Procurement is a key part of doing business. Without a good procurement system, you may not be getting the deals you deserve on the goods and services your business needs to grow.
You may also find that you’re not using the right services to support the productivity of your staff, which may mean it’s time to look beyond just which option is the cheapest. Managing your procurement properly is vital to improving your bottom line and profitability, as well as the overall health of your business.
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What is Procurement
Procurement is the entire process of sourcing and purchasing products from any external source. This covers:
- Identifying a need and working out the best solution
- Vendor management
- Price negotiation
- Selection of goods and services
- Purchase order/request approval
- Receiving goods and services
Procurement is most important in situations of scarcity, that is if you are short on cash or resources and need to make optimal choices with limited funds. Purchasing is a part of procurement; it’s the basic act of acquiring a product and paying for it. Purchasing should be streamlined and consistent, while procurement requires more flexibility.
Why is the Procurement Process Important?
The primary goal of procurement is to get the best service for the best price. It helps you avoid pitfalls that range from overpaying to buying something affordable but with little-to-no value. You also need to make sure that procurement does not take excessive resources in terms of employee time.
Procurement thus includes negotiating pricing and terms with vendors and selecting between multiple quotes. A good procurement manager will take into account not just price, but whether the product has all of the features you need.
It’s also important to streamline the process so that you are spending the least time possible to get results. Most especially, automating or outsourcing the more routine aspects of your day-to-day can save time you can then spend on researching the right vendor.
When done well, procurement increases your profitability. It also helps you understand your own supply chains and ensure that your suppliers are reliable. This is important across all of the goods and services you buy.
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What’s the Difference Between Indirect, Direct, and Service Procurement?
While the procurement process is important across everything you buy, it’s vital to understand the difference between the types of procurement. The main types are:
- Direct procurement – This is the materials or items you use to produce your end product. For retail, this is what you put on your shelves. For a restaurant, this is ingredients and cookware. For a SaaS product, it’s the tools you need to build your software. Everything you procure this way ends up going out the door to customers or is used to directly construct your end product.
- Indirect procurement – Your business also has a lot of other things that are vital to the business, but don’t directly contribute to sales. This includes rent, office supplies, advertising, etc.
- Service procurement – This is when you are procuring something other than a physical item, such as contingent labor, contractors, or your lawyer. This can cover both direct and indirect procurement.
Each process is equally important, but there are some essential considerations to note. For direct procurement, there is often a stricter need for specific numbers to arrive on a specific date. Sometimes with indirect procurement, you can make an emergency run for something like office supplies or printer paper without going through a formalized process.
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Stages of the Procurement Process
We’ve mentioned the stages of the procurement process above, but let’s break them down in more detail:
1. Identify the Need
The first stage is realizing you need something. With software, this often means making note of a situation where your employees are using two or three applications for a task that should only require one.
This might also refer to subscription renewal. It’s almost always a good idea to check out other options when any contract comes up for renewal, even if you think you are happy.
Once the need is noticed, then the specific requirements should also be identified. For example, when looking for a customer management system, you need to know how many customer records you typically store, what fields you need to record, how marketing and sales will use the platform, etc. This should involve consulting all affected departments before making a purchasing decision.
2. Select Potential Suppliers
The second stage is to identify and select any and all companies that can potentially supply the software you need. Depending on the software, your list might have only one or two names or be quite robust.
At this stage, some companies realize that there is no off-the-shelf solution that fits their needs and that they are going to have to look into something more customized. Identifying this need early can give you more time to negotiate with potential developers.
Once you have your list of suppliers, you can move on to negotiation.
3. Negotiate the Best Option
Now it’s time to go through the list and find the best option. Typically, you want to be left with at least two or three different companies to negotiate with, but if you have a long list it’s more than fine to narrow it down quickly by eliminating vendors who are at price extremes (too expensive or suspiciously cheap) or clearly don’t support the features you need.
