Navigating the world of procurement can seem challenging, but mastering it is essential for building strong, cost-effective supplier relationships in the business world. Procurement is the process of sourcing, acquiring and paying for goods and services from suppliers. It is a multi-step strategy required to maintain business operations, spending and supplier relationships efficiently.
An effective procurement strategy allows a business to gather the necessary resources at the right price and quality while minimizing risks and costs. Its role in supply chain management impacts an organization’s overall efficiency, profitability and sustainability.
Why Is Procurement Crucial for Maintenance Management?
Proper procurement strategies keep maintenance management operations running smoothly. Here are some ways that following consistent services procurement practices can benefit an organization.
- Saves cost: An organization saves money with a well-planned procurement process by strategically sourcing goods and services from potential suppliers at their best price. The business then keeps a record of these transactions in a central database, so its budget and spending patterns are available for those who need to see them. These available records also let an organization structure its spending across vendors. An effective procurement process allows an organization to be knowledgeable in tracking vendors, contract management and compliance, and risk management. This results in increased productivity and more savings.
- Saves time: When procurement is automated, it streamlines an organization’s workflow. A business saves time and, by doing so, improves its operational efficiency. This then frees resources in a more strategic direction. For example, when a company has a manual procurement process, a team member would spend time searching for vendors, comparing prices and negotiating terms before even creating a purchase order. This process may take days or weeks — so a procurement software would cut that time down considerably.
- Saves efficiency: When the procurement cycle is automated, it reduces the chance of human error. It also helps an organization negotiate better terms by leveraging bulk purchases and building stronger supplier partnerships. Products and services procured are of higher quality. Delays and defects are minimized, leading to smoother operations and more effective use of resources.
Key Stages of the Procurement Process
Procurement processes can vary from business to business but generally follow this structure:
- Define the product/material/service need: Before placing an order, a procurement professional identifies the requirements for a product or service based on the business needs. The product or service may be new, it may be a restock item, or it may be a subscription renewal, and the exact technical specifications and service characteristics must be determined before anything else in the purchasing lifecycle is set in motion.
- Identify and select suppliers: Now that the business knows its requirements, it will research the best vendors available and request a quote from them. For strategic sourcing, the company will send this request to more than one provider to allow for competitive bidding and to compare the best possible prices. When assessing vendors, it’s important to consider supplier reputation, product quality and speed.
- Request for proposal (RFP): Once the vendor is decided upon, the business makes a formal RFP, or purchase requisition. This lets the other employees know that there’s a need for a particular product or service, as well as its price and the timeframe in which it’s needed. Whichever department oversees the request can approve or deny it.
- Negotiate and contract: The business will get a few quotes from vendors before making a final purchasing decision. From there, it can go through a contract negotiation process. A contract is created once the two parties agree on the final terms.
- Place purchase order: After the contract is formalized, a purchase request template can be filled out and sent to the vendor. It will detail the specific goods and services the company needs. The vendor will then fill out the order using this information.
- Receive and inspect purchase: Once the business receives the good or service, it will inspect it for damage or errors and ensure that it was delivered as expected.
- Invoice and pay: If the good or service meets expectations, the business should have an invoice payment process through its accounts payable department to ensure that vendor payments are sent on time.
- Keep records and maintain relationships: The business will maintain records for the procurement process with the vendor. Record keeping will also help when it comes time to reorder goods and calculate taxes.
Types of Procurement
Procurement can be direct or indirect, depending on how a business uses the items it procures. Direct procurement (direct spend) is the purchase of a product directly related to a manufactured creation. It can be in raw materials, resources or services, but no matter what it is, it’s core to what a business delivers to a customer or end user. For example, a computer manufacturer would source electronics, chips and other parts directly used to build the computer, which a customer would later purchase. This type of goods procurement usually involves a significant investment, a large volume of materials and solid relationship management with a few vendors to ensure supply chain consistency and product quality.
Indirect procurement (indirect spending) is the procurement of goods or services that support a business’s day-to-day operations but are not part of its final product and do not directly impact production activities. A good example of this is office supplies. Nonetheless, goods or services indirectly procured can impact a company’s operating expenses. While these purchases may be smaller and less frequent, costs can add up if you don’t pay attention to the purchases being made. Indirect procurement also involves coordinating stakeholders and departments to buy items to keep a business operational.
Procurement Team Job Roles
Those who work in a procurement department or are involved in procurement management oversee a business supply chain and may hold one of the following positions. Some of these jobs may have overlapping responsibilities.
