Procurement Management
Monday, November 25, 2013
Everyone buys things – groceries, clothes, transport services, housing.
When you're buying vegetables, you probably only spend a few seconds deciding what and where to buy.
After all, if you make a mistake and finish up with apples that rot in your fruit bowl after a few days, the money you've wasted is insignificant.
When you choose a new car, though, you'll spend longer evaluating what you want, and you'll consider things like prices, and the levels of after-sales service that different dealerships offer.
Procurement – buying goods and services at work – also demands a range of approaches depending on the situation, although the decisions are usually bigger ones. What's more, since it's someone else's money you're spending at work, you need to be more rigorous about ensuring you've considered all the factors required to make a good purchasing decision. Who do you use as a supplier? What kind of contract terms do you need? What constraints and restrictions do you have on your purchasing power? And should you make something, or buy it in?
Procuring – or purchasing – goods and services from external suppliers is a critical part of most organizations. The materials and support provided by your suppliers are often key to their organization's overall success. Therefore, it's good practice to manage the entire supply acquisition process carefully to make sure you get what you want – and what you pay for.
Having a process in place allows you to manage the ordering, receipt, review, and approval of items – and it sets up procedures for managing the supplier relationship. Doing this properly helps you ensure that everything you buy is fit for purpose, and it helps you identify and resolve issues quickly. Developing an effective procurement management process will help you maximize the value of your supplier relationships – and safeguard and maximize the results of your project.
Sure, this takes a lot of work. However, if you get procurement right you can drive down the prices you pay for resources, at the same time that you protect yourself from all of the stress, disruption, delay and cost that comes with unreliable suppliers or defective inputs.
Strategic Procurement
Here are some ways to increase the contribution that your procurement practices deliver to your organization.
Develop a procurement policy
Every project has different supply needs, so it's impossible to define one process that works for every situation. However, if you start with a comprehensive policy, and define the purchasing framework, you'll have a set of principles that people can use to procure materials throughout the life of a project, or throughout the organization. Then, when unexpected supply needs occur during a project, the team will know how to make purchasing decisions, and get the materials they need quickly and effectively.
If you rely on strict rules, you'll probably face too many variables. Establishing principles helps you use the policy in a wide variety of situations. On the other hand, lacking a policy like this often leads to expensive duplication, poor cost control, and higher overall risk.
Your procurement policy can help you do the following:
Establish best practices for purchasing.
Confirm the business objectives of the purchasing function.
Ensure alignment with corporate governance initiatives.
Define necessary quality controls.
Make sure people know what they should, and should not, buy.
Identify who does what at each stage of the procurement process.
Use technology to manage purchasing information
Good management information is key for getting good value for what you spend. Unless you know where your money is spent, how can you possibly manage costs effectively? When you give the project team complete information, you enable them to direct resources where they're needed the most – and deliver maximum value to the project.
Use technology effectively within your organization to do the following:
Simplify and automate procurement procedures.
Create templates and user guidelines, where possible. In really complex purchasing situations, it may be worthwhile developing a full-blown Procurement Decision Support System (PDSS).
Provide up-to-date cost information, as well as supplier contracts and arrangements.
Provide access to online sourcing, where available.
Manage supplier relationships
You should know your suppliers as well as your clients – both are key stakeholders in your project's success. When you develop strong supplier relationships, these suppliers have a vested interest in your success, so they're more likely to provide higher-quality service and reduced costs. Suppliers often go beyond expectations for customers who work with them on a regular basis, rather than customers who contact them only when there's a problem, or when the contract needs to be renewed.
Here are some best practices for building strategic supplier relationships:
Protect supplier information.
Encourage your suppliers to find innovative ways to meet your needs by limiting strict requirements where possible.
Stay in regular contact to limit the risk of any drop in quality.
Provide incentives for high-quality supplier performance.
Provide ongoing training and support for account managers to make sure they know how to develop and nurture these key relationships.
Proactively control costs
As a business function, procurement is a cost center. The costs depend on how efficient your processes are. Here are some steps you can take to reduce overhead costs, and improve business responsiveness:
Regularly assess your processes to identify how to improve workflow. Regular reviews of goods and services, suppliers, and procedures are essential to maintain maximum efficiency and low operating costs.
Make sure procurement responds to the changing objectives of the organization.
Combine and strengthen your supplier base to increase your purchasing power.
Pay attention to contract terms, and put verbal agreements in writing.
Create a strong contract from the start. Shop carefully, and compare suppliers.
Establish an effective, streamlined bidding process that's appropriate for the situation. For example, buying office supplies is very different from purchasing the services of a specialized consultant.
Invest in recruiting, developing, and retaining a strong procurement team.
Research what other clients and competitors are doing to make sure that your processes are current and effective.
