Reasons to Invest in Procurement Solutions
The COVID pandemic has accelerated the digital transformation of the procurement function. Organizations looking to stay relevant and win the competitive edge are adopting automation technologies to streamline and optimize their procurement function. The procurement function makes significant contributions to the cost-saving and operational management efforts undertaken by businesses. End-to-end procurement solutions improve the efficiency of the procurement function by eliminating redundancy, inaccuracies, and inconsistencies.
Importance of the Procurement Function
The procurement function is concerned with the purchase of goods and services required by the organization. Procurement spending has a direct implication on overall organizational spending. The procurement function is viewed as a strategic function that contributes to the improvement of organizational profitability. A well-managed procurement function helps reduce raw material costs, identify better quality and economic sourcing options, and streamline operations.
The spending in any business is broadly classified as pay and non-pay expenses. Pay expenses are concerned with dispensing salaries and wages. Non-pay expenses are concerned with all expenses other than the payment of salaries and wages. The procurement function contributes to the non-pay expenses of the organization.
The 5 important aspects that the procurement function must focus on are mentioned below.
1) Value for Money:
While evaluating products or services for purchase, the focus must not be only on the price, other important factors like quality and relevance must be considered. The product or service must be value for money rather than just a low price.
2) Transparent Competition:
The bidding process must be open and transparent, right from placing the bid to closure. Every vendor must have a fair and reasonable chance to compete for the bid. There should be no favoritism or partiality in choosing the vendor among the bidders. In case the bidding or tendering process is not followed by the organization, the choice of the vendor must be objectively carried out. The choosing process must be transparent and easily understandable by all the vendors.
3) Fair and ethical transactions:
All the procurement transactions – from sourcing to payment must be conducted in a fair and ethical manner. Gifts in cash or kind should not be entertained for sanctioning the bid. The integrity of the employees must not be compromised at any time.
Every employee in the procurement team must be accountable for their actions and plans. Employees must report to their superiors and must be responsible for their procurement actions and decisions.
All procurement bids must promote equity among suppliers. Irrespective of their size (small, medium, large), all vendors must be provided an equal opportunity to place their bids. Any good procurement policy must be built with equity as the core.
Best Practices in Procurement Management
All procurement managers will strive for becoming “procurement champions”. How does one become a procurement champion? One of the tried and tested ways is to implement the procurement best practices laid down by domain experts. Powerful procurement solutions are built on best practices. We have picked the top 5 procurement best practices that can be followed to improve and streamline the procurement function.
Leverage cross-functional knowledge/expertise:
Today’s procurement manager needs to have a fair knowledge of the Production, Finance, and R&D processes in addition to his procurement knowledge. An amalgamation of production processes knowledge, technological innovations, and market expertise is required for the holistic growth of the procurement function. A procurement function that leverages cross-functional expertise is positioned for sustained growth.
Optimization of supply chain communications:
The procurement department works closely with supply chain and warehouse managers, contract managers, logistics, and finance. Lack of clear and open communication channels both inside and outside the business can affect the business’s bottom line. For example, a well-negotiated deal may result in purchasing the item at higher costs if the systems and processes do not provide complete visibility of stocks and rebates.
Establish strategic supplier relationships:
Supplier relationships hold the key to long-term cost savings. The procurement team must focus on building strategic supplier relationships keeping in mind new market innovations and competition. Automating vendor management accelerates vendor onboarding and invoice processing.
Focus on Total Cost of Ownership rather than Price:
Sourcing must not focus on the price alone. Factors like required storage, manpower, logistics, handling, etc. must also be considered while choosing the supplier. Successful procurement teams focus on the total cost of ownership rather than the price factor.
Several procurement tasks like negotiating with suppliers, renewing contracts, etc. need to be backed with updated procurement data. The generation of PRs and POs is a laborious process that needs 100% accuracy. Relying on manual procurement processes compromises on speed and accuracy of the procurement function. Automating key tasks in the procurement process accelerates the procure-to-pay and source-to-pay cycles and relieves employees from performing tedious, low-value tasks. Procurement software solutions enable procurement managers to make informed purchase decisions and optimize the procurement process.
