Procurement-An Advanced Learning

Procurement-An Advanced Learning

This is my 2nd article for the complete understanding of modern-day procurement. In previous article, I was limited to the understanding of the procurement and basic concepts were discussed. In my current article, all aspects of modern-day procurement will be discussed. I believe readers will get benefitted from this article. Pictorial support is provided wherever required for the better understanding of the topic.

Flow of the discussion will be as under.

·??????What is procurement?

·??????Basic principles of procurement

·??????Life cycle of procurement

·??????Types of procurement

·??????Procurement Process Flow Steps

·??????3 P’s of procurement

·??????Five Pillars of procurement

·??????Models of procurement

·??????AI in Procurement

·??????Negotiation Techniques, Steps and Known Errors in negotiation.

·??????KPI in procurement

·??????Best Practices in procurement

What is procurement?

“Procurement is defined as the strategic process to streamline an organization’s operations to purchase quality goods and services from suppliers to realize business objectives of cost saving, achieving time efficiency and improving profitability”.

Above definition is self-explanatory and clearly differentiate between purchasing and procurement. Impulse buying is purchasing, and planned purchasing is procurement. We have discussed procurement in detail in previous article (https://www.dhirubhai.net/feed/update/urn:li:activity:7068113074339086336) and will focus on other topics to avoid unnecessary details. For reference link is given above for those who wants to read the article.

What’s the Difference Between Purchasing, Procurement, and Sourcing

Purchasing vs. Procurement

Basic Principles of Procurement

Any theory without basic principles has no meaning and so as the Procurement. In modern day business, profitability of the company is primarily linked to efficient buying and gives a cutting-edge advantage to an organization which procurement process is efficient as compete to those which are ignoring this basic and carrying inefficient procurement process. ?

To achieve the goal of efficient procurement process, there are some certain principals which needs to be followed and based on these principals, an organization can develop the efficient procurement process. Depending on the organization, the principles differ slightly. Seven of the most popular procurement concepts are listed below:

1-????Cost-effectiveness:?

Cost Efficiency is basic principle, but it needs to be handled very carefully. Quality goods and services and Cost efficiency are two opposite principals so when acquiring?products?and services, the firm must handle the process effectively and efficiently. It’s important to remember that a low price does not always imply a higher value; qualities like quality and durability also play a role in assessing if a purchase is worthwhile.

2-????Fairness:?

Individuals or suppliers should not be given special consideration in procurement. All proposals should be honestly evaluated based on how well they match the needs of the company.

3-????Competition:?

Unless there are special reasons or a sole-source provider where the item or service is only accessible from one vendor, organizations should seek competitive bids from numerous providers.

4-????Time Efficiency:?

To assist optimize value and prevent delays, procurement?activities?must be carried out effectively. Swift turnover of the transactions, will ultimately reduce the cost of the procurement and will add value to the profitability of the company.

5-????Transparency:?

Organizations should make essential procurement?information?available to the public and suppliers alike. Only when there are legal or other compelling grounds to keep?information?private should it be kept private.

6-????Integrity:?

Those involved in procurement should aim to be seen as trustworthy, dependable, honest, and accountable at all times. Funds must be used for the original purpose and in the best interests of the organization.

7-????Accountability:?

Everyone participating in the procurement process is responsible for their decisions and actions. They must accurately disclose all purchase operations, including any mistakes.

Life Cycle of the Procurement

The phases in a company’s procurement life cycle are frequently customized to meet the company’s specific requirements. Some firms may combine the processes in the procurement life cycle, while others may have multiple sub-categories. It is generally determined to evaluate the efficiency of the procurement department. Life cycle is categorized as under

?1-?????Profile Category and Need Analysis

The organization must first determine the demand and the specify, what is required. Organization should identify the real business requirement, budget allocation for the spending after considering all the facts. After that requirement may be generated for market research to learn about the item’s cost and other required information.

All the?information?obtained at this point, both internally and outside, serves as the foundation for the entire procurement plan that will be applied. This step of the procurement life cycle often involves personnel from all levels of the organization as well as?data?from outside sources.

2-?????Strategy for Purchasing and Sourcing

Different kinds of strategy are required for different kinds of items and services. There are certain policies established in every organization for the purchasing of different items and services and followed accordingly. If policy doesn’t in place, then strategy is defined as per the nature and requirement of the item.

3-?????Evaluate vendors and compile a vendor portfolio.

Usually a list of vendors have been selected through discussions and based on the requirement and market reputation. The benefit of having a pre-approved supplier list?is that the firm may try to establish a solid working relationship with a group of suppliers to obtain the greatest pricing and value. It also saves time spent negotiating with new potential suppliers each time a procurement requirement arises.