Using these overall guidelines, you can build a strong and strategic procurement function for your organization. Take the time to develop and adopt your principles of strategic purchasing. This will help you create a clear procurement management plan that your team, or anyone in the organization, can follow.
Procurement Management Plan Checklist
A checklist helps ensure that you don't miss key steps when building a comprehensive procurement management plan. It also helps with the overall scheduling of activities. The following is a comprehensive seven-phase procurement checklist – pick and choose the elements of this that you want to use, depending on the scale of procurement you're engaged in:
Phase One: Identify Needs
Define the material requirements of the project.
Evaluate which products or services you'll buy, and which you'll make in-house (you may want to review this later in the process as well).
Identify potential alternate and/or substitute products and services.
Identify the maximum lead times you need between ordering and delivery.
Identify batch sizes required. You may get discounts for bulk deliveries, but do you have the storage capacity these would need?
Identify payment terms you are prepared and able to meet.
Identify various procurement methods.
Make sure needs are consistent with corporate standards and the overall procurement process.
Phase Two: Plan the Procedure
Create a timeline for doing research and for coordinating the procurement process.
Coordinate procurement needs with other parts of the project or business.
Identify constraints, restrictions, and assumptions that may impact the procurement plan.
Determine who has authority for what, and decide which process to follow when you need to change the plan.
Finalize the procurement method to ensure fairness for potential suppliers.
Write the request for proposal (RFP) and other specification documents.
Phase Three: Research Suppliers
Identify potential suppliers. Remember to review past experiences with suppliers.
Investigate contract possibilities.
Assess the macro, or external, environment to determine the impact on the procurement plan.
Determine the organization's purchasing power, and consider ways to increase the relative strength of your position.
Recommend changes to the plan to address any risks involved.
Phase Four: Source Suppliers
Develop terms, conditions, and other provisions for the bidding process.
Pre-qualify suppliers. Determine which suppliers potentially have the capacity and ability to meet your needs.
Begin the bidding process. Document all inquiries, and provide more information to suppliers as required.
Negotiate terms with suppliers using the principles of your strategic procurement process.
Document the process you use and the decision you make, in case there's a dispute at a later time.
Phase Five: Analyze Suppliers
Review all official bids. Use decision-making frameworks like grid analysis and paired comparison analysis to analyze the proposals received.
Review your decision to outsource supply – could this be sourced more cost-effectively in-house? (Take care – things are often more complex and difficult to provide than you might initially expect!)
Consult with necessary stakeholders, and recommend the supplier you want.
Phase Six: Award the Contract
Contact the supplier with the winning bid, and inform appropriate stakeholders of the final decision.
Contact unsuccessful bidders, and debrief them as appropriate.
Establish a process with the chosen supplier to develop and maintain the contract, or statement of work.
Clarify expectations, and develop performance-monitoring procedures. Ensure that billing and scheduling expectations are clear and acceptable.
Phase Seven: Manage the Contract
Determine procurement metrics to manage and evaluate the contract and the supplier.
Determine how you'll manage requests for changes.
Document how you'll handle performance disputes. Use After Action Reviews to record what happened and lessons learned.
Maintain a supplier file to help colleagues evaluate suppliers in the future.
Choosing the Right Level of Procurement Management
The approach described here is an effective way to make sure your procurement management plan is complete and effective. But, fully implemented, it can also create a resource-heavy, bureaucratic and expensive process, which is clearly not appropriate in all procurement situations. The cost (and therefore the complexity) of your procurement management process needs to be justified by the benefits it will deliver.
For a very simple piece of procurement, such as having the carpets replaced in a small office building, merely getting quotes from three different suppliers might be a perfectly adequate procurement management process. One the other hand, an auto manufacturer would use a comprehensive procurement management procedure for its relationship with a windshield supplier.
Factors to consider when evaluating the benefits that different levels of procurement management would bring to a particular supplier relationship include:
The size of the supply contract: the larger this is, the more management may be needed.
Duration of the supply relationship: the longer the relationship, the more management may be needed.
Risks to your organization of supply problems: the greater the impact if a risk materializes, the more management may be needed.
Cost and impact of switching: the more expensive or problematic it would be to switch if something went wrong, the more management may be needed. It's usually much harder to replace suppliers of strategic items, than it is to change suppliers of operational materials or services such as office furniture or catering.
Tip:
For information on procurement management in projects, see our article on Request for Proposal Documents .
Key Points
Procurement management is an important part of project management and day-to-day operations. Companies almost always need some form of supplies, so the better you are at managing the purchasing process, the more likely you are to minimize costs, and maximize the value you receive from suppliers.
Purchasing goods and services is a basic function within organizations, so it's not always seen as a strategic process. However, if you take the time to assess procurement management from a strategic perspective, and if you actively look for ways to add value to the process, you can gain significant advantages, and improve the overall success of your projects and operations.