Negotiation can be a nightmare. Not everyone is good at it, and the back and forth can become uncomfortable. Sometimes you can end up making a mistake that impacts your entire relationship with the company. If this sounds entirely too familiar, check out MainStreet Procurement. We can negotiate on your behalf, with or without you in the loop, or we can act as an advisor and tell you what to say (and what not to say).
4. Place a Purchase Order
Once you have negotiated the right price with your chosen vendor, it’s time to place a purchase order. Some vendors have requirements as to how they want to receive the order.
Make sure that your purchase orders are detailed enough so that the supplier understands what you need. Many companies automate this step.
5. Take Delivery
If what you get is not as specified, it’s time to go back to the vendor and talk to them about how they have not met your expectations. Usually, this means there’s been a mistake that can be rectified. In rare cases, you may have to go back to the negotiating table (or seek a different company if they truly were not working in good faith).
Once the item or service is delivered, you need to receive it and inspect it. In the case of SaaS, this means having IT test the software to ensure it integrates smoothly with your systems.
Delivery should be properly recorded, and in the case of software, IT should document how the installation process went and whether it met expectations.
If the supplier is slow sending your software (or anything else), then you might need to expedite. Expediting is putting pressure on the supplier if they are not meeting the deadline (or if you realize you need it faster).
Ideally, this should happen very rarely, especially if you are doing your vendor management correctly. Staying on top of vendor management also helps you understand if some of your suppliers routinely need a follow-up to get them to deliver on time. (Needless to say, this should be taken into account on contract renewal).
Occasionally you may need to expedite something because of an emergency, although this is more common with consumables.
7. Product Assessment by Team Members
Once you have your software in place, the end users and team members should be encouraged to check it out, play with it, and thoroughly test it. If something is not meeting your needs, you can go back to the vendor.
You can also make notes for when the contract comes up for renewal. This will help you decide whether to continue with the software and whether to ask for changes. If you have purchased custom software, then you should be able to request changes as needed.
Give team members a time limit of when to get back to you with any concerns so this phase does not drag on. This doesn’t mean that you shouldn’t listen to concerns moving forward, but the initial assessment period should be as timely as possible.
8. Invoice and Payment Clearing
The vendor should send you an invoice that refers to the original purchase order. Once you are sure that your software (or other product) is as requested and up to standard, you should promptly pay the vendor. Make sure that you always pay on time unless you are withholding payment for a very good reason. With SaaS, this is particularly important, as the ideal is to seek a long-term relationship with a supplier who properly supports all of your needs.
Make sure to keep good records and evidence that you paid the invoice. If they take a check by mail then keep a record of when you sent the check in case it gets lost or delayed in the mail.
If you’ve already paid a deposit, make sure that the amount of the final invoice correctly reflects the deposit already paid. Always check the amount of an invoice before you pay it.
9. Record Keeping and Review
The entire procurement process should be properly documented. Make sure to keep records of the vendor you chose as well as those who came close. If something happens with your preferred vendor, having the other proposals on hand can save you a lot of time if you need to find a backup vendor.
It’s also important to review how your records so that you can identify any areas for improvement. As a company becomes more established it’s possible that a vendor has been blacklisted, but a new team member isn’t aware. Or conversely, something may have happened with a vendor a while back, but enough time has passed to reevaluate their product. Good record keeping also makes onboarding new members of the procurement team much smoother.
10. Ongoing Training
Finally, everything you do should feed back into future processes. Use what you have learned to identify where additional and ongoing training is needed for all members of your procurement team.
Your procurement process should never be static, instead, it should focus on constant improvement and streamlining.
The idea is to get through these steps quickly, but without sacrificing quality and always keeping in mind how each product or service purchased supports your business’s overall goals.
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Getting the Best Value
Your goal is always to get the best value. But value doesn’t always equate to getting the lowest price. So, how do you determine if you’re truly getting the best value?
If you abide by the pillars of procurement, you will have a much better chance of unlocking the best value for your company.
