Role of Procurement Automation in Efficient Business Operations
Imagine an employee in the procurement team who completes all the work on time, never calls in sick, never asks for a raise or promotion, and rarely makes mistakes! Literally the “ideal employee”. Yes, we are talking about the procurement automation bot – the latest addition to the procurement team. Automation in procurement and the adoption of digital procurement technologies has been advancing over the past decade. The adoption of procurement bots is the next logical step that organizations looking to leverage digital technologies are bound to take.
Understanding the Procurement Processes
The procurement function is an essential part of every business, irrespective of the size or type of the business. The procurement function is made up of a series of steps that are performed by an organization to obtain goods or services that are required to achieve business goals and objectives. Identifying and working with the best suppliers to obtain goods or services at the best prices and of good quality is the aim of the procurement function.
The output of the procurement function has a direct bearing on the cost-saving initiatives of the organization. In addition to cost-saving objectives, the procurement function also focuses on risk and compliance management, improving supplier performance, shortening the sourcing cycle time, and improving contract utilization. An effective procurement process focuses beyond just the purchase of goods and services. Gaining a complete understanding of the requirements of all business units, mapping the right supplier with the requirement, monitoring and evaluating vendor performance, and negotiating contracts to derive value for money are some of the main focus areas of the procurement function.
Here are 7 important steps to an effective procurement function:
1. Identify and understand the business requirements of all business units
A job well begun is half done. Understanding the business requirements of individual business units is the most effective start to the procurement function. Identifying and consolidating the requirements of all business units provides visibility into the categorical spending and cost-saving areas in the organization.
2. Identify and evaluate vendor list
Once the requirements are identified and consolidated, the search for relevant suppliers begins. Vendor search may be conducted online, or more structured searches like RFPs, FFIs, and RFQs. The identified vendors are evaluated based on their pricing, track record, warranty and guarantee terms, industry recognitions, and quality of service. The vendor offering the best market price and the maximum value is chosen by the procurement team.
3. Contract negotiation with the chosen vendor
Once the vendor is chosen by the business, the contract negotiation process begins. Contract negotiation is an important step in the purchasing process. The buyer-supplier relationship and value creation for the purchase can be improved through tactical contract negotiation. Scope of work, pricing structure, discounts, delivery timelines, and terms and conditions are the factors asserted while negotiating the contract.
4. Create and submit a Purchase requisition and release the Purchase Order
The Finalization of the vendor contract leads to the next step in the purchasing process, which is the creation and submission of the purchase requisition (PR). All the contract terms that are mutually agreed upon are mentioned in the purchase requisition. The PR is submitted for approval by the procurement head and finance. Once it is approved by the finance, a purchase order (PO) is raised by the finance team to the supplier containing information such as the purchase order number, supplier information, and pricing and delivery time.
5. Receive and Inspect the Goods and Services upon delivery
The vendor delivers goods and services against the purchase order. The procurement team needs to inspect the delivery to ascertain the quality of the goods or services delivered. Successful delivery inspection will initiate payment for the order, while failed inspection leads to rejection and return of goods and services.
6. Process the payment to the vendor against the invoice
Most suppliers send the invoice for payment mentioning the price for the delivered goods/services at the time of delivery. The procurement team matches the PO against the invoice to ensure that the quality and quantity of the purchase are met. The payment of the invoice may be pre-, or post-delivery according to the terms agreed by the supplier and buyer.
7. Document the purchase process
Once the purchase process is complete, end-to-end documentation of the purchase-to-pay cycle is required. Documentation helps track and analyze the expenditure and ensures audit readiness of the procurement process.
Each of the above steps can be customized according to organizational needs.
Perils of Manual Procurement Processing
The complexity and scope of the procurement function are expanding by the minute with the globalization of businesses. Relying on manual procurement processes exposes the business to multiple risks. Here are some of the perils of running the procurement process in the manual mode:
Compromised risk and compliance management:
Managing the supplier risk is one of the challenges faced by the procurement department. The other types of risks faced by manual procurement processing are market risks, delivery risks, fraud, and operational risks. The human bias in manual processing is a potential risk for fraud and data inaccuracy. Effective compliance management is always a challenge in manual procurement processes.
Increased risk of maverick spending:
Any purchase that falls outside the scope of direct purchases increases the risk of maverick spending. Uncontrolled and unaccounted spending proves expensive for businesses. The scope for indirect purchases is more with manual procurement processing.
Long and cumbersome process cycles:
Manual procurement processing is ridden with delays and bottlenecks that result in a long and cumbersome procure-to-pay cycle. Repetitive admin tasks eat away productive work time of employees, which results in dissatisfied employees and lowers productivity levels.
Data inaccuracy and inconsistency:
Any process that is predominantly handled by humans is prone to data inaccuracies and inconsistencies. Reporting and analysis of procurement data provide key performance insights. Manual data handling is prone to inaccuracies and overlooks. Inaccurate procurement data results in excess or shortage of inventory, erroneous business decisions, and business losses.
Manual procurement processes are characterized by excessive paperwork for every task. Managing huge volumes of paperwork can be a challenge for the procurement team. There is a high incidence of displacement and damage of paper-based invoices when handled manually.
Inadequate vendor management:
Maintaining strong buyer-vendor relationships is paramount for the procurement function. Streamlined PR and PO processing ensures efficient vendor onboarding and timely payout. Manual processing of the PR and PO is prone to overlooks and fraud. Delays in vendor invoice processing leave them disgruntled and affect the buyer-vendor relationship adversely.
Procurement managers have their plates full with monitoring and controlling of various procurement functions. Automated procurement systems simplify and streamline the procurement process, making life easy for procurement managers.