Major Challenges In Procurement And How Can You Overcome Them?
Every transaction that a business deals with has the capacity to transform the business outcome. It is crucial to develop a procurement strategy to have better business and purchasing processes.
What Is Procurement?
Procurement, in simple terms, is the acquiring of different products or services in a series of steps meant for an organization or a business. It includes obtaining the best possible products at the best possible price. You need to understand the business policies, the exact requirement, the features, or the benefits that the vendor provides while abiding with the social and corporate responsibility of your organization.
You must now think that this process that we explained here is the process of purchasing, but purchasing is a little different from procurement. Let us try and understand why.
In layman terms, if procurement is a [set], then purchasing is a [subset] of procurement. Purchasing is the last step involved in procurement, the one that only deals with buying the product/service agreed upon by both the involved parties. Procurement is the whole process of sourcing, negotiating, strategic selections, and other steps that we have listed below in the blog. Purchasing is merely one of the steps involved in procurement. Therefore, purchasing is a part of procurement, while procurement itself is an elaborate process.
Significant Challenges in Procurement and How to Overcome Them
Coming to the forefront of this article, let’s take a look at the challenges that are prevalent in procurement. These challenges can hinder the business processes and make it difficult for the business to stay above the profit line.
Let’s go through these challenges one by one.
Risk Mitigation/ Risk Management:
Risks are prevalent in every aspect of a business, and managing risk can help in successfully handling the business. A risk in procurement can hinder the business processes and lead to an overall decline in the business. Hence, considering the supply risk can help your business to a great extent.
Risks involved in procurement can prove to be fatal for the whole cycle of the supply chain process, and hence, it is essential to understand and overcome these risks on time. Some major risks involved are market risks, potential frauds, compliance risks like anti-corruption, policy adherence and cost, quality, and delivery risks.
When the size of projects increases, the risks and the challenges associated with them also increases. One such challenge is access to inaccurate data. Inaccurate data can motivate bad or ill-informed decisions, which ultimately reflect as a loss on the business cycle. Purchases that are made based on inaccurate data lead to problems like inventory shortage and excess inventory.
Having access to accurate data is essential in big projects as it helps in putting up a strong case in front of the management or the primary decision-makers. A decision that is driven by data has a slim chance of being unsuccessful as compared to a decision made with inaccurate data.
Procurement was thought of as an operational process, but this is where organizations were lacking. If they think of procurement as only an operational process, it could lead to significant challenges.
Procurement is a strategic process where making and implementing a strategy is as essential as any other process.
Strategic considerations are taken into account in each step of procurement so that it is in sync with company policies and is optimized for risk mitigation. However, implementing a strategy in each step becomes for every business unit and location a challenge in itself.
Supplier Related Issues
Finding the right supplier who delivers the quality promised and in the dedicated timeline can be a real task. Matters related to the supplier are probably the most significant challenges that supply chain professionals have to face.
The supplier-related issues all have the same solution — continuous monitoring and evaluation. Supplier performance can be monitored by ensuring they deliver the right products, in the right time frame and according to the quality guidelines specified by both the parties. Just like customer relationship management, a supplier relationship is also crucial for the smooth functioning of the procurement process. Overviewing more than three vendors and understanding their relationship can help develop a good supplier process in the organization.
There are some purchases or orders sourced which become too small to be handled by procurement. They may be too small a purchase or too infrequent or random to be added in a vendor catalog. These purchases seem small individually but, once calculated in total, can go up to millions. These uncontrolled and out of the cycle purchases are also known as dark purchasing.
Suppliers often bypass the rules of procurement for them and instead treat it as a general purchase via phone, email, or fax. It becomes a burden for the employees. This challenge acts as a major hindrance in cases where trivial purchases are more than the planned and analyzed procurement. These complex spend can be either outsourced or automated to help the employee and maintain the strategic process.
Reporting and Analysis
Big data and AI have a growing buzz these days, and procurement is another process that requires enormous amounts of data. Now, the amount of data can be substantial, but the quality of data or the data being good is more important for procurement officers and in turn, for the business.