Tags:
Skills, Strategy Tools
When you're buying vegetables, you probably only spend a few seconds deciding what and where to buy.
After all, if you make a mistake and finish up with apples that rot in your fruit bowl after a few days, the money you've wasted is insignificant.
When you choose a new car, though, you'll spend longer evaluating what you want, and you'll consider things like prices, and the levels of after-sales service that different dealerships offer.
Procurement – buying goods and services at work – also demands a range of approaches depending on the situation, although the decisions are usually bigger ones. What's more, since it's someone else's money you're spending at work, you need to be more rigorous about ensuring you've considered all the factors required to make a good purchasing decision. Who do you use as a supplier? What kind of contract terms do you need? What constraints and restrictions do you have on your purchasing power? And should you make something, or buy it in?
Procuring – or purchasing – goods and services from external suppliers is a critical part of most organizations. The materials and support provided by your suppliers are often key to their organization's overall success. Therefore, it's good practice to manage the entire supply acquisition process carefully to make sure you get what you want – and what you pay for.
Having a process in place allows you to manage the ordering, receipt, review, and approval of items – and it sets up procedures for managing the supplier relationship. Doing this properly helps you ensure that everything you buy is fit for purpose, and it helps you identify and resolve issues quickly. Developing an effective procurement management process will help you maximize the value of your supplier relationships – and safeguard and maximize the results of your project.
Sure, this takes a lot of work. However, if you get procurement right you can drive down the prices you pay for resources, at the same time that you protect yourself from all of the stress, disruption, delay and cost that comes with unreliable suppliers or defective inputs.
Strategic Procurement
Here are some ways to increase the contribution that your procurement practices deliver to your organization.
Develop a procurement policy
Every project has different supply needs, so it's impossible to define one process that works for every situation. However, if you start with a comprehensive policy, and define the purchasing framework, you'll have a set of principles that people can use to procure materials throughout the life of a project, or throughout the organization. Then, when unexpected supply needs occur during a project, the team will know how to make purchasing decisions, and get the materials they need quickly and effectively.
If you rely on strict rules, you'll probably face too many variables. Establishing principles helps you use the policy in a wide variety of situations. On the other hand, lacking a policy like this often leads to expensive duplication, poor cost control, and higher overall risk.
Your procurement policy can help you do the following:
Establish best practices for purchasing.
Confirm the business objectives of the purchasing function.
Ensure alignment with corporate governance initiatives.
Define necessary quality controls.
Make sure people know what they should, and should not, buy.
Identify who does what at each stage of the procurement process.
Use technology to manage purchasing information
Good management information is key for getting good value for what you spend. Unless you know where your money is spent, how can you possibly manage costs effectively? When you give the project team complete information, you enable them to direct resources where they're needed the most – and deliver maximum value to the project.
Use technology effectively within your organization to do the following:
Simplify and automate procurement procedures.
Create templates and user guidelines, where possible. In really complex purchasing situations, it may be worthwhile developing a full-blown Procurement Decision Support System (PDSS).
Provide up-to-date cost information, as well as supplier contracts and arrangements.
Provide access to online sourcing, where available.
Manage supplier relationships
You should know your suppliers as well as your clients – both are key stakeholders in your project's success. When you develop strong supplier relationships, these suppliers have a vested interest in your success, so they're more likely to provide higher-quality service and reduced costs. Suppliers often go beyond expectations for customers who work with them on a regular basis, rather than customers who contact them only when there's a problem, or when the contract needs to be renewed.
Here are some best practices for building strategic supplier relationships:
Protect supplier information.
Encourage your suppliers to find innovative ways to meet your needs by limiting strict requirements where possible.
Stay in regular contact to limit the risk of any drop in quality.
Provide incentives for high-quality supplier performance.
Provide ongoing training and support for account managers to make sure they know how to develop and nurture these key relationships.
Proactively control costs
As a business function, procurement is a cost center. The costs depend on how efficient your processes are. Here are some steps you can take to reduce overhead costs, and improve business responsiveness:
Regularly assess your processes to identify how to improve workflow. Regular reviews of goods and services, suppliers, and procedures are essential to maintain maximum efficiency and low operating costs.
Make sure procurement responds to the changing objectives of the organization.
Combine and strengthen your supplier base to increase your purchasing power.
Pay attention to contract terms, and put verbal agreements in writing.
Create a strong contract from the start. Shop carefully, and compare suppliers.
Establish an effective, streamlined bidding process that's appropriate for the situation. For example, buying office supplies is very different from purchasing the services of a specialized consultant.
Invest in recruiting, developing, and retaining a strong procurement team.
Research what other clients and competitors are doing to make sure that your processes are current and effective.
