Procurement best practices for effectively managing your supply chain and optimizing procurement can prevent successful businesses from experiencing some problems experienced by struggling businesses. We present a list of best procurement practices for your company to adopt.
The implications of buying products from the wrong suppliers may result in substandard quality, higher than necessary pricing, and shipping delays causing stockouts or costly production shutdowns that impact the bottom line. Poor procurement processes take their toll on your company’s gross margin, profitability, cash flow, and supplier relationships. Your business needs to establish a reliable supply chain, improve communications, and plan ahead when using best practices in purchasing and procurement.
Understanding Procurement: A Quick Overview
Procurement includes strategy, requesting and getting approval for purchases, issuing RFQs, RFPs, and purchase order forms, contract management, negotiating, competitive bidding by potential suppliers, evaluating and selecting the best suppliers meeting order requirements, purchasing the goods or services, and enforcing best spend management practices to reduce business costs.
To understand the top-level differences between procurement vs. purchasing, purchasing is a subset of procurement. Procurement includes more processes and activities. You can investigate the differences of sourcing vs. procurement by reading this guide. Sourcing, a component of procurement, focuses on supplier selection when buying goods or services.
Benefits of Implementing Best Practices
The benefits of implementing best practices for procurement management are:
- Streamlining and digitizing business processes for more efficiency in the procurement cycle
- Getting better product and service quality, optimal pricing and credit terms, and on-time delivery
- Improving communications for employee teams, including the procurement team and other stakeholders, and suppliers
- Optimizing supply chain management, supplier and document management, with a shift of onboarding tasks to suppliers
- Reducing errors and fraud risk with better financial controls and risk management
- Gaining real-time visibility for data-driven insights and better spend management
- Contributing to corporate ESG (environmental, social, governance) goals
Procurement Best Practices
Procurement best practices include:
- Use a cloud-based, unified procurement software system with streamlined, automated workflows and real-time visibility and status for stakeholders, and an electronic documents repository.
- Establish and improve company policies for procurement, including approvals.
- Strengthen the intake to procure process with greater communication and visibility.
- Get multiple competitive bids from potential suppliers and volume discounts when possible.
- Determine if the number of active products, parts, and suppliers can be reduced.
- Clean the vendor master file for data accuracy, lack of duplication, and current status (or archive vendors).
- Strengthen computer data controls and financial control over errors and fraud.
- Establish an ongoing process for supplier evaluation, including financial stability, pricing, quality, on-time delivery, credit terms, ESG practices, and other metrics.
- Get more competitive bids from suppliers periodically.
- Renegotiate contracts with suppliers.
Looking for procurement efficiencies and controls using best practices?
#1 – Unified Modern Procurement System
Each authorized stakeholder should be able to obtain the same view (based on role permissions) in a real-time, cloud-based system with one unified database, rather than being stymied by multiple siloed systems used by different company departments. This unified system should include dashboards with KPI metrics to measure progress, decision-making support, and real-time reports.
This unified system should streamline business processes, eliminate manual data entry with electronic automation, and include self-service supplier onboarding to shift tasks to the supplier and improve data accuracy. With digital transformation, the results will include less human error, elimination of disruptions from bottlenecks, and much more efficiency. In the next section, we explain how to optimize procurement practices with automation.
When your unified procurement system is integrated with your business ERP system, the company can use its inventory forecasting tools for optimal inventory management, including the EOQ (economic order quantity) and ideal timing of supplier orders.
#2 – Company Policies for Procurement
The first step to improving procurement with best practices is making sure that the right company policies are articulated, reviewed, updated if necessary, and electronically documented to establish procedures and controls over business spending. These policies can include images of purchasing and procurement forms to explain when they are required, who completes and approves them, and how to complete them. Screenshots of forms created using automation software can be included in the company procurement policy.
In company policies, provide measurable guidelines for authorized types of spending, standardized electronic documents, and designated approvers with stated dollar limits. Your employees, including the procurement department, and other internal stakeholders get a better understanding of company requirements.
