Bharat SainiLast Updated on March 7, 2024 by Bharat Saini
Procurement is a comprehensive term that includes all the steps of buying products and services that are required for a company to operate. Its core functions include strategic planning, budgeting, market research, vendor selection, negotiation, purchase, inventory management and contract administration. The procurement plays a significant role in the sourcing, monitoring, and optimising of the end-to-end process, which helps the business in meeting its objectives.
- Who is involved in procurement?
Procurement typically involves stakeholders from across the business, such as procurement/sourcing managers who develop and execute sourcing strategies, category managers who manage specific spend categories like IT, marketing, or facilities, operations who provide input on business needs and requirements, finance who oversee budgets and help analyse proposals, legal who review contracts and agreements, requesters who initiate purchases of required goods and services, approvers who sign off on purchases above certain thresholds, and suppliers who provide goods and services to the organisation.
- Key procurement activities
Some of the main activities managed by procurement teams include developing sourcing strategies for spend categories, researching suppliers and conducting competitive bidding, negotiating contracts with optimal pricing and terms, managing and developing supplier relationships, monitoring supplier performance and mitigating risks, generating savings through spend consolidation and optimization, ensuring purchasing compliance and contract adherence, managing procurement technology and systems, and analysing spend data and identifying opportunities.
- Key sourcing activities
Main sourcing activities include developing a sourcing strategy for a specific product or service, researching suppliers, markets, and pricing, creating requests for information (RFI), quotes (RFQ), and proposals (RFP), contacting and qualifying potential new suppliers, obtaining and comparing quotes or bids from vendors, negotiating based on pricing, quality, capabilities, terms, and conditions, and selecting and awarding business to a preferred supplier(s).
- Sourcing process steps
The typical strategic sourcing process consists of analysing spend data to identify the need, researching the supplier market landscape, developing the sourcing strategy (single vs. multi-source, local vs. global), creating and issuing the RFI/RFP/RFQ, evaluating supplier responses, conducting negotiations and selecting suppliers, implementing and managing supplier contracts, and monitoring performance and improving over time.
- Sourcing models
Sourcing teams employ various models, including competitive bids, which obtain multiple bids to leverage suppliers against each other; preferred suppliers, which consolidate spend with fewer strategic partners; direct source, which is single sourcing for lower complexity and low-risk items; insourcing, which uses internal capacity to fulfil needs versus external suppliers; and regional vs. global, which balances cost, quality, and geographic proximity.
- Sourcing and procurement alignment
While sourcing and procurement have distinct scopes, close cross-functional alignment is crucial. Sourcing goes hand-in-hand with broader procurement activities like category management, budgeting, supplier management, and system integrations. Effective collaboration ultimately reduces risk, lowers costs, improves agility, and provides savings back to the bottom line.
Sourcing and Procurement Best Practices and Strategies:
- Supplier selection criteria
When evaluating and selecting suppliers, common criteria include pricing/total cost, quality, delivery reliability, financial strength, technical capabilities, geographic proximity, cultural fit, and compliance/risk profile. Weighing both quantitative metrics and qualitative factors results in well-rounded decisions. The key is aligning criteria to the specific purchase objectives, requirements, and constraints.
- Negotiation strategies
Common negotiation strategies employed by sourcing professionals are benchmarking fair market value, bundling spend for volume discounts, extending payment terms, securing small concessions that add up, being flexible on low-priority terms to gain leverage on must-haves, highlighting competitors’ capabilities, and walking away from unviable deals. The key point is to look for mutual wins.
- Supplier relationship management
Procurement is concerned with the further management of relationships with suppliers after the initial sales process has been completed. This also means setting performance indicators, monitoring SLA, rectifying disputes, giving feedback and coaching, incentivizing further improvement, conducting business reviews, managing contracts, and deciding when to renegotiate or leave relationships that are unproductive.
- Stakeholder engagement
Engaging with the internal stakeholders in the early stage and throughout the process is a must for the procurement. This provides for the alignment of priorities, requirements, constraints, risks, and sourcing methods before the RFPs are issued. Stakeholder input also strengthens RFP quality and achieves buy-in. Regular communication prevents late-stage surprises that derail deals.
- Spend visibility and analytics
Classifying spend into categories and gaining visibility through spend analysis tools allows procurement to identify savings opportunities, rationalise suppliers, negotiate better contracts, and make data-driven decisions. Clean, comprehensive, current spend data is imperative for strategic sourcing and cost optimization.
- Supplier diversity and inclusion
The number of the businesses that are now trying to purchase their goods and services from formerly neglected business enterprises, such as minority, women, veteran, LGBTQ+, and disabled-owned businesses is increasing. It helps to create more economic opportunities and inclusion hence bringing a new culture into the community. Procurement is a vital driving force in the creation of diverse supply pipelines, partnering with potential suppliers, and tracking utilisation.
- Sustainability and social influence
In addition to cost, quality and delivery, procurement is now also being responsible for evaluating the environmental and social effects of supplier’s practices. The criteria shall be the level of carbon emissions, use of renewable energy, waste reduction, ethical labour conditions and social development of the community. This is achieved through the adoption of purchasing policies that are in line with the organisational values.
- Procurement and finance partnership
Close collaboration between procurement and finance is essential for aligning sourcing strategies with budgetary constraints and directing savings to priority areas with the greatest ROI. Finance provides guidance on cost management and validates the business case for procure-to-pay investments. This partnership is mutually beneficial.
- Change management for new systems
When implementing procurement technology tools, change management is critical to drive user adoption and achieve ROI. Tactics include stakeholder analysis, training, communications, business process reengineering, performance support and reinforcement of benefits. Without user buy-in, systems fail to reach potential.
Conclusion
In summary, SaaS procurement software involves every process from the beginning to the end which is needed for buying the required goods and services. The procurement function gives special attention to researching markets, identifying suppliers, obtaining competitive bids, negotiating terms, and awarding business. While unique in scope, sourcing and procurement work together to enable data-driven spend decisions that benefit the organisation. With a shared understanding of their different but complementary roles, cross-functional teams can optimise the entire source-to-pay lifecycle.
