It‘s a long-range plans for ensuring timely supply of goods and/or services that are critical to a firm’s ability to meet its core business objectives.
Steps in strategic procurement process
Strategic procurements are core acquisitions that could determine organisation‘s success or failure; with potential to bind organisations in to long term contractual agreements. As such, they must get input from senior management and all other relevant stakeholders. Strategic procurement steps are chronological, where each next step is influenced by the preceding one.
The 10 fundamental steps in Strategic procurement processes are: –
1. Requirement identification Business procurements essentially take place in response to market needs or demand. And
demands can either be internal -e.g. raw materials for production- or external -e.g. products and services for consumption.
Requirement identification in procurement should lead into determining what exactly is required.
Key performance indicators (KPIs) in this step should include: –
- Identification of exact requirements through the use of procurement need analysis.
- Clarity on issues of; type, quality, urgency and total spend against market affordability.
2. Budgeting for the Procurements
Having identified what the market requires, a procurement budget -which is part of the main budget for an organisation- must be drawn. Strategic procurement ‗in collaboration with finance department‘ should draw up a procurement budget, which would correctively track actual expenditure against the planned acquisition schedule.
A procurement budget influenced by cost models should achieve the following outcomes:
KPIs:
- Outline total cost of acquisition (i.e. from ordering all the way receiving)
- Prevent unnecessary diversions from the budget schedule.
- Ensure that current procurement costs are less or at least equal to previous ones.
- Enable the achievement of: cost reduction, cost avoidance and return on investment (ROI).
- Provide a cushion for unexpected but necessary expenditure, 20 – 30% of total acquisition value should suffice.
3. Supplier Sourcing and Short listing
Having organised the financial requirements, strategic procurement team should embark on a search for potential suppliers who can reliably provide requirements to the organisation as and when required. Sourcing is; the identification and selection of the supplier whose costs, qualities, technologies, timeliness, dependability, and service best meet the organization‘s needs. The sourcing and short listing step is about identifying and analysing the ability, dependability and reliability of a supplier to provide best value for money and fit for purpose supplies. At this stage, instruments like; questionnaires, request for proposal (RFP), request for samples,
bench marking, bidding or reverse auction could be used.
The sourcing and short listing step should provide a short list of:
KPIs:
- Suppliers who meet qualification criteria.
- Suppliers who rate among the best in what they offer. (Bench marking exercise can apply here)
- Long term-focused suppliers, willing to be bound in to long term and mutually beneficial business relationships.
4. Negotiating and selecting suppliers
Negotiation is applicable where there is disagreement or potential disagreement between suppliers and buyers. Based on the strategic requirements, shortlisted suppliers or bidders (at least 3 per category) must be invited to a final ‗face to face‘ negotiation. This negotiation approach is preferable; as personal traits and gestures are better observed here than is otherwise the case. At this stage, ABC Classification of suppliers can assist in categorising and finally selecting suppliers based on their capabilities. Just as is the case in all businesses, time is money in procurement. Therefore negotiations must not drag on forever.
KPIs:
Negotiations must:
- Bring unity and discipline in pursuit of set objectives.
- Achieve fair terms and conditions that solidify team work.
- Encourage mutual concessions aimed at removing impasse.
- Produce an effective unit that can outwit competition.
In strategic negotiations, parties must pursue a win – win (collaborative) approach. This ensures that; while the buyer gets right quality and quantity at the right price, place and time, the supplier equally makes a reasonable return.
No consistency in performance would prevail where returns do not match the effort.
5. Drawing and signing a buyer – supplier contract
Contractual agreement is the immediate step after negotiations. They take effect between two legal subjects; one intending to sell (offering) and the other intending to buy (accepting). The core purpose of contracts is to formalise the buy – sale agreements between consenting parties.
KPIs:
Among other things contractual agreements must:
- Be drawn and signed off immediately after agreement.
- Outline the agreed performance, pricing, terms, conditions, rights and obligations for both parties.
- Outline the period (beginning and ending) of an agreement.
- Clarify on how risks and cost of unexpected occurrences will be shared.
- Outline penalties for willful misconduct and remedies for non-performance.
Contractual agreements in procurement professionally address all pertinent issues including survival and nonexclusive clauses.
6. Issuing of orders (the actual buying)
After contractual agreements, the strategic procurement team should issue out a well specified order, a requisition order.
Depending on the agreement, some suppliers require deposits (e.g. a percentage of total cost price) before arranging and dispatching orders.
KPI‟s:
Orders must be:
- Specific (i.e. quality, quantity, time and place) for easy conformance.
- Cost effective. For instance, ‗consignment inventory‘ and ‗bulk purchase‘ systems significantly minimise storage cost for suppliers and transportation cost for buyers respectively.
7. Receiving, inspecting and recording supplies
All receipts must be well recorded; damages, rejections or returns must be immediately reported to the supplier. Most delivery documents includes a notice for buyers to notify suppliers on faults, damages or shortages within seven days of receipt; failing which complaints would not be acceptable.
KPIs:
- Receipts (i.e. procured products or services) must meet quality and other agreed performance standards.
- Packaging order and material should respond to the agreed requirements.
- Rejections, shortages and damages must be recorded, returned or reported to suppliers as quickly as the agreement requires. These records must be kept for a final supplier performance analysis exercise.
To simplify stock taking (particularly for transiting goods), bundle receipts should be recorded as packages, while loose items should be recorded by their specific names.
8. Issuing payments to suppliers
Upon receiving, checking and verifying goods or services, procurement departments must notify relevant parties (including remittance teams or paying masters/financial institutions) on the order and condition in which these goods or services are received, effectively authorising payment release or the opposite.
KPIs:
- Early payment terms (e.g. 2/10 net 30) should be utilised for as long as they are worthwhile.
- In the absence of early payments benefits, payment should only be made in the final days of the agreed grace period.
- Account (credit) procurements should be preferred to ‘up front‘ or ‗cash on delivery‘ acquisitions.
- Cash payments should be discouraged; while closed cheques, electronic funds transfers (EFT) and bank‘s letter of credit payments must be encouraged.
9. Performance assessment and management
In strategic procurement, performance assessment and management is an ongoing process of ensuring that suppliers meet or possibly exceed performance expectations.
KPIs:
- Rejection rate (value of goods rejected /value of goods received) should be minimised.
- Long term relationships and team work spirit must be built and strengthened.
- Corrective consultations between parties must be encouraged.
In the current -fiercely competitive- global market, continuous improvement on operating systems is no longer a luxury but a sturdy weapon for sustainable growth and success.
10. Contract ending (Dissolution) or renewal
This is a point where an agreement or contract comes to an end (expires), a point where an overall performance appraisal is conducted. For ongoing projects, it is at this stage where outstanding performers are rewarded with new contracts while below par performers are released.
NB:
- Parties must always strive for an amicable dissolution; thus creating a possibility for future business.
- Released parties must be respectfully notified with clear reasons attached, so as to create an atmosphere serene enough for similar future partnerships.
- Strategic procurement processes cannot operate in isolation; they must always be aligned to the overall strategic objective of an organisation.
Although knowing beforehand what an acquisition process entails enables procurement teams to strategically map out deviation resistant approaches, strategic procurement budget should always provide for an emergency fund (e.g. 20% – 30% of the total procurement value) aimed at accommodating sudden but very critical expenses.
While market demand is fundamentally influenced by consumer affordability, strategic procurement should be influenced by the ‗Value for money‘ and ‗fit for purpose‘ principles. As such, clear responses to as many relevant questions as possible would provide guidance on the resources and efforts required in the processes.
