As the costs of purchasing continue to rise, it’s important that business owners follow best practices when it comes to the procurement process. In today’s economic climate, CFOs and business executives have little room to rest on their laurels without feeling the heat from investors and external entities.
For this reason, you’ve got to transform your procurement process across your supply chain to achieve “best in class” status.
A changing world now demands better quality, speedier delivery, and superior overall value than before. Consequently, more and more business owners are turning to their supply chains to generate additional value and cut out waste. From supplier development and integration to cost management and strategic sourcing, there are several untapped avenues that you can take to stay ahead of the competition.
The truth is, few companies are as strategic as they need to be when it comes to supply chain management. To eliminate waste, improve efficiency, and make your dollars stretch further, read on and learn how to optimize your procurement strategy by following these five steps.
What is the procurement process?
The procurement process can be described as locating, paying for, receiving, and documenting necessary goods to support business operations.
Optimizing the procurement process involves the practice of maintaining or improving existing performance standards while slashing costs across the supply chain. To do this, companies are no longer viewing procurement as a back-office function, and instead considering it a key driver of business value.
According to a RAND Corporation study, purchased goods and services account for roughly 85 percent of commercial firms’ total expenditures. This presents a major opportunity for business owners to increase profits—by reducing the costs of purchased goods and services and receiving maximum value from every supply in the supply chain.
5 Steps to Improve the Procurement Process
Step 1: Automate Your Workflows
A recent Deloitte survey reports that less than 20 percent of CPOs have solidified a procurement automation strategy for their company. This is becoming a distinguishing marker of success for those firms that are able to leverage advances in technology to reduce friction in their procurement process flow.
There are currently several procure-to-pay tools available on the market that can get you started optimizing your supply management and vendor selection workflows. By utilizing these tools, you can make technology work for you by reducing repetitive operations in the procurement process and lessening the manpower required to reach procurement objectives.
The Elements of Procurement Automation
There are five constituent elements of procurement process automation, each of which must be accounted for in any procurement process flow chart. Below, you can view a list of the foundational aspects of automation on the commercial and government procurement process:
- Supplier Management: Connecting to suppliers and managing relations with them with the end-goal of ordering.
- Invoice Approval: Reconciling each invoice by comparing the invoice to the purchase order.
- Contract Management: All contracts are securely stored in a cloud-based environment.
- Purchase Requests: Automatically determine whether a product order is approved based on automated matching criteria.
- Purchase Orders: Streamline accounts payable by eliminating manual handling of purchase orders and payments.
Automating your workflows has the potential to unlock significant value for your organization. Today, best-in-class organizations are acquiring AP automation software to perform spend analysis, supplier performance analysis, and more.
Step 2: Optimize Your Inventory
Among the first procurement process steps for optimization is to reassess your inventory. To reduce working capital and boost profits, an increasing number of companies are turning to their inventory quantities to ensure that they are holding inventory at an appropriate real cost.
Despite what many business owners believe, inventory holding costs constitute a major portion of the total cost of an item. By some estimates, up to 60 percent of the cost of an item held in inventory for 12 months is the result of holding costs, including insurance, warehousing, taxes, and more.
Free Bonus Guide: 12 Ways Procurement Automation Can Improve Your Work Day
For this reason, optimizing your inventory presents an excellent opportunity to boost your bottom line. The key is to forecast accurately by ensuring that you order only enough inventory to cover demand. Therefore, demand planning is one of the key procurement process steps to optimize.
Step 3: Improve Supplier Engagement
No matter the industry you work in, you likely have one or more suppliers who deliver products or materials, conduct repairs and maintenance service work, or perform urgent services. No doubt, the relationship you manage with your supplier or vendor is crucial for your business’s success.
The downside, however, is that locating new suppliers, onboarding them, invoicing them, and finally paying them through manual processes can be arduous, time-consuming, and prone to mistakes. That’s why more and more business owners are migrating to streamlined procurement processes and workflows.
Among the many benefits that procurement automation can have on a business’s supplier engagement are superior communication with suppliers, KPI-centered supplier performance metrics, and trust-building with vendors as they will regard your integrating them into automated processes as a sign of good faith and long-term confidence.
Step 4: Standardize Control and Risk
It’s important that business owners regularly review their supply management standard operating procedures and apply best practices wherever appropriate. No matter what office manages the procurement process, procurement-related policies must be reviewed and optimized to remove bottlenecks while remaining uncompromising in deterring theft and fraud.
A common thread among best-in-class organizations is that they consistently apply risk-mitigation techniques and methods whenever they make decisions regarding sourcing.
In short, companies that adopt responsible risk mitigation strategies in their procurement processes take the following measures:
- Locate and identify all relevant risk elements
- Calculate the likelihood that each risk event will occur (i.e., EPA violations, OSHA incidents, etc.)
- Determine the monetary costs of each risk event
- Monitor and prioritize risk-reduction measures that address each high-priority risk
Step 5: Focus on the Bigger Picture – Total Cost of Ownership
One of the most critical steps to thinking strategically about the procurement process is to shift one’s focus on the total cost of ownership (TCO) of an item or product rather than the one-time purchasing cost. In both the private sector and governmental procurement processes, it is important to not concentrate solely on the price of a supplier’s bid.
The dollar amount of a bid only reveals a small portion of the total costs of ownership of an item. For instance, the one-time acquisition costs of an item only make up between 30 and 40 percent of a finished good. Other largely overlooked aspects of an item’s TCO include training, warehousing, environmental costs, quality assurance costs, and transportation costs.
Therefore, assessing a product’s real cost necessitates taking a high-level view of the many input costs of a product from buyer to seller.
Unlocking Best-in-Class Procurement Status
Where best-in-class companies and second-tier organizations often diverge is in their willingness to reach out to suppliers and ask them the all-important question: “How can we, together, reduce the total cost of ownership?”
You might be surprised by how eager suppliers may be to work with you to streamline procurement processes and minimize the amount of legwork necessary to optimize your supply chain.
No matter whether you’ve already implemented some of the above procurement strategies yourself, no modern procurement strategy is complete without investing in effective purchase order software. This way, you can utilize fully-automated technology to help lower costs, find efficiencies, and become a best-in-class procurement manager.