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• Procurement is the business of sourcing goods and services from vendors. Depending on the size of the organization and the unique needs of the business, procurement can be quite complex.
• And, a complex operation that takes money out of the company is one that requires a truly efficient management process if costs are to be kept within the bounds of reason.
• That’s where the procurement management process comes in.
What is the Procurement Management Process?
Procurement management is the process that ensures that all the raw products, materials, goods, and services required by an organization have been acquired in a streamlined, cost-effective manner. Among its key functions are sourcing, vendor selection, and contract management.
Why Procurement Management is Important
The procurement management process is pivotal for organizations for the reasons mentioned here:
1. Facilitates Cost-Reduction
The major objective of the procurement management process is to help mitigate costs, reduce the bottom line, and make the process of acquiring goods and services easier. Through careful planning and contract negotiations, procurement teams are able to secure favorable costs and thus keep spending under control.
2. Interlinked With Other Functions
Procurement management is one part of the link in supply chain management. Whatever affects procurement management will inevitably trip up the rest of the supply chain’s operations. Procurement and supply chain activities go hand-in-hand and a weakness in one disrupts efficient functioning in the other.
3. Reduces Organizational Risks
Owing to the role of a sourcing specialist on a procurement team when selecting vendors and discussing terms and conditions as part of the PM process, the organization has a better understanding of its overall risk. Operational clarity – knowing who you’re in business with, the contract terms, and the quality of the products and or services – reduces risk.
Now, here’s how you can effectively manage your company’s bottom lines as you carry out your procurement management process.
4 Ways to Efficiently Manage the Bottom Line in the PM Process
(i) Focus Your Efforts on Process Automation
Companies don’t only save money when they renegotiate contracts but when they also automate their processes.
Consider the fact that manually processing invoices costs on average $12 to $30. Whereas, an automated system significantly reduces invoice costs from as high as $30 to a meager $2.07 per invoice according to American Productivity & Quality Center.
So, look at every step of your procurement management process and focus on areas that can be easily automated such as the requesting supplier information, requisitioning process, and vendor auctions, and take the necessary steps to digitize what you can.
(ii) Review Contract Terms with Existing Vendors
Whether you have a handful of vendors or an entire multitude of them, periodic contract reviews and supplier performance evaluations can help identify ways to cut down on costs.
For example, if you notice that you routinely order from certain vendors often, you might want to renegotiate a contract in such a way that you order in bulk and can thus profit from better discounts.
Remember to prepare well for the negotiations. Take time to assess current market prices for goods and services before approaching vendors. This will give you leverage and allow you to make data-centric decisions.
(iii) Consider Working with Other Vendors
In procurement, relationships are incredibly valuable – especially the vendor-supplier relationship. Great effort is placed into fostering and nurturing professional working relationships. However, if a vendor-supplier relationship is no longer serving you, perhaps it’s time to look elsewhere.
If a long-time supplier is now failing to meet their end of the bargain, constantly delivering goods late and in a way, that’s now affecting your production, it might be time to cut your losses.
Switching suppliers might be difficult at the onset but you might even find a new supplier with a better-quality product or service, who can deliver faster, and at a lower price. You’ll never know if you don’t make the effort to explore your vendor options.
And speaking of suppliers…
(iv). Cut Back on the Number of Suppliers You Have
Are you working with more vendors than you need to? Do you absolutely need every single vendor you’ve got a contract with? Is there a single vendor who could potentially provide a combination of the services or goods you’re currently sourcing from multiple suppliers?
Perhaps you’re asking why this is even important.
Well, in a nutshell, it’s about economies of scale. You see, the more suppliers you have, the more you’re paying in terms of processing fees, delivery, and administrative costs. You’re also potentially spending quite a bit more time on accounting, purchasing, and negotiating. And, as we know, time is money.
So what we’re saying is, reducing your suppliers could save you quite a lot but it could also expose you to more supply chain risk. So, if you decide to cut back on the number of suppliers you have, ensure you’ve got a list of ‘emergency’ vendors who can provide what you’ll need when you need it should your main vendor fail to come through.
Ready to Get Started with Robust Procurement Management Software?
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