Over the past few years or so, companies have struggled with a procurement crisis. From trade wars with China to shipping gridlocks, companies are struggling to get the materials and products they rely on. To address this problem, managers first need to go back to the basics, such as addressing what is procurement in business and the role it plays.
What Is Procurement in Business?
Procurement refers to the process of sourcing and purchasing goods and services for the business. In today’s supply chain crisis, procurement also involves actually getting these products and services to the place of business for operations to flow seamlessly. Several components must work together to achieve the desired outcome.
What Are the 3 Ps of Project Procurement Management?
Project procurement involves three main components. Managers must address all three to achieve long-term results when seeking optimization options.
- People: Consider the schedules of the people involved in procurement to ensure orders come in on time. For example, if a big order requires the general manager’s approval, try to get it done before he leaves for vacation.
- Paperwork: In the modern era of business, paperwork refers to documentation. Ideally, all your procurement documents are digitized and can be transmitted, processed and approved online.
- Process: Following the procurement process is crucial to ensure no missed steps and no delayed delivery. If your company has no established process, it’s time to change that.
What Is Procurement Optimization?
Procurement optimization refers to the process of improving procurement performance. Each company faces its own unique challenges when it comes to procurement, so optimization can manifest in several ways:
- Sourcing more sustainable ingredients
- Achieving faster delivery times
- Improving the regularity of deliveries
- Reducing wastage by timing operations with deliveries
Before tackling any project in business management, you need to assess what the current situation is vs. what the goals are. Then, determine what impediments are blocking the way in between.
What Are the Most Effective e Procurement Steps?
To achieve procurement optimization, companies need an established procurement process. This requires ownership of the process and proper management. It also requires the leveraging of technology to facilitate a smooth process. These are effective e procurement steps that business owners take to ensure smooth operations.
1. Item Request
The procurement process begins with someone making a request from the purchasing department. For example, the IT team might determine that it’s time for a computer upgrade because the older computers can no longer support the upcoming OS upgrades.
2. Vendor Selection
In some cases, you might already have established partnerships or vendor agreements with existing companies. In these instances, sourcing what you need is fairly easy. If you need to find a new supplier, this could require some research. These are some of the most important considerations when making a decision:
- Current and long-term availability of products and parts, if applicable
- Cost of items and delivery
- Speed of delivery
- Guarantees of service or product quality
For example, after reviewing the IT needs, you might determine that your employees mostly use web apps and don’t need expensive Mac or Windows computers. Instead, you decide to purchase Chromebooks. You follow the rule of thumb of getting at least three quotes, so you reach out to Samsung, HP and Best Buy for bids.
3. Purchase Approval
After you’ve secured a few bids and negotiated terms with the vendor of your choice, you need to seek approval from the finance team. In some organizations, the person responsible for procurement might need to seek approval before looking for vendors. However, that approach makes it difficult to make a strong case for what you intend to purchase because you won’t have all the information.
Most organizations require procurement to submit the following information for purchase approval:
- Person, team or department requesting products or services
- Number of items or description of the type of service
- Information about the vendor or service provider
- Price or quote provided
- Reason for order
4. Create Purchase Order
Typically, the finance department generates the purchase order, which tells the vendor that an order has been approved. This may or may not be the original amount you requested. If the finance department plans to build a long-term relationship, this step might also include an onboarding process. In some cases, your company might need to be onboarded as a bulk purchaser as well.
5. Receive Invoice and Order
The vendor submits an invoice for payment and an order description. This provides you with the opportunity to review the order and determine whether there is an error or you plan to change the order for other reasons. For example, the finance department might decide to purchase five Android tablets alongside the initial Chromebook orders.
6. Make a Payment
Vendors generally determine the terms of payment, but if you would like to pay by a method not offered, don’t be afraid to ask. Sometimes, vendors don’t include all payment options on an invoice because they want to keep it simple or prefer a specific method over others. The finance department usually sends the payment on behalf of the company.
7. Accept Delivery
One of the biggest causes of waste and damage is that companies do not always make adequate preparations for delivery. Consider, for instance, that your company ordered 50 Chromebooks, but it also ordered 50 new desks and chairs. The weather forecast also predicts rain, so storing them temporarily outside is not an option. Your company would need proper measures to eliminate the risk of damage to the brand-new items.
What Are Some Effective Purchasing Improvement Ideas?
Procurement approval sometimes involves a long wait time, which also affects the purchasing team. Delayed improvements cost businesses lost productivity and time is money. So, what can you do to ensure things move at a faster pace?
1. Empower Employees
The more bureaucracy a workplace has, the less agile it is and the more cumbersome it is to get simple things done. Not all items require purchase approval from the finance department. For example, while the finance department needs to approve purchasing 50 Chromebooks, it might not need to approve $50 on stationery for the office.
2. Formalize the Process
Organizations often do not have a formal procurement process in place. This can create confusion about who to ask for what when needs arise. Creating a formal process makes it easier for employers to report problems and make requests.
3. Leverage Technology
The best way to formalize procurement and track progress is to digitize the entire process. When workers can complete the entire thing online, it simplifies the process of submitting the information and receiving approval. Technology can also make it easier to create visuals that represent the process during optimization efforts. At Fluix, we provide the technology our clients leverage to streamline their purchasing and procurement processes.