Review contract performance:
A review of contract performance should be done on a regular basis to identify opportunities for renegotiation. Renegotiation of the contract could happen due to one or more of the following reasons:
- Availability of suitable replacement
- Fall or rise in requirements compared to forecasted values.
- Introduction of the new design by a competitor
- Innovation in the supplier industry
Renegotiation and renewal of contracts based on review enable businesses to optimize their supplier base.
Procurement Automation is Here to Stay
There are several drawbacks to manual procurement processes. Automation of key procurement tasks not only overcomes these drawbacks but also improves the performance of the procurement process. Repetitive and low-value tasks are automated, which enables employees to focus on more productive and strategic tasks. The accuracy and consistency are maintained by automating key procurement processes. Vendor engagement can be greatly improved by automating the sourcing and payment processes. Lastly, procurement automation enables better operations and compliance management.
Here are the capabilities that procurement automation brings to the procurement process:
Centralized access/availability of information –
A procurement process that gathers information from multiple sources cannot be efficient. Automation provides centralized access to information, from vendor data to accounts payable data, making it easy for the procurement manager to make informed decisions.
Process Performance Improvement –
Automation of the procure-to-pay cycle helps eliminate the delays and bottlenecks associated with PR, PO, and invoice approvals. Employees get more time to focus on strategic tasks, which has a direct bearing on the performance of the procurement process.
Standard procurement policies –
Standardization of procurement policies is as important as the centralization of data. Standardization of procurement policies ensures consistency and transparency in the treatment of each vendor. Following a standard set of steps across each type of purchase, the process makes it easy and faster to procure goods and services. Appraising team members of a standardized set of rules and policies are more effective than having different sets of rules for each purchase.
Continuous process improvements –
Gathering feedback from every purchase helps learn from past mistakes, optimize processes, and build on success. Feedback can be collected through surveys of internal and external stakeholders or based on performance KPIs. An automated procurement system can collate feedback and KPI data and present it to procurement managers for analytics. Analysis of this data forms the basis for continuous process improvements.
Strategic sourcing –
The sourcing process needs to be transparent and open so that all the suppliers are given equal chances and are appraised with the same information for the submission of bids. Potential suppliers must be provided with all the information required to submit a bid. Standardization of the bidding process ensures easier evaluation and increases the openness and transparency of the sourcing process. Automated procurement solutions coupled with business intelligence capabilities enable procurement managers to make informed buying decisions. An updated supplier directory maintained by the procurement software helps track contract statuses and supplier performance.
Accuracy and consistency –
As mentioned in the above sections, automation brings standardization to the procurement process. Minimizing human intervention eliminates the bias and errors associated with data handling in procurement. Standard automated procurement processes also bring inconsistency in operations.
Transparency and accountability –
A clear description of roles and responsibilities can be laid down by procurement solutions. Implementing an automated procurement system enhances accountability among employees. Also, standard procedures and policies increase the transparency of transactions.
Flexibility and mobility –
Cloud procurement solutions provide a high degree of flexibility and mobility for the user. Anytime, anywhere availability and access to the procurement app make life easy for the procurement manager. The flexibility provided by the software makes future upgrades a hassle-free affair.
In a nutshell, procurement solutions provide total improvement of the procurement function. Procurement automation would be on the priority list of progressive organizations looking to optimize their procurement operations. Cavintek – one of the leading workflow automation solutions companies, provides intuitive procurement automation solutions. Cflow is a SaaS workflow automation solution that can automate the procurement workflow within minutes.
Types of e-Procurement Solutions
What is an e-Procurement solution? An e-procurement solution or software is enterprise software that integrates and automates the entire procurement cycle in an organization. E-procurement solutions enhance the transparency of the spending and approval processes in the procurement cycle. Businesses can choose the e-Procurement solution provider based on the features provided by them. Unlike conventional procurement solutions, e-procurement transactions are done via the Internet. E-procurement not only includes the use of internet applications but uses Intranet and Extranet applications. E-Procurement solutions are classified based on the type of procurement activity that is taken care of.
