Procurement for beginners
Procurement professionals find, agree terms and acquire goods or services from an external source for organisations. Twenty years ago, the profession was known as “purchasing” – a much narrower term wherein practitioners were essentially buyers. Today, procurement as a profession brings much wider value to organisations, with benefits such as ensuring security of supply, negotiating lower costs, reducing risk, improving quality, increasing efficiency and driving innovation.
There’s no firm rule about how big a business must be before a procurement function is required. A 2017 research study by Wax Digital found that 68 per cent of businesses introduced procurement due to rising costs, while 45 per cent hired procurement professionals due to inefficient and labour-intensive processes.
Seven ways procurement can bring value to your organisation
1. Discover new suppliers
“But we’ve always used the same supplier!” If this sounds familiar, it may be time to reconsider where you source your goods and services. It’s not uncommon, particularly in small communities with fewer options, for a business to use the same supplier for decades or even generations. While this has some benefits (the supplier knows your business inside-out and you’ve built very close working relationships), there are a number of risks involved.
Firstly, your supplier may not be offering a competitive price compared with other players in the market. Very long-term suppliers can become complacent, not only in failing to offer the best value for your dollar, but complacent in the sense that they fail to bring anything new to the table. Running a tendering process or even a competitive bidding process will enable you to find the best supplier to meet your organisation’s needs. But be sure that a low price isn’t the only criterion (see point 7).
2. Know your spend
“Who the hell keeps ordering crates when we have a shed full of them already?”
Really getting to grips with your spend data takes time, dedication and (increasingly) clever software. Procurement professionals harness the power of big data to build accurate pictures of where and how organisations spend their money. This process can help identify previously unknown wastage, inefficiencies and duplication of spend. It’s also a way to map out your supplier base and understand where consolidation may be possible.
Today, many organisations make use of systems that can completely automate the procurement of a product, from the moment of purchase all the way through to payment of the supplier. This frees up your (human) procurement professionals to concentrate on strategic, business-critical projects.
3. Create fit-for-purpose contracts
“Are we seriously locked into this for another five years?”
Contracts are the cornerstone of procurement and supply management, and must be absolutely fit-for-purpose. Procurement professionals create contracts with a strategic lens – that is, taking into account the needs of the organisation in five to ten years’ time.
Contract management through effective Supplier Relationship Management (SRM) is a must when it comes to realising the benefits agreed to in the contract. Without contract management, you’re unlikely to see anywhere near the value you were promised.
4. Employ master negotiators
“Tell ‘em they’re dreaming…”
Negotiation is one of the core skills in procurement, as a negotiation with suppliers is the crucial point where savings and other benefits can be won or lost.
The best negotiators:
Spend more time in planning and less in negotiating.
Know the outcome they want, and where they are willing to compromise.
Know that it isn’t just about price.
Are resilient to pressure tactics (such as “this offer is only available for the next hour”.
Are firm, but not aggressive.
Look for mutually beneficial solutions.
Stay calm under pressure.
5. Drive innovation
“They’ve been offering the same old service for 20 years.”
An important aspect of Supplier Relationship Management involves nurturing innovation in the supplier base. Many of the world’s leading organisations now recognise that game-changing innovation is more likely to come from their suppliers than from their own R&D teams.
Innovation is a broad term, and could mean anything from finding more efficient ways of working, to coming up with ways to keep costs from rising, to inventing a completely new technology that will give your organisation a competitive edge.
6. Increase your purchasing power
“We’ll get it cheaper by the dozen.”
To get the best price, it’s often necessary to work at scale. Small businesses have difficulty negotiating a competitive price with large suppliers as their orders simply aren’t large enough. This is where Group Purchasing Organisations (GPOs) come in – where a group of organisations come together to leverage their collective buying power and obtain discounts from suppliers.
7. Understand benefits beyond price
“Just choose the supplier with the cheapest price.”
Only going for the lowest price is not advisable when procuring goods or services. Quality concerns aside, there are a whole range of benefits that should be taken into account when choosing suppliers. These include:
Total Cost of Ownership – TCO takes into account all the direct and indirect costs involved in acquiring a product over its entire lifetime, including factors such as machine maintenance, fuel consumption and disposal costs at the end of its life.
Social procurement – this may involve working with minority-owned suppliers or suppliers that have a social focus, such as the employment of workers with disabilities.
Green/environmental procurement – taking a suppliers’ environmental credentials into account.
Minimising exposure to risk – assessing the suppliers’ regulatory compliance to reduce the likelihood of that supplier being involved in activities such as labour abuses or modern slavery.
Looking for advice?
CIPS Australasia is the peak professional body for procurement and supply chain management. Visit www.cips.org.