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Procurement plays a pivotal role in any organization due to its major influence on the overall cost of the business. It goes beyond traditional purchasing or buying; where it encapsulates everything that needs to happen before, during, and after the purchase. It can generate a good return and significantly lower operating costs; hence, choosing the right strategy and ensuring service and sustained quality on investment and lower operating costs significantly; hence choosing the right strategy, and ensuring service and sustained quality, is crucial for any winning organization. Let’s look at a few tips to help in the journey.
It’s always advantageous to understand not just the items you purchase; but the material that goes into their production, the trends that influence the cost, quality and availability of this material, and the environmental and political factors that affect them. Knowing suppliers lets a business understand potential threats or opportunities related to demand and supply.
Knowing the impact your partnership has on your supplier’s profitability, being aware of your supplier’s business network, their plans of enhancing capacities, their appetite for innovation and the quality systems they have in place are all very critical in managing the suppliers effectively. The ability to build a strong relationship with the suppliers is an essential factor for the success of a business. Supplier segmentation is vital in this regard, and you should know which suppliers you need to build strategic relationships with by investing in each other for long-term growth.. Supplier segmentation is vital in this regard and you should know which suppliers you need to build strategic relationships with by investing in each other for long-term growth.
When procuring a wide range of goods and services, one must understand that one strategy wouldn’t fit all. For commodities, it’s important to forecast future price trends based on external influences. Simulating the impact of forecasted price, exchange rate shifts, storage and finance cost of forwarding and purchasing allows you to identify the optimum purchasing windows and volumes. Let’s take paper as an example. Following the key economic trends in pulp producing countries will indicate future price trends. Understanding each sourcing country’s domestic seasonal pull vs export potential through the year provides insight into which country to source from and when the sourcing should be done.
Certain items would work best with bulk purchases while others would benefit through Just-in-time purchasing; based on the level of supply assurance, lead time, demand volatility and so on. Some locally procured items with reliable suppliers would work well with strategies such as vendor-managed inventory. While closely tracking your purchasing spending against the planned budget, it may periodically call for shifts in identified strategies.
Managing costs at an optimal level is important, however negotiations that are purely based on price provide a narrow scope for the growth of your business. Therefore, it’s important to focus on value-based negotiations that allow for a compelling total cost of ownership. It’s essential to understand the tenor of a transaction when developing negotiation models to ensure that it complements long term growth of both your and supplier’s business.
In preparing for negotiations, a data driven approach is always advantageous. For example, you can analyze past trends and future forecasts based on your knowledge of the product value chain and the supplier strengths, weaknesses and other factors that influence their costings. It’s always important to be ready with a fallback or the best alternative to a negotiated agreement. The need for smart contracts and effective contract management is apparent. While Service levels and Key performance indicators ensure each party is aware of expectations within a period, contracts must be transaction-based to suit each one’s unique needs.
The value central procurement can drive within all functions through a procurement hub is immense, as though contracts are mere business continuation for functions, it’s always a value saving opportunity for procurement.
The need for contingency planning has never been proven more than in the current context due to COVID-19 pandemic and economic crisis related uncertainties that businesses are faced with. A periodically monitored risk matrix highlighting the likelihood and impact of the identified risks is a best practice to follow so that the contingencies are carefully planned. Performing a full risk assessment of suppliers including their business continuity plans, geopolitical exposures and their processes, helps in understanding the items that are at high risk.
The current level of uncertainty in the business environment also highlights the importance of scenario planning. Simulating possible scenarios based on different sets of assumptions with trigger points allows us to switch between the scenarios. This keeps the suppliers as well as the business fully aligned and ready for possible contingencies from the start.
What are sustained long term contingency planning steps that can be taken? Securing required buffer stocks of critical items with longer lead times, ensuring that all key materials have an alternate supplier base, having alternate fallback options built for shipping and freight forwarders and having local sources secured for Imported items etc. are some of the critical areas to focus on.
In this dynamic, complex and disruptive era, the need for digitization of procurement has come to the forefront and the question that a business needs to ask is not “why go digital?” but “when?” Digital procurement allows automation of repeatable tasks to boost efficiency and reduce costs; it equips stakeholders across with real-time insights and analytics through Artificial Intelligence (AI) and easy-to-use online tools; it deploys smarter ways to infuse data models to enrich day-to-day operations and decision making. Digitization also transforms buyer interactions with suppliers and other third parties by offering platforms for new levels of collaboration.
While moving forward with what we do best, we must adapt digital solutions to future proof procurement. Digitization is your friend, but quality data is your foundation. Starting with standardization and using procurement analytics will be a game changer. Upskilling the employees to be future ready is also a critical step in this journey.
In summary, Know your products and suppliers; Understand that one strategy does not fit all; Shift from price based to value-based negotiations; Build a solid contingency plan and step into the future of digital procurement. Though you may need to customize these points and according to your organization’s unique needs we hope these tips will help you in your journey towards progressive procurement. Think Big, start small, and act fast.
This article is a part of the Business Tips for Trading Across Borders series — A collaborative effort of The Ceylon Chamber of Commerce and United States Agency for International Development (UASID) Partnership for Accelerating Results in Trade, National Expenditure and Revenue (PARTNER) Activity
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