to categorizing purchases to best determine which purchasing process certain goods and services should use. This usually requires an understanding of the operational needs of the company.To determine the value of this method for your company, consider these questions:
Having an effective method for storing and sharing documents like a bill of quantities and item specifications can also be especially important for ordering complicated item sets from your list.
Contract management refers to establishing ongoing purchasing arrangements with suppliers. Despite the existence of many types of contracts, the end goal of any contract is to secure cost reductions through effective agreements. To establish an effective approach to using this method, consider these questions:
There’s a great article by Adrienne Watt that covers the concept of contract management in relation to the procurement planning process - a valuable read for cost-reduction enthusiasts.
E-procurement is the management of procurement processes through dedicated procurement software tools. The goal of e-procurement is to reduce the amount of company resources needed to execute the procurement strategy. To implement this method, consider these questions:
The use of an e-procurement system has become a popular approach for many companies that are seeking to plan and implement an improved procurement strategy.
(Back to Top)Managing procurement processes requires employees to execute workflows, meaning that an understanding of the company’s available resource capacity is required.Before deciding on which specific procurement processes will be used, there are a few questions to think about in relation to your company’s workflow capacity:
Based on these questions, determine which purchasing processes will be sustainable by your workforce, and plan out the steps that will be used to accomplish these workflows.
This term refers to the completion of a procurement cycle (also referred to as Procure-to-Pay or abbreviated “P2P”). It can be understood as the moment something needs to be “purchased” or “procured” through to the moment it is “paid” for. Payment in a business environment is often handled through a submitted “purchase” order, and “payment” is then handled by a received supplier invoice.In many procurement processes, an internal form, known as a “purchase requisition order” (or simply “requisition”) is used by someone who doesn’t have purchasing authority to indicate that something needs to be ordered.What’s the difference between purchase orders and requisitions?Consider which steps will be involved in your purchase to pay process:
Establishing a single point of entry for invoices across multiple locations can be beneficial for accounts payable as well. Find out more about streamlining purchasing with accounts payable.
Strategic sourcing, also sometimes referred to as Source-to-Pay, or abbreviated as “S2P”, can be understood as a negotiation process between a business (the buyer), and one or more vendors (the seller) in order to secure the best value from a purchase.Different types of “sourcing events” exist, including auctioning and tendering - each with their own unique process quirks.In some cases, a purchase for a single order of goods or services may also be “multi-sourced”, meaning that the order will be fulfilled from more than one vendor source.
Consider which steps will be involved in your strategic sourcing process:
When completing a sourcing event, it’s also good to plan out how the finalized deal will mesh with interact with your purchase-to-pay and accounts payable processes.
While not as involved as the purchase-to-pay or strategic sourcing processes, expense tracking is an important consideration for tracking business spending that takes place outside of purchase orders.
Not all business expenses require a purchase order to be raised.In fact, the operational cost of raising and a single purchase order can range anywhere from $60 to $750 - making expense tracking a valuable part of the procurement strategy.
Once the most effective procurement methods and processes that a company can sustain have been identified, they can be applied to more detailed operational procurement plans.Breaking down the procurement strategy into multiple plans ensures that workflows can be designed to improve productivity, not hinder it.Procurement plans should be created for:Each branch. If the company operates multiple branches across different regions, a plan for managing the operations of each branch will be required. When applying different methods and processes at a branch level, consider things like different currency requirements, delivery and billing addresses, and how the purchase-to-pay and accounts payable systems will be streamlined throughout those branches.The SRM method will need to be given additional attention if international vendors are involved.Each department.If specialized purchasing or operations are classified by their own department within the company, those departments warrant their own unique procurement plans. When applying procurement methods and processes to a department, consider what types of purchasing occur in those departments, whether those departments need to keep track of inventory stock levels, and how procurement workflows will be structured and assigned to department managers.Each project.If new project development arises on a regular basis, a plan for handling procurement in each of those project environments is required. When applying procurement methods and processes to a project plan, ensure that the scope of work is identified, estimated time-frames and item quantities are provided, and that managers are provided with a list of suppliers to communicate with and order from.Because the scope of a project can vary drastically from industry to industry, be sure to consider elements that may be specific to the company’s professional field as well.Each item category.An “item” refers to any good or service that a company orders. When applying procurement methods and processes to a list of items, consider how item specifications for goods and services will be communicated, how contract arrangements will be established and managed for each item, and how items can be grouped and ordered efficiently from a list of suppliers.While the item and inventory management method outlines what needs to be ordered, developing a plan for categorizing items aims to structure how those items are ordered and accommodate any unique buying strategies that may apply to a particular category of item.
Once an overall procurement strategy and detailed procurement plans are implemented, there are several indicators that allow the effectiveness of these plans to be tracked.An effective procurement strategy should provide these noticeable benefits:
The creation of a procurement strategy also has a number of organizational advantages, especially for management. Peace of mind is attained by knowing that deliveries will be made on time and that projects will be completed on time and within outlined budgets.Procurement strategies are a highly scalable investment. When established early in a company’s development, the need to restructure methods, processes, and workflows is avoided, because the procurement strategy can adjust to meet scaling purchasing requirements.
Are you in the process of drafting a procurement plan?
Have you created one in the past?
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