Procurement management: benefits and best practices for your business
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Whether it's a SaaS tool or a product upgrade, companies of all sizes are vulnerable to poor supply planning. As a growing organization's needs become more complex, optimizing procurement becomes essential.
In this article, we'll cover everything to do with procurement management.
What is procurement management?
Procurement management is essentially the set of processes for purchasing essential goods and services for your business from external vendors. For instance, if your business needs a cloud-based expense management solution, your procurement management team will source a suitable vendor and onboard the tool (often using a p-card.)
When executed well, procurement management reduces vendor costs and eliminates inefficiencies in your sourcing supply chain. Typically, procurement management involves everything from sourcing products, negotiating prices, purchasing them, and paying for them once a supplier delivers their product or service.
Procurement management is often confused with procurement planning. The latter is a series of processes that defines procurement tasks for an upcoming period. It is a high-level process that doesn't deal with the day-to-day aspects of procurement that procurement management teams handle.
When conducted efficiently, procurement management gives your business a competitive edge. Your business will experience stronger vendor relationships and greater transparency in its sourcing supply chain.
4 benefits of efficient procurement management
A well-run procurement department offers many benefits. Here are some of the critical advantages your business will receive.
Reduced vendor-related costs
Vendor expenses are some of the biggest expenses your company incurs. Reducing these expenses can help boost your gross margins.
A good procurement management process will help you balance price competitiveness with product quality and generate a greater return on investment from the money you spend paying vendors.
Businesses these days must adhere to a range of sustainability regulations. Because of this, you must monitor vendor compliance or risk pushback from your customers. An efficient procurement management process helps you identify critical business goals and the vendors that can help you achieve those goals.
Transparency in sourcing also will help bring the following advantages:
- Ensure vendor compliance with environmental, social, and governance initiatives
- Eliminate shadow IT
- Ease tail spend management
- Accurate and competitive vendor pricing
- Eliminate maverick spend
High product quality
If your business receives high-quality services from its vendors, you're less likely to produce something that leaves your customers dissatisfied. For instance, when reacting to last-minute demands from customers, you can rest assured that you have the necessary tools to execute tasks and deliver the product to your customers.
Higher gross margins
Your profits increase as your costs to acquire goods go down. By eliminating inefficiencies during the material procurement process, you'll increase your chances of boosting your company's gross margins through these savings.
Thanks to smooth procurement, you'll model product development cycles accurately, meet demand, and build customer loyalty.
The 8 steps of a procurement management process
Procurement management might look complex when you begin tackling the challenges it presents. However, every successful procurement process has a few common steps.
Step 1: Define business needs
The first step you must take is to define what your business needs from suppliers. For instance, which SaaS apps can potentially reduce your development team's workload and get them to execute value-added tasks?
Define these goals and the metrics you will use to track goal progress.
Step 2: Build a potential vendor list
The next step is to begin screening vendors that can help you achieve your goals. Most companies screen vendors based solely on price. But it’s better to focus on additional criteria like product quality, potential ROI, and future enhancements.
For instance, your product team might currently need a simple automation tool. However, as your product grows in complexity, that automation tool might not serve them well. Evaluate vendors based on their ability to cater to your growing needs and how well their product scales with your business.
Step 3: Vet your suppliers
Many vendors charge hidden fees and other "service charges" that increase monthly expenses. It’s critical to avoid these vendors since their pricing might become even more unpredictable in the future. Once you've vetted your suppliers, it's time to negotiate prices.
Step 4: Negotiate contracts
Negotiate to create win-win situations and follow the best vendor negotiation strategies. Doing this will incentivize your vendors to participate in your growth and prioritize your business.
As a result, your business will not suffer from any disruption of services when vendor contacts end.
Step 5: Send a purchase order
Purchase orders (POs) are official notices you send to your vendors, notifying them of the goods you would like to purchase and the payment terms. It looks like an invoice, except there's no payment required upon receipt, and you'll send it to your vendor instead of the other way around.
A PO is matched against an invoice to authorize payment, so make sure you carefully store it in your records.
Step 6: Inspect the product or service upon receipt
Once a vendor receives your PO, they will deliver the product or service. Make sure to inspect the product you receive carefully. Note all product delivery attributes in your vendor scorecard and note any defects for your records.
These records create an audit trail that you can use to measure vendor performance and handle disputes down the road.
Step 7: Approve invoice
Assuming the product or service is up to scratch, it's time to clear your vendor's invoice. Match the invoice they issue against the PO you had previously raised and forward the approved invoice to your AP team for payment.
Step 8: Update relationship records
Fill your vendor scorecard accurately, and save all data. Depending on how the vendor performed, you might have to reconsider your relationship or contract terms with them.
Document and record everything connected to the procurement process, and you'll have no issues negotiating contracts or redefining vendor terms.
What are the primary functions of a procurement management team?
Procurement management teams contribute immensely to your business's success. Here are every procurement team's essential functions:
- Product sourcing: Procurement teams locate and vet essential products and services that help a business run smoothly.
- Contracting and vendor negotiation: Vendors negotiate prices with procurement teams, setting the tone for the relationship.
- Supplier performance monitoring: Procurement teams add vital inputs to supplier performance monitoring tasks by recording data.
- Procurement trend forecasting: Procurement teams leverage analytics to forecast vendor costs, and effectiveness, and to quantify ROI.
