Procurement as a Strategic Value-adding Player in Organizations

Last week I had an interesting conversation with some colleagues I am mentoring on procurement including my wife (she is a procurement professional and I don’t know how we both ended up in the same profession). The argument? Procurement is generally transactional, reactive, and full of blame, and their contributions are not appreciated and never get a seat at the table. I explained how and why procurement is strategic and contributes immensely to organizational success.

This article is in response to that conversation and I hope readers will find meaning and develop a strategic approach to procurement.

What is Procurement?

Procurement/Procuring - the acquisition of goods and/or services including actions necessary for acquiring external resources for the organization and may include drafting requests for proposals, requests for quotations, submitting requisitions, placing purchase orders, and inspecting the final goods and/or services.

How does this happen? The procurement department usually is responsible for receiving requirements/needs from other departments, identifying vendors or suppliers/service providers, and contractors, facilitating vendor bid evaluation, negotiating, and purchasing goods or services to fulfill those requirements.

Somebody asked me in 2008, why can't you go to the shop next door and get me what I need instead of going through a bureaucratic process? I guess procurement teams are being asked this same question today.

What is Strategic Procurement and why is it Important?

Strategic procurement helps formalize the systemic gathering, analysis, and application of information and data to assist organizations make informed decisions in aligning their procurement strategy with business strategy and goals, securing the best possible value, and reducing overall costs over time. Strategic procurement is not transactional, it has taken a paramount role in driving business performance and delivering intelligent insights that create unparalleled value. In procurement transformation, agility, time, quality, and cost are crucial.

In today’s competitive, uncertain, and interconnected business environment, organizations - whether for-profit or non-profit, private or public are trying to do things differently and finding new and innovative ways to achieve a competitive advantage. You will realize that procurement in many organizations is viewed as a transactional support function. However, the reality is procurement plays a more bigger role. According to the Ivalua Procurement Executives Survey of 2013, a majority of procurement executives (73%) stated that the objectives of their procurement department are linked to the global objectives of their companies.

?If you currently debating how to improve the efficiency of your department and organization and reduce lead time, reduce costs, mitigate risks, and drive profitability? Then are thinking strategic procurement.

Studies have also demonstrated that procurement is progressively seen as indispensable presenting the largest category of spend, ranging from 50% to 60% of revenue/expenditure. Procurement is more than just getting goods delivered or services/works performed, it is a key element in the financial success of an organization. For instance, when you combine a good procurement strategy with well-defined roles and responsibilities, professionally trained personnel, policies and systems, and leadership that sees value in procurement, you are on the right track to delivering a world-class procurement guiding the organization to superior performance.

Having defined procurement and its strategic nature, let’s turn focus on the process and briefly explain it.

?Steps of the Purchasing Process

The procurement process consists of several logical steps/stages. If executed well, each stage will deliver the required results and generate positive benefits. These steps should be adapted to suit each organization’s needs. However, as a general guide, the following steps can be taken:

1. Determining the needs & Procurement Planning.
2. Communicating the needs through purchase requests.
3. Reviewing & approving the needs.
4. Finding potential suppliers (quotes collection//tender process).
5. Evaluation and supplier selection (Committee evaluation).
6. Formalizing the commitment (Contract/Purchase order).
7. Follow-up (Scheduling and delivery) and receipt and Inspection.
8. Closing out the transaction (Payment, filing documents, performance evaluation) including conducting three-way matching.
9. Keep Records/Securing supporting documentation.

Some best practices in Procurement

• Procurement Strategy: How do procurement leaders build and maintain resilient procurement systems in a complex global environment? This can be done by developing and adopting a robust procurement strategy to support business strategy.
• Procurement Planning: Investing in procurement plans to forecast needs and improve the effectiveness of a project by ensuring timely deliveries, and maximizing the potential benefits of economies of scale through consolidated bulk purchasing among others.
• Prequalification of suppliers and Service Providers: Build a database of prescreened vendors. Establishing pre-qualified vendors can add significant benefits to the procurement function including cost optimization, improved service levels, relationship building, timely procurement, and risk mitigation
• Establish Procurement Evaluation Committee: This is a group of individuals established for independent review and evaluation of procurement documentation, evaluation, recommend the most appropriate supplier or service provider based on specified criteria.
• Communication: The importance of communication with internal and external stakeholders cannot be overlooked Communication is crucial to procurement success and yet it is surprisingly one of the biggest areas in need of improvement. Effective communication will improve the process and reduce disagreements. Poor or ineffective communication may lead to delays and defective goods or services.
• Automation: Identify and use appropriate ERP to make the process seamless, eliminate manual processes, and improve visibility and reporting.
• Monitoring and Evaluation/KPIs: Remember that strategic procurement is a long-term process, so it’s important to develop the right metrics for monitoring performance over time. Develop KIPs and monitor them to help you remain on course and continuously improve.

Hope this was helpful. Share your thoughts and let us know if your procurement is strategic or operational.