#3 – Strong, Visible, Intake-to-Procure Process
Intake-to-procure is part of the procure-to-pay process that begins with submitting purchase requests to initiate approved purchase orders. The unified system should make submitting purchase requisitions easy for employees, and visible to all stakeholders, including the submitters, budgetary managers, procurement/purchasing department, finance/payables team, legal department, and executive management.
Purchasing approval (or denial) status and subsequent purchasing status should be automatically communicated within the automated system. Images of documents should be provided or easy to access. Supplier engagement will increase with better status communication, faster purchasing approvals, and better access to documents.
#4 – Competitive Bids and Volume Discounts
Part of the best practices procurement process is getting at least 3 suppliers’ competitive bids on pricing and terms. With some automated sourcing software for E-Procurement (electronic or digital procurement), suppliers respond to RFPs or RFQs with the required specifications that the procurement department has written. They may participate in automated bidding auctions and answer questions about their capabilities and financial strength. Terms include delivery, credit, early payment discounts, and volume discounts offered.
#5 – Reduce the Number of Parts, Products, and Suppliers
To gain cost savings from procurement and make production easier with less potential rework, some companies involve the engineering department in potential procurement changes that reduce the number of parts, products, and suppliers used. This type of strategic sourcing project, initiated by the best-in-class procurement leaders, enables opportunities for reducing inventory levels, conducting procurement contract renegotiation, and obtaining higher volume discounts.
#6 – Clean Vendor Master File
Having a clean vendor master file in your unified software system reduces errors and the potential for fraud. Clean up the vendor master file to know which vendors are active and accurate. Procedures for cleaning up the vendor master file include:
- Correct data entry errors that occurred from a manual process
- Update vendor information
- Eliminate duplicate vendors
- Archive unused vendors
- Indicate preferred vendors in a vendor master file field
#7 – Strengthen Computer and Financial Controls
Strengthen computer and financial controls with process automation by:
- Using enterprise-grade security to protect the safety of the procurement function’s data
- Automating error detection flagging
- Providing an audit trail for auditors
#8 – Conduct Ongoing Supplier Evaluation
Having procurement professionals perform supplier evaluation with the right procurement technology is a step in the procurement process that should be continuous, rather than subject to one-time implementation when purchasing goods for the first time. Conduct ongoing post-purchasing and time-interval reviews of your company’s suppliers with vendor scoring/data analytics as part of the monitoring process.
Consider a full range of items for ongoing vendor evaluation, including:
- On-time delivery
- Current pricing and terms competitiveness
- ESG principles for sustainable procurement
- Financial condition
When your company allocates business opportunities to the best suppliers, you’ll improve supplier relationship management with the remaining excellent performers.
#9 – Get Periodic Competitive Bids
Pricing and supplier competitors change with the passage of time. Manufacturers and other suppliers may reduce their cost structures through larger production volumes or system efficiencies as they grow. New competitors may be introduced to the market with better quality, products, pricing (including better credit payment terms), and delivery performance.
#10 – Renegotiate Supplier Contracts
As a procurement strategy and tactic, besides getting periodic competitive bids, have procurement team members renegotiate contracts with suppliers for better terms and cost reduction. As your company increases its volume of business and has more supplier competitor options, it becomes more attractive to the supplier as a customer.
Optimize Procurement Processes with Automation
Cloud-based procurement automation software from Tipalti lets you access designed-in best procurement practices and best purchasing practices. Tipalti procurement automation software, integrated with your ERP system, email, and Slack with a single sign-on, provides benefits optimization. You can also integrate Tipalti AP automation software to achieve a complete solution on one unified platform to automate the procure-to-pay cycle.
Tipalti provides simple purchase requisition management with predefined, custom forms. You’ll get automated approval routing that complies with company policies for expenditures. When the purchase requisition is approved, Tipalti PO Management software automatically creates the related purchase order.
For procurement, use self-service supplier onboarding to input supplier contact data, financial information, and contractual details. As an advantage, employees can use Tipalti’s Amazon punchout to make business requisitions and purchases through Amazon Business with their business-only pricing. Watch our webinar to learn about best practices for implementing a technology-empowered procurement process.