Procurement is more than just managing spending through a structured process. It adds value to match the needs of your organization. It’s about influencing and negotiating price and quality. It builds relationships with key stakeholders and supplies. Its purpose is to provide value for money. Hence, a wide range of skills from project management and conflict resolution to research analysis and negotiation is required. The role goes beyond getting a contract signed. A typical procurement manager collaborates and influences post contracts to ensure good supplier relationships and business outcomes.
Procurement is the process of buying goods or services. The procurement process exercises control over spending money, over the process rendering or competitive bidding process and over cost itself. Therefore, it is cost management to a major extent. It is always associated with cutting costs and cost analyzers. Some of the best procurement managers are excellent price negotiators. Besides price, they always negotiate three parameters: quantity, quality and delivery time. They also manage Incoterms and therefore, logistics is a part of procurement with Expeditors doing the job.
Sometimes we have to add or replace a supplier with mergers and acquisitions as we do strategic sourcing. Procurement is pure commercial management as it requires supervision over contracts and parties involving terms and conditions. This is often related to contract management as the person working in procurement is a buyer or purchaser.
Project managers often get tasked with sourcing goods, services or labour for their projects from outside vendors or contractors. The first step in procurement planning is deciding whether to source outside services at all. They do this to outsource expertise they don’t already have. Moreover, they manage project risk or control costs.
The procurement route usually involves a sequence of actions and decisions that needs to be established based on your company’s needs. They identify the appropriate type of contract and invite suppliers to submit procurement documents.
The manager or a procurement service provider (PSP) selects a supplier through a process of bidding, negotiation and awarding of the contract and eventually closes out the contract procurement. It’s a formal process of planning and administering agreements with other parties.
It’s an approach that can be used in different situations with different suppliers. Procurement usually involves a contract that is essentially an agreement between two or more legal entities. This creates an obligation to do or not do a particular thing.
There are three major types of contract
- Cost reimbursable
- Time and materials.
The risks between the supplier and the buyer vary in each contract type. In essence, you’ll pay more if you’re less willing to tolerate uncertainty.
Procurement can get complicated and has legal ramifications. So get advice from experts within your organization to get it right the first time. Once you’ve selected the appropriate contract type, invite suppliers to bid for it and consider their submissions. Requests for proposal (RFP) are the most common type of procurement document but there are also requests for information(RFI) and requests for quotation(RFQ).
How to evaluate the suppliers?
When you’re evaluating different suppliers you may want to consider cost reliability, timeliness, quality availability and reputation. Different companies may use different criteria to judge their potential suppliers. The exact priorities will depend on your project and your organization as an end-to-end process.
Contract management falls into three phases: (1) Pre-award, (2) Award and (3) Post-award as each involves different activities performed by the buyer and the seller. Your organization will probably have its way of dealing with procurement. Decisions may be decentralised using standardized procedures or project managers might be empowered to make most of the decisions themselves making a centralized uniform decision. Whatever may be, it is important to understand the role of procurement to best manage it based on your organizational structure and projects.
Ways to Improve your procurement process:
- Capitalize on new trends
- Be more agile
- Attract and retain top-notch talent
- Eliminate functional boundaries
- Deliver on your business’s top priorities
Once the role of the procurement function in an organization was simply to buy things. It responded to demand and instructions from the business to place orders with suppliers. However, a purely transactional procurement function adds little value. We pay more for goods and services that fail to secure the full value or manage risk in our supply base. All of this puts the supplies firmly in control.
Procurement transformation is the journey from the transactional procurement to a more strategic procurement function. The transactions relating to purchasing activity are still there but the real focus of the organization shifts to one that is a fundamental enabler of business success.
Strategic sourcing is when the function responsible for sourcing is not merely reactive to internal functions but is connected and working together with the rest of the organisation. This ensures everything that is sourced is coordinated as a whole; based upon the needs and wants of the organization.
Procurement ensures that the greatest value is secured from the supply base and that this value flows through the organization to better enable us to satisfy our end customers through the optimum supply base possibilities. The sales and marketing functions of organizations that manage how customers are satisfied to have long since been driven by the goals and strategy of the organization which in turn are also shaped by what customers need and want.
The old-style transactional procurement has not been positioned in this way. But modern strategic sourcing means that procurement responds directly and actively helps deliver what the organization is trying to achieve. It also helps shape strategy based upon what is happening in the supply base. A truly strategic approach to procurement that can bring great value is made possible by connecting, sourcing and satisfying the stakeholders.
The journey of procurement transformation from tactical to strategic takes considerable effort. Companies that make this leap realize significant benefits from dramatic cost reduction, reduced supply base risk, unlocking new and greater value and securing innovation from the supply base.