4-?????Request for Quotation

This step is taken once the need analysis is done and finalized and the requirement of item and services is shared with the vendor. Usually, a group of vendors is selected to share the RFQ to get the best possible rates and for better negotiation.

5-?????Vendor Selection and negotiation

Once vendor is selected after RFQ, price is further negotiated to get the best possible price.

6-?????Supplies Accuracy and supplier Efficiency

After the delivery of items or services, the supplier is evaluated for accuracy and efficiency and graded for future business with the organization. ??

7-?????Procurement Life cycle Assessment

Once the transaction is completed then we must assess the time of life cycle as short life cycle will lead efficient procurement and ultimately save the cost of the company.

Types of the procurement

·??????Direct procurement

·??????Services procurement

·??????Goods procurement

·??????Indirect procurement

1-?????Direct procurement

The?acquisition?of the inputs that a company needs to make its Finished product is known as?direct procurement. This is the raw material that is often required in the manufacturing industry. The profitability and?performance?of an organization are heavily influenced by the cost and efficiency of?direct procurement. Usually direct procurement is directly monitored by owners or the top management as normal variation is quality or price may cause a huge loss to the company.

2-?????Indirect Procurement

Indirect procurement?refers to the?acquisition?of services or inputs that aren’t directly utilized in the production of a company’s product but are necessary for day-to-day operations. It might be office supplies or equipment upkeep. The running of the firm is hampered by delays in?indirect procurement.

3-?????Goods Procurement

Procurement of tangible items is called Goods procurement. It may include direct and indirect procurement. It is categories separately as different kind of procurement procedure and documentation is involved in Goods procurement.

?4-?????Services procurement

Procurement of intangible services is called services procurement. Different kinds of services are required in different kinds of organizations depending on the operations. Different techniques for procurement are required for services as compared to Goods procurement and documentation as well. So, this category is different from Goods procurement.

Procurement Process Flow Steps

1-?????Determine all business divisions’ needs for products and services.

2-?????Identify the Requirement by discussion with respective department.

3-?????Identifying the Requirement’s Specifications

4-?????Create a Purchase Requisition

5-?????Review the Requisition

6-?????Make a list of potential providers and analyze them.

7-?????Send RFQ to the vendors.

8-?????Finalize the price and terms of the contract by negotiating it

9-?????Create a purchase order / Work Order

10-?Purchase Order Delivery

11-?Inspection And Supply of Products/Services

12-?Approval of Invoices and Disputes

13-?Keeping and Reviewing Records

14-?The Payment Procedure

3 P’s of Procurement

1-?????People

2-?????Process

3-?????Paperwork

?1-?????People

The number of people participating in the procurement process is determined by the sale of the product and the number of procurement orders. Procurement personnel are in short supply at a small firm.

2-?????Process

To work successfully, the procurement process must be well-designed and managed. When a procurement department is chaotic, it leads to inefficiencies and inconsistencies across the process, which can result in delays and difficulties with purchases and payments. At every level of the process, transparency assures that there is no corruption or manipulation.

3-?????Paperwork

It is critical to retain records at every stage of the purchase process. Although practically every step of the process has been digitized, both the?buyer?and the seller benefit from the efficient capture of all?information?at each level, as well as the coordination and comparison of all relevant?data?at each stage.

Five Pillars of Procurement

1-?????Value

2-?????Competition

3-?????Transparency & Ethics

4-?????Record-keeping and Accountability

5-?????Equality

1-?????Value

The cheapest choice for a provider isn’t necessarily the best. The value should guide the procurement process. The customer should strive to obtain the highest quality goods that are also the most cost-effective. It has a cascading?impact?on the company’s completed goods or services when a customer compromises on the quality of the input based on the lowest cost. The most important consideration when choosing a provider should be value for money.

2-?????Competition

A level playing field for all vendors is ensured by creating a bias-free and transparent vendor selection procedure. The?buyer?benefits from this free competition since he or she can acquire the greatest deal.

3-?????Transparency & Ethics

Whether through direct purchase, tenders, or bids, the selection procedure for a vendor is extremely prone to corruption. Any unethical?activities?used to influence the vendor selection process will have a negative?impact?on the quality and value of the?products?purchased.

4-?????Record-keeping and Accountability

Each person involved in the procurement process should be held accountable for their actions. Procurement stages may be more easily traced with good record-keeping processes.

5-?????Equality

Having a fair and standard procurement procedure across all industries gives all participants an equal chance to succeed.

Models of Procurement

A procurement model is a set of processes that a company or organization takes to acquire goods or services. The degrees of hierarchy, control, and decision-making in procurement are also defined by procurement models. The finer points of a?procurement strategy?are generally specific to each organization and its operating environment.

