7 best practices for successful procurement management

Procurement is the term used to describe the management of purchasing in the broadest sense of the term. Whether centralized or not, the process of purchasing from suppliers plays a strategic role in a company's operational functioning, as well as its financial performance. That's why it's essential to know the right methods to use on a day-to-day basis to manage procurement more effectively.

What is procurement?

Procurement is the process of buying products or services from suppliers. It involves several key stages:

• Drawing up specifications, particularly for complex purchases with elaborate technical specifications.
• Sourcing to identify and list suppliers capable of providing the product or service required.
• Competitive bidding to obtain offers from suppliers.
• Closing : choice of merchant, negotiation, internal validation and contract signature.

In the public sector, competitive tendering can be carried out via a public procurement procedure, particularly when the total contract value exceeds a certain amount. In the private sector, most purchases are made by mutual agreement, simply by signing an estimate.

In recent years, you've heard more and more about e-procurement. This term refers to the evolution of procurement towards online services to manage the entire purchasing process.

The central role of corporate procurement

When you assess the risks to which a company is exposed, you may not think first of procurement. Yet the supply chain is entirely dependent on its suppliers.

If raw materials aren't available from manufacturers, you can't produce. If prices rise sharply, you're forced to cut your margins, at least temporarily, until you can raise prices or improve productivity.

You surely noticed this during the health crisis in 2021. Tensions on supply sources have an almost immediate impact on the availability of end products, but also on their price. So it's easy to understand why it's so important to secure relationships with suppliers, so as to remain a priority customer, even in times of crisis.

How to optimize purchasing management?

1 - Dematerialize your purchasing management

When it comes to e-procurement, the first best practice is to adopt dematerialization. In many companies, the employee who needs a product fills in a purchase order on a sheet of paper, which is then signed by a number of managers before being sent to the supplier.

All this is very time-consuming. This leads to problematic delays in the supply chain. Sometimes, requests get lost along the way.

To meet these challenges, Mon Intranet has developed a Procure to Pay software module that dematerializes the purchasing management process from end to end:

• The employee fills in and submits his or her electronic purchase order online.
• Managers validate the request.
• The validated purchase order is sent electronically to the subcontractor.
• The employee acknowledges receipt of the products and generates a request for payment, which is validated by the person in charge of paying the suppliers' invoices.

With such an online solution, paper purchase orders are a thing of the past. The time saved in order preparation and validation is substantial. You'll also be able to reduce procurement lead times, which can jeopardize the smooth running of your operations.

Another important point is that such software allows you to centralize supplier information in a database. This facilitates sourcing management.

2 - Centralize supplier information

By using a centralized database for all your company's suppliers, you'll gain in efficiency not only in sourcing, but also in the negotiation phase. Let's take the example of a large company with several industrial sites. If each purchasing department places its orders independently, it must :

• Search for and list suppliers for each product in the catalog.
• Negotiate pricing conditions individually.

By using a common platform, the purchasing process is faster. You have access to information on every supplier listed in the company, as well as the volume of business already done. This gives you effective leverage for the negotiation phase. This is one of the essential components of an e-procurement solution.

3 - Assess the risks

Choosing a service provider includes a risk management component. These risks are manifold:

• Conformity risk: if the product does not meet certain standards, particularly when it is manufactured on other continents where standards are different.
  
  
• Price fluctuation risk: the price of certain raw materials can vary considerably according to different criteria. If your supplier is a wholesaler or distributor, he will be more directly exposed to these fluctuations, and will have to pass them on to you more quickly.
  
  
• Supply tensions: what is the production volume of your raw materials producer? Where is it located? Is this activity strategic for him? Does your contract represent a significant proportion of its sales? All these questions are essential to assess and anticipate possible difficulties in delivering the expected products.
  
  
• Quality problems: specifications enable you to define the level of quality expected for each product delivery. Acceptable deviations must be precisely defined. An audit of the manufacturer's facilities provides useful insight into working methods and the level of quality you can expect.

To limit risk, it's always best to reference at least two suppliers for a given requirement. This not only maintains competition, but also provides you with a back-up solution if your historical supplier runs into difficulties.

Securing your supplier relationship with a contract will help you find rapid solutions to any problems that may arise. Contracts establish a legal framework. Not everything should be contractualized, as this would make the purchasing process too complex. But it's good procurement practice to draw up a contract that goes beyond the general terms and conditions of purchase, whenever you exceed a certain amount or there's a new specificity.

Once again, it's a question of balance. We mustn't get bogged down in the complexity of certain contracts. This could discourage some suppliers.

What's more, the administrative complexity of contracting is always reflected in the bill paid by the customer. Besides, a contract doesn't settle everything. What's important is the relationship of trust you can establish with your contact.

4 - Control every purchase appropriately

When an employee places an order, he or she is incurring an expense. Is this expense justified? Is the amount appropriate? Management needs to control each purchase to validate it against operational priorities and budgetary objectives.

This control must be proportionate. There's no point in having a €50 purchase request approved by 5 management lines. On the other hand, when it's a strategic capital expenditure that commits the company over several years, then tighter control is fully justified. The validation circuit must therefore be adapted to the company's policy. It must remain efficient, and not lead to excessive delays throughout the supply chain.

5 - Buy when necessary and optimal

Expenses have an impact on the company's cash flow. Each order received generates a cash outflow in the weeks that follow to pay the supplier's invoice. If the products ordered are not used quickly, cash is mobilized for stock that does not produce added value for the company.

Management of production schedules must enable us to anticipate supplies as effectively as possible. The price of raw materials fluctuates over time, depending on economic conditions and the season. As a result, the purchasing department has to find the right balance between a target price and an optimum stock level. The priority is always to ensure uninterrupted supply to the supply chain. After all, when production comes to a standstill due to a lack of raw materials, fixed costs remain, weighing heavily on the company's balance sheet.

6 - Avoid budgetary slippage

Each year, the company defines an expenditure budget for the various departments. Centralized purchasing facilitates the work of the accounting department, which can then track the evolution of expenses against the budget, according to their allocation. Any uncontrolled increase in expenditure is then quickly identified. Of course, this is only possible with the implementation of appropriate tools.

The profitability of a company's business, or even of a single project, is intimately linked to adherence to the budget. It serves as the basis for calculating costs and setting prices for finished products. This is why the procurement process must be directly linked to the budget.

7 - Understand the overall value of the subcontractor

The added value of a raw materials manufacturer cannot be reduced to the price of its products. On the contrary, you need to take into account :

• Delivery times, especially for unplanned requirements.
• payment terms.
• The range of products available.
• The quality of products delivered: quality defects and delivery problems are a risk and a cost for the supply chain.
• The stability of the contractual and financial relationship: predictable and reasonable price trends, balanced sales policy.

All these elements must be taken into account when making your selection. Price always includes a certain level of service. It's the quality of this service that you need to analyze to see if it meets your needs.

There are many factors involved in optimizing the procurement process. Mastering them requires the right tools and the involvement of everyone in the organization involved in purchasing.