By Rudy Lukez, Director, ERP Product Development, and Larry Simcox, Sr. Director, SCM Cloud, Oracle
Is your procurement process anything like shopping for groceries? If it isn't, would you like it to be?
Think about how different people take different approaches to buying groceries. Some of us make detailed lists, compare products, look for coupons, discounts and sales.
Others shop on a whim, with no advanced planning or budgeting—which is a shame, because food is often the second-highest cost for a household.
Small and medium businesses (SMBs) find themselves in a similar situation when it comes to procurement. The cost of inventory and supplies rank just behind rent and salaries at most SMBs.
And the approaches can be as varied as buying groceries. For some companies, procurement is chaotic, with functional and business units buying the supplies they need without any departmental coordination—and little oversight. Other SMBs try to keep a handle on costs with careful planning, process controls and supplier negotiations, but this can quickly become an administrative burden—especially if your company is growing faster than your staff can keep up.
But with the right systems in place, procurement can create tremendous value for your organization.
To help you implement a truly strategic procurement process, follow our own shopping list—a 5-point checklist for building strategic relationships with your suppliers based on Oracle's Modern Best Practice for Procurement.
Strategic procurement requires companies to identify, document and manage the full lifecycle of purchasing activities. Collectively called smart sourcing, this step involves the up-front work of identifying opportunities by analyzing spending patterns and supplier performance. It sounds burdensome,but technology can be a huge help.
With a centralized cloud solution, you can automate most of the steps in the sourcing process. When you need to solicit bids from various suppliers, the system can automate and track all the steps—from issuing RFQ and RFP documents, to supplier responses, negotiations and awards. It can even automatically compare responses from multiple suppliers, so that you don’t have to comb though reams of spreadsheets comparing terms and pricing. You can be confident that you’re accepting the best bids, from the most appropriate suppliers.
It’s like collecting coupons and making bulk-buy purchases when you shop for groceries. Those “25 cents off” and “get 10 items for the price of 7” deals really add up over the course of a year. When your company has a set of pre-approved suppliers to choose from, the savings will add up quickly.
Your business suppliers are like the brands used in your kitchen. If your kids don’t like the brand of snacks you buy, you will probably switch. And if the 99-cent loaf of bread is always moldy or stale, the $1.29 product from a competitor will be much easier to swallow. Armed with knowledge of other brands, you can easily contact the more expensive brand and ask for coupons to lower the list price.
It’s the same for small to medium business. If you choose suppliers simply because they show up, you might not be getting the best deals, the highest quality, or the right materials. Supplier management is a continuous, closed loop process and cost isn’t the only criterion. When looking at procurement strategically you can drive suppliers to meet other strategic goals related to quality, value, and risk reduction.
Once you’ve established the strategic and policy requirements used to select suppliers, it’s time to translate them into standard terms and conditions from which you can build procurement contracts and ensure spend compliance. Any company that has ever tried to negotiate a contract has felt the pain of multiple rounds of revisions with finance departments, lawyers and executives. Rather than emailing Microsoft Word documents and risking mistakes, you can create and store contract documents in the cloud.
Once the contract is executed, you can monitor contract effectiveness with analysis linked to purchase transactions.
Again, playing off the grocery shopping example, it’s like working off your regular shopping list. When you purchase weekly items at your local supermarket, you’re essentially engaged in an informal contract with your regular brands. If their performance falls short, you stop buying that brand and switch to a new one. Other brands are happy to offer incentives (coupons, bulk buys, specials) to sell their products and, from their perspective, win your loyalty.
The failure of many SMB procurement processes is the difficulty employees have in following them. Reduce this friction by streamlining the requisition process and leveraging automation in the cloud. You can make your employees more efficient by giving them rule-based, self-service tools. With self-service procurement, you can control the entire process—from requisition and purchase order, to receipt and payment.
Think of a child sitting in the shopping cart and asking for a specific brand of cereal (requisition). You approve their request (purchase order). You put the box into your cart (receipt), and finalize the acquisition process at the check-out register (payment). Putting the product in your refrigerator or pantry after you get home is analogous to adjusting your inventory.
A smooth and transparent accounts receivable process—fully connected with your strategic procurement cloud—promotes strong vendor relationships. Even more important for fast-growing SMBs, it helps you manage cash flow, take advantage of early payment discounts, leverage volume buys, and prevent fraud caused by duplicate, inflated or ghost invoicing.
Since cloud data is generated in real time, this step in strategic procurement provides daily updates to monitor purchasing and suppliers. It also lets you schedule payments to coincide with the monthly financial close, manage disputes, and streamline audits.
You leverage coupons, loyalty club memberships, rebates, specials and bulk buys at your supermarket. At the end of the month, you reconcile your bank account with supermarket payments to verify rogue or unauthorized spending. With connected solutions in the cloud, strategic procurement is just as easy and as profitable.
Following lists is easy and prudent. And while deploying a robust, strategic procurement process might be a little more complicated than buying groceries, today’s cloud applications make it much cheaper, simpler—and less stressful—for SMBs than it ever has been before.
Which is why we make lists for grocery shopping. Lists reduce stress, organize our purchases, keep us focused on the best brands for our needs, and drive down our costs. It works every day in our homes—and it will certainly deliver ongoing value to every SMB.