Some of the e-procurement types like e-sourcing or web-ERP have already received a lot of attention and are being used by companies, other lesser-known types like e-informing or e-reverse auctioning are yet to mature and gain popularity among businesses. A brief of various forms of e-Procurement solutions is given below.
E-sourcing solution – It is a type of procurement solution that focuses on identifying new suppliers for a spend category. The search for prospective suppliers is done via the Internet. By identifying new suppliers, businesses can increase competitiveness in the tactical procurement process. The offers from various suppliers and product and service reviews are available online for comparison by the buyers. The supply risk associated with various categories can be reduced by using an e-sourcing solution. E-sourcing supports the specification phase of procurement.
E-ordering solution – e-Ordering is concerned with the creation and approval of purchase requisitions, submitting PRs, and receiving goods and services that are ordered through a procurement solution that operates via the Internet. Typically, the goods and services ordered via e-ordering solutions are indirect goods and services (not related to goods and services). The ordering catalog provided by the software is used by all employees. Ordering of indirect goods or services may happen in an ad-hoc manner.
E-tendering – The tendering process involves sending RFPs and RFIs to suppliers identified in the sourcing process and receiving their responses. When the tendering process is carried out via the Internet, it is referred to as e-Tendering. E-tendering is supported by an e-tendering system or software. The analysis and comparison of received tenders can be performed by the rendering software. The scope of the e-tendering process ends with an assessment of tenders, closing, or negotiation with the vendor is not included in its scope. E-tendering supports the selection phase in procurement and facilitates the RFI and RFP activities.
Web-based ERP – Web-based ERP is concerned with the process of creating and approving purchase requisitions that are ordered via the Internet. The main intent of e-ordering and web-ERP solutions is similar. The goods and services ordered by a web-ERP system are directly related to the product. These are referred to as direct goods and services. Supporting software systems for the web-ERP system are used only by the employees of the purchasing department. Ordering of direct goods and services happens in a planned manner.
E-reverse auctioning – Surplus goods and services are usually auctioned off by a business to other buying organizations. The buying organizations submit bids to the selling organization for the purchase of goods. The auction operates in an upward or a downward pricing mechanism. A reverse auction operates in the opposite fashion where a buying organization asks for goods and services it requires from a number of suppliers. E-reverse auctioning is the reverse auctioning function done through Internet technology. E-reverse auctioning focuses on the price of goods and services auctioned, other factors like the quality, reputation of suppliers, etc. are taken care of by the preceding phases in procurement. E-reverse auctioning closes the deal between the buyer and the seller when a mutual agreement is reached.
E-informing – The informing process is not directly associated with the steps of the procurement process. E-informing is concerned with the gathering and distributing of purchasing information from and to internal and external parties with the help of Internet technology. Publishing purchasing management information on an extranet that is accessible to internal clients and suppliers is a type of e-informing. The data gathered by e-informing software is used for purchasing intelligence and spend control management.
E-contract management – All the activities related to a supplier contract are managed by the e-contract management solution. Management of receivables, contract settlements, payments, performance securities, contract variations, and auditing and control activities are covered under e-contract management.
E-Purchasing solution – An e-purchasing solution is used for procuring low-value, high-volume goods, and services. The E-tendering solution is used for procuring high-value, low-volume goods. Using an e-purchasing solution simplifies the purchase of goods and services. The main component upon which an e-purchasing solution is built is the e-catalog. The suppliers publish the items online for buyers to choose from. Choosing from published items, placing the order, receiving the order, and payment – everything is done online.
E-Invoicing solution – An e-invoicing solution presents the customer with an invoice for payment. In most companies, the Finance or Accounts payable department issues invoices for approval, processing, and payment.