How is a procurement team structured?
Every organization structures its procurement team differently. However, every team has four broad functions. These are:
- Purchasing: Personnel in this function negotiate prices and set contract terms.
- Sourcing: Sourcing teams locate potential vendors and vet their services against business goals.
- Contract management: These teams monitor supplier performance and compliance.
- Analytics: Analytics is responsible for forecasting trends in performance and conducting spend analysis.
A procurement team's structure depends on a business's needs. Broadly, there are three models you can follow when structuring your procurement department:
- Department-based model: In this approach, each department team has a procurement professional embedded within it. This person handles all procurement tasks related to the team's needs.
- Category-based model: This approach creates central procurement teams that handle requests in specific categories. For instance, all technology purchases get routed to a tech procurement team.
- Hybrid model: A hybrid approach combines the previous two approaches. Typically, highly technical products or intensely regulated functions require specialized procurement that a department-based model cannot handle.
If your organization is small and flexible, a department-based model will work best since you can make decisions quickly. Category-based procurement works best for large organizations where departments might not be in touch with each other. A central team will have oversight on all spending and eliminate issues.
Hybrid approaches work in specialized industries that have unique compliance and product needs. For instance, hazmat industries or financial services require procurement professionals knowledgeable about regulations and industry procedures.
6 procurement management best practices
Here are six best practices to help you install a smooth procurement management process in your business.
1. Define procurement goals
Often, businesses look at procurement as a cost-saving tactic and squeeze their vendors with low-price requests. This approach is short-sighted since it incentivizes vendors to deliver substandard products.
Connect your procurement strategy to business goals, and you'll evaluate vendors more effectively. You'll focus more on ROI and less on costs.
2. Enforce transparency
Data-driven transparency will offer you and your vendors deep insights into procurement trends. As your business grows, your needs will change. Communicating these needs to vendors using data will help them reorient their businesses to support you better.
Transparency will also help you monitor compliance and use sustainability as an edge in the marketplace.
3. Use multiple suppliers
Supplier risks can hobble your business. Always choose multiple vendors to reduce your risk exposure. This advice applies especially when choosing SaaS apps since your team uses these products daily.
Always have a backup vendor in place, and you'll reduce supplier risks significantly
4. Use data
Procurement is all about efficiency, and data offers you the best way to ensure that your processes are optimal. Creating metrics and tracking them for everything related to inventory and procurement efficiency will help you model your future needs.
You'll ensure your business always has the supplies it requires to function smoothly. By eliminating guesswork, you can reduce unnecessary spending and boost margins.
5. Hire a digitally proficient team
Data is increasing in the procurement world, and you must hire or train your procurement team to handle large datasets. Evaluate a potential hire's familiarity with data and software. Use data in every decision you make and emphasize metrics with every process choice.
6. Automate your procurement management process
Automation helps you create lean and flexible teams that respond to requests immediately. By automating most clerical tasks, you can free your team's time to perform value-added work.
For instance, your procurement team can spend more time understanding a vendor's SaaS products. The more familiar your team is with these products, the greater is your ROI from vendor investments.
How to automate procurement management: 3 strategies
Automation and outsourcing have many benefits for organizations. By leveraging third-party expertise, you can focus on your business and quickly handle challenges as they arise.
Here are some critical procurement processes you must automate or outsource.
Leverage pricing benchmarks to get the best deal
Contract negotiations can be tricky since figuring out the price that satisfies your vendor, maintains a healthy relationship, and gives you maximum ROI can challenge you.
Ramp’s Price Intelligence feature gives you the ability to negotiate better prices with your vendors using data contributed by your peers. This functionality is available across multiple SKUs per software with costs broken down per-user, which makes it easier to confidently procure software.
Centralize SaaS vendor activity
As your organization grows, keeping track of vendor activity can be challenging. A central dashboard to manage all your subscriptions will help you keep track of all vendor spending.
Ramp client Eight Sleep took back control of their SaaS spending by centralizing vendor activity and eliminating manual data entry. Ramp helps Eight Sleep save over 80 hours every month, thanks to automation.
Centralizing SaaS procurement also helped Eight Sleep eliminate zombie SaaS subscriptions and the risk of shadow IT.
Pay invoices and close your books on time
As your subscriptions grow, managing multiple vendor payment details can get messy. Ramp automates everything from vendor onboarding to bill payments, helping you close your books up to eight days faster.
When onboarding a vendor, Ramp automatically reaches out to them and collects ACH and payment information. Thus, you won't waste time figuring out how to pay them.
You can incorporate multi-level payment approvals with Ramp's accounts payable software and automate bill payment processes. Ramp also helps you pay vendors in multiple ways, from ACH to checks and automatically detects vendor details within invoices to make bill payments hassle-free.
Learn more about how Ramp can streamline SaaS procurement for your business.
Procurement management helps you streamline vendor activity and beings benefits to your business such as :
- Reducing vendor-related costs and boosting gross margins
- High product quality
- Better vendor compliance
- Better vendor relationships
Procurement management tends to suffer from inefficiency due to:
- Lack of data-driven processes
- Lack of spending visibility
- Poor procurement team organization
- Disconnected data sources
Purchasing is a part of the larger procurement process. Procurement includes more processes such as vendor negotiation, analytics assessment, and contract management.