Purchasing is not the same as procurement. Although, both are involved in the acquisition of goods and services, they are two distinctly different processes. Understanding this can help companies become better at both buying and selling.
Purchasing is the transactional part of doing the actual acquiring; from creating a purchase order and getting authorisation to the placing of the order, receiving delivery and the payment. It concentrates on direct cost savings and quality.
Whereas procurement is strategic and deals with the whole process of acquisition; from identifying what’s required, to sourcing it to receive the best value and then managing both the contract and supplier and measuring the results before repeating the process again. It looks beyond just direct cost savings and quality to deliver additional opportunities to save time and money and other less tangible, but equally important benefits, e.g. ESG (Environmental Social and corporate Governance) and innovation, throughout the lifetime of a supplier contract and relationship. It does this through providing consistency, transparency and visibility of every step in the process and by creating records that help to reduce fraud.
The procurement process is not as complicated as it sounds, as it’s something that everyone does subconsciously throughout their daily lives, to ensure they save time and money and get what’s right for them, e.g. when buying a car.
No matter the size of the company, it’s never too early to follow a simple procurement process. It becomes even more important as companies grow as there are more people involved and budgets increase.
For many companies the sourcing of goods and services is often as far as the procurement process gets, as it’s seen as the focus to get best value, to work with the right suppliers and to ultimately protect the company’s bottom line. As we’ll discover in later articles there is also significant value to be gained by effectively managing contracts and suppliers.
As with many other business areas, procurement likes to use TLAs (Three Letter Acronyms) to describe processes, let’s keep it simple here.
The first part of the sourcing process is to identify exactly what is required by working closely with internal stakeholders, such as users and budget holders. Involve them throughout the whole process to get the best results. These requirements may be based on what has been purchased previously or may require revisions because of changes in circumstances, e.g. Covid. It’s also an opportunity to learn what’s new and improved through research and by talking to potential suppliers, which may help to identify potential new efficiencies and ways to reduce consumption and waste.
These requirements are a key piece of information that is sent to potential suppliers to respond to. The more complete it is, the easier it is for them to offer a comprehensive and competitive response.
The next part of the sourcing process is to clearly identify what represents best value and the criteria to evaluate supplier responses against to achieve this. Exactly what represents best value and the evaluation criteria will vary from company to company as each will have a different set of values that are important to them.
Nowadays, as well as quality and price, other factors are becoming more important, depending on what’s being sourced. These considerations vary from wanting to work with new and innovative suppliers to ones that have suitable CSR credentials. There are many different aspects to CSR, such as sustainability, diversity and social impact and suppliers may well chose to focus on certain ones. Increasingly companies want to work with suppliers whose values align with their own.
How to select which suppliers to invite to respond and how many suppliers will vary on the types of goods or services required, the value of the spend and it may vary between different companies. It could be based on research, recommendations, specific expertise etc. As a rule, it’s always best to invite at least three suppliers to respond, with the incumbent being one of them.
Share the requirements with the suppliers and let them know what’s important to the business. Ensure the prospective suppliers are all treated fairly by sharing all relevant information and giving them sufficient time to respond.
Objectively compare the supplier responses by creating a simple score card using the pre-determined criteria and idea of what represents best value. Pay particular attention to the pricing as on more complicated sourcing activities it may not be clear what the comparable costs are. Ask for clarification if unsure.
After the preferred suppliers have been short-listed, have a meeting with them to go through their responses and to get to know them a little. Having good chemistry with a supplier is a key part of a good working relationship.
Having completed this, there will be a preferred supplier that offers the best value to the stakeholders. In some cases, there may be a need to have more than one preferred supplier.
It’s important to remember that despite companies going through the sourcing process they may choose to remain with their incumbent supplier as they have performed well in the past and are competitive. Although prospective suppliers may not be too happy about this, they also appreciate it benefits them with their own existing customers.
The last part is to negotiate with the preferred supplier to get the very best deal possible at acceptable commercial and contractual terms.
Depending on the type and the cost of the supply will determine whether a standard supplier contract is used or whether there need to be specific negotiated clauses. Take the time to read through the contract paying particular attention to any reference to any price increases during the contract, key dates, penalty clauses and any other buyer obligations. Create a summary of key terms. Make sure everyone knows who has the authority to sign different types of contract.
Finally, the implementation of the supplier. Work closely with the supplier as they’ll be the experts having done it many times before.
It may be too early to consider this now, however Its good practice to run sourcing activities towards the end of every contract or every couple of years to ensure the continued receipt of best value.
The sourcing process can either be done using spreadsheets, shared drives and emails or by using a procurement software, such as oboloo, that follows proven processes and maintains permanent records for audit.