Small and medium-sized businesses share a common problem:
Stay lean and keep costs low, or follow the best practices that enterprise companies do to maintain competitiveness?
This is the question that often pops up when considering investing in procurement. Many SMBs decide to forego investing in a procurement department and associated practices altogether.
But here's the thing:
If you’re a business of any size, be it a brand-new startup or a long-established enterprise, you’re procuring (purchasing) goods and/or services.
As such, you should have some form of procurement management procedures in place, even if that’s a simple supplier vetting policy and a purchase order workflow.
In this article, we’re going to cover all things procurement management to help you decide which practices are right for your organization’s age and stage, and which might be overkill right now.
What is procurement management?
Procurement management is the overarching orchestration and coordination of procurement activities.
It includes strategic activities like sourcing and negotiation, as well as more tactical tasks like placing purchase orders and matching invoices.
A huge element of procurement management is the constant assessment and optimization of existing practices and processes, such as implementing accounts payable automation software or conducting quarterly process audits.
The importance of effective procurement management for SMBs
Not sure if procurement management is worth investing in as an SMB?
Here are seven ways that an effective set of procurement management processes can benefit businesses of all sizes.
Strategic sourcing
A major component of procurement management is the strategic sourcing of new vendors.
This allows you to improve the quality of the goods or services you produce without reducing quality, as well as protect yourself against supply chain issues by promoting supplier diversity.
Cost savings
Effective sourcing of vendors, well-designed and executed purchasing processes, and quality supplier contract negotiations can all lead to cost savings.
You are then able to either pass these savings on to your customers to maintain a competitive advantage or keep prices stable and drive up profits.
Improved efficiency
Good procurement management helps you work faster by introducing standardized workflows and using automation software to hand over manual, repetitive tasks to machines.
Reduced waste spending
Businesses regularly underestimate how much they are spending unnecessarily.
This is known as waste spend, and it can be difficult to detect. Common sources include:
- Missing out on the ability to leverage economies of scale through a centralized purchasing unit
- Overlapping software licenses (such as when marketing and design have separate project management tools that offer similar functionality)
- Contracts that could have been better negotiated if a dedicated procurement person or team existed
Good procurement policies help reduce this waste spending through approval processes, pre-approved vendor lists, and established purchase and order confirmation workflows.
Better risk management
Great procurement management includes a stringent and careful vendor vetting process, which is conducted before supplier relationships are formed but should also be reviewed on a regular basis.
This helps protect your company against the various forms of risk that come with working with third-party suppliers, such as:
- Security risks, such as if a software supplier faces a data breach
- Financial risk, such as if a supplier goes under and leaves you short on components you need to continue production
- Reputation risk, such as if a PR scandal on behalf of a vendor impacts how customers view your company
Improved supplier relationships
Supplier relationship management is a critical aspect of good procurement management.
This encompasses a wide range of practices, such as quarterly business meetings, regular supplier performance reviews, and contract renewal and renegotiation conversations.
By enhancing and fostering the relationships your brand holds with its suppliers, you’ll reduce the likelihood of a contract breach, improve your ability to negotiate a better price, and maybe even get an early heads-up on new features that are in production.
Maintain compliance
Procurement management is also concerned with a number of legal and compliance aspects related to purchasing, such as the maintenance of accurate financial records.
This can even extend to maintaining compliance with internal company policies, such as only purchasing from suppliers that meet certain ethical or sustainability guidelines.
Core components of procurement management
So, what actually goes into managing procurement?
This is a broad and varied practice, but we can divide most activities into the following five categories.
Supplier research, vetting, and selection
First up comes the research, vetting, and selection of vendors.
The research process involves reviewing the market to understand what options are available and creating a shortlist of potential suppliers based on your pre-identified requirements.
Then, you’ll vet each of the potential options for factors related to security and other risks.
Finally, you’ll prioritize and select the vendor you’d prefer to work with before moving forward to the next stage.
Contract negotiation
Here, you’ll begin negotiation conversations with the vendor you’ve chosen to work with.
If you can reach an accord, the contract will be signed, and the formal business relationship will begin.
