Is procurement a strategic initiative? Most companies don’t see it as such; too often we encounter corporate initiatives that consider Procurement an afterthought not required for inclusion in strategic discussions, leading to process and systems designs that are not user-friendly. However, with a well-designed and thoughtfully implemented Procurement system companies can take advantage of far reaching value add from the business through to finance and accounting, and ultimately have a positive impact on bottom-line corporate performance
To achieve a higher standard of procurement, we first, should understand what it is - an integral part of an organization that can provide all of the following:
- Vendor Management including: Risk, Registration; Contract Negotiation and rate/ price setting
- Requisition creation and management for goods and services
- Purchase Order creation and management (including receipt recognition)
- Invoice creation and Payment
Overlooking the importance of procurement, organizations are making fundamental procurement system or process design flaws that may be leaving substantial money on the table. Many organizations may put proper focus on the ‘big ticket’, high value items but gloss over the small dollar value purchases that could be causing substantial leakage in the company’s bottom line. Poor system and process design ensures that the users will:
- Incorrectly use the system, creating additional work on the back end or in the approval cycle and increasing the processing time and effort required and potentially introducing unintended risk to the organization
- Avoid using the system for purchases and instead order goods/services by contacting supplier directly thus not capitalizing on prior negotiated rates and contracts
- Entering the order after the invoice has been received
Without proper design, a company may be missing an opportunity to capitalize on cost savings mechanisms driven by functional improvements, as well, as strengthened process controls. Common organization gains from best-practice procurement processes include:
- Supplier Risk reduction and compliance through the use of standard contracts
- Reductions and/ or the elimination of superfluous spend related to….
- Economies of scale resulting in cost savings for goods and services by identifying and leveraging strategic suppliers
- Control of purchases for only approved goods
- Increased Working Capital Management elevated by the centralization of negotiations to set better payment terms
Designing a competent system may seem like too large and tangled a task to take on, however, with proper management, we see organizations in every industry capitalizing on intuitive functionality and avoiding the common pitfalls that are pervasive in Procurement systems worldwide.
The key to a successful design and implementation of a robust, integrated procurement solution is the engagement of the right people from the get-go. Organizationally the Chief Procurement Officer should be working with other c-suite executives to understand the corporate vision and help lead the development of purchasing requirements and analytics to support the business. Purchasing Managers (Buyers) within the procurement department (or business areas) should likewise be engaged and empowered to manage supplier contracts and obtain the best possible pricing and terms for the organization.
Once the design is laid out, Procurement can begin negotiating contracts and catalogs with preferred suppliers. This is one of the most important aspects of any system/process implementation. By enabling the system content, the user can utilize a “shopping” experience similar to other services on the web, like Amazon. Enabled content will also facilitate seamless finance related tasks like: journal entries, fixed asset tracking, goods and services receiving, and invoice processing/ payment with advanced analytic, reporting, and drill down capabilities.
Having contracts and content within their systems will enable better reporting, less risk for the organization and provide a mechanism to drive accounting for transactions. An organization can also reduce the level of approvals for goods/services that are bought on contract thus making the user experience better. For goods/services that are not on contract should be routed to a Purchasing Manager(Buyer) so they can review as to why it is needed and possibly negotiate a contract for it via a preferred supplier or create a new supplier relationship.
Procurement should also be involved in managing all the supplier relationships and setup to assure compliance and manage contractual agreements with the suppliers.
Having Procurement engaged upfront with the vision of the company and a good purchasing process will support the purchasing requirements of an organization with tighter controls and less risk. Eventually the controls and agreements with the preferred suppliers will provide the ability for the organization to get better pricing and terms from their suppliers.