Introduction:
If you are honest about the role procurement plays in an organization, then this may sound counter intuitive. That's because the procurement department and procurement process is there to slow the business down. Effectively, we are gatekeepers to spend and protectors of the business from risk.
Our procurement processes are there to act as a speed bump to the organization and stakeholders. What I mean by this is that the process we have is to clarify, verify, or justify. Sometimes all three.
We require stakeholders to create well defined scopes of work and we don't send out bids without them. We require scorecards to be completed in a logical way that removes bias from the selection of suppliers. We pass to our fellow speed bump, legal, to ensure risk is reduced in contract formulation.
As you can see, there are many ways the procurement process slows the organization down, and rightfully so. However, we will illustrate some ways to make it a more efficient procurement process.
Identify Inefficient Processes
The first step in solving a problem is admitting you have one. Review your procurement process and be honest with yourself. It may be hard to do, but bring in outside help in the form of consultants or other departments. Improving procurement efficiency isn't easy but as procurement professionals it's something we must do to get better.
Work From a Standard Procurement Policy
Develop a standard procurement policy. This should be the over arching rules of the game to your procurement team. It should also include standards to how your purchasing process will be completed, procurement authority, ethical definitions, outlines to your procurement process at each step, and overall rules for bids.
Bottleneck Identification: Where Do Things Get Hung up the Most
Every department has a process in house that is just slower to navigate than others. Don't be afraid to reach out to stakeholders involved in the procurement process routinely. Ask them their opinions of where they think the slow downs occur most often. This will shed some light to dark areas you may not know exist. The Article "Major Bottlenecks & Problems in the Purchasing Process gives a great overview as to the bottlenecks affecting procurement process.
Train Employees to Proper Processes
You can't impact the supply chain for the positive if you do not have well trained employees in the procurement system. It's more than being able to develop procurement strategies, it's about being able to manage the entire procurement cycle. Work to identify where your procurement team may be lacking in knowledge of the procurement process flow. It may be that you need more of standardized procurement processes established.
Supplier Feedback
Don't leave out your suppliers. I'm sure you'll expect the feedback that they can be paid quicker. However, you'd be surprised as to how your true partners in the supply chain on the supplier side can help you with this topic. Let them walk you through what they view as your procurement process. Sure, they'll have gaps but you could learn a fair amount from candid conversations with your suppliers.
Kaizen Events
Kaizen events are awesome once you've attempted the topics above. Get the entire procurement team together. Include outside stakeholders and suppliers if you wish. Run an indepth, few days long, Kaizen event. Focus on your procurement process, procurement strategy, and the entire procurement cycle. With your identification of inefficient processes within your procurement system, you should be able to lean those procurement processes out to outstanding results.
Supplier Consolidation
One of the quickest ways to increase efficiency is to consolidate the work of your procurement process and that's done by supplier consolidation. Simply put, it's easier to manage spend with 50 suppliers than it is with 500. Often times, procurement teams are stretched too thin with too many suppliers.
Stakeholders work outside of procurement process at times and you get massive defragmentation in your supply chain. One of your strategic procurement focuses should be consolidation efforts and below we will show you how.
Keep Data in One Location
One of the key steps in supplier consolidation is ensuring that your data is kept in one location. That means your procurement systems should allow you to monitor spend in one location. Whether that be a procure to pay system that spend must go through or on the accounts payable side, you need to make sure you have visibility to that which you wish to control.
Categorization of Spend
Once you have control over the visibility of your spend, you must then categorize it. Start with a Pareto Analysis and identify your tops suppliers by spend. You'll typically find that 80% of your spend is consolidated with just 20% of your supply base.
What are the primary items that make up what that 20% is supplying to you?
Your next step is to identify if the items are strategic in nature, bottleneck items, leverage items, or non critical. This should give you a good place to start in how to manage that spend. Sievo provides an excellent overview to spend taxonomy here.
Supplier Consolidation Strategy
After this step you then can begin to look at the bottom of your list for like items and start moving them to your larger suppliers. This is key for supplier relationship management and allowing the leverage of your spend to impact pricing. You will likely get better pricing from suppliers that already have much of your spend than having the same type of item being defragmented to a lesser spend level supplier. This should be key to adding efficiency to your procurement processes.
