What is procurement management? Benefits and best practices

Unless your business is 100% self-sufficient and vertically integrated, it will need to purchase goods, services, and data from other businesses in order to operate effectively. Whether these purchases happen frequently or sporadically, it’s important to have a clear process in place to handle them. This is where procurement management comes into play. 

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But what, exactly, is procurement management? What steps should the process include, and what benefits does it offer your business vs informal processes? Below, we answer these questions and more to help you establish the procurement management process that is ideal for your business. 

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What is procurement?

Procurement is the process of acquiring goods, services, data, and other resources from an external partner such as a vendor or supplier. It’s a key part of supply chain management, and is necessary to keep a business operating efficiently without bottlenecks or other hiccups.

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What is procurement management?

If procurement refers to the act of acquiring necessary goods and services, procurement management involves all of the processes that go into sourcing these necessities 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.)

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Typically, procurement management involves everything from sourcing products, negotiating prices, purchasing them, and paying for them once a supplier delivers their product or service.

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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.

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When conducted efficiently, procurement management gives your business a competitive edge. Your business will experience stronger vendor relationships,greater transparency in its sourcing supply chain, and ideally lower vendor costs. 

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Procurement management steps

While procurement management can look slightly different from business to business, it will typically consist of the following steps:

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1. Define your business needs
2. Build a list of potential vendors
3. Vet your suppliers
4. Negotiate contracts
5. Send a purchase order
6. Inspect the product or service upon receipt
7. Approve the invoice
8. Update relationship records

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Step 1: Define your business needs

Before you begin looking for vendors, you must have a clear sense of what your business actually needs. 

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Literally, this means identifying the goods and services that your business needs to function: The components or materials necessary to manufacture a product, the marketing copy necessary to sell that product, etc. 

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But more abstractly, it also means identifying your longer-term business goals and understanding the role that procurement might play in helping you reach them. If you have a long-term goal of making your development team more efficient, for example, this might inform how you evaluate and ultimately procure different SaaS applications to support them.

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In addition to identifying your business goals, you should also define the metrics and KPIs you will use to track goal progress.

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Step 2: Build a list of potential vendors

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.

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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.

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Step 3: Vet your suppliers

Just because a vendor or supplier can provide what you need doesn’t mean they would be a good partner. Before contracting them, it’s critical that you properly vet them to ensure you’re not entering a business agreement with someone who would be bad for your business. 

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There’s no one way to vet a supplier, but some questions you should seek to answer during this step include:

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• Are there any hidden fees or service charges that you’re not seeing, which could pad your bill and should be factored into your budget?

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• Does the supplier have a track record of consistently delivering high-quality goods or services, on time and without delays?

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• Are there client or customer testimonials that you can review to get a better sense of what it’s like to work with the vendor?

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• For SaaS procurement, what does deployment, integration, and trouble-shooting look like during implementation?

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• What does customer service look like, more broadly?

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Step 4: Negotiate contracts

One of the key functions of the procurement management team is to negotiate vendor contracts in order to maximize value for your business. This means knowing the fair value for whatever it is that you are sourcing (based on industry knowledge and pricing) and using that information—as well as your professional relationships—to negotiate fair terms. 

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It’s important not to focus only on issues of price and delivery schedule, though. The contract should also aim to protect your business by outlining the repercussions your vendor would face if they fail to meet their end of the bargain.

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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.

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A PO is matched against an invoice to authorize payment, so make sure you carefully store it in your records.

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Step 6: Inspect the product or service upon receipt

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Once a vendor receives your PO, they will deliver the product or service according to the schedule and terms outlined in your contract. 

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Make sure to inspect the product you receive carefully. Note all product delivery attributes in your vendor scorecard and catalog 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.

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Step 7: Approve the 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 issued, and forward the approved invoice to your AP team for payment.

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Step 8: Update relationship records

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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.

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Document and record everything connected to the procurement process, and you'll have no issues negotiating contracts or redefining vendor terms.

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The procurement management team

Most large and mid-sized organizations have a procurement management team (also called a procurement team) comprised of individuals who are responsible for all things procurement. Below, we answer some of the most common questions business owners tend to have when they are designing their procurement teams.

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What are the primary functions of the procurement management team?

Procurement management teams contribute immensely to your business's success. Here are every procurement team's essential functions:

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• Product sourcing: Procurement teams locate and vet essential products and services that help a business run smoothly.

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• Contracting and vendor negotiation: Vendors negotiate prices with procurement teams, setting the tone for the relationship.

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• Supplier performance monitoring: Procurement teams add vital inputs to supplier performance monitoring tasks by recording data.

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• Procurement trend forecasting: Procurement teams leverage analytics to forecast vendor costs, and effectiveness, and to quantify ROI.

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• Analytics: Procurement teams use reporting and analytics to forecast trends in performance and spend analysis.

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How is a procurement team structured?

A procurement team's structure depends on a business's needs. Broadly, there are three models you can follow when structuring your procurement department:

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• 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.

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• 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.

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• 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.

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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.

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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.

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Benefits of efficient procurement management

A well-run procurement process offers many business benefits. Here are some of the critical advantages your business will receive:

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Reduced vendor-related costs

For most businesses, vendor-related costs often account for a large portion of the business expenses your company incurs. Reducing these expenses can help boost your gross margins. 

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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.

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Greater transparency

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.

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Transparency in procurement also will help bring the following advantages:

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• Ensure vendor compliance with environmental, social, and governance (ESG) initiatives

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• Eliminate shadow IT

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• Ease tail spend management

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• Accurate and competitive vendor pricing 

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• Eliminate maverick spend

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High product quality

Few things are as detrimental to customer trust and brand loyalty than when you disappoint your customers with a product of poor quality or, worse—one with defects and potential safety hazards. 

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Effectively vetting your vendors and the goods you receive from them as a part of a thorough procurement management process reduces the risk that you’ll accidentally pass a subpar final product on to your customers. 

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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.

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Thanks to smooth procurement, you'll model product development cycles accurately, meet demand, and build customer loyalty.

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6 procurement management best practices 

Here are six best practices to help you install a smooth procurement management process in your business.

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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.

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Connect your procurement strategy to business goals, and you'll evaluate vendors more effectively. You'll focus more on ROI and less on costs.

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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.

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Transparency will also help you monitor compliance and use sustainability as an edge in the marketplace. 

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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. 

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Always have a backup vendor in place, and you'll reduce supplier risks significantly

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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. 

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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.

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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.

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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.

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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. 

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Automating the procurement management process with Ramp

Automating some or all of your procurement management process can help your organization become more efficient and supercharge the benefits we spoke to above. If you’re looking to for procurement automation, we recommend you start here with some of these powerful features from Ramp Procurement:

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Leverage pricing benchmarks to get the best deal

Contract negotiations can be tricky, because you need to settle on a price that satisfies your vendor, maintains a healthy relationship, and gives your organization as much ROI as possible.

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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.

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Centralize SaaS vendor activity

As your organization grows, keeping track of vendor activity can be challenging. This can lead to duplicate subscriptions, unused or underutilized SaaS packages, and other wasted spend. 

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Ramp’s Vendor Management software serves as a central  dashboard to manage all your subscriptions will help you keep track of all vendor spending. Record contract details, set renewal reminders, track SaaS usage, and leverage pricing data to make sure you’re getting a fair price on all of your subscriptions.  ‍

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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.

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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.

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Ready to learn more about how Ramp can help streamline your business’s procurement management process? Start for free today.

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