A low price that leaves your employees spending more time on tasks because the software lacks certain features they need is not value. At the same time, you don’t want to be paying for features you don’t need. Value means getting the highest return on your investment.
Make sure to take into account durability (which in software terms is directly connected to scalability) – will your current software serving 30 employees still be effective when you have 300?
You may need to conduct risk assessments and/or cost-benefit analyses to ensure that you are making the right choice. This should be done when you identify the initial need to determine if it is worth moving forward.
You should give a fair chance to all suppliers who can provide the software you need. Don’t give preferential treatment to individuals or companies based on things like existing relationships. Don’t just seek bids from larger, well-known companies; do your research and look for smaller, niche businesses as well. Sometimes this can help you find somebody who has what you thought you could only get through an expensive and time-consuming custom deployment. Assess bids objectively. Some companies find a scoring system where each bid is given points based on price, features, reviews, etc. This can help you overcome bias, which may not always be conscious. People are often biased towards the familiar.
Always seek bids from multiple vendors unless there is a very good reason not to. For example, you might not do a competitive bid on renewal if you are working with a vendor that has built your custom software and is continuing to tweak and improve it. Otherwise, you should always do competitive bidding unless this is a sole-source situation in which no other vendor sells what you need.
Ethics and Transparency
Unless you have good legal reasons not to, relevant procurement information should be made available to everyone involved. Keeping things transparent helps demonstrate to suppliers that they are being treated fairly. This helps keep you from burning bridges you might need to cross later.
Additionally, you should make sure that you monitor the ethics of your potential suppliers. Consider your own stance in regard to equity, environmental sustainability, and other important values. For obvious reasons, avoid using suppliers that you know are involved in inappropriate behavior.
Avoid conflicts of interest whenever possible. If, for example, somebody on the procurement team has a relationship with a potential supplier, that person should be recused from making decisions regarding them. This is another case where using MainStreet can help; we can help you with objective assessment in situations where you are not sure you can trust your own objectivity or that of your team.
Accountability and Record Keeping
Make sure that everyone involved in procurement is kept accountable. They should be required to keep accurate records and report in, and should not be punished for simple errors (which can result in them not being reported and then potentially multiplying).
Keeping good records leaves less room for error, shows targets for ongoing training, and makes sure that nobody is violating ethics rules. It also means that you know everything that has happened in your company’s procurement and can keep track of past decisions.
One of the issues that can come when people keep going back to the same set of vendors is a lack of equity. However, supporting equity also helps support value and transparency.
Equity, in this sense, means ensuring that you look at and take bids from a diverse range of vendors and contractors. It means looking at new companies as well as established ones. This allows those companies to grow, improves healthy competition, and ultimately brings you higher-quality services. Supporting equity supports your bottom line and helps the economy in general thrive. This does not mean, of course, giving a contract to somebody based on demographics when they can’t necessarily fulfill it, but it does mean that you should give them the same fair chance you give to everyone else.
Following these pillars can help you ensure that your procurement process really is giving you the best possible value and is operating efficiently. The most important thing is to be very clear about what you want and need and make sure that you look at all options to get it. It’s also vital to keep your integrity, which does not interfere with your bottom line. In fact, it does the exact opposite by ensuring that you get the best software for your needs.
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The Key Players in Procurement Management
Startups typically don’t have dedicated software procurement people. Procurement might be handled by IT or the key stakeholder. Larger companies, however, often task an entire team to source, find, and negotiate the best deals. This puts companies that can’t afford a full team at a decided disadvantage.
This is where MainStreet comes in. At your request, we’ll jump in to negotiate your next contract with your vendors – saving you time, money, and peace of mind along the way.
Whether we’re negotiating the lowest price, adding in subscription perks, or simply confirming that you’re already paying what you should for the services you need, MainStreet Procurement is always in your back pocket when you need us. Outsource your procurement needs to our expert team so you can get back to building your business.