Using these overall guidelines, you can build a strong and strategic procurement function for your organization. Take the time to develop and adopt your principles of strategic purchasing. This will help you create a clear procurement management plan that your team, or anyone in the organization, can follow.
Procurement Management Plan Checklist
A checklist helps ensure that you don't miss key steps when building a comprehensive procurement management plan. It also helps with the overall scheduling of activities. The following is a comprehensive seven-phase procurement checklist – pick and choose the elements of this that you want to use, depending on the scale of procurement you're engaged in:
Phase One: Identify Needs
Define the material requirements of the project.
Evaluate which products or services you'll buy, and which you'll make in-house (you may want to review this later in the process as well).
Identify potential alternate and/or substitute products and services.
Identify the maximum lead times you need between ordering and delivery.
Identify batch sizes required. You may get discounts for bulk deliveries, but do you have the storage capacity these would need?
Identify payment terms you are prepared and able to meet.
Identify various procurement methods.
Make sure needs are consistent with corporate standards and the overall procurement process.
Phase Two: Plan the Procedure
Create a timeline for doing research and for coordinating the procurement process.
Coordinate procurement needs with other parts of the project or business.
Identify constraints, restrictions, and assumptions that may impact the procurement plan.
Determine who has authority for what, and decide which process to follow when you need to change the plan.
Finalize the procurement method to ensure fairness for potential suppliers.
Write the request for proposal (RFP) and other specification documents.
Phase Three: Research Suppliers
Identify potential suppliers. Remember to review past experiences with suppliers.
Investigate contract possibilities.
Assess the macro, or external, environment to determine the impact on the procurement plan.
Determine the organization's purchasing power, and consider ways to increase the relative strength of your position.
Recommend changes to the plan to address any risks involved.
Phase Four: Source Suppliers
Develop terms, conditions, and other provisions for the bidding process.
Pre-qualify suppliers. Determine which suppliers potentially have the capacity and ability to meet your needs.
Begin the bidding process. Document all inquiries, and provide more information to suppliers as required.
Negotiate terms with suppliers using the principles of your strategic procurement process.
Document the process you use and the decision you make, in case there's a dispute at a later time.
Phase Five: Analyze Suppliers
Review all official bids. Use decision-making frameworks like grid analysis and paired comparison analysis to analyze the proposals received.
Review your decision to outsource supply – could this be sourced more cost-effectively in-house? (Take care – things are often more complex and difficult to provide than you might initially expect!)
Consult with necessary stakeholders, and recommend the supplier you want.
Phase Six: Award the Contract
Contact the supplier with the winning bid, and inform appropriate stakeholders of the final decision.
Contact unsuccessful bidders, and debrief them as appropriate.
Establish a process with the chosen supplier to develop and maintain the contract, or statement of work.
Clarify expectations, and develop performance-monitoring procedures. Ensure that billing and scheduling expectations are clear and acceptable.
Phase Seven: Manage the Contract
Determine procurement metrics to manage and evaluate the contract and the supplier.
Determine how you'll manage requests for changes.
Document how you'll handle performance disputes. Use After Action Reviews to record what happened and lessons learned.
Maintain a supplier file to help colleagues evaluate suppliers in the future.
Choosing the Right Level of Procurement Management
The approach described here is an effective way to make sure your procurement management plan is complete and effective. But, fully implemented, it can also create a resource-heavy, bureaucratic and expensive process, which is clearly not appropriate in all procurement situations. The cost (and therefore the complexity) of your procurement management process needs to be justified by the benefits it will deliver.
For a very simple piece of procurement, such as having the carpets replaced in a small office building, merely getting quotes from three different suppliers might be a perfectly adequate procurement management process. One the other hand, an auto manufacturer would use a comprehensive procurement management procedure for its relationship with a windshield supplier.
Factors to consider when evaluating the benefits that different levels of procurement management would bring to a particular supplier relationship include:
The size of the supply contract: the larger this is, the more management may be needed.
Duration of the supply relationship: the longer the relationship, the more management may be needed.
Risks to your organization of supply problems: the greater the impact if a risk materializes, the more management may be needed.
Cost and impact of switching: the more expensive or problematic it would be to switch if something went wrong, the more management may be needed. It's usually much harder to replace suppliers of strategic items, than it is to change suppliers of operational materials or services such as office furniture or catering.
Tip:
For information on procurement management in projects, see our article on Request for Proposal Documents .
Key Points
Procurement management is an important part of project management and day-to-day operations. Companies almost always need some form of supplies, so the better you are at managing the purchasing process, the more likely you are to minimize costs, and maximize the value you receive from suppliers.
Purchasing goods and services is a basic function within organizations, so it's not always seen as a strategic process. However, if you take the time to assess procurement management from a strategic perspective, and if you actively look for ways to add value to the process, you can gain significant advantages, and improve the overall success of your projects and operations.
