People who run a business wear many hats every day. They deal with operations, strategy, finance, customer relationship management, business development and a lot more.
As a result, procurement is often overlooked. It is sometimes considered a low-priority issue and gets less strategic attention. This might be your biggest mistake. That’s because you spend most of your sales revenue on procurement, and a nonstrategic approach could result in mistakes and losses.
Let's put it this way: A small improvement in your procurement can have a huge impact on the bottom line of your business. So with an organized and well-developed procurement process, you should expect to see impressive results and increased productivity.
Let's take a look at six actionable and effective procurement tips that you and your business can use to run a hassle-free procurement process.
1. Don't fall for false promises.
This might sound like pretty obvious and simple advice to follow. However, believe it or not, it is one of the most complex parts of procurement. You might end up investing more money than you initially intended to if you're not careful. There are chances of this happening if you don't research potential vendors enough.
When a vendor promises you the lowest cost, it might excite you because you want to cut down on costs. If you're not careful, however, you might end up paying more than you initially anticipated at the end of your purchasing cycle. That's because the vendor might have sneakily avoided highlighting the multiple overhead costs in the contract.
You need to take careful precautions to avoid this. Leverage a strategic sourcing platform. This will help you analyze your vendor's overall past performance and identify performance benchmarks. It will also help you estimate your savings and advise you on who's the best-performing vendor. That way, you can easily avoid all sorts of risks.
2. Maximize supplier incentives.
When businesses are on a shoestring budget, they may prefer to pay invoices at the last moment. It might seem like a smart step and can quickly evolve into standard practice. This leads vendors to add financial incentives to their contracts.
Vendors usually offer discounts to motivate early payments. Efficient procurement management involves maximizing cost-saving solutions proposed by vendors. Interestingly, such financial considerations are not entirely new, but they have become more commonplace.
Some organizations still fail to make these considerations that can reduce costs. Despite all of the benefits of early payment, many companies still release their payments just on the due date, losing out on financial incentives that could have helped them cut costs.
Taking advantage of an automated e-procurement system will help you avoid this mistake. You can use the system to release payments early and take advantage of financial incentives.
3. Hire procurement professionals.
The impression that procuring is the same as accounting or clerical work couldn't be more wrong. Procurement professionals have an entirely different and specific skill set from those professions, so you cannot expect professionals from other teams and departments to handle the job.
You need to hire a procurement professional if you are losing your money through the procurement department. Make sure to hire a professional who possesses skills like data analysis, industry knowledge, and interpersonal and negotiation skills.
Professionals with such skills will help you evaluate your vendors and conduct the negotiation to save money. Even if you're tied up with the wrong vendor in a long-term contract, they can help you renegotiate your deal and use best procurement practices to save your money.
4. Streamline the procurement process.
You need to streamline your procurement process and make it more transparent. You can leverage IT software solutions such as an Enterprise Resource Planning system, supplier management system, business spend management software and supply chain management software.
However, you need to pick the right technology, because it will have an impact on your organization's overall business performance. While it might cost you a bit at the beginning, it's a great investment that will help you save time and get more organized. You also need to invest in your staff to train them how to use the software.
If you are a small business or have a shoestring budget, you can opt for an open-source software platform. Open-source software will help your organization effectively run the procurement process.
5. Abandon a decentralized supplier database.
A decentralized database will lead to several issues like cash leakage, information duplication or outdated information. This results in wasting money and time on repetitive work to update each database individually. Also, your procurement department might end up using old agreements or pay too much for services and/or goods.
So, you need to create a centralized supplier database to make sure there is no cash leakage. This is one of the best procurement practices to adopt, as it helps you avoid the duplication of information by using the most updated information.
But how exactly will a centralized supplier database help you with procurement?
- A centralized database will help you understand how and where your organization is spending money. It will help you understand your budget so you can plan for a smooth flow of cash.
- The centralized database will help you cut down on the number of vendors and orders. Especially in a big organization, there might be many orders for the same material with the same vendor ordered at the same time. Multiple orders will slow down your processing time, so you need to limit the number of vendors. Conduct a thorough vendor evaluation so you can narrow down vendors who offer you the best price and quality.
- It helps you evaluate vendors and collect accurate data from various relevant sources. It also allows your procurement team to analyze different vendors. This will help you identify the best vendors who deliver the highest quality of resources and on-time service for the best price.
- It can help you improve your contract negotiations. You can prepare a contract and negotiate for lower bulk price based on the timely payments and past history of orders. It also helps you increase the power of your procurement team. The contract enables you to build and strengthen your relationships with vendors.
6. Build strategic partnerships.
Great vendors may be all around, but there's only a handful of vendors that are perfect for your organization. Once you've found them, you cannot afford to lose them. So make sure you build long-term, strategic relationships with them. Those relationships will help you win the trust of your vendors. As a result of these strategic partnerships, you will get opportunities to discuss your procurement needs and budget. Also, a good partnership enables you to negotiate the price with your vendor. This will help you and your vendor to mutually benefit from your partnership.
There you have it: six powerful procurement tips for you to maximize your savings and run a flawless procurement process. Some of these may be a bit harder to implement than others, but they will definitely amplify your efforts with the right approach.
Do you have any other effective procurement tips business owners should know? If so, please feel free to share your thoughts in the comments.