What is Procurement? Procurement Management Process

Procurement 101 - Procurement Management

PurchTips Edition #450

Procurement Management

Almost all companies are involved in buying and selling. Buying raw materials for manufacturing or finished products for distribution, companies seem to be more focused on the selling process than on the buying process. But consider this basic math: A company that spends one million dollars a year on purchasing can add $100,000 to its bottom-line by saving 10% on how it makes its purchases.

Procurement is not just about buying stuff but much more. As with any cost control program, there should be a clear set of policies, procedures, metrics, and constant review. In other words, “Best Practices.”

From many an executive’s viewpoints, however, a purchasing department in most organizations are perceived to have three primary purposes, referred to as the “Three Main Functions”:

  1. Managing spending.
  2. Supporting operations
  3. Protecting the organization from risk

For many companies who do not see the importance of “buying smart,” they may assign just a few individuals to do purchasing on an as-needed basis. Indeed, those tasked with purchasing-in many cases-have little knowledge of the overall needs of the operation as well as budget limits. It becomes more a matter of just not running out of inventory. Larger companies with more complex needs normally develop a specific department dedicated to purchasing. Normally, departments have a leader who establishes best practices and is held accountable for oversight and certain measurable performance standards.

What constitutes procurement management?

When we speak of “management,” we imply planning, coordination, and oversight. Let’s start with planning.

One of the main implications of best practices in developing an annual estimate of what to expect. It usually starts with an assessment of the market and what to expect in the way of demand and potential sales. Working backward,  estimated COGS (Cost of Goods Sold) and operational supplies requirements can be derived, and a resultant estimated purchasing budget. The procurement manager can then analyze the staffing required as well as strategizing on how best to control costs at the same time as preserving quality standards and individual vendors’ ability to meet the forecast procurement needs. In addition, there may be new vendors or even new products that can meet the requirements of the company. In other words, the procurement is not reactive but proactive in controlling costs as well as building up a strong bench of providers.

Key Procurement Management Activities

Depending on the type of industry, procurement managers should be up-to-date on the macro and microeconomics of the industries they depend on. For example, if the company purchases raw products and commodities, the manager needs to know what is happening, such as price trends, logistics, options pricing, and potential substitute inventory. Not only should procurement managers have an understanding of the current situation, but must constantly keep updated on what is impacting their suppliers and their ability to deliver quality products at reasonable prices and within acceptable delivery times. For example, if major suppliers have mechanical problems or labor union problems the procurement manager should be aware of those potential bottleneck issues and develop an alternative plan just in case.

In summary, procurement is much more than picking up a phone or sending an email to vendors and placing an order. Indeed, procurement can be one of the most important activities a company can have. Procurement is not just a business activity; it is a technical skill that requires training that includes how to forecast, budget, negotiate and interact at the highest levels of corporate governance.

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Separating A Procurement Department Into Tactical & Strategic Teams

Separating A Procurement Department Into Tactical & Strategic Teams

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Copyright 2019. This article is the property of the Next Level Purchasing Association and may not be copied or republished in any form without the express written consent of the Next Level Purchasing Association. Click here to request republishing permission.

By David Millington, SPSM, SPSM2, SPSM3 - Director of Education (Next Level Purchasing Association)

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