For most enterprise companies, procurement is a critical endeavor that requires a dedicated team, specialized software, and a number of complex processes and policies.
But what about the SMB?
Is there value in investing in procurement practices for small or medium-sized businesses? Do the benefits of procurement outweigh the costs of additional process steps and personnel required?
In this article, we’ll explore the role of procurement in small businesses.
We’ll dive deep into the world of procurement, explaining what it is, how it works, and where it may or may not be appropriate for SMBs to implement. We’ll also explore seven powerful tips for making procurement more effective.
What is procurement?
Definition of procurement
Procurement is the process of acquiring goods and services from other businesses.
The term can be used to refer either to the set of practices undertaken as part of the procurement process or the team responsible for actioning them.
Procurement covers all activities related to obtaining goods and services from suppliers.
This begins with supplier research and strategic sourcing and includes the purchasing and receipt of goods as well as ongoing vendor management.
Procurement vs. purchasing
These two terms often get confused. They aren’t the same thing, but they are related.
The purchasing process is transactional and is all about the short term. It's about placing an order with a vendor and receiving the goods or services requested.
Procurement is more holistic and strategic and focuses more on the long term. It involves sourcing new vendors, negotiating rates and terms, putting agreements in place, and managing supplier relationships.
Purchasing, therefore, is one component of the broader procurement process rather than an alternative.
Types of procurement
Procurement can be conceptually broken down into a few different categories.
Often, this distinction is purely theoretical.
However, larger organizations may opt to delegate the different types of procurement to various sub-teams within the larger procurement department to streamline and specialize.
Direct procurement vs. indirect procurement
The first distinction we can make is between direct and indirect procurement.
Direct procurement relates to any goods or services used to produce the thing the company sells. For example, microchips and glass would be two examples of direct procurement for a smartphone manufacturer.
Indirect procurement is pretty much anything else. For example, that smartphone manufacturer needs marketing software to power its campaign, and it needs office chairs for all of the admin and finance staff.
These purchases don’t go directly into producing smartphones, so they fall under the umbrella of indirect procurement.
Goods procurement vs. services procurement
The second way to divide up procurement is to separate goods from services.
This one is pretty straightforward.
Goods procurement covers the procurement and purchasing of physical products, like office furniture. Services procurement relates to the procurement and purchasing of services provided, such as engaging a marketing agency.
Software procurement can fall into either camp, though today, most software is bought on a subscription basis and is considered a service since you don’t own the software itself.
In many organizations, software procurement is a separate team due to the intricacies and security concerns involved in buying and using software.
Procurement vs supply chain management
The procurement process and supply chain management are closely related but distinct business functions that often work together.
Where the procurement function focuses specifically on acquiring goods and services from suppliers, supply chain management encompasses a broader scope of activities. It oversees the entire journey of products from raw materials to final delivery, including procurement, manufacturing, logistics, inventory management, and distribution.
For example, a furniture manufacturer's procurement team might focus on sourcing raw materials like wood and fabric through a competitive bidding process for significant cost savings.
Meanwhile, the supply chain team oversees supplier performance, ensures those raw materials arrive on time, coordinates production schedules, manages warehouse inventory, and handles risk management against the threat of supply shortages.
Small businesses often start by focusing on procurement management before expanding into full supply chain management as they grow. This allows them to manage good supplier relationships and optimize procurement activities before taking on the complexity of managing an entire supply chain.
How do procurement processes work?
While every company has a slightly different approach to procurement management, based on their needs, size, and desired balance between agility and security, most follow these broad steps:
Needs identification
First, the business carefully reviews its requirements for a vendor, product, or service. This allows them to assess potential suppliers objectively.
The procurement team will also identify specific goals, such as achieving cost savings in office supplies, improving supplier performance across procurement KPIs, or ensuring ethical sourcing of raw materials.
The needs and goals established in this step flow throughout the procurement process and help ensure strategic sourcing of goods and services.
Review of the current situation
The procurement team reviews the current state of the procurement process while keeping their specific strategic sourcing goals in mind.
If the goal is cost savings, they may focus on measuring the current costs of the overall procurement process across office supplies, raw materials, and more. If the want to achieve more sustainable procurement for their goods and services, they're more likely to focus on measures of sustainable sourcing and green procurement such as the carbon footprint and energy use.
Taking stock of current procurement KPIs is especially important when procuring software. The procurement team will assess the current tech stack to make sure any new additions will integrate well, especially when considering a vital business function such as accounting or enterprise resource planning.
Make or buy analysis
This process involves determining whether it's better to purchase the goods and services needed or create them internally.
In this case, procurement management can overlap with supply chain management, procurement usually being responsible for procurement practices but in this case considering a strategic shift in the supply chain itself.
When the procurement process overlaps with a new focus procurement hasn't typically been responsible for, internal stakeholders may expand the procurement function, or they may bring in supply chain management experts to consider aspects of risk management.
Market research
If the decision is to buy the goods and services needed, the procurement team will engage in market research to understand what supplier options and cost savings are available.
The team will compare those options against their established benchmarks for current supplier performance to determine potential cost savings for office supplies, raw materials, and more.
Vendor shortlisting
Based on this research, the procurement team will identify suppliers that fit the given needs, creating a shortlist of ideal suppliers for these goods and services. This may include the possibility of expanding current supplier relationships, adding new goods and services to existing contracts.
