9 questions to ask about your procurement

Procurement is the first entry into your supply chain. It is the start of everything. It is also where you are most likely to introduce a lot of risk, costs, and issues into your business.As your procurement matures, it becomes less about reducing costs, and more about adding value. It becomes a much more strategic part of the overall business, and less just part of operations. By asking the following questions, you can determine the maturity of your procurement and how strategic it is. Start by asking:

1         Do you distinguish between buying and procurement?

Often these terms are used interchangeably, but there is a difference between buying and procurement. In terms of supply chain management, procurement entails sourcing, purchasing, and vendor management. If you are just comparing prices and purchasing as needed, then you may have a buying department and not a procurement department.The next question to ask is:

2         Are there procurement processes in place?

As mentioned above, procurement is more than just buying. The procurement life cycle generally entails:

1.  Identifying a need
2. Determining specific requirements
3. Sourcing, including information requests, and finding alternative suppliers
4. Approving budgets and cash flows
5. Negotiations and contractual obligations
6. Purchase requisitioning and purchase orders
7. Inspections
8. Payment
9. Record keeping
10. Vendor management and contract reviews

You need to determine whether you have processes in place for each of the above steps of the procurement lifecycle. These must be in place, before considering more advanced tools, such as procure-to-pay or contract lifecycle management software.This leads to the next question:

3       How robust are your processes?

As soon as you have determined that there are documented processes in place, these need to be reviewed to determine how robust and transparent they are. Having transparent and robust processes (such as vendor vetting, levels of authority, and delineation of purchase requisition creation and approvals) will reduce the risk of corruption and manipulation. The processes should be such, that all buying is equitable and fair. For more about business processes in general, check out this article: https://sbsolutions.biz/why-you-need-know-show-your-process-flow/Next let’s speak about vendor data management:

4        How do you manage vendor master

data?

It is important to have a specific set of processes and good governance for vendor management.These should address the following:

1. Regular master data management, such as – what data is required, the format of the data, and who may capture and/or edit this data.
2. What is the onboarding process for a vendor (e.g. is it an Excel questionnaire)?
3. How are payment terms and payment methods determined and vetted?
4. Who checks a new vendor’s legitimacy and does due diligence on them?
5. How often is the data reviewed?

Now let’s discuss a very specific aspect of vendor management:

5         Have you categorised your vendors?

This forms part of the greater vendor management process and is important for overall vendor governance, as well as being very useful to assign responsibilities to specific procurement staff.There are various ways to categorise your vendors. The easiest is based on what is being bought; which means you would have categories for raw materials, office equipment, travel, or consumables. Another possible way of categorising is by value of annual spend, or whether the spend is direct (such as for raw materials for manufacturing) or indirect (such as for utilities and services). You can even categorise vendors based on whether the procurement is centrally or locally based. There is no need to pick just one, as each vendor should have multiple categorisations.This leads to:

6         Do you perform vendor reviews?

Initially, it could be as simple as cost comparisons between suppliers, and comparing the invoice values to the quote/ contract. The next step is checking that deliveries are made within the stated lead time and checking that the orders are fulfilled as per the original purchase order. This is often referred to “on-time in full”.As your procurement matures, you may want to add in further key performance indicators, such as turn-around times, supplier availability and capacity, stock availability, and making accommodations, such as expediting orders. Another measure could be availability of data from their side, for instance batch manufacturing records or recall history. It may even be important to do site visits and vendor audits, as required in certain industries, such as food and pharmaceutical manufacturing.This can also be used to drive negotiations in the future, and to improve on the service level agreements.This leads to:

7         How do you measure your procurement team?

As you measure your vendors, you need to measure your procurement team. This means that you need to measure the team as a whole, as well as the individuals. Best practice is to have measures that are driven down by the overall procurement strategy, and that the individual data can roll up into this. For more information about good KPIs, read this article: https://sbsolutions.biz/kpis-beyond-smart/ .One of the first KPIs typically implemented is cost per unit. This can lead to some very bad procurement practices, such as having a year’s supply of toilet paper, which takes up a lot of space, because buying in bulk allowed for an amazing discount. This is why it is important to look at the total cost of ownership (including storage and risk costs), not just individual unit costs. Other measures to look at include:

• Compliance to procurement strategy and procedures
• Purchasing outside of contracts
• Cost and quality tracking
• Contract management
• Relationship management

All of the above form part of a greater whole – procurement governance: 

8         Do you have a governance practice for procurement?

Good procurement governance, much like good corporate governance, drives transparency, auditability, and equity. It is also closely linked to processes, vendor management, and procurement KPIs. Ideally, procurement governance should be detailed in a policy document, which should drive all the procurement behaviours. In addition to being the framework for good governance, the policy should also address:

• Vendor selection – when are new vendors sought out, and what due diligence is required
• Category strategy – for direct (manufacturing), indirect (utilities & facilities), and service procurement
• What procurement models are used – local, centralised vs. hybrid

It should also address the corporate social responsibility required of your vendors. Whether this is economic empowerment, environmental impacts and redress, or general social upliftment.Another component that procurement governance should address is risk management. So ask:

9         How are you managing risks?

As mentioned in the introduction, procurement is where a lot of risk can be introduced. The possible risks need to be identified, and then prevented or mitigated. The various risks can generally be categorised as:

1. Policy and procedural risks, such as non-compliance to or circumventing of the process, lack of oversight, or poor processes that do not encourage transparency
2. Vendor related risks, which include poor vendor choices, over-reliance on a single vendor, and unreliability of supply
3. Internal issues, such as poor data, unclear roles and responsibilities, and poor contract management
4. External risks, which typically include market forces, strikes, and transport issues.