Procurement 101Creating a Procurement Strategy: 3-Step Planning Approach
“Did I get the best value?”
Individuals ask this question every time they buy something.
On a personal level, buying something is as simple as swiping a credit card (or using saved payment details online).
For businesses, the purchasing process is more complicated. This is why many companies place an emphasis on the importance of planning out a procurement strategy.
A procurement strategy is established by first determining the most efficient methods and processes that can be sustained by a company. Procurement management plans for individual branches, departments, projects, and item types are then created from these established methods and processes.
This approach towards creating a procurement strategy ensures that objectives are well aligned with the capacity of a company’s operational workforce, and can be accomplished by following a 3-step planning process.
- Step One: Determining Procurement Methods
- Step Two: Determining Procurement Processes
- Step Three: Creating Specialized Procurement Plans
Steps FOR ACHIEVING Effective Procurement Planning and Strategy:
Procurement methods are used to add structure to the way procedures and processes operate in a purchasing workflow.
The first step of creating a procurement strategy is to determine the most efficient and sustainable procurement methods and tools to use.
To adopt every method of procurement that exists is beyond the scope of many businesses, due to the time required to implement each method and the individual requirements of every business.
Because of this, selecting procurement methods to use based on available resources and the operational needs of the company is critical when developing an effective procurement strategy.
Procurement is a profession for a reason. The unique methods of procurement used by some companies are very detailed because of their industry’s specific requirements, but here’s a shortlist of some commonly used methods:
Spend Control / Spend Management
Spend control and management refer to the method of ensuring that costs do not exceed financial limits, and that money is not wasted on unnecessary or unapproved purchases.
To develop and apply this method, consider these questions:
- What is the total amount of available funding?
- Who is involved in the purchasing process, and how are approvals managed?
- How will expenditure be tracked and reported on?
- How will budgets be adjusted and improved?
Budgets have the potential to harm, rather than help a company. Be sure to know the difference between good and bad budgets when establishing your spend control method.
Supplier Relationship Management (SRM)
Supplier relationship management refers to the method used for ensuring that the purchase of goods and services is channeled through a list of approved suppliers, and that this list is optimised and updated on a regular basis.
To implement this method, consider these questions:
- How will supplier selection be managed?
- How will supplier performance and quality be evaluated?
- How will your list of suppliers be categorised?
- How will transaction histories be recorded for review?
Routine checkups can secure discounts and verify that due diligence is upheld. More reading is available about maintaining good supplier relationships.
Item and Inventory Management
Item management refers to categorising purchases to best determine which purchasing process certain goods and services should use. This usually requires an understanding of the operational needs of the company.
To determine the value of this method for your company, consider these questions:
- What items need to be purchased?
- When or how often do these items need to be purchased?
- Where will the items be ordered from?
- How will the items be paid for and tracked?
Having an effective method for storing and sharing documents like a bill of quantities and item specifications can also be especially important for ordering complicated item sets from your list.
Contract management refers to establishing ongoing purchasing arrangements with suppliers. Despite the existence of many types of contracts, the end goal of any contract is to secure cost reductions through effective agreements.
To establish an effective approach to using this method, consider these questions:
- How will service contracts be initiated and managed?
- Would establishing a contract make sense for these regularly purchased items?
- How will purchase orders be kept on-contract?
- Do established contracts need to be renewed or renegotiated regularly?
There’s a great article by Adrienne Watt that covers the concept of contract management in relation to the procurement planning process – a valuable read for cost-reduction enthusiasts.
E-procurement is the management of procurement processes through dedicated procurement software tools. The goal of e-procurement is to reduce the amount of company resources needed to execute the procurement strategy.
To implement this method, consider these questions:
- How long will it take to implement an e-procurement system?
- Will the cost of implementation provide a good return on investment?
- Does the system meet all of the requirements outlined in the procurement strategy?
- What benefits does e-procurement provide over other methods?
The use of an e-procurement system has become a popular approach for many companies that are seeking to plan and implement an improved procurement strategy.
Managing procurement processes requires employees to execute workflows, meaning that an understanding of the company’s available resource capacity is required.
Before deciding on which specific procurement processes will be used, there are a few questions to think about in relation to your company’s workflow capacity:
- What are the specific purchasing actions that people are going to be taking?
- How will these actions be tracked and reported on?
- Who will be responsible for each action?
- What tools and methods will be used to manage each process?
Based on these questions, determine which purchasing processes will be sustainable by your workforce, and plan out the steps that will be used to accomplish these workflows.
The Purchase-to-Pay Process
This term refers to the completion of a procurement cycle (also referred to as Procure-to-Pay or abbreviated “P2P”).
It can be understood as the moment something needs to be “purchased” or “procured” through to the moment it is “paid” for. Payment in a business environment is often handled through a submitted “purchase” order, and “payment” is then handled by a received supplier invoice.
