In a fairly recent past, the supply department had the exclusive function of taking direct and indirect purchase orders from different areas.
The main problem was that many of these orders were placed on an urgent basis, without the required information, putting buyers in real trouble.
This lack of strategy caused financial losses for businesses, as the high investment levels didn’t bring a proper return to them.
But change was inevitable to survive in a competitive market. Today, the procurement area is considered one of the most strategic for organizations as a whole.
However, there are still many doubts about the operation of procurement areas, which goes far beyond the negotiation processes with suppliers.
See below the key tasks of the procurement area and how to make it more strategic.
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Procurement area’s key activities and strategies
The buyer has several tasks to fulfill on a daily basis, and a clear purpose: to reduce the company’s costs, without impacting the quality of purchased products or services.
Learn about some of these activities and how to be more strategic in each of them:
The procurement area is in charge of supplier selection. Those who work in the area must be aware of the company’s key demands, regarding both raw materials and equipment & services.
Before starting the purchase process with a supplier, the buyer must consider different aspects – such as price, quality, delivery times, payment modes, risk-related issues and compliance.
Even if it seems a plain process, hiring suppliers is one of the tasks that usually demand much time from buyers. Therefore, having a supplier management tool helps to optimize work and reduce costs in the procurement area.
Procurement performance evaluation
Procurement performance is linked to company performance as a whole. Questions such as “Does it improve the product that reaches the customer?”, “Does it interfere with the return on investment?” and “Does it meet compliance rules?” are some issues to be considered.
Therefore, if many complaints are reported regarding the final product or if suppliers don’t comply with company’s rules and policies, for instance, the procurement area must reevaluate its partner base and act quickly to change the situation.
The supplier evaluation work must be constant, in order to improve the operation of any procurement area. Good partners should track the feedback on their own service, and realize what can be improved, even if there’s nothing seemingly wrong.
Analysis of purchase requests
One of the procurement area’s key functions is to produce and evaluate internal requests. When an order is placed, for instance, there’s the possibility that the cost estimate information has been already provided.
The analysis of purchase requests by buyers is very important, since every dollar saved in procurement means a dollar of profit for the organization. The professionals must evaluate whether the purchase orders are in line with the business goals and the available budget.
Buyers can also submit a counterproposal to internal orders, estimate delivery times, look for alternative products, find a more interesting supplier, or set a spending cap for new proposals.
Definition of KPIs in procurement
Key performance indicators (KPIs) are critical for several areas. They allow evaluating important data, in order to achieve positive goals and results for the business.
Each company sector has its own KPIs, as they measure progress in different ways. In the procurement area, some indicators that can be monitored are:
- Number of requests taken per month
- Number of replacement purchases
- Customer satisfaction index
Having well-defined procurement KPIs is vital for buyers, so they can be more assertive in their decisions. Additionally, the area will be able to measure its performance and identify problems that could go unnoticed.
Increasing the company’s revenue must be a goal of all areas. However, some areas have a higher weight in this task. As the market is increasingly competitive, profit margins tend to be very low – which puts material investment at the top of the expense list.
Let’s say a factory sells its products for R$ 100, with a material cost of R$ 50, a production cost of R$ 30 and a profit of R$ 20. If the procurement area reduces the material acquisition cost by 10%, the net profit will increase by R$ 5 (25%).
Consequently, if production reduces its cost by 10%, the net income will increase by R$ 3 (15%). It may seem little at first glance, but when more than 1,000 units are sold, these values become relevant to the company’s profitability levels.
Negotiation with partners
One of the main skills of the buyer is knowing how to negotiate with partners, and reaping the best opportunities. The professional must master the art of negotiation, understand financial processes and know how to convince the supplier to offer the best proposal.
The same is true for your internal customers. The new practices of the procurement area, including good negotiation, will impact the company’s profits directly.
Strategic value of the procurement area
In addition to the operational process, buyers work to plan the company’s expenses. It’s this planning that enables to make larger investments, without a negative impact on the accounts or payroll, for instance.
The procurement area evaluates also its actions over time, measuring its consequences and creating projections. A change of supplier, for instance, requires greater attention before signing the supply contract, in addition to a trial period.
During this period, final product quality (in the case of raw materials), and supplier performance are evaluated and compared. If the established KPIs indicate progress, the action has been successful. If not, it would be time for a reevaluation and come up with a new plan.
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