Many departments and divisions exist in big organizations, some of which may or may not be geographically dispersed. Management decisions can be made centrally or locally. The control over the purchase process may be grouped into several procurement models.

1-?????The Local Procurement Model

Control and decision-making are done at the local or departmental level under this procurement paradigm, which is not?centralized. Procurement choices would be completely within the discretion of the local division or department.

This strategy is based on the assumption that local management would have a better understanding of the department’s specific demands. It allows for a more flexible?procurement strategy?with fewer layers of bureaucracy. There’s always the possibility of making rash spending decisions without considering the big picture.

2-?????The Centralized Procurement Model

The central procurement approach gives central management complete control over procurement choices. All procurement must go via a?centralized?approval procedure, and central regulations apply to all local choices. When making purchasing selections, such a procurement model keeps the company’s or organization’s total budget and spending in mind.

Personnel with experience and dedication to the task conduct purchase negotiations. When purchasing in bulk, you also get a better price. However, there’s a chance that you won’t satisfy all of the specific requirements that each local level has. The procedure is complicated by the several levels of bureaucracy involved.

3-?????Hybrid Model

A hybrid procurement approach, which combines localized and central procurement, is used by certain businesses. Some purchases are made centrally, while others are made locally in this arrangement. This approach combines the best features of both models, allowing the local departments some autonomy while remaining under organizational management. A center-led procurement paradigm is another name for it.

?Benefits of Artificial Intelligence in Procurement

AI in procurement provides a set of applications that allow businesses to automate purchasing procedures, inventory management, supplier management, contract lifecycle management, and invoicing management. These apps work with ERP system, whether it’s Oracle, SAP, or something else entirely.

These functions are usually addressed by the increasingly powerful procurement management AI Solutions available:

Creating purchase orders based on need and having the relevant employees enter them into the system.

Checking purchase orders for line items that need to be filled up by a vendor.

Submitting outstanding purchase orders for approval or rejection to the relevant personnel.

Automate the submission of electronic purchase orders to vendors.

Send out reminders to customers to confirm recent purchase orders or cancelations.

Keep a stock of items to avoid shortages.

As items, materials, and services arrive, complete financial and inventory transactions.

Gather?data?and analyze trends to optimize and maximize revenues.

Other Main features of AI are: -

·??????Demand Planning

·??????Forecasting

·??????Data management

·??????Inventory management

·??????Logistic Management

Negotiation Techniques (Tips and Tricks)

Understanding and Research

The negotiator can negotiate when he/she is in full command of the pertinent?information related to the subject and have a deeper understanding of all of the aspects that go into a negotiation. Negotiating a fair bargain requires research and awareness of the technical and commercial components of the procurement item.

Explicitness

Rather than agreeing to a price range, it is preferable to negotiate a clearly stated lowest price. Pricing that is explicitly mentioned and agreed upon eliminates future disagreements. If a price range is agreed upon, a higher price may be charged, which is unfavorable to the negotiator. There should be no opportunity for misunderstanding by explaining and agreeing on the technical and other parts of an agreement with utmost clarity and accuracy.

Expect Protracted Negotiations

A one-meeting agreement is unusual in negotiations. It may take several rounds of negotiations until both parties are completely pleased with all of the parameters. Being persistent might provide positive outcomes if you realize there is an opportunity for bargaining. However, it takes a skilled negotiator to know when to walk away from a deal and change the tide in one’s favor.

The Good/Bad Guy Strategy

A common negotiating tactic is for the negotiator to say that the terms must be agreed upon by a higher authority. This puts a stumbling obstacle in the way of cutting rates or obtaining more advantageous arrangements. This approach may be avoided by clearly indicating that talks will only take place with the decision-making authority.

The Art of the Subtle Walk Away

An important bargaining technique is to walk away from a deal that looks to be a good deal since the supplier claims it is the lowest price?bid?for you. The supplier is eager to sell you their goods, but how can you know whether they are being truthful? In business, a conservative understanding of statistics is equally important. As a result, mastering the skill of walking away establishes power, allowing you to influence pricing to your advantage.

You Have the Right to Insist on a Price Reduction

What if a vendor is astute enough to quote a price that is implied in the sliding range? That is an excellent query. You should be aware that you are not negotiating with a single vendor in this scenario, and your supplier should be aware that other vendors have provided cheaper quotes. The negotiation isn’t done just because a salesperson proposes a price after you’ve refuted it. Until a contract is signed, the endeavor to lower the price might continue.

Don’t Let a Salesperson Ride Your Emotions

This is arguably the most crucial bargaining advice for a customer who may be a victim of a salesperson’s manipulative tactics, in which they try to play with your emotions. A skilled salesperson may attempt to enter your personal space and exploit your emotions.

