Increasing profits by implementing best practices in the procurement cycle
The procurement cycle comprises key steps that a company should make in order to obtain products or services. Management should understand that this process is becoming more of an art instead of an automated process. It is the road to success for responsible management, when handling public or corporate funds. It starts from identifying the correct needs of the company, to the final step of granting the product, or contract, to a certain supplier, all these, ultimately leading to increased profits.
By identifying and implementing best practices in the field, companies can create a specific and tailored procurement cycle that best fits their needs. This will result in increased performance and profits and, namely, building a competitive advantage on the market.
Steps in the procurement cycle:
- Need acknowledgement
Every business must know if there is a need for a new product or service, a need to update their inventory or stock. The company may have ordered this product or service in the past, or it may represent a novelty for the company.
- Need precision
Identifying the appropriate product for any company is critical. Defining the requirements for every product ensures that the requested product or service has the necessary performance requirements desired by the company. These requirements can be standardized and some industries have numbers assigned to specific parts to help identify a specific product. A structured approach ensures compliance with our needs, and allows the receipt of the right product, with the right quality, at the right cost, in the right quantity, delivered at the right location, in the right time and with the right documents.
- Product or service sourcing
The provenance of the product or service needs to be determined. The company may, perhaps, have an approved list of suppliers which have delivered the required product or service performance in the past. In case it doesn’t dispose of such a list, the business will have to search for an appropriate supplier. The company needs to determine the best supplier for every product or service.
- Price and terms establishment
By benchmarking similar products on the market and analyzing all relevant information, the company will determine the best price and terms for the product or service. In the case of large organizations, a Master Agreement is sent where the prices and terms are set for a longer period of time. Recommended is to take notice of the needs identified in Step 1 and compare no less than three possible offers before taking a final decision.
- Order placement
At this point, the company places the purchase order and this becomes a contract between the two parties. The newly created contract specifically defines the price, time and delivery specifications, the obligations of each party and all the terms and conditions of the product or service.
- Order receipt and inspection
Once the products or services are received by the company, they need to be inspected and can be accepted or rejected. In the case of shortages or non-compliance with the agreed specifications, the products or services need to be reported to the supplier so that the appropriate compensation to be supplied. Once the goods are accepted, the company is obligated to provide payment for them. The items are then checked in the warehouse, if required, and entered into their own inventory system.
- Invoice approval and payment
For the invoice to be approved, a minimum of three documents are required: the invoice itself, the receiving documents and the original purchase order placed at the supplier. Usually, the invoices are received and paid within 30 days.
- Records update
In order to keep track of all the products or services, to increase performance and, in case of audit, the company needs to maintain proper records of purchasing ledger and stock records. This can be automatically done by purchasing specific software.
Following these steps enables the company to benefit from a well-structured process which has direct effects on the performance of the entire Supply Chain Management system.
Savings in the procurement department can be achieved by implementing good practices in a number of areas within the department. The aim of these savings is to drive down purchasing costs by improving the supplier relationship or contract, among others, thus leading to a decreased price for the products or services needed.
Ernst and Young have identified some of the key procurement functions that companies should follow.
- Every company should have a detailed spend map implemented across the entire organization, which should be updated quarterly;
- The company should be a driver of sustainable savings (when, where, why and how);
- Every employee should be engaged with the broader organization to have a holistic understanding how procurement can reduce costs across the entire value chain;
- The company should make an extra effort to ensure that value is created through contract management, supplier relationship management frameworks or strategic sourcing;
- Be delivering procurement within an operating model that connects commercial and technical capability to drive optimal client outcomes.
- Purchasing and procurement center (n.d.), Steps to purchasing cycle – Standard and tender process
- Ernst and Young (2014), Five things – Getting the basics right in procurement
- Purchasing and procurement center (n.d.), Procurement savings – Ways to increase your profit
Tags: operational performance, Procurement performance, Supply Chain Performance