10 Procurement Mistakes And How To Immediately Avoid Them
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The success of your procurement department is just as important, if not even more important than sales. Nothing happens overnight, so managing a successful procurement department also takes strategic planning, hard work, and dedication.
Every organization makes mistakes, whether they realize they’re making them or not. By understanding the most common mistakes, you can keep an eye out for them, put processes and procedures in place to avoid making them, learn from them, and fix them promptly.
While not exhaustive, here’s a list of procurement mistakes organizations make and how you can avoid them:
1. Going above your budget
Going beyond the set budget is actually pretty common. This happens either because organizations spend too much at the start of the budget year, either because of poor management of overall costs as the year progresses. No matter the cause, you should plan ahead to ensure there’s ample budget, where possible, and pace yourself accordingly with how major decisions are made with purchases.
The best way to avoid overspending is to set monthly budgets. This way, you can track spending in real-time, and, in case you did overspend, you can catch yourself in time and not let things unattended for too long.
2. Not building relationships with suppliers
Another procurement mistake you may be making is not keeping up your relationships with your suppliers. They can offer new ideas or can point out helpful products in development that could benefit organizations. Without regular communication, you may miss out on savings, new supplier programs, opportunities for innovation, and more.
Building relationships with suppliers is as easy as building any other business relationship. Make sure you’re up to date with what’s going on by reading emails, subscribing to newsletters, or following their social media channels. You can even schedule regular calls to make things more personal.
3. Not negotiating
A common procurement mistake organizations make is assuming that the catalog price is set in stone. Often, that’s right. But it’s in your company’s best interest to negotiate prices, including additional costs such as shipping and other charges made in getting you the supplies.
When it comes to suppliers that you plan to maintain a long-standing relationship with, it can be worth it to ask if they’ll negotiate deals on repeated orders (perhaps in return for early payments) or on a larger volume.
However, make sure you’re not bargaining for every single order you make and that the deal benefits both parties.
4. Impulse buying
Yes, that’s right! Impulse buying happens in the business world too, and more often than you would think.
Sometimes, professionals buy without considering if there’s any strategic alignment. Decisions like these may seem right at the time, but end up eating up the budget or affecting workflow.
Impulse buying may also involve focusing on one part of the decision without looking at other factors, such as valuing price over quality. Consider the bigger picture. Don’t give in to rushed deadlines and impulse buys. Establishing procedures and processes can go a long way to ensure all of your procurement decisions align with the strategic plans.
5. Not seeking out innovation
With all the technological advances, even the most well-intentioned procurement pro can forget to check with suppliers on opportunities for product innovation.
To avoid this, reach out to your supplier, as part of your relationship-building efforts, and let them know about any emerging needs. Think about how these types of discussions can pave the way for new products specifically to address your business’ needs.
6. Forgetting technical compliance
Any upgrades to one’s technical compliance should be made before the production/execution is initiated.
As buyers secure the cost given the total cost of ownership, they’re also responsible for ensuring technical compliance with commercial conditions. Before arriving on commercial terms, it’s the purchaser’s responsibility to organize as many technical review meetings and work-shops with suppliers as necessary.
This will help the buyer and the seller align. As organizations focus more on commercial trends, often, they forget to accomplish technical requirements.
7. Forgetting commercial conditions
Demanding commercial conditions like liquidated damages, extended service/goods warranties, bank guarantees, or payment conditions has a direct impact on the pricing level.
Therefore, the buyer should communicate his demand along with his RFQ. Doing this helps the seller accommodate those costs within their offer.
Having effective purchasing terms and conditions protects buyers if problems or legal issues occur and ensures they only receive the services/goods they defined, with the correct price, without entering claim/variation mode and correct incoterms, etc.
8. Not having a compliance policy
Compliance is important for both buyers and sellers, as it means consistency, reliability, and ethics. Without a clear set of compliance rules, operations are open to costly risks, potential litigation, and more.
Make drafting a compliance policy your priority. Schedule a meeting with all stakeholders and develop a compliance checklist, complete with all “red flag” moments. Then, train everyone who touches the procurement process in using this checklist.
Once you make a compliance policy, review it at least once a year to check whether it needs to be updated.
9. Isolating major decisions
Procurement systems should move things along smoothly, which is why some purchases are made without looping in other departments on purchasing decisions. But that can easily backfire and end up costing more time and money in the long run.
For major purchasing decisions that will affect other departments, it’s a must to get every stakeholder’s input before placing the final order. Keeping lines of communication open goes a long way toward making purchasing decisions that benefit the whole company. This may require specific changes in the organizational structure. You can support these changes by automating the departments involved using software designed to work together.
10. Refusing to use a procurement software
Often, organizations are suspicious of using new technology to improve business processes because they worry about the additional cost or have security concerns. But the truth is, procurement software saves time and money while also improving the entire purchasing process.
In fact, organizations that use e-procurement software drastically reduce their requisition order cycles, requisition to order costs, and cut back on maverick spending and improve their spend management.
Many organizations make mistakes when it comes to procurement. What matters is not making the same procurement mistakes over and over again. Hopefully, this article will help you avoid them in the future.