Automation in procurement is still a far-fetched dream as only 2% of organizations claim to have fully automated their procurement process, while 54% of organizations say they have started digitalization. With a large number of procurements being handled manually, human errors and misunderstandings are a common challenge. Not to forget, the move from manual to automated poses another challenge.
Access to good reporting and analysis tools or the right reporting technology can help a business make strategic procurement decisions and take intelligent actions. Business intelligence helps figure out where procurement is thriving and where it is failing along with answering the “why” of this process.
Procurement is a very specialist department, which has put it in the spotlight and created massive demand these days. Huge firms are all looking to acquire people with expertise in this area. Companies must pay attention to the skill development and expertise of their employees as it ultimately helps in streamlining the process and gaining maximum benefit from it.
Firms need to keep their staff aligned with the coming age technologies and keep working on employee development to retain specialist people and continue their procurement process.
Managing Stakeholders/ Stakeholder Engagement
Stakeholders can be challenging to manage, more so when they vary in their interests and have different opinions on the outcome of a project. Some stakeholders have a direct impact on the project, while others might have indirect. So, the priority of stakeholders can be variable.
Such versatility in stakeholders makes it difficult to manage and coordinate between them to produce a productive and fruitful outcome.
Long Process Cycle
As such, the procurement process can be considered a long cycle, but in many instances, products or services are ordered in an urgency to complete a project or to make some deadline. As a result, proper steps and cycles are not followed, which leads to an increase in risks and challenges.
These shortened cycles lead to incomplete preparation of the technical specifications, overlooking the procurement schedule, extending the timeline for bids or proposals, failure to start the evaluation process on time, or the setbacks or lack of time for contract negotiation leading to poor deliveries and overpriced products.
Overcoming the Procurement Challenges
The above sections must have given you an idea about the challenges involved during different phases of the procurement process, and it is essential to understand and put forth a solution for these challenges.
The ways listed below can help you overcome some of the most crucial procurement challenges that might come your way.
Handle the Risk Right
Like we saw above, risk management is one of the most complicated challenges that a procurement manager has to sort. Right risk management can be done with a keen understanding of the suppliers and their upcoming processes. Pre-screening is an essential step before on-boarding as it helps in choosing the supplier and reducing risk. Continuous monitoring of the steps involved in procurement can also help in the reduction of any risks that occur during the process.
Risks in the supply chain process can be anything from reducing the supply risk to staying in lines with the compliance. Identifying the risks associated with each supplier, understanding their supply chain process and putting up recovery plans in case things go south can help secure the procurement process of any risks.
Sustainability means thinking about the future and making use of only essential resources. This approach helps companies move towards a circular economy, an economy that is based on recyclable opportunities rather than a linear one, which is entirely based on exploitation and exhaustion of resources. Sustainable development and economic processes can lead to overall financial stability and greater profits in the present and the future.
Get Your Finance and Procurement Team Together
Finance is an essential aspect of every domain in business. The CPO and CFO working together can bring in a significant acquisition and procurement plan. A vocal and robust collaboration between the finance and procurement department can build a better market presence and kill competition and market presence.
Integrate the Right Data
Data is of the utmost importance to any business, and it will become integrated more and more as we move forward. Data will become more and more complicated, and evolving a big data strategy that fits your process can help you overcome your procurement process.
Invest in Procurement Software
Investing in a procurement software can be the right choice as such solutions are capable of managing everything involved in procurement right from evaluating, selecting, till creating agreements with suppliers. Most of the procurement software can also be of great help when it comes to managing suppliers, transactions, and even accounts payable. Also, the embedded analytic capabilities constitutes to reduced risk and improved savings. Promena e-Sourcing, Coup, Procurement Express.com, SutiProcure are some of the top Procurement management software.
The challenges faced in procurement and their solutions mentioned above are the most common or the most vital. If we talk about the procurement process in general, it should be an organized and well-researched process. So, let's try and understand the procurement process in a stepwise manner.
Importance of the Procurement Process
Procurement is an essential step if we look at it in business terms as a business or an organization is spending a lot of their revenue on purchasing and acquiring goods and services. Hence, managing these procurement practices becomes vital.
