In a world of global supply chains and trying to be as efficient as possible, procurement has become increasingly important. Being able to select the right suppliers based on cost, efficiency and the ability to deliver is essential for business success.
Procurement management is the process used to ensure that everything is taken care of, from ordering to fulfilment. In this guide we are going to take a closer look at just what procurement management is, the process, how to automate procurement management and its general importance.
eXceeding is a procurement consultancy that was founded on the principle of providing impartial, best practice, procurement advice to organisations of all shapes and sizes. Working with both the public and private sector, eXceeding has years of experience in delivering procurement solutions to the marketplace.
What is Procurement?
Procurement is a defined structure, method and technique used by organisations to streamline their purchasing processes of goods, works and materials whilst reducing costs, establishing relationships with suppliers and improving time efficiency in the process. Procurement can be direct, indirect, reactive, or proactive in nature.
The procurement process generally involves;
- Identifying & understanding customer and supplier requirements
- Selecting the right tools – including processes – to communicate with suppliers
- Pulling together relevant information for proposals and requests for quotes
- Creating policies for evaluating proposals, quotes, and suppliers.
Careful management of the procurement process ensures that all items and services are properly acquired, and that projects and processes can proceed efficiently and successfully.
The importance of procurement in the public sector cannot be underestimated, as it is governed by rules and procurement laws which must be strictly adhered to. Public procurement law regulates the purchasing by public sector bodies and certain utility sector bodies of contracts for goods, works or services.
There are many different rules that you must follow in order to submit applications for public procurement contracts. Many of which can be found in this government guideline.
What is Procurement Management?
Procurement management is responsible for overseeing every process involved in acquiring the products, materials and services needed for efficient business operations. It is also referred to as the source-to-settle process – where the evaluation, selection and creation of the agreement with the supplier is managed.
Procurement Management Process
The procurement management process can be broken down into several stages. These stages include;
- Specification and planning
What goods, works and services are going to be needed? Can these be sourced internally or are external requirements needed? Once a detailed list is put in place this will help establish the budget.
- Identifying and selecting suppliers
After researching and identifying the potential suppliers, make sure they can fulfil company requirements – exactly. Only compare specific suppliers for advantages or disadvantages of using them. Cost, delivery times, safety, service, support, environmental responsibility should be criteria that are carefully scrutinised.
- Proposal requesting, negotiating and contracting
This is the stage where negotiations can begin (with your selected suppliers) and at this point, you can understand a supplier’s dependability and trustworthiness. You should clearly communicate your expectations and requirements such as delivery timelines, payment details, control mechanisms and so on. Once everything is agreed, a contract can be signed.
- Control and delivery
Your purchasing department is responsible to accurately control all deliveries and payments after the contract has been signed. Aside from quality control, your purchasing department should regularly meet with suppliers to review orders against established specifications and delivery tracking. This is where you may need to make changes to contracts as your needs shift.
- Measurement and analysis
Using KPIs, the whole procurement process must be analysed. From efficacy, cost efficiency, speed and overall success of the whole process. By taking these steps, the success of future projects will be secure and findings must be shared with management/stakeholders so that they can be discussed in detail.
The procurement management process is closely linked to the 7 stages of procurement which include the following stages;
- Preparation of requisitions
- Authorisation of request
- Search for suppliers
- Selection of suppliers
- Placing a purchase order
- Receipt of goods and services
- Invoice processing and payment of suppliers.
Procurement Management Automation
Procurement management has several stages that can be automated, which not only speeds up the process, but also limits mistakes occurring.
Some of the key functions and processes that can be automated include;
- Purchase requisition
This is to allow all staff members to create a record of their requested items from a list of approved suppliers. Software can automate who gets access to make these purchase decisions, allocate budgets per department and set authorisation permissions for those who can make the necessary purchases.
- Purchase orders
Using an electronic or automated system removes the need for manual paper-based purchase orders (POs) or time spent on data entry. Approved purchase requisitions automatically become as many purchase orders as necessary depending on the number of items and suppliers.
- Invoice approvals
An automated system can take paper-based invoices and corroborate the information to then approve if the invoice should be paid. If there are any discrepancies, the automated software can flag these to send to accounts payable to manually check.
- Supplier approval and management
Supplier checks are time consuming. Automated systems can perform background checks, supplier request for quote (RFQ) reviews, and follow up in the case of missing documents or information.
- Contract approvals
You can keep all of the information for contract approvals in the same place attaching contracts to approved suppliers in the supplier file system so that compliance checks can be easily made.
Importance of Procurement Management
We have seen how procurement management works, what it is and understood what elements can be automated. But the question to answer is, why is procurement management important?
There are several reasons why procurement management is so important including;
- It directly affects the bottom line
Purchasing is an ongoing process throughout a business lifecycle affecting budgets and directly impacting the bottom line. By establishing how much will be paid to suppliers – even on the smallest value items – savings can be made having a huge impact on the bottom line.
- Reduces risk in the supply chain
A healthy supply chain is a trusted one. Disruptions can have serious consequences including, a loss of reputation, as well as goods and services not being completed. Good procurement, or supplier relationship management, means selecting the right suppliers who can minimise these risks and foster a better relationship with suppliers who can go the extra mile to ensure you have what you need.
- Drives the long-term strategy of the organisation
From establishing economies of scale for smaller businesses looking to grow, to larger businesses maximising their opportunities, procurement management teams can identify suppliers who not only have innovative ways of working, but also find new suppliers who can step in to secure constant access to essential goods in the future.
- Affect your reputation
We live in a global economy with supply chains constantly changing and under threat from different factors. We have seen how delays can affect store items being available but in other fields, disruptions can lead to a myriad of difficulties. How items are sourced, transported and dealt with are more critically observed today than ever before. Having suppliers who meet ethical standards are just as important as those who push the boundaries of innovation as this will reflect on your organisations when being audited by buyers and consumers.
Procurement management is also referred to as the source-to-settle process – where the evaluation, selection and creation of the agreement with the supplier is managed. Closely aligned with the 7 stages of procurement, procurement management is essential for helping reduce risks in the supply chain as well as drive the long-term strategy for your organisation.
At eXceeding we can help organisations get to grips with their procurement processes and create a tailored strategy to deliver not only cost savings, but also a streamlined process, saving time and reducing human error. With over a decade of experience and helping organisations such as CRFCA, ICAEW and WorldRemit improve their procurement strategies, why not drop us a line to see how we can help you achieve your goals.
Check out our procurement ebook for more information about procurement and how we can help deliver value to your business.