7 procurement best practices you should follow in 2021 [UPDATED]
Table of contents
Here is a quick video summary in the case you don't have time to read the entire article:
Considering today's competitiveness on the market, it's crucial that businesses adopt new philosophies, methods, and processes that will make them "best-in-class". Doing your best just isn’t good enough anymore. You should constantly be thinking of new, better ways to contain costs and produce results despite challenging circumstances on the market.
So what makes a company best-in-class? There is no single right answer for that, but there are practices and processes that big players swear by. And now it's time for you to implement them:
1. Procurement automation
Automation plays a critical role in making businesses more efficient by enabling them to save time and money. In procurement, automation helps reduce repetitive operational processes and amplifies the strategic role. Unfortunately, only 18% of procurement leaders have a digital procurement strategy supported by a complete business case.
But the digital transformation for procurement activities is inevitable, so you need to embrace automation and make your procurement processes efficient and seamless.
Three reasons organizations should automate procurement
Eliminates costly data entry errors and redundant work;
Reduces time spent on expected transactions by streamlining workflows;
Leads to more strategic sourcing and informed buying decisions; automated programs can analyze huge amounts of data faster and more accurately than humans.
Here’s the main mistake organizations make when deciding to transform their procurement process: they choose a software they hope will make them more efficient, and they structure their workflows and processes around that chosen technology.
As a best practice, you should first review the processes that need improvement, and only then select the technology that best satisfies those process needs. Best-in-class companies find a way to use technology to produce beneficial information without having to perform various "workarounds" to extract and view the data. They recognize the importance of an efficient purchase-to-pay process and have adopted strategies and mechanisms to get the most significant benefits from technology.
2. Procurement transparency
A transparent procurement process ensures that all the team members, as well as the qualified suppliers, have access to procurement methods, evaluation criteria, technical specifications, etc.
By harnessing the power of data analytics and automation, best-in-class procurement organizations eliminate dark purchasing and aberrant spending behavior.
Six benefits of procurement transparency:
No more duplication of requests;
Better record management;
Advanced strategic planning;
Increasing accountability and improved performance.
How to ensure spend transparency in the procurement process:
Define and implement procurement policies properly;
Monitor and document every step of the procurement process;
Identify and manage a list of approved supplier lists;
Establish fool-proof procurement contracts;
Conduct frequent audits.
3. Supplier engagement
Every best-in-class procurement organization has suppliers who deliver essential products, perform regular maintenance, or complete one-time urgent repairs. Effectively collaborating and partnering with vendors is a key enabler as it improves business expectations and value contribution. Best-in-class companies work closely with suppliers long after a deal has been signed.
One thing to keep in mind is that one-way communication (telling suppliers what to do and how to do it) is not as effective as two-way communication that requires both buyer and seller to mutually manage the relationship.
But how do you determine which suppliers to engage? You look at where your main risks and opportunities are across all sourcing categories. Next, you’ll determine the 20% of the suppliers that can make 80% of the difference to your risk profile, costs, and reputation.
A procurement organization can improve supplier engagement by:
Providing a mechanism to ensure that the relationship stays healthy and vibrant;
Generating win-win situations and trust;
Creating a platform for problem resolution;
Treating suppliers as strategic partners;
Developing continuous improvement goals to achieve value for both parties;
Monitoring supplier performance with specific KPIs;
Ensuring that performance measurement objectives are achieved;
Enabling collaboration and communication with vendors.
Look into supplier management tools that offer a set of unique features to improve the source-to-contract process and enhance supplier engagement.
4. Optimized inventory
More and more CFOs have put inventory on their radar screens, and their financial teams are constantly looking for new ways to improve the bottom line and reduce working capital. Best-in-class procurement organizations are constantly reviewing their inventory quantities and striving to keep them at an optimal level.
For most organizations, however, determining the optimal stock levels seems like an impossible numbers game. Inventory managers are faced with the challenge of managing tens or hundreds of thousands of items, each with their own characteristics, requiring complex and time-consuming calculations.
As profit margins shrink, procurement organizations are constantly looking for ways to control their spend and improve the bottom line, so procurement teams need to constantly review their inventory and strive to ensure they stay optimal.
The main reason for out-of-balance inventories is poor planning and forecasting. The "real" cost of holding inventory often is higher than the generally assumed 20% to 25%. In fact, recent research reveals that inventory holding costs could represent up to 60% of the cost of an item that is held in inventory for 12 months. Those findings included the holding cost of insurance, taxes, obsolescence, and warehousing.
Procurement leaders around the world are slowly recognizing the power of better data-driven insights, with more and more CPO admitting they are leveraging intelligent and advanced insights for cost and inventory optimization.
5. Digital contract management
Contract management is an integral part of the procurement cycle. A well-established plan assists contract managers to properly manage contracts by addressing transition management, performance monitoring, and by helping to ensure that both parties fulfill their commercial and contractual commitments.
Still, 81% of procurement organizations don't use any Contract Lifecycle Management (CLM) software. As a result, they face several pain points, including lack of consistency across contracts (53%), cumbersome processing (45%), and supply chain continuity problems (36%).
As I've previously mentioned, the digital transformation for procurement activities is inevitable. You can stay clear of procurement pitfalls by moving your contract management process to the cloud. If contracts are created, stored, and maintained in a centralized data repository, your organization can reduce costs and risks.
Contract management plans should be developed for all medium to high-risk contracts. A public authority should ensure that contracts are managed following the contract management plan and that plans are kept current.
6. Focus on TCO (total cost of ownership)
Strategic sourcing pushes you to shift your focus from looking only at the purchase price to understanding the total cost of owning or consuming a product or service. Leading companies are considering many other factors that affect the total cost of ownership.
Establishing a "total cost of ownership" mindset is a goal that the supply management organization needs to embrace and perpetuate throughout the entire enterprise. Identifying this cost requires looking at the entire process of procuring and consuming the product or service, something that can only happen with cooperation and input from both the buyer and the seller.
7. Appropriate levels of control
Supply chain management policies and procedures should follow an appropriate sequence and structure. They should also be reviewed frequently (if not constantly) and brought up to date. Keeping them realistic and easy to understand also helps ensure compliance. It's certainly possible to go too far in establishing policies and procedures!
Risk mitigation goes hand-in-hand with policies and controls, and best-in-class procurement organizations integrate risk-mitigation methodologies into their sourcing decision process.
Automate your procurement game with Prokuria
A procurement management tool is the first step towards building a sustainable procurement strategy. With Prokuria, you can automate your procurement process and achieve cost and time savings.
3 benefits of using Prokuria
1. Real-time tracking
Monitor your suppliers in real-time, step by step, response by response, etc.
Easy to customize to your specific requirements like approval flows, audit needs, or special user rights.
3. Fast & easy for suppliers
No account set-up required; everything is managed through a private webpage.