Being Efficient #1 – Procurement Process
As promised in our previous blog, where we spoke about 6 business processes you can automate, presenting the first episode of our “Being Efficient” blog series, today’s topic being – your procurement process or purchase cycle.
For any business which is engaged in the manufacturing or trading of goods and / or services, there is a continuous interaction with its suppliers and with its customers. We are sure, that like all successful businesses, you too keep an effective track of purchase orders which you place with your suppliers, as well as sales orders which you receive from your customers. In this blog, we will focus on the process from where it all starts – your procurement process – and how you can become more efficient in it.
As always, the logical way to start, is by examining your current procurement process and understand, whether there are any issues you want to solve.
How is your Procurement Process performing?
To begin with, measuring the following factors, can give you a good idea of how your purchase cycle is performing –
- Procurement Costs – As a business, your continuous effort is to reduce your procurement costs. Your procurement costs may go down for number of reasons – cost of your raw materials is reduced, a new supplier is found with better rates, a less expensive substitute item is used, a cheaper transportation method is found, or simply better negotiation. A lower cost will mean, that you will be able to free up your cash, be more competitive in the market, and win better business compared to your rival businesses.
- Administrative Costs – These costs are not related to the items being purchased, but rather related to the activities related to procurement or purchase of those items. In a way, it is a good measure of efficiency – if your purchasing costs are within the budget, then you are operating at a high frequency; if your purchasing costs are exceeding the budget, then you have a problem.
- Inventory Turnover Ratio – Sometimes, we tend to think, that the price at which an item is purchased is a good measurement of procurement performance. However, price may fluctuate because of multiple factors – market conditions, availability of the item, demand for the item etc. Thus, a more logical way to look at purchase efficiency is to look at your inventory turnover ratio – which basically measures the number of times your company managed to liquidate your entire inventory, in a given period.
- Supplier Stability – How stable are your suppliers? Are they consistently supplying material of the expected quality and within the expected timelines? Are they extending a decent credit period? Are they providing you discounts on the basis of your goodwill and business relationship? In short, are they just looking at some short-term gains, or are they genuinely invested in a long-term association with you?
- Material Quality – Quality can mean multiple things to you, based on the segment you belong to. But overall, you can look at durability, consistent timelines of delivery and reduction in wasted resources, as a true measure of how the quality of your input materials or raw materials are contributing towards your purchase performance.
Now, that you may have got a fair idea of how efficient your current purchase process is, let’s look at 5 ways in which you can become more efficient.
5 Ways to make your Procurement Process more efficient
Evaluate each purchase
The main role of any purchase cycle is to reduce the costs of the materials which you need. It is not enough to just process purchase orders whenever there is a need, but you need to monitor what is being ordered versus, what is being used in your manufacturing and trading processes. Given, that you have a contract with most of your key suppliers, it is important that all your purchase orders are available at a single place for your immediate review.
Build strong supplier relationships
One of the key ingredients of having an efficient purchase cycle is to build a network of trustworthy suppliers. This automatically eliminates the need to start from scratch for every procurement need that you have. If you have a good working relationship with your suppliers, you can sit back and relax, knowing that you will get the right quality, fair negotiations and timely delivery. Over a period, this will surely convert into an increased market share, better responsiveness to market demand, increased ROI and shortened order fulfilment lead times, all for you.
Implement a contract management system
Negotiation is an important part of developing good relationships with your supplier network, and it is important to have a strategy in place, which is beneficial for both parties involved. Negotiations typically involve a contract, and often that means that documents are mailed back and forth, in order to reach an agreement. This could cause confusion, as different people may have been involved in multiple conversations, at different points in time. Implementing a contract management platform makes project planning, vendor management, bid management and negotiation much simpler as everyone is now able to review orders at one place.
Use analytics to make intelligent decisions
Having a 360-degree view on every part of your purchase process, helps you to track your projects and keep your finances in check. In reality, however, any business works with hundreds of vendors every year, and managing multiple contracts becomes time consuming and cumbersome, making analysis difficult. Thanks to technology, businesses can implement systems, which not only make managing contracts easier, but also provide you with powerful analytics and reports. At the end of the day, you can use analytics and technology to take the right decisions at the right time.
Integrate your purchases with your sales trends
Operationally, there is a limit to how much efficiency you can bring in to your purchase cycle. To make the procurement process truly agile, you need to integrate your sales data into it. Who is your customer, what do they want, how often they want it, are important points for you to consider. With this approach, you can optimise your procurement process to service your sales cycle, rather than selling as per your internal processes, which is obviously not going to work.
If we quickly summarise all the steps listed above, which can make your purchase process efficient, a common link that will emerge is – technology. Indeed, automating your purchase cycle is one of the fastest ways to increase efficiency and be successful. Most importantly, an optimized procurement process will positively affect your bottom line and increase your efficiency and profitability.
In our next blog, we will focus on how you can being more efficient in your sales process.
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Author: Pramit Pratim GhoshPramit, who has been with Tally since May 2012, is an integral part of the digital content team. As a member of Tally’s GST centre of excellence, he has written blogs on GST law, impact and opinions - for customer, tax practitioner and student audiences, as well as on generic themes such as - automation, accounting, inventory, business efficiency - for business owners.
Pramit Pratim Ghosh
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