In these economic-driven times, where businesses are looking for every option to drive down costs, effective procurement has established itself as a key mechanism for getting more for less, as well as mitigating risks and creating value.
A well-planned procurement strategy can avoid the need to re-tender so frequently, which can save time and free up internal resource. It is also likely to reduce costs across your supply agreements, help to mitigate any risk in your supply chain and increase efficiency and innovation in the way services are delivered.
It is therefore vital for businesses who want to optimise costs and manage procurement effectively to have a robust procurement strategy in place. This will also enable them to understand how to select suppliers with whom they can develop long-term collaborative relationships based on trust.
When is the right time to review your procurement strategy?
The answer is that you can run a strategic review of your procurement function at any time. Maybe you need to review spend, relieve pressure on internal resources or just to understand whether you are following best practice with your internal procurement processes and procedures.
There are, however, some key triggers which prompt organisations to review their procurement:
- They are not happy with the service being delivered by the incumbent supplier.
This is common. Often, we find that this is a result of a lack of understanding as to what was agreed. The best way to avoid this is to ensure that initial selection process is thorough, the contract terms are fully understood and tailored to the needs of the organisation, and that the responsibilities are laid out from the outset to ensure a better relationship can be maintained.
- They are at a point of change.
Perhaps there has been a merger, or maybe a period of growth which means the businesses is in the midst of a transformation. There may be a need to align the procurement processes and procedures of multiple parties or to review, consolidate or change suppliers to meet the changing needs of the business.
- There is pressure to reduce costs.
This is often the primary motivation for change. It could be a global issue or perhaps senior stakeholders have identified an overspend in one area of the business. This may result in a review of the market to better understand whether best value is being achieved, it could result in a consolidation or suppliers or perhaps a re-tendering exercise.
- Their contracts are due to be reviewed or renewed.
Perhaps governance dictates that contracts are renewed after a certain period or perhaps the contract is reaching its point of renewal. Either way the most likely trigger is that the contract is due to be reviewed.
Let’s look at this final point in more detail. The contract is due to come up for renewal and the organisation is considering its options. But again, when is the right time to review your procurement contracts?
It might surprise you to hear that businesses looking to go out to tender need to start thinking about their options around two years before their existing contract comes to an end.
It seems a long time doesn’t it? But tender processes are lengthy and take up a huge amount of time and resource.
If you leave it too late your existing supplier will realise that you are on the back foot and you may have no choice but to extend the current contract. Sadly, this often results in the incumbent supplier squeezing you on terms, as they have the upper hand when it comes to negotiations.
It sounds complicated doesn’t it? Well, it doesn’t need to be. Let’s break it down into a few simple steps:
7 key steps to running an effective procurement process
- Understand & Define Your Needs. Get to grips with everything about the service or product: this means definitions, usage, what has been specified and why, current and future needs and trends. This is also the point where you need to identify stakeholders who will be involved in the processes from all parts of the business.
- Assess the Market. Look at the supplier marketplace and run supplier assessments in order to find alternatives to existing incumbents. Also think about whether you want to invite your incumbent supplier to tender for the new contract. Understand the key supplier marketplace dynamics and current trends. Take a view on the key suppliers’ sub-tier marketplace and analyse for any risks as well as opportunities.
- Prepare a supplier survey
A survey will help you to evaluate potential supplier capabilities to meet your requirements. This is a quick identifier at the start of the process to assess whether your requirements are feasible and can be delivered by the suggested supplier base. This is also a mechanism to encourage the right ‘type’ of suppliers to respond to you.
- Building the strategy
Your procurement and sourcing strategy will encompass the previous three steps, but also consider the following points:
a) How competitive the supplier marketplace is: Are you a strategic account for your potential service providers? Dynamics will change as you move onto a bigger and better service provider and smaller accounts are less likely to be able to leverage relations. It is better to get an ‘A’ team from a smaller provider than a ‘Z’ team from a larger provider.b) How supportive your organisation’s users are to testing incumbent supplier relationships:
A sourcing team has two sets of internal stakeholders: the people who use the things that are bought, and the executives who manage overall costs. Users will be happy to embrace a new service provider as long as the service itself is not disrupted and the relationship with the incumbent does not deteriorate. Those managing costs will be happier if costs are improved but they will also be concerned about service quality.c) Getting the most out of your supplier. Collaborating with your supplier is a key area that needs to be explored in order to grow a successful relationship and avoid becoming a statistic. You might want to look at ways to collaborate with your supplier in order to:
– Reduce complexity and in turn increase productivity.
– Create corroborative process improvements that reduce the cost of doing business.
– Change the way the relationship is structured, e.g., invest in supplier operations to guarantee access to supply, new technology or process improvements.
– Become a reference site, or case study.If the supply base is competitive, you can harness those forces to leverage better pricing or terms. If you don’t have any leverage over your supply base then you are relying on good faith that suppliers will share new approaches and innovations with you.
- RFx (or Request for ‘X’).
Where a competitive approach is used, a request for proposal or bid will need to be prepared (whether it’s an RFI, RFP, RFQs, eRFQs, ITTs or the collective RFx). This will define and make clear the requirements to all prequalified suppliers. It should include product or service specifications, delivery and service requirements, evaluation criteria, pricing structure, service level agreements (SLAs), key performance indicators (KPIs), Service Credits and financial terms and conditions. A communication plan should also be implemented at this stage to attract maximum supplier interest. Ensure that every supplier is aware they are competing on a level playing field.Again, think about whether you want to invite your incumbent supplier to tender and do it for the right reasons: it’s an expensive process to run tender and even to respond to, so it will only deteriorate relations further if you have no intention of considering them as a proper contender.Once the RFx is sent out to all potential suppliers, make sure they are given enough time to respond, or the opportunity to reasonably request an extension. You should request that potential suppliers confirm their intention to respond, to ensure at the end of the process you do not end up with no responders, even follow-up messages should also be sent out to encourage a greater number of the ‘right’ type of responders.
- Selection process
This is where the negotiations come in. The sourcing team need to apply its pre-determined evaluation criteria to the supplier responses and if you need more information then ask for it. Manual and electronic tools can both be used for this purpose. Think about the long-term goals and the collaborative piece mentioned earlier; cost savings are not the ‘be all and end all’, if we look back to the opening statistic it’s clear that the relationship between a supplier and client is at the heart of a successful contract, and if you are looking to drive innovative practises and get ahead of the competition then this should be your focus over pure financials.
- Transition and implementation.
There will be a period of transition while the service hands over from the incumbent to the new supplier. Make sure that all parties are well communicated with and understand their role and responsibilities. Inform all users of the changes and closely monitor the new supplier’s performance during this period to ensure that it lives up to expectations.
Whilst there a number of triggers which may prompt organisations to review their procurement strategies, it can be done at any time. The most important consideration is that you follow a well-managed process to reach your desired outcomes.
Why engage a procurement consultancy to manage your procurement processes for you?
Negotiating contracts with new or existing suppliers is a long and resource-hungry process. Engaging a procurement consultancy can help to provide a fresh perspective to sourcing challenges. They also tend to have in-depth current market knowledge, supply management expertise and enviable project management skills.
In a world where there aren’t enough hours in the day for the day job, it’s hard to think how most organisations can develop and maintain an effective sourcing strategy without a pre-existing specialist team.
eXceeding was founded on the principle of providing impartial and unbiased services to businesses to help them achieve the best services and solutions for their needs, seeking to reduce overall spend without reducing quality of service or finding the right provider for your requirements.
For further information on our procurement services please visit our strategic procurement transformation page.