Disruptions, shortages, and out-of-stock situations impact your uptime and ability to meet customer expectations. Indeed, in the second quarter of 2023, supply chain issues remained a top concern for 23% of small business owners, according to the MetLife and U.S. Chamber Small Business Index. A procurement strategy increases supply chain visibility and resiliency while reducing your financial and operational risks.
In addition, a purposeful approach to procurement can save your company money and bolster relationships with suppliers. Follow this step-by-step guide to develop a procurement process suitable for your business goals and needs.
1. Assess your needs, goals, and budget
Procurement cycles differ by company; small and medium businesses (SMBs) should refrain from trying to create a one-size-fits-all plan. Instead, complete an internal review to learn what goods and services each department requires. Categorize these as direct (raw materials or services for production) or indirect (supports business activities). Then, break them into goods or services. Remember to include pricing and quantities to understand the spend for each group.
This step aims to see how much your business spends on direct and indirect goods and services. These figures will give you an idea of how procurement can benefit your company and how a strategy can help you overcome supply chain challenges.
[Read more: 6 Ways to Protect Your Business From a Supply Chain Disruption]
2. Establish metrics to measure your procurement performance
Procurement key performance indicators (KPIs) track your company’s efficiency and process goals. Monitoring metrics increases visibility into your supply chain and shows where you’re improving or need further action. You should set small business KPIs before beginning any new process.
Consider tracking the following metrics:
- Rate of emergency purchases.
- Procurement return on investment (ROI) and benefits.
- Supplier defect rate.
- Purchase order (PO) and invoice accuracy.
- Compliance rate.
- Supplier lead time.
- Vendor availability.
- PO cycle time.
- Cost per invoice and PO.
- Procurement ROI and benefits.
- Spend under management.
- Price competitiveness.
[Read more: Big Brands’ Inventory Management Partners Share Top Tips to Slay Supply Chain Snarls]
3. Consider current and new procurement technologies
Capterra stated, “Nearly 30% of SMBs plan to implement a new supply chain management tool in 2023.” Moreover, MHI predicts that “digital supply chains will be the norm” by 2033.
Although companies can choose an all-in-one procure-to-pay suite, Capterra found that many organizations opt for specialized tools. Niche programs are easier to use, integrate, and deploy.
See if your current software supports your procurement process, and while planning your strategy, look for opportunities to automate tasks using supply chain tech. Doing so can decrease errors and save time, allowing your procurement team to focus on high-value activities instead of data entry.
Procurement software solutions fall into the following categories (and several tools cover multiple areas):
- Accounts payable and spend analysis: This software helps companies understand the procurement process and find cost-saving opportunities. Solutions include Coupa, SAP Ariba, Precoro, and PRM360.
- Procure to pay: These end-to-end platforms centralize many procurement activities. Consider solutions like mjPRO, Procurify, Precoro, Basware, and MHC Software.
- Purchasing: Automate your approval workflows and view real-time spend data with SAP S/4HANA Cloud, Emburse Certify Expense, Spendwise, Veeqo, Unleashed, Planergy, Teampay, and Order.co.
- Request for proposal (RFP): Create a central database for your procurement documents and use artificial intelligence (AI) tools to improve your workflows. Software solutions include Responsive (formerly RFPIO), Loopio, Avnio Response Cloud, RFP360, QorusDocs, and RocketDocs.
- Spend management: Manage your expenses automatically and visualize your costs with software like BILL Spend & Expense (Formerly Divvy), Ramp, Brex, Airbase, and Spendesk.
- Strategic sourcing: Automate your sourcing and procurement process with software such as aPriori, Procol, and Anvyl.
- Vendor management: Review, track, and manage suppliers with solutions from QuickBooks Online, Vanta, SAP Fieldglass, Venminder, Ncontracts, and Tradeshift Pay.
4. Find and evaluate suppliers
Identify vendors for each good, electronic component, service, raw material, or service your business requires. Obtain supply market intelligence using free resources from the U.S. Small Business Association and the U.S. Census Bureau. Also, consider paid services, such as IBIS World, Crain’s, Bloomberg, and Gartner. Consider each vendor’s cost structure, market information, past performance, and commodity profile.
This prescreening process is enough to move to the next stage for some services and goods (office supplies or standard maintenance items like grease). However, you should further evaluate complex parts and essential production components when the products substantially impact your budget and production capacity. The more risk that’s involved, the more time you should dedicate to the vetting process.
Consider criteria such as the following:
- Location: Review the geographic stability, distance from your company, and supply chain infrastructure.
- Cultural and language differences: Determine if barriers will cause communication issues during the process.
- Working conditions: Focus on health and safety practices, child labor usage, and general working conditions.
- Employee capabilities: See if there is a history of labor disputes or strikes, the turnover rate, and the workforce skill level.
- Cost structure: Go over the total costs, including production, marketing, material, administrative, and supply chain expenses.
- Technological capabilities: Consider the company’s approach to technology in design, equipment, processes, methods, and any current or future investments in research and development.
- Quality control: Look at what system they use and record to ensure consistency for current and anticipated demand.
In the second quarter of 2023, supply chain issues remained a top concern for 23% of small business owners, according to the MetLife and U.S. Chamber Small Business Index.
5. Choose a sourcing strategy
After approving a purchase, your procurement team must select a supplier and either buy directly from them, send an RFP or a request for quote (RFQ), or enter into an agreement.
An RFP solicits bids from suppliers. It should outline your project and provide delivery requirements, financial terms, pricing structure, and product or service details. Alternatively, a company uses an RFQ when they only need a price quote, not information about products or services.
[Read more: Do You Have a Supply Chain Backup Plan? How to Plan Ahead]
6. Select suppliers and negotiate
Once you review the documents and choose a supplier, it’s time to negotiate vendor contracts. The agreement should outline the scope of work, delivery dates, budget, contract duration, legalities, terms, and conditions.
It’s important to remember that, ideally, you’re building a long-term relationship. You need to get the best deal possible. At the same time, compromise is part of negotiation.
7. Finalize documents and keep records
The onboarding process begins immediately after signing and approving the contract. Larger organizations often require individuals to complete a purchase requisition (PR). This form requests the procured goods or services and requires approval from an internal department manager or leader.
From there, the business creates a purchase order (PO). This document goes to the supplier and details the services or goods and negotiated terms and conditions.
Small businesses should keep all records on file, whether those records are paper files or digital forms. Doing so helps show your overall ROI and can support you when negotiating future vendor payment terms. Moreover, it’s essential for business tax and audit purposes.
Store the following documents:
- Supplier invoices.
- Delivery reports.
- Company policies.
- Invoices.
- Purchase orders.
- Packing lists.
- Payments.
- RFPs and RFQs.
- Procurement budget approvals.
- Contracts.
- Goods received note.
8. Inspect shipments and pay suppliers
Check out your first shipment to ensure everything is in good condition and in the correct quantity. Also, note if the supplier met the delivery schedule and satisfied the services outlined in the contract. If you have any concerns, contact the vendor for a meeting. Otherwise, you can go over the invoice for payment.
Companies often use the three-way matching method. It compares the purchase order, invoice, and itemized list for accuracy. From there (depending on your payment terms), your financial department will process the payment and send it to the supplier.
9. Review and adjust your procurement strategy
All business strategies are living documents. Nothing, including contracts, is set in stone.
Your procurement KPIs will highlight opportunities for improvement and areas where you could save money by adjusting your process or negotiating better contract terms. Likewise, you may realize inefficient processes are driving up administrative costs. In this case, automated spend management software or vendor management tools can boost productivity while reducing errors and ensuring policy compliance.
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