- Chief Procurement Officer (CPO): A CPO leads the entire procurement and supply chain department within an organization.
- Procurement analyst: A procurement analyst evaluates goods and services from vendors to determine which item a business should purchase. They may meet with vendors, test products, negotiate contracts and create cost reports. They also build and maintain relationships with vendors and make buying decisions.
- Procurement buyer: A procurement buyer researches vendors and negotiates contracts to find suppliers with the best possible rates. They may follow up with the vendor to ensure the item’s delivery was carried out correctly.
- Procurement specialist: A procurement specialist is the person who makes the purchase. Their responsibilities include locating key vendors, negotiating purchasing agreements and ensuring the materials and products meet the business’ specifications.
- Purchasing agent: A purchasing agent procures supplies, negotiates contracts and studies data to ensure the business gets materials at reasonable prices and follows laws and regulations regarding purchasing activities.
- Purchasing manager: A purchasing manager works in a senior-level position, looking for goods and services to meet a company’s needs and negotiates the lowest price for the best possible materials. This individual manages purchasing agents and considers an item’s condition to determine whether it should be used or resold.
- Sourcing manager: A sourcing manager also oversees the procurement of goods and services for a business and may collaborate with vendors to secure the necessary materials to meet production requirements.
Procurement vs. Purchasing
Procurement and purchasing are related tasks but different in reach. While these terms are often used interchangeably, they are not the same. Purchasing focuses more on the transactional aspects of sourcing products, while procurement is the overall process.
Procurement is the sourcing, acquiring and payment process for obtaining goods and services from vendors. It includes several steps, from identifying a business’ needs to selecting suppliers, negotiating contracts and managing relationships with those suppliers. Procurement focuses on cost savings and building solid relationships with suppliers over the long term.
Purchasing is a small part of the procurement process. It deals with the specific actions of buying goods and services, making payments and ensuring these materials are delivered on time and meet the needs of the business. The purchasing process is more about the day-to-day transactions, while procurement functions more as part of the overall planning to meet a company’s needs effectively.
Procurement vs. Supply Chain Management
Just like purchasing makes up a part of the overall procurement process, procurement is only one component of supply chain management. It’s all about sourcing, acquiring and paying for the goods and services a business needs.
Supply chain management, however, encompasses the entire process of planning, executing and controlling the flow of materials, information and finances from suppliers to customers. It includes additional activities like production, warehousing, shipping, distribution and customer service with the ultimate goal of improving efficiency, reducing costs and enhancing customer satisfaction.
5 Mistakes to Avoid in Procurement
While procurement is a strategic process with many steps, it can be challenging, and sometimes, mistakes are made. These include:
- Inaccurate material specifications: Making purchases from a vendor based on the wrong data can lead to discrepancies that impact a business’ bottom line. These include inventory shortages, too much inventory and other additional inventory management challenges. Data must be accurate and reliable.
- Inability to negotiate contracts: If a company lacks strong negotiation skills, it will end up in an unfavorable supplier relationship. This can lead to higher costs, unreliable delivery schedules, supply chain disruptions, price fluctuations and damage to a company’s reputation with suppliers.
- Only focusing on costs (instead of supplier quality): If a business only focuses on price and not quality, it can lead to product defects, unhappy customers and a damaged reputation for the company.
- Lack of record keeping: Documentation is important throughout the procurement process. Without it, there is a higher risk of miscommunication with vendors and internal teams. This can result in disputes over contract terms, incorrect orders, missed delivery times and a lack of compliance with legal and regulatory entities, which can make auditing a nightmare.
- Not using available software: Not using technology or software can lead to errors and incorrect invoicing, which, in turn, can damage a company’s reputation, not to mention added costs and liabilities of the business itself.
How CMMS Software Helps With Procurement
Using a CMMS software like Coast can help optimize the procurement process for maintenance teams that rely heavily on asset management and parts inventory for decision-making purposes. At its very basic function, a CMMS can keep track of assets and the parts required to operate those assets. It maintains detailed records of all assets or parts purchased, making incorrect material specifications less likely since they can easily be referenced. A CMMS also improves documentation by automatically recording all procurement activities, including purchase requests, contracts and supplier communications. It also stores data in a centralized system that can be helpful in negotiating contracts, as users can review past purchases and pricing trends to make informed decisions during negotiations.
Finally, CMMS software allows businesses to automate routine tasks, including reordering materials, tracking asset performance in real time and generating reports using preset maintenance KPIs determined by the procurement officer. Automation can reduce any inefficiencies from human error, which leads to a more successful procurement process regarding supplier performance and forecasting.
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