As competition intensifies, manufacturing companies operating in different industries are also focusing on incorporating strategies that can lead to cost reduction, capacity expansion, and operational efficiencies – putting pressure on their procurement system to successfully mitigate risks involved in the procurement process.
Analyzing Different Types of Procurement Risks for a Multinational Conglomerate – A SpendEdge Case Study _compressed
Modern companies are operating in increasingly intense scrutiny driven by technology, customer reviews, and expectations for service improvements. Their main objectives are to minimize cost by improving the procurement cycle, manage risks, maintain vendor relationships, and streamline processes.
However, reducing costs still remains the top priority for businesses. Procurement professionals need to think before making any purchase. It might sound an easy task, but only experts will understand the difficulty involved in selecting and creating purchase orders for every request that comes to their desk. This is where unnecessary expenses start. Therefore, it is important for companies to profile the challenges faced during the management of the procurement cycle that can lead to the failure of the project.
Key procurement cycle challenges
#1 Inaccurate planning
Mostly, the decisions made while planning for purchase and delivery are crucial as they affect the overall schedule and total cost of the operations. Improper planning in the procurement process may result in material shortages or surpluses, cash flow problem, and unnecessary delays. Therefore, companies should follow procurement best practices and prototype planning models to facilitate pre-tender and procurement processes and improve their procurement cycle.
Want to avoid unnecessary material shortages and cash flow problems? Get in touch with our experts and know how they can ensure best in class procurement cycle for your organization.
#2 Reducing costs
The process begins with the proposal of the annual budget. However, the reduction of costs majorly depends upon effective supply chain management. Even small reductions in material costs in a company’s total operating budget can impact the organization positively by increasing its profit margins. Therefore, professionals managing the procurement cycle must adopt procurement best practices and negotiate effectively to obtain materials of the highest quality at the lowest cost.
#3 Legal and political environment
Legal environment refers to a broad legal framework that governs all business activities including research and development apart from procurement rules and regulations. It involves various aspects such as manufacturing, finance, marketing, and contracts of the procurement management system. Similarly, the political environment includes trade associations, professional associations, and business firms or companies that are engaged in the procurement process. Their varied interests affect the overall budget of the procurement management system and disturb the complete procurement cycle. Such an environment requires companies to include detailed provisions in their contracts and develop a strong coalition among policy makers, bureaucrats, and interest groups to get their procurement process in place.
#4 Maintaining vendor relationships
Vendor relationship management is an intellectual approach to manage relationships with vendors who supply goods and services to the organization. The methodologies of vendors pre-qualification in the procurement cycle vary from company to company but the relationships strengthen when procurement professionals follow mutually agreed upon standards to assess the performance.
How to manage your procurement cycle?
Our team of procurement experts at SpendEdge realizes that ensuring efficiency in the procurement process has a positive chain reaction within the entire organization. Therefore, we are highlighting four steps that are critical to step-up your procurement cycle:
- Incorporate a contract management system
- Maintain a good supplier relationship
- Automate processes
- Employee training and development
Making changes in the procurement cycle may seem a daunting task at first but it is extremely beneficial in the long run. Request a free demo and know how our experts can help you improve the procurement cycle.
The importance of having category management in procurement is now dawning on organizations that do not have well-defined procurement goals. One of the key reasons for this being that these players are unable to get the best value out of their third-party controllable spend. Moreover, companies could end up paying a hefty price for processing day-to-day transactions without having a clear-cut plan.
What is category management in procurement?
Category management is a strategic process that involves organizing procurement resources to focus on certain specific aspects of spend. Category management heavily focuses on organizational spend. If leveraged effectively throughout the organization, the results can be significantly greater than traditional transactional-based procurement negotiations. Applying category management in procurement benefits companies by minimizing risk in the supply chain, reducing the cost of buying goods and services, and increasing the overall value from the supply base and gaining access to more innovation from suppliers.