Vetting and risk analysis
The procurement team then researches each potential supplier, analyzes risks such as security exposure, and vets each vendor for financial stability, ethical sourcing, carbon footprint and energy consumption, or any other key metrics identified in the procurement strategy.
RFX (RFQ or RFP)
A request for quotation (RFQ) or request for proposal (RFP) is surfaced to each potential vendor to gather required information regarding pricing and availability.
The procurement team may use a system for competitive bidding on these goods and services contracts, while being careful not to damage strong supplier relationships.
Supplier prioritization
The procurement team then puts the final shortlist in order of priority and moves forward with the supplier at the top of the list first.
Note, however, that cost reduction is not the only consideration here. To manage risk and ensure operational efficiency even in the face of potential shortages in these goods or services, the procurement team will consider how to strategically manage spend across multiple suppliers for more sustainable procurement management.
Negotiation
Here, the production team may negotiate price and terms of the contract, including delivery timeframes, service level guarantees, risk management terms, payment terms, and so on.
Contract signing
Once an agreement is reached, the contract is signed, and a deal is in place between the buyer and the vendor.
Do businesses need a procurement team?
Many SMBs question the need to invest in procurement.
Creating an additional team (even if that’s just one person) is, of course, an expense, and that's before you look at the cost of procurement software and the burden of additional approval processes that inevitably slow down purchasing.
Moreover, SMBs face some unique procurement challenges that larger organizations may not, such as:
- Limited bargaining power due to low purchase volumes
- Lack of expertise and experience
- Limited availability of time to focus on supplier relationship management
Does a typical SMB need a procurement team?
If your company manufactures and sells a physical product, then procurement is going to be an incredibly important facet of business. It will help you reduce costs and increase profit margins as well as maintain supplier diversity to reduce issues associated with supply chain delays.
If you have multiple locations, branches, or regions, then you could benefit from the economies of scale that come with centralizing purchasing, then procurement might also be a good investment.
If, on the other hand, your company primarily sells a service that doesn’t require a physical input (like a marketing agency), or if you only buy and sell pre-made goods and operate out of a single location (like a pharmacy), then you probably don’t need a procurement team at this stage.
However, you should always keep future growth plans in mind.
If you have intentions to scale your business, then it's likely you’ll need a procurement team down the line. You might not be a small business forever! It’s a good plan to implement the best practices that enterprise companies use early, rather than wait until you’re plugging a gap or solving a problem.
7 tips for improving procurement operations
About to implement a procurement team? Or just looking for tips to improve your existing operations?
Consider implementing these seven best practices.
1. Leverage modern technology
Today’s procurement teams are spoilt for choice when it comes to tech that can help them streamline operations.
Software solutions like BILL can assist with supplier sourcing, allow you to leverage automation to speed up things like approval workflows, and offer better spend visibility.
2. Focus on supplier relationship management
Many SMBs neglect vendor relationship management, but it's a critical practice for minimizing the impact of supply chain shortages, holding suppliers accountable to contractual obligations, and capitalizing on negotiation opportunities.
Aim to hold a quarterly review with each supplier to review performance and discuss any important business updates from both ends.
3. Beef up your negotiation skills
Negotiation is a skill, meaning it can be improved with practice.
To help secure your company better procurement deals that cut costs while maintaining quality standards, invest some time in learning about different negotiation tactics.
PS. We’ve got a guide on that: How to negotiate with vendors effectively.
4. Determine whether centralized procurement is the right fit
There are two broad approaches to procurement: centralized and decentralized.
Centralized procurement is when one team takes care of the procurement of the whole organization.
Benefits of centralized procurement include economies of scale and greater control.
However, it limits freedom at the local level.
Decentralized procurement is the opposite.
Individual department heads or branch leaders are responsible for procurement. They have more control locally and can sometimes take advantage of local supply chains, lowering transport costs.
However, it's harder to access economies of scale, and there is more overall risk involved.
You’ll need to choose which is the right approach for your organization and formulate your policies around that.
5. Regularly evaluate and adapt procurement practices
Speaking of procurement policies, these aren’t a “one and done” situation.
Yes, you should invest time upfront in creating detailed processes and ensure this documentation is available to all involved in procurement.
However, it is also critical to be adaptive to things like market changes, new compliance requirements, and fluctuating business needs and priorities.
6. Streamline approvals processes
Where possible, use automation to streamline approvals processes.
This will allow procurement team members to easily route contract approval requests to legal or seek sign-off on a new deal from their team leader.
7. Improve supplier diversity
Finally, do what you can to increase supplier diversity. This will help protect you against supply chain disruptions or shortages.
For example, a restaurant chain might have a great deal with their poultry supplier.
But if, due to unforeseen circumstances, they run short on chicken and won’t be able to meet your purchase request in time, it's always handy to have a backup vendor on hand so you don’t have to cross anything off the menu.
Automate your procurement process
Procurement is a crucial business department for maintaining effective supply chains, reducing unnecessary expenditures, and ensuring compliance with internal policies and external legislation.
To ensure your procurement processes are as efficient as possible, look for opportunities to streamline workflows using automation software like BILL.
BILL can help you manage and orchestrate payments to vendors, develop approval routing workflows, and improve spend visibility across the board.