A good or bad procurement process is like the two sides of the same coin. The slightest decrease in purchasing cost can result in a positive change reflecting on profits, whereas a lack of proper decision or lack of appropriate strategy can flip the coin and run the company down to the ground. Therefore, having an adequate procurement process in place ensures that the business stays healthy and keeps reflecting positively on the profits.
The fact that procurement is an elaborate process helps us understand why it is essential to follow certain steps or strategically plan the whole process. The procurement process follows a 10-step cycle for better management and results, understanding these steps and following them closely can help in understanding the challenges and solving them when required. These steps involve:
Step 1: Need Recognition
The laws of business sustenance are the same as that of humans. Humans need to identify their needs and act on them if they want to continue to live and not cease to exist.
Businesses also require recognition of their needs and act on the same. The requirements must be defined as identified. Whether the need is internal or external and whether the product needs to be reordered or a new product/service has to be ordered.
Step 2: Specific Need
Needs can be particular to different organizations. Some industries set standards to make the specification process easier, whereas others might have no point of reference. The product might have been ordered in the past, or there must be some identifiers like the color, weight, or type of product required.
Step 3: Source Options
Choosing the right supplier is like finding the perfect pair of jeans. It’s difficult, but not impossible. Moreover, once you do find a pair of jeans that fits you perfectly, there is no going back from there.
Similarly, finding the right supplier is essential. A business can go about the same in two different ways; either they have an approved vendor list, or they research magazines, internets, and sales representatives to find the perfect source. The second method calls for identifying the best supplier and making a choice for their business.
Step 4: Price and Terms
Every company wants to make a purchase based on their terms and suitable costs. So, a business checks all the relevant information to determine the best price and the terms of the arrangement. The cost and the terms of a product/service depend upon various factors like was it readily available, or tailor-made and what the competitor suppliers are providing.
Most businesses check at least three suppliers before making their final decision.
Step 5: Purchase order
A purchase order is a document shared between the buyer and the service provider. It outlines the price, specifications, and the associated terms and conditions for the product/service acquired. It can also contain any other obligations or terms that the parties have agreed upon while making the purchase.
Step 6: Delivery
Delivery, like in standard terms, is the sending of the purchase ordered by any medium. This medium can be both electronic and physical. Sometimes, the medium of delivery is mentioned in the purchase order, and other times, it is either obvious or agreed upon by both parties.
Step 7: Expediting
Expedition of the purchase order is for maintaining the punctuality of the product/service or for maintaining the timeline for the same. The expedition becomes even more critical when any delays are faced, be it in payment dates, delivery times, or work completion.
Step 8: Receipt and Inspection of purchases
The recipient needs to receive; either accept or reject the delivery of the product. Accepting the delivery obligates the organization to pay for the same.
Step 9: Invoice Approval and Payment
The invoice needs to be approved before making the final payment to the supplier. Usually, three documents are required or checked, including the invoice itself, the receiving document, and the original purchase order.
Any discrepancies that appear in these three documents have to be solved before making the final payment. Payments are made in the form of cash, cheques, credit transfers, and other forms of electronic payments.
Step 10: Record Maintenance
Record maintenance is essential for both; cases where there is a conflict and the audit process, both internal and external. Maintaining proper records of the purchases made and keeping purchase orders filed and saved can help a business in any tax or warranty conflict that might come their way.
We have seen the ten steps of the procurement process. These steps help go about procurement in a timely and efficient manner, which in turn makes it easier for the business to align their needs and make purchases based on that.
To Sum UP!
All these challenges in procurement hinder the overall process and hence create room for financial losses and operational incapabilities. Procurement as a process should be strategic and based on insights rather than on instinct.
If the process of procurement is carried out systematically with risk calculation and insights, it turns into a profitable process that ultimately builds the foundation of a fruitful business. In all, procurement is an essential aspect of any business and should be done keeping in mind the acquired data and plans of any organization, along with representing their social and corporate responsibility with every purchase that they make.
Streamlining the procurement process can be highly beneficial and can yield better business outcomes. The simple way to get here is to invest in a best procurement management software solution. If you are confused, have a look at the list of the top procurement software systems, created by GoodFirms.
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