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The procurement process is more than just identifying, sourcing, and purchasing raw materials from the right suppliers. It’s an integral and strategic process of any business, large and small. When executed properly, it can enable businesses to save costs, build better vendor-supplier relationships, optimise the supply chain, and create value across business processes. Every business therefore must plan to improve the procurement process for business efficiency.
As a MSME owner in India, it’s likely that you understand the importance of procurement efficiency and effectiveness. Procurement related challenges are numerous, and though there is no singular solution, the idea is to work for continuous process improvement.
If you are looking for solutions to common procurement problems and design a strategy to bring procurement process improvement, this article will help you learn the best practices and methods to optimise procurement.
What is procurement?
Procurement refers to the practice of planning, sourcing, and purchasing goods and services from suppliers. Though, most organisations follow their own procurement process, the goal is to get quality goods at affordable rates that add value.
Large organisations for instance, often adopt demand aggregation strategies for procurement efficiency, while smaller businesses with lesser requirements, often overlap these functions.
Why is procurement for small businesses important?
A well-defined procurement management plan enables small businesses to optimise costs and resources, understand market and customer needs, and identify areas of improvement. It also helps them to minimise supply chain risks, manage suppliers and vendors, and leverage technology and tools for process improvement.
How to improve procurement processes?
There are several business challenges for Indian MSMEs, especially in procurement. Lack of skills for technology adoption, inability to define procurement needs, wastage, risk management, are just a few of them. For any business to function optimally, it’s important to find sustainable solutions to procurement challenges, and outline an action plan that identifies gaps and fixes them.
Listed below are some of the key steps to improve the procurement process for MSME businesses.
1. Align procurement to overall business strategy
The first step to improve the procurement process is to view procurement management as a part of the overall business strategy and not an independent activity.
Put simply, it means that all activities in procurement should be conducted keeping the business end-goals in mind and focus their efforts in that direction.
For example, if the business’s goal is to optimise logistics and warehousing costs, your procurement and logistics strategy should be aligned to serve the business goal. Procurement teams should find local suppliers for their sourcing requirements. This will reduce transportation costs, provide time to place orders and reorder, match inventory stock-in and out, and optimise warehouse layout.
To improve the procurement process, it is therefore recommended to:
- Have quarterly meetings to stay aligned with business objectives
- Identify misaligned objectives and re-strategize
- Review spends, policies, workforce skills to make internal changes as per business needs
2. Identify gaps in processes
Every business has processes that work optimally and others that require improvement. As a procurement manager or MSME owner, a simple way to bring procurement process efficiency is to identify those processes that require improvement. Check for the following:
- How are things currently being done?
- What are the bottlenecks?
- What’s working well?
- Which steps take up the most time and deliver least results?
- Where can automation be implemented?
- What are the expenses and where are you saving the most?
- What’s the impact on business?
For instance, if your suppliers are delaying delivery, consider finding new suppliers with shorter delivery timelines. Or, if you have been buying raw material offline (e.g., steel metal) consider buying steel online for better rates and supplier comparison.
In brief, check existing processes to find gaps and implement changes for improvement.
3. Define a sourcing strategy
Sourcing is a key component of procurement, and without an effective sourcing strategy, procurement process improvement is difficult.
The goal of strategic sourcing should be to enable businesses to source quality products that offer value. Based on how your business works, sourcing can include: compiling requestion requirements, budgeting, collecting data, identifying and analysing suppliers, negotiating with suppliers, and outlining RFPs. Ideally, it should also include vendor-supplier assessment and improvement.
Once again, your sourcing strategy should be aligned to your business goals and contribute to it. For instance, if the business goal is to sell premium quality products, then finding and procuring ISO certified raw materials is required.
In brief, planning and documenting a raw material sourcing strategy is a key step in process improvement. It will enable you to understand how sourcing is performing and how a more efficient solution can be found.
4. Outline steps for supplier selection
Selecting the right suppliers and vendors for your business can impact its overall success. It’s important to plan your supplier and vendor selection programme to improve the procurement process.
This will also enable you as a MSME business to save time, streamline supplier selection, and keep business compliant. The procurement process guidelines will also eliminate errors and inefficiencies, bring transparency, and make supplier selection a fair and reliable process.
For instance, a supplier selection process for small business procurement can involve the following steps:
- Curate a centralised database of suppliers with details on key contact persons, pricing, raw materials available, charges and fees, order frequency etc.
- Review supplier performance on a regular basic – add/remove suppliers from database based on contract terms and performance
- Maintain the practice of identifying new suppliers based on changing business and market requirements (e.g., finding local suppliers to support local development)
- Define processes for supplier evaluation, selection and onboarding
While this can be a time-consuming and daunting process, it is also the most reliable ways to streamline procurement processes and make it seamless.
5. Identify tools required for digitisation and automation
It’s impossible to bring efficiency in procurement policies and procedures without adopting new age technology for digitisation and automation. Today, there are numerous software available in the market to streamline procurement processes. There are tools for vendor management, invoice generation, warehouse automation, and more that procurement can leverage.
After the setback caused by the pandemic, most large and small businesses, had to adopt digitisation into their processes. In procurement, the adoption of tools enabled process transparency, data availability, workflow automation, digital payments processing, and more.
If your procurement strategy does not involve digital tool adoption, it’s time to change and drive efficiency in completing complex tasks and improving workforce productivity.
6. Educate and train involved stakeholders
When you decide to go digital and implement business process change, it’s imperative to have all stakeholders aligned and updated. A common obstacle to process change is the inability to communicate coherently and timely with all stakeholders and share updates.
Some of the steps that you can take to improve business procurement processes are:
- Send fortnightly updates to relevant internal and external teams on latest trends, business updates, technology adoption etc.
- Communicate regularly with external suppliers and vendors to discuss workflows, challenges, payment terms, meet expectation, share information, etc.
- Schedule trainings (online and offline) with relevant teams e.g., with vendors, trainings on vendor onboarding procedures can be conducted
A well-defined strategy for raw material procurement, will recognise the need for regular skill upgrade.
7. Establish a feedback mechanism
While feedback is a process most businesses ignore, it is one activity that can transform the overall procurement process. Feedback from suppliers, vendors, team members, cross-functional teams, and customers is first-hand information of how a process is working – good or bad. It can help teams identify pain points, bottlenecks, cost-centres, profitability, quality concerns and more. Together, it can help to improve procurement functions, streamline and bring efficiency.
Some of the steps you can take to establish a clear communication and feedback channel are:
- Use tools like survey forms, questionnaires, polls for clarity on how current systems are functioning
- Collect feedback from internal teams on vendor performance and take necessary steps e.g., provide training if tools are not being used, send feedback email if deliveries are not as per SLAs etc.
- Set review cycles to monitor new systems and update as required
Design an effective procurement policy for efficiency
Procurement is a win-win situation between the buyer and seller (supplier or vendor). In most cases, both are keen to make changes in processes if it positively impacts the overall business objectives. Though there are several tips for raw material suppliers to improve buyer relationship, as a procurement manager/business owner, it is recommended for you to bring change internally for better results.
Listed below are the steps you can take to design a comprehensive procurement strategy for an improved and result-oriented procurement process:
- Requisition need analysis
- Supplier identification, qualification and selection
- Contract management and negotiation
- Purchase order release
- Funds allocation and advance payments
- Order delivery, quality inspection and acceptance
- Invoicing and final payments
- Inventory and warehousing solutions