Benefits of category management in procurement
Category management in procurement is of great strategic importance, and if applied effectively across the organization, the results can be significantly greater than traditional transactional-based purchasing and procurement negotiations. Let’s take at some of the strategic benefits of adopting category management in procurement:
Improved supplier performance
Having an efficient plan of category management in procurement will enable companies to work with suppliers in a better manner. Also, organizations can increase the speed between initial adoption and full implementation of the plan. Once new supplier contracts are initiated, category management in procurement provides a layer of continual strategy adjustment.
Maintaining efficiency in the procurement cycle has a positive chain reaction within the organization as a whole. The key objectives of a procurement process extend to far more than merely obtaining goods and services to satisfy the internal requirements. A successful procurement process aims to optimize business operations and create a significant business value. Having a highly streamlined procurement cycle is vital to the financial success of a company. But even the best procurement process often require refinement in order to yield better returns. But in today’s highly competitive world, if you keep doing what you always have been doing, chances are that it might become obsolete. To survive, companies need to keep constantly updating themselves on the market trends and ensure that the procurement cycle is best in class. Consider incorporating these methods to improve your procurement process:
- Incorporate contract management system
Companies can use technology to improve the procurement process is by incorporating a contract management system. It will alleviate the whole task of creating new contracts every time the company onboard a new supplier. Contract management and the use of standard templates is more time-saving and facilitates the improvement of efficiency. Furthermore, standard contracts can avoid the risk of errors being made in the procurement cycle and ensure that all important concepts and language are included in each and every contract.
- Maintain good supplier relationship
Ensuring a good relationship with the suppliers is critical in a good procurement cycle. A mutually beneficial relationship between the organization and suppliers comes with a great deal of effort and hard work. It is important that businesses are dedicated to growing relationships with their vendors and suppliers through trust, honesty, open communication, and ethical business practices. It will also result in improved goodwill as a happy supplier will most likely spread a good word about the company, leading to new sourcing avenues.
- Automate processes
A company’s procurement cycle might function well manually. But its full potential and true efficiency can be realized with automation. With a good e-procurement program in place, companies can gather data, conduct supplier research, gain greater visibility into the spend, and ensure the requirements are being met. Furthermore, this can help streamline the procurement process, making it easier than ever to create contracts, send payment, and track invoices and shipment in order to drive efficiencies.
- Employee training and development
Well trained employees can contribute majorly towards an efficient procurement cycle. Training and development create scope for employees’ personal evolution but also has a significant impact on the company’s productivity and profitability as a whole. It reinforces the goodwill of the business and allows it to maintain the competitive edge. Furthermore, it leads to higher customer satisfaction, lower costs and faster growth. As a form of effective communication, training can lead to an increase in productivity and allow employees to make the best decisions for the company’s progress.
To know more about the steps involved in procurement cycle and the challenges in the procurement process
Every procurement process is more complex than it might seem to be. Since procurement is an umbrella term that includes several core business functions, it should be considered a core part of any organization’s corporate strategy. Strategic procurement is an organization-wide process. Moreover, having a good procurement process in place will ensure that companies pay the best price for goods or services, save time by choosing the most reputable vendors, and minimize order delays and mistakes. Each organization varies from one another in terms of their operations and requirements. Some organizations require a formal process to suit their complex environment, which is often the case in government or education sectors. In those industries, vendors must comply with strict guidelines. Others, like enterprise businesses, require a few key steps to manage budgets more effectively. Here are the steps involved in a successful procurement cycle:
Step #1: Need recognition
Every procurement process begins when a business feels the need for a good or a service. These goods or services can either be internal – any materials required to run the business, or external – materials that the business will eventually sell. At this stage, businesses are also expected to set a budget within which they expect to procure the goods or services. This will help companies to ensure that they don’t end up paying too much and overshooting their budget.
