There is a lot of literature and out-of-experience knowledge out there but yet, in daily business life, one encounters a very common misunderstanding of the terms Procurement, Purchasing and Buying. Whilst the first two are mostly B2B undertakings, the latter may be a B2C process as well.
- Procurement must include the importance of strategy preferably at corporate management level. Because procurement is an umbrella term that includes several core business functions it should be considered a core part of any organization’s corporate strategy.
- Purchasing is a subset of procurement. Purchasing generally and simply refers to purchasing goods or services. It may include receiving and payment as well.
- Buying may be considered as a further subset of purchasing, widely recognized as the immediate act of actually acquiring something for the value of money be it in cash, wire transfer or against credit.
“Revenue is generated by sales but profit is made in procurement.”
– Eric Roth
Every company has its own business strategy from which a procurement strategy with its strategic sourcing must be drawn and executed. Here are major points to consider when formulating a solid procurement strategy:
- Supplier Optimization: The company chooses an optimum mix of vendors who can provide the best prices and terms. This process usually means that the less able suppliers who cannot provide a quality service at the terms and prices required are discarded.
- TQM: Total Quality Methods, requires the vendors to provide an ever increasing quality service with zero errors. The supplier ensures purchasing best practices using a number of tools such as KAIZEN or Six Sigma.
- Risk Management: As more companies obtain their supplies from so-called LCCs, they are more concerned with the risk management of this supply chain. Whilst these countries can supply products at very advantageous prices, these advantages can be soon negated by a natural or human disaster.
- Global Sourcing: Large multinational companies see the world as one large market and source from many vendors, regardless of their country of origin. Beware: Supply and demand may switch and a today’s supplier market may very well become a consumer market tomorrow and prices rise. Therefore, predict and follow the emerging supplier markets and always go as close to the source (raw materials, manufacturer) as possible.
- Vendor Development: Some companies believe that they are working hand-in-hand with their vendors. They therefore spend some time in developing processes that assist these vendors. There may also be the situation where a company is dependent upon just one supplier for their products. If this supplier is unable to perform to the required standards, the purchaser may assist the vendor in improving their service or implement processes to improve their procurement cycle.
- Green Purchasing: This is one of the more common purchasing strategies for larger corporations and governments. This strategy champions the need for recycling and purchasing products that have a negative impact on the environment.
Speaking of strategy: You may have encountered problems with your vendors not really cooperating. At the bottom of this page, you will find a 5-point strategy to supplier cooperation. It has helped rather big international corporations, it has helped me throughout the years and I hope, it helps you too!
“Do procure at favourable price but do not procure at cheap, low price.”
– Eric Roth
Once a procurement strategy is concluded and set in place, there is need to come up with some procurement guidelines mostly but not necessarily only for internal use. Procurement guidelines contain policy, process and measures as major points.
At the bottom of this page, you find a sample of a procurement policy.
Read more ( → click to expand )
Payment- & Delivery Terms
Within delivery terms, the delivery time might be an issue. As lead time and delivery time get confused as often as procurement and purchasing (see above), let me emphasize here that there is a big difference between those two. At the bottom of this page, you will find a graphic showing this difference. In addition, you will the most common payment- and delivery terms too. Highly advised: Stick to one of the Incoterms (current issue) and think outside the box: There is more and more intercontinental dispatch by train (as opposed to sea shipments) available.
Certifications / Quality
Lots of things need to be certified nowadays. When procuring, make sure a) the certifying body, the issuer of the certificate, is possibly certified too, b) you see the original and obtain a copy of the claimed certificate and c) you understand that vendor and its manufactured products possibly carry seperate certificates. At the bottom of this page, you will find a link collection to widely demanded certifiication where you can find further detail information.
Quality is as important as price and availability. I suggest, you perform not anly announced inspections at your vendor’s facilities but also random inspections at their production lines and your ordered goods, its packaging and if possible supervise the loading. Consider quality checks according AQL and report on it internally as well as towards the supplier.
At the bottom of this page, you find a sample of a procurement process.
At the bottom of this page, you will find a description of two major procurement measures. Naturally, there are more to consider but included is a workable (*.xlsx format) sample of vendor KPI scorecard with a traffic light rating system.
For those of you who could not enjoy the luxury of working with a state-of-the-art ERP system software but still want to reach higher than the next-door average business, the following set of documents may initially help you out.