The procurement department is the key to ensuring that the necessary services and materials to operate a business are acquired in the most effective manner possible. The processes that are used by the procurement department are often similar throughout a particular industry, yet business specific in details. In addition to finding and setting terms with vendors, the procurement practices in place ensure that vendor management and communication are effective and assist the business in obtaining the items they need for the best cost.
The methods that the procurement department use to negotiate terms and discounts are vital to the success of the business. If the procurement process is well honed, it can save a business thousands of dollars annually. Conversely, without a well-trained procurement department, a business can lose a great deal of money in lost discounts, shipping, unnecessary inventory, and business lost to lead times.
The procurement practices that are effective are finely tuned over time to ensure that the best possible guidelines are developed and used to train employees. The 10 best procurement practices being used in business today are listed below.
1. Authorized Purchasing Agents
An authorized buyer master list should be developed and maintained. It should be routinely revised to ensure that only authorized signatures are on purchase order packets used in invoice payment. In addition, a master list should be maintained for authorized receivers. No material should be accepted and received by the company by anyone but an authorized receiver. This will ensure that bad products or overages that could end up costing the business a great deal of money aren’t signed for or received into the inventory system.
The proper flow for purchases should be purchase requisition signed by the employee or department requesting the materials, and an approval signature from an authorized purchaser is forwarded to the procurement department; a purchase order is issued for the requested stock and sent to the vendor; stock is received at the facility by an authorized receiver, material checked into inventory, receiving documents sent to procurement; purchase requisition, purchase order, and receiving documents are sent to accounting to be attached to the invoice for payment.
2. Transparent Processes
Transparent processes should be in place throughout the entire procurement platform. All team members should be able to search and review purchase orders, purchasing specs, and past purchases from a specific vendor. This is to ensure that new orders can follow the standard that has been set if there isn’t an automated purchase point in place by the software system being used. In addition, it assists in open supplier communication by ensuring that any procurement specialist could familiarize themselves with the suppliers’ product, terms, and history as necessary to keep the wheels in motion. If a supplier needs a purchase order number from four months ago for their audit, it is not conducive to a working relationship for them to encounter barriers when contacting the company for assistance. With transparent processes in place, once a procurement specialist learns the software, it is simply a matter of looking up the data on the supplier.
In the past, there were procurement agents that were material or vendor specific, and when that agent left the company, all of their key suppliers and discounts were gone as well. With a transparent process, the benefits to the company stay with the company, regardless of the procurement specialist issuing purchase orders.
3. Automatic Procurement
Automatic procurement processes should be used anywhere possible. This is because of the rate of efficiency, and also to remove the possibility for human error from the equation. If automatic reorder points are set, there is no need for manual entry and issue of purchase orders. Automatic reorder points can be updated as the need changes, so there is no concern that order quantities are etched in stone once they are automated.
This can be handled with blanket purchase orders and automated set points that trigger email communication with the vendor. By ensuring that stock items and raw materials are automatically ordered, the risk of production coming to a standstill greatly decrease. There is no vacation for the reorder system, or lost paperwork. It simply continues to stock the shelf with the necessary inventory until it is told to stop or pause for a set amount of time.
4. Capital Purchases
For any capital purchases, a strict process should be followed without deviation. The procurement department should require RFP packets to open the project billing center and issue purchase orders to that specific project code. The request for proposal, or RFP, packet should include the scope of work, timeline, and proposed contract structure including payment terms.
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The RFP packets should be sent to no less than three approved vendors, and the completed RFP’s should be submitted and reviewed by the authorized purchasing agent heading the capital purchase venture. Once the capital purchase is awarded to a specific vendor, the scope of work, timeline, and proposed contract structure should be adhered to without fail. Usually, in capital purchasing and capital projects, the requestor is also the project manager, and they will oversee the project from start to finish while tracking the budget and verifying that the capital funds are properly accounted for. This sometimes falls on the procurement department, but it isn’t the accepted norm for capital funds.
5. Purchase Requisitions
Purchase requisitions should be required in order to issue purchase orders for supplies, facility tools, and other items that aren’t raw materials or repair and maintenance supplies. A purchase requisition should provide all of the necessary details to place the order, and should be from a pre approved vendor, or have a vendor request attached to the requisition form. The purchase requisition should include a signature from an authorized purchasing agent, and also indicate the cost center that should be charged for the purchase.