Purchase order management
Now that you’ve got an established relationship in place with the vendor, your purchasing team or heads of departments (depending on your procurement policies) can begin the purchasing process.
This is usually managed via a purchase order process. The person who wants to make a purchase creates the PO, sends it off for approval, and then forwards it to the vendor once they get the green light.
This PO number must be present on the resulting invoice sent by the supplier so the accounts payable team can match them up.
Vendor performance management
Vendor performance management is all about ensuring your suppliers live up to the expectations set out in your contract.
This might involve monitoring key metrics and KPIs, as well as regular performance review meetings (quarterly usually does the trick).
Contract management
The final piece of the puzzle is contract management.
This involves keeping on top of renewal or termination dates, reviewing performance across the contract term, and potentially renegotiating the agreement or considering other vendor options once a contract expires.
9 common challenges of managing procurement
Like all business endeavors, procurement comes with its own unique set of challenges, especially for small and medium-sized organizations, such as:
- Supplier management: Ensuring that your vendors meet the quality, cost, and delivery requirements set out in your supplier agreement.
- Cost control: Keeping costs down while making sure that quality doesn’t slip.
- Compliance and regulation: Maintaining compliance with legal and regulatory requirements (which are always subject to change), along with internal policies and processes.
- Risk management: Keeping on top of the various risks that come with dealing with third party suppliers, such as financial, reputation, and security risks.
- Supply chain management: Avoiding and managing disruptions to supply chains related to economic and geopolitical events as well as natural disasters.
- Data management: Keeping data secure, organized, and visible in a way that’s useful to improving procurement processes
- Technology: Integrating new technologies as they emerge to remain competitive.
- Sustainability and ethics: Keeping up with the increasing pressures to prioritize sustainable and ethical procurement practices while balancing this with economic goals.
- Stakeholder alignment: Ensuring that all procurement stakeholders, from the C-suite to the department leaders who need the goods being ordered.
Managing and mitigating these procurement management challenges can be tough, but by implementing the following best practices, you can help avoid a number of them.
Best practices to improve their procurement management
Develop, document, and distribute policies
First, get clear on what your expectations are of anyone involved in procurement.
Build an accounts payable policy, a purchase order process, a vendor vetting workflow, and more.
Carefully document these processes and ensure those documents are kept updated and accessible by all who require them.
Establish a vendor management practice
Determine how you’re going to monitor and manage vendor performance.
Some examples to consider include:
- Setting up a vendor management dashboard or spreadsheet to keep track of KPIs
- Establishing a quarterly meeting cadence
- Performing vendor audits every six months
- Revisiting available competitors each time the contract is up for renewal
Invest in ongoing training and development
One of the best ways to continuously improve your company’s procurement practices is to invest in your improving team’s skill sets.
You could consider providing a subscription to popular online procurement publications, or pay for specialized training sessions, such as upskilling procurement specialists in risk management or strategic sourcing practices.
Decide on centralized vs. decentralized procurement
There are two main schools of thought on how procurement should be managed:
- Centralized procurement. All company procurement is handled by the same centralized team.
- Decentralized procurement. Individual branch managers or department leaders can procure goods and services for their teams.
Centralized procurement offers more control and provides greater opportunity for economies of scale.
Decentralized procurement puts more power in the hands of the people who are actually using the goods or services being procured and can, in certain circumstances, provide access to localized sourcing opportunities.
Integrate and automate
Finally, consider how your procurement business unit might be able to take advantage of the benefits offered by automation.
A few examples of effective places to leverage automation include:
- Invoice and purchase order matching
- Purchase approval workflows
- Payments to approved suppliers
- Vendor performance reporting
Streamlining procurement management
Procurement is an important business unit for creating healthy relationships with vendors, maintaining compliance with internal policies and legal requirements, and keeping costs low.
Some SMBs, however, see procurement as an unnecessary cost center.
The secret here is to take advantage of modern automation and software tools that can help you streamline manual and repetitive aspects of procurement, allowing your team to focus on the more strategic activities that improve overall business profitability.
Platforms like BILL can help you automate aspects of the procurement and purchasing process, from approvals to purchase orders to supplier payments.