So be sure to have your facts and objectives on hand and keep the conversation on track. You may still have fun and create a connection but do it with caution so that you always have the upper hand and the salesperson knows he’s dealing with a seasoned professional.

Use Evidence of Alternatives to Persuade Compromise

As discussed, it is critical to emphasize it so that you are aware that you, too, have options, but that you have evidence to back up your claims so that you are not dismissed by a seasoned salesperson. To stay in business with your market goodwill, the salesman must compromise on the transaction. You are, after all, the purchaser!

?Steps of Negotiation

Negotiation methods and approaches for successful procurement negotiations are as under

Planning:?

The significance of?planning?for any negotiation cannot be overstated. On both sides of the negotiation, adequate preparation and a complete understanding of the aspects involved speed up the process. Negotiations should not be hindered by repeated internal discussions if the negotiating team agrees on a procurement plan. Some negotiators go even farther and try to learn everything they can about the firm and the executives they’ll be dealing with.

Agenda:?

Finalizing an agenda for the meeting so that both negotiating teams are on the same page saves a lot of time. Knowing the other team’s agenda means that you’re well-prepared with pertinent info and responses.

Research the Firm’s History:

?It’s a good idea to research the company with whom you’re negotiating. It’ll aid you in anticipating their signature strategies. And if the organization has a strong track record for efficiency and quality, you’ll know that finding a reputable and dependable provider is well worth the effort.

Pick Wise Team Members:?

It’s critical for all members of a negotiation team to communicate well with one another and to agree on the negotiating approach and aim. The group should agree on what they’re prepared to compromise on and how much they’re ready to give up. Negotiation outcomes will suffer if there is a lack of consensus among the team. It’s also a good idea to go through your bargaining approach with your team and decide on nonverbal communication methods.

People Make an organization:?

Don’t undervalue the importance of interpersonal skills. Every business is represented by a person at the end of the day. It is a good idea to attempt to get to know the opposing team.

Summaries Clearly:?

After the negotiation, summarize all of the agreed-upon points so that all of the negotiators know what the other has comprehended. Misunderstandings and the need to renegotiate are avoided as a result of this. As quickly as possible, get everything in writing.

Typical Negotiation Errors

Inadequate Preparation:?

Failure to prepare adequately might result in protracted discussions or needless re-negotiations.

?Aggression:?

A?win-win?situation for both sides is the ideal outcome of a negotiation. Long-term, mutually beneficial connections are developed because of this. When one negotiator is overly aggressive and reluctant to compromise on any issue, the relationship will suffer.

Details:?

Failure to pay attention to all of the flaws may result in an agreement that appears to be fine on the surface but contains several loopholes and details that will ultimately harm the organization.

Emotions:?

Because business talks are ultimately between groups of people, it’s easy for emotions to take precedence over other factors. Take a break if the discussion becomes heated.

Ethics:

Being ethical pays off in every situation. It might be quite tempting to take a clear shortcut, but this can have a negative influence on the business relationship. When the truth is disclosed, it will tarnish the negotiator’s reputation.

KPIs in Procurement

Performance?Indicators for Purchase Orders

Order Cycle Time:?The time it takes for one order cycle to complete. This will aid in determining which provider is the most suitable for emergency supplies.

Cost of Each Transaction:?The cost of processing each purchase, which aids in keeping track of internal expenses. The time it takes to fulfill an order from the moment it is placed to the time it is delivered.

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Key?Performance?Indicators?for Supply

• Provider Availability:?How prompt and available is the supplier in the event of a last-minute request or emergency order?
• Number of Suppliers:?This will inform you if you rely on a small number of suppliers too much
• Quality, Accuracy, And Compliance:?Determine whether or not the provider adheres to the standards in terms of quality and accuracy. Too many flaws and errors are expensive and time-consuming. Supplier Capacity: Identifying suppliers who can handle huge orders is critical.

Key?Performance?Indicators for Return on Investment

• Savings and?Cost Avoidance:?The amount of money saved by a corporation as a result of its procurement procedure. It is a savings when a procurement procedure assists in the elimination of certain expenditures.
• Total Return on Investment (ROI):?The total return on investment of the procurement process.

Key?Performance?Indicators for quality and Cost

·???????Defect Rate and Quality

·???????Rate of Adherence

·???????Accuracy

·???????Order Costs and Invoices

·???????ROI

·???????Authorized expenditures

·???????Price Competition Among Vendors

Best Practices in Procurement

·???????Make Procurement Processes More Automated

·???????Have Well-Defined Processes

·???????Adopt a transparent process!

·???????Create a contract and documentation hub that is centrally located.

·???????Make Inventory Decisions Based on Data

·???????Have a multi-sourcing strategy in place.

·???????Develop long-term relationships with your suppliers.

·???????Educate your procurement staff.

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