Step #2: Vendor selection
This is one of the most crucial steps in the procurement cycle. Companies must identify different vendors who can cater to their requirements. A comprehensive comparison should be undertaken to understand which vendor provides the best value and quality for your goods or services. It’s important to find vendors who not only deliver a high-quality product for a competitive price but also has a strong reputation.
Step #3: Internal approval
The next stage in the procurement process involves getting the thumbs up from the internal department that controls finances to purchase your goods or services. This includes creating a purchase requisition document and submitting it to that department.
Step #4: Purchase order
The purchase order is used to buy materials between a buyer and seller. It specifically defines the price, specifications, and terms and conditions of the product or service and any additional obligations.
Step #5: Order details and invoice
This is the stage of the procurement process where the vendor sends an invoice to the purchaser which describes exactly what the order includes. The invoice confirms the sale and reaffirms exactly when the payment is due. When the purchaser receives the order, they typically have a limited amount of time to notify the vendor of any issues with the good or service. At this point, purchase orders, order receipts, and vendor invoices – are aligned and reconciled, highlighting any discrepancies to ensure that what you are being charged matches what you have received.
Step #6: Payment
Once the order is received, the next step in the procurement process is for the purchaser to make payments to the vendor within the timeframe that has been agreed upon. Usually, payment is made in the form of cash, check, bank transfers, credit letters or other types of electronic transfers.
Step #7: Maintain a Record
The final stage in the procurement cycle is essential to ensure all-around bookkeeping and audit purposes. These include purchase records to verify tax information and purchase orders to confirm warranty information. Purchase records reference future purchases as well.
To know more about how companies can enhance their procurement process
A procure to pay process in a typical organization is lengthy, time-consuming, and laborious. The process starts out with requirement planning, then RFQ, vendor selection, purchase order, goods receipt, order and goods assessment, payment invoice, and reporting. Manually going through all such processes can be hard and laden with errors. Additionally, an organization may be running multiple processes in parallel with numerous vendors, and tracking them might just go out of hand. A traditional procure to pay process involves a lot of checks, authorizations, paperwork, communication, and errors. With a flurry of innovations in this sector, automation has stood out as the clear winner as it helps organizations better understand their spend and increase contract compliance. So why should an organization use procure to pay software?
Benefits of Procure to Pay (P2P) Software
Enhanced spend visibility
Automation eliminates the requirement for a lot of paperwork and enforces manual checks within each stage of the procure to pay process. Automated procure to pay software provides end to end visibility between POs, goods receipts, invoices, and other documents to ensure goods are as per specification before issuing payment. By providing real-time data to both buyers and suppliers, it offers better spend visibility.
Easy access to records
Procure to pay software eliminates all the paperwork and stores all records in the system digitally. As a result, it becomes easier when procurement professionals want to retrieve data on a particular supplier or transaction. They can get the data instantly, rather than having to go through all the files and documents. Also, buyers can easily access the online catalogs from suppliers, and also review and approve purchase orders in electronic formats. Additionally, the cloud-based system can provide selective permissions and encryption to allow multiple levels of access. It can also generate automated reminders to alert users when purchase orders are pending or require approvals.
Contracts are an essential document for any organization. Hence, they store such documents regardless of importance or time. However, it’s not the same with catalogs; they only keep catalogs from a selected few suppliers. Procurement professionals cannot access information on suppliers past offerings or offerings from new suppliers as they do not have their catalogs. An automated procure to pay software helps procurement professionals to link the software with the contract management system and store contracts in the absence of catalogs of a supplier. Such software assists procurement professionals to fetch details and historical costs of previous orders from a particular supplier even without a catalog.
The automated procure to pay software has the ability to create reports that provide more profound insights into supplier performance. It can detail over supplier spends over various levels, compliance issues, and status of contracts and shipments. Such real-time reports are valuable to businesses as it assists them with strategic spend analysis and controls their maverick spend.
Want to gain better insights into procure to pay cycle and P2P software?