6. Supplier Processes
A master supplier list should be maintained and updated regularly. The list should be located in a shared directory where a read only copy can be found by every person company wide. In addition, preferred suppliers should be denoted with any discounts that they offer to help ensure that the best choice is made when purchasing materials or supplies. When a request is received and the material needed isn’t available from a current supplier, the procurement department may request a Vendor Approval Form from the person that submitted the purchase requisition form. Along with the Vendor Approval Form, any credit applications from the potential supplier should be submitted to the procurement department. Once the procurement specialist sets up a vendor account with the new supplier, they can be added to the master list and the purchase order can be issued to them. If, however, they cannot be an approved supplier for any reason, the procurement specialist should locate a replacement vendor for the purchase, and should notify the requesting department of the change prior to placing the order, as there are product spec differences that can be critical in terms of raw materials.
7. Procurement Specialist Role
The goal as vendor liaison should be to develop and maintain strong relationships with suppliers. The procurement specialist should establish expectations and ensure they are clearly related to the supplier. They should also routinely evaluate the performance of the vendor, and advise the vendor of the findings.
In addition, the procurement specialist should know the vendor alternatives and work to develop relationships with two or three supporting suppliers in the case of logistic or shortage issues. The procurement department as a whole is the point of communication with the suppliers, and it should be an open channel of information into the business, always looking for opportunities to save time, money, and shrinkage. By having multiple supply line options, the procurement department essentially guarantees that inventory will be constant and production will never cease due to lack of the material necessary to create or package the goods.
8. Supplier Agreement
A master contract should be drawn up for vendor agreements. This is to avoid individual contract terms with suppliers that may not be favorable to the company, such as unreasonable payment terms, costly shipping terms, or purchase set points that aren’t favorable to the company. For example, if the procurement department can negotiate with raw material vendors and contract goods at a 2% discount if purchased in lots of 25 or more, this should be the goal across the board with the raw material vendors. Typically, once a supplier is informed that other vendors are offering such a discount, they will give the same or better discount in order to gain your business. This makes master contracts fairly easy to set terms in groups of specific raw material or tooling, essentially all items that are used in the process of manufacturing or packaging your product and are necessary to stock bulk in inventory.
9. Three Way Matching
Use a three-way matching system in order to purchase, receive and issue payment. The process is started with either a purchase requisition or a procurement department purchase order. Goods or services are received by an authorized receiver, and then everything is matched to the invoice when it arrives from the vendor. By requiring this three way match, unauthorized purchases are able to be returned. Any shortages or overages are noted and invoices can be adjusted and correct invoicing can be requested. This ensures that there is no overbilling, undervaluing resulting in accrual, or materials on hand that aren’t accounted for. It is by far the best aid in inventory reconciliation, and aids in accounts payable auditing.
10. Purchase Order Processes
All purchase orders issued should be received and closed within a 30 day period, unless otherwise specifically denoted with the actual lead time and delivery date. Purchase orders that are left open-ended in your system are a way for material to be ordered without authorization, and inventory can be heavily affected by receiving material to closed or cancelled purchase orders, therefore no adjustment to actual stock is being made. Purchase order records should be audited monthly and any voided or cancelled purchase orders should be zeroed in the system and closed so that nothing can be ordered or received against that particular purchase order.
Procurement procedures are constantly changing for the betterment of the business, and it goes without saying that a large part of working in procurement is the ability to analyze and report on cost savings, profit margins, and product performance. Procurement departments often work hand in hand with Research and Development teams, largely to observe the performance of raw materials and how they live up to the manufacturing specs and anticipated shelf lives. If a raw material of the packaging element fails, generally it is the procurement department that provides assistance to the recall team in obtaining raw material data sheets and specs, ensuring that the root cause of the problem can be resolved with the vendor selling faulty material.
Procurement departments are much more than just a purchasing team. They are a strong ally to the manufacturing and production teams they work with, and they streamline the work of the receiving associate accepting deliveries on a set schedule, versus whenever the vendor feels like having it delivered. Procurement departments also keep the purchasing process smooth and efficient, lending an additional checkpoint to the accounts payable department they work alongside. With the many strong procurement procedures that ensure purchasing and receiving are exact matches with all inventory fully documented, it allows invoices to be paid with confidence that there is no overbilling taking place.
As procurement practices continue to evolve, the next big thing in procurement appears to be the bidding software that is gaining popularity. With the ability to request quotes and product information in a system that allows vendors to answer on the software platform, and upload documents as well, it puts an end to printing, scanning, and filing from other software systems. Procurement bidding software is just the latest trend in the system’s procurement departments use to save businesses time, money, and labor hours. With all of the benefits of employing a centralized procurement department, it’s easy to see why many businesses are hiring procurement specialists by the droves.