By Farshad Bahmed
Typically, owners of small-to-medium businesses (SMBs) manage their procurement function as an afterthought. They prioritize finance, staffing, marketing, and customer growth, and they tend to focus on procurement only when the company grows beyond a certain threshold.
But SMBs spend a significant amount of their sales revenues on procurement: 45 to 65 percent, according to the Business Development Bank of Canada. And according to Bain & Company, companies that implement better sourcing strategies and processes can save up to 15 percent of their total spending.
Developing a strategic approach to procurement can bring major benefits to SMBs, apart from having a positive impact on the bottom line. Here are seven best practices in procurement for SMBs and the advantages they can deliver.
1. Hire procurement experts: SMBs tend to have minimally staffed procurement teams that report to either the Finance or human resources department. This effectively makes procurement team members paper pushers, responsible for transactional activities such as carrying out purchase orders and invoicing suppliers. Often, SMBs don’t invest in hiring procurement experts that they can use as strategic resources who can bring value to the business. They also tend not to invest in procurement training. Investing in hiring procurement experts and training procurement teams might seem like a significant cost, but the consequential savings will be significant. A McKinsey report found that the return on skill investments for procurement workers is typically between 15 and 25 times the cost.
2. Spend time analyzing procurement spend: An experienced procurement analyst can provide practical analysis that has an immediate positive impact on the business. For example, with volume consolidation, different business units that buy the same items, such as laptops or office supplies, can buy them together and generate a greater discount. With supplier consolidation, instead of buying similar items from multiple suppliers in smaller quantities, orders are pooled together and given to a single supplier for reduced prices. Another area that can be improved by proper analysis is “maverick spend,” or excessive spending outside of contracts. But SMBs aren’t typically staffed to do full audits of their costs to check the sources of the biggest leaks. In the process, they miss critical saving opportunities.
3. Focus on procurement compliance and governance: This area includes processes such as controlling and monitoring item codes; tracking purchase requisitions, orders, and invoices; following a delegation of authority for purchase approvals; and comparing budget against spend. Poor process governance and compliance, a common symptom observed across SMBs, leads to spend leakage. The right strategy and process in this area can eventually add up to considerable savings in many areas. It can help SMBs control maverick spend, achieve greater accountability for purchasing decisions, and be more disciplined about budget overspend.
4. Develop strategic supplier relationships: SMBs don’t spend time building strategic supplier relationships, but doing so can glean cost savings from better discounts. They can also gain supplier-driven innovations such as a new packaging material that holds the same weight, but is much less expensive. Other operational benefits include vendor-managed inventories, where suppliers commit to hold inventories on behalf of organizations, reducing the cost of inventory holding and warehousing for SMBs. Strategic supplier relationships, in general, are key for all businesses—large or small. For example, Chrysler lost out on US$24 billion worth of unrealized income due to poor supplier relationships arising from turbulent ownership over a 10-year period.
Higher cost savings, access to market innovations, and the ability to reach strategic business objectives make the investment in strategic procurement worthwhile.”
5. Automate procurement processes: Procurement software solutions with automated industry-standard processes result in faster lead times for transactional activities such as submitting and releasing purchase requisitions, purchase orders, and supplier invoices. Automated processes also enable procurement process compliance, which determines the approver depending on the amount of spend and which teams need to approve purchase orders. Overall, well-implemented standard procurement software fulfills most of the process and compliance requirements for SMBs, while also helping to increase efficiency and improve the productivity of procurement teams.
6. Invest in collaborative procurement: One of the latest trends in procurement is collaborating with other SMBs for procuring nonstrategic common items such as office supplies. SMBs pool together their volumes and come up with big common orders for suppliers. This drives higher discounts and benefits for all parties involved. For example, Efficiency East Midlands (EEM) is a consortium of 97 companies in the housing sector that buys goods and services in bulk to generate massive cost savings.
7. Outsource certain procurement functions: Many SMBs have hired consultants or specialized companies that manage all procurement processes, from tendering to invoicing. Outsourcing the procurement function not only allows SMBs to focus on their core strategic activities, but also reduces procurement functional costs overall. Organizations gain high-level procurement talent, the ability to develop strategic partnerships, and access to market knowledge that might help with new product development, inventory, or packaging ideas.
Although SMBs have typically viewed strategic procurement as a priority for larger companies, the time has come for them to understand the benefits of focusing on it in their own companies. Higher cost savings, access to market innovations, and the ability to reach strategic business objectives make the investment in strategic procurement worthwhile.
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