In many procurement processes, an internal form, known as a “purchase requisition order” (or simply “requisition”) is used by someone who doesn’t have purchasing authority to indicate that something needs to be ordered.
Consider which steps will be involved in your purchase to pay process:
- Will requisition orders be placed?
- Will purchase order placement be centralised or decentralised?
- How will delivery receiving be tracked?
- How will invoices be processed and 3-way matches confirmed?
Establishing a single point of entry for invoices across multiple locations can be beneficial for accounts payable as well. Find out more about streamlining purchasing with accounts payable.
The Strategic Sourcing Process
Strategic sourcing, also sometimes referred to as Source-to-Pay, or abbreviated as “S2P”, can be understood as a negotiation process between a business (the buyer), and one or more vendors (the seller) in order to secure the best value from a purchase.
Different types of “sourcing events” exist, including auctioning and tendering – each with their own unique process quirks.
In some cases, a purchase for a single order of goods or services may also be “multi-sourced”, meaning that the order will be fulfilled from more than one vendor source.
Consider which steps will be involved in your strategic sourcing process:
- Who will initiate and manage sourcing events in your company?
- How will internal and external communication be managed?
- How will offers be evaluated and compared with one another?
- How will completed sourcing events be delivered, recorded, and reported on?
When completing a sourcing event, it’s also good to plan out how the finalised deal will mesh with interact with your purchase-to-pay and accounts payable processes.
The Expense Tracking Process
While not as involved as the purchase-to-pay or strategic sourcing processes, expense tracking is an important consideration for tracking business spending that takes place outside of purchase orders.
- Do business expenses such as travel or food occur regularly in your business?
- How will receipts recorded and processed?
- How will reimbursements to employees be documented?
- How will credit notes from suppliers be documented?
Not all business expenses require a purchase order to be raised.
In fact, the operational cost of raising and a single purchase order can range anywhere from $60 to $750 – making expense tracking a valuable part of the procurement strategy.
Once the most effective procurement methods and processes that a company can sustain have been identified, they can be applied to more detailed operational procurement plans.
Breaking down the procurement strategy into multiple plans ensures that workflows can be designed to improve productivity, not hinder it.
Procurement plans should be created for:
If the company operates multiple branches across different regions, a plan for managing the operations of each branch will be required.
When applying different methods and processes at a branch level, consider things like different currency requirements, delivery and billing addresses, and how the purchase-to-pay and accounts payable systems will be streamlined throughout those branches.
The SRM method will need to be given additional attention if international vendors are involved.
If specialised purchasing or operations are classified by their own department within the company, those departments warrant their own unique procurement plans.
When applying procurement methods and processes to a department, consider what types of purchasing occur in those departments, whether those departments need to keep track of inventory stock levels, and how procurement workflows will be structured and assigned to department managers.
If new project development arises on a regular basis, a plan for handling procurement in each of those project environments is required.
When applying procurement methods and processes to a project plan, ensure that the scope of work is identified, estimated time-frames and item quantities are provided, and that managers are provided with a list of suppliers to communicate with and order from.
Because the scope of a project can vary drastically from industry to industry, be sure to consider elements that may be specific to the company’s professional field as well.
Each item category.
An “item” refers to any good or service that a company orders.
When applying procurement methods and processes to a list of items, consider how item specifications for goods and services will be communicated, how contract arrangements will be established and managed for each item, and how items can be grouped and ordered efficiently from a list of suppliers.
While the item and inventory management method outlines what needs to be ordered, developing a plan for categorising items aims to structure how those items are ordered, and accommodate any unique buying strategies that may apply to a particular category of item.
Indicators of Effective Procurement Planning and Strategy:
Once an overall procurement strategy and detailed procurement plans are implemented, there are several indicators that allow the effectiveness of these plans to be tracked.
An effective procurement strategy should provide these noticeable benefits:
- Order quality is consistent throughout goods and services, meeting expectations.
- Budgets are never exceed, and effective use of allocated funds are easily confirmed.
- Inventory stock levels are balanced, avoiding over and under stocking of key items.
- Total cost of ownership is noticeably reduced for all purchased goods and services.
- Staff are motivated and able to complete their workflows clearly and efficiently.
The creation of a procurement strategy also has a number of organisational advantages, especially for management. Peace of mind is attained by knowing that deliveries will be made on time, and that projects will be completed on time and within outlined budgets.
Procurement strategies are a highly scalable investment.
When established early in a company’s development, the need to restructure methods, processes, and workflows is avoided, because the procurement strategy can adjust to meet scaling purchasing requirements.
Are you in the process of drafting a procurement plan?
Have you created one in the past?
Share your experience in the comment section below!
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