Effective procurement management is an important part of running a business. It involves acquiring goods and services at the right quality, quantity, price, and time to meet your operational needs. Below, we walk you through the basics of procurement and how these can lead to cost savings, improved supply chain efficiency, and increased profitability.
What is procurement?
Procurement refers to the process of purchasing goods, services, or raw materials from external suppliers. It includes a range of activities, including sourcing goods, negotiating contracts, purchasing, and supplier management. Effective procurement is vital for ensuring that your business has access to the resources it needs to operate efficiently.
What do I need to think about when managing procurement?
- Sourcing strategy: Start by developing a clear sourcing strategy. This involves identifying the types of goods or services you need, determining whether to make or buy them, and selecting the right suppliers.
- Supplier selection: Carefully evaluate potential suppliers based on criteria such as price, quality, reliability, and reputation. Consider the supplier’s financial stability and capacity to meet your requirements. Links to finding potential suppliers can be found on our Supply Chain Management page.
- Negotiation: Negotiate terms and conditions with suppliers to secure favourable terms. This may involve price negotiations, payment terms, delivery schedules, and quality standards.
- Stock management: Efficient stock management is essential to balance supply and demand. Avoid overstocking or understocking by closely monitoring inventory levels – potentially using software, including automated reorders – and adjusting your orders accordingly.
- Quality assurance: Implement quality control measures to ensure that the goods or services received meet your specified standards. This may involve inspections, audit or testing.
- Cost control: Keep an eye on your procurement costs, particularly when inflation and other factors can lead to significant rises over a short period of time, and seek opportunities for cost reduction. Consider whether you can make savings from bulk purchasing, or by negotiating supplier discounts, and keep an eye on what other suppliers can offer so you can ensure your expenses are continuing to be benchmarked against competitive rates.
- Manage the relationship: Establish and maintain positive relationships with key suppliers. Open communication and a positive relationship can lead to improved collaboration, better terms, and a more reliable supply chain.
- Risk management: Identify and mitigate procurement risks, such as supply chain disruptions, price fluctuations, and supplier failures. Develop contingency plans to address potential issues. Risk Management magazine has a more extensive guide to managing procurement risk.
- Legal requirements: Ensure that your procurement activities comply with legal and regulatory requirements. Be aware of laws related to contracts, labour, environmental standards, and fair trade practices.
- Technology and tools: Consider adopting procurement software or tools that can streamline processes, monitor stock levels, track spending, and provide data for informed decision-making.
Managing procurement is a multifaceted task that involves careful planning, execution, and monitoring. By understanding the basics of procurement and implementing effective strategies, you can optimise your supply chain, reduce costs, and ultimately make your business more profitable and competitive.
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