Ideas of Where to Automate Processes
In this section we will describe some topics of where you can automate some processes and possible systems that can help you. Some of these are going to require you to integrate with suppliers and communicate well what your visions are. Don't discount how your supply base can help you with your procurement process efficiency.
VMI and Consignment Supplier Solutions
This is a big opportunity to not only make your procurement processes more efficient but you can reduce inventory and, therefore, decrease money tied up in inventory. Most may think that MRO related items are best for a supplier to manage.
However, I've found that there are plenty of opportunities where a supplier of components may take on the action item of managing inventory in a VMI or Consignment model. Reach out to your suppliers and pick their brain of whether they've done it for other customers and what that model may look like.
RFP/RFQ
Templates speed the process up. For each of your spend categories, you should work to develop an RFP/RFQ template to fit the needs of your business. Remember, procurement is a process and processes should be standardized.
You can't even begin to measure without standardization. Review your typical business needs within each category and develop standard templates so as bid opportunities come up, you'll have quick access to the required documentation to get if off the ground.
Approval Levels
Again, process is king with procurement and approval levels are no different. In my experience, I've seen different departments, in $1 billion dollar companies, have different approval levels. How could this be?
Work with senior leadership and sell the benefits of increased efficiency with a more centralized approach to approval levels of spend. Having the same approval levels across the board will also help in identifying what departments handle strategic spend most often versus non-critical or leverage items.
3 Way Matching
Having a three way match process in your procurement process is a critical step. Your supply chain should understand the importance of a 3 way match so that spend is verified before it's paid. Creating ways to streamline purchasing verifying spend can remove a huge work load from your procurement teams.
Chief Procurement Officers and senior leadership should evaluate what invoice matching software is on the market and see how that can add to procurement automation. You can read more about the Procurement 3 Way Matching Process Here.
KPI Tracking
As mentioned before, a process can only be controlled if it is measured. Variances in the data help you do that, but first you must have established KPI's as your method of baselining the data. This is typically a fun conversation to have with stakeholders too! Work between silos to discover what matters most, what's measurable, what's trackable, and what kpi's allow for action!
Once you have these KPI's established, you can build out detailed dashboards to track it. Research macros and dashboard that can pull in data automatically for evaluation. Understand what your typical variance in measurements are. From there, you can quickly red flag items that fall outside that zone for quick reactions that impact the company for the better.
Streamline Communication
Evaluate your current communications and who you do that with? We've all heard of some meetings being capable of being an email instead. My view is that meeting communication is good, but if I'm always in a meeting then I'm not doing the work necessary in evaluating data to make real decisions.
Also evaluate systems like shareable notes or spreadsheets that multiple people can work on at the same time. This is a great way to reduce communication as everyone is seeing the change in data in real time. Project management systems can do this as well when the focus is something much longer. Meetings, at which point, can be times to get into the weeds instead of spending the first half of a meeting reviewing where everyone is and receiving updates.
Contract Management
Lawyers love to justify their hourly rates! Redlines can take days to get back and legal is typically a bottle neck to the procurement process. Contract management systems can work like the the shared spreadsheet where in multiple people can be working on the same document.
Instead of sharing documents back and fourth through email, automated notifications can be sent to stakeholders for their next actionable item. Also, signatures can be processed through these systems as well. An added feature is it creates a contract management repository so everyone knows where the document is and no need for additional communication to find a contract from a few years ago.
Conclusion
Procurement process efficiency is a step to take AFTER you've really implemented the full procurement strategy inside your organization. I'd recommend focusing on this after that step due to the fact that you really can't worry about getting more efficient at something you aren't very good at to begin with. Review where your procurement process is now and where the improvement can be. Once cleared up and the low fruit has been taken advantage of, you can really dial in your procurement systems to create impactful procurement automation.
It's my opinion that this step of procurement efficiency is for mid to late state procurement lifecycles. It's when you feel your department is has reached that diminishing returns and needs to get more advanced to make an impact. Make sure that the current process reflects your tactical and strategic goals. You can make significant cost savings with an effort to automate procurement for goods and services.
Want to learn more procurement best practices? Check out our Top 5 Procurement Best Practice here.
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