4 Procurement Pitfalls to Avoid

When you think about Procurement, what word springs to you mind? Risky? Complex? Procurement is evolving, so it no longer has to be the daunting process it used to be. Done well, Procurement can bring many benefits to your company, so here’s 4 tips on what to avoid:

 

Pushing Suppliers too Hard.

An “old School” procurement practice used to involve grinding suppliers to squeeze every last drop of profit out of the arrangement, even if it meant putting financial pressure on the supplier. This approach often led to an imbalance, where the buyer’s cost projections were based on the assumed ability for the supplier to maintain the current supply levels at the rock-bottom prices.

If the supplier suddenly stopped delivering e.g. in order to supply to someone else, (even your competition), or because they simply lack the resources to maintain the supply ­– The buyer’s company could potentially grind to a halt.

Managing the relationship with your suppliers should be the focus for today’s procurement professionals, especially if the supplier is a SME as there are tangible benefits of working with this type of supplier. So introducing effective approaches that creates beneficial, sustainable relationships throughout your supply chain is something that you should aim at.

 

Sourcing from Vendors Without a Contract

Companies today are only as strong as their weakest link in the supply chain, so it’s imperative that each vendor you work with is able to meet your quality standards in a safe and ethical way. The risks to your finances, as well as your reputation, far outweigh the returns.

Effective due diligence is required to ensure you are selecting qualified vendors while mitigating risk for your enterprise. Monitoring and reporting throughout the life of the business relationship is important as well, as any changes within your vendor’s structure may not appear to be problematic at first, but could lead to increased risk exposure for you and your enterprise.

Another big challenge with using uncontracted vendors is the increased risk of procurement fraud. Procurement fraud is not common, but it is very real. It can also be very costly; one major goal is to make it very risky to undertake.

But fraud is a potential risk for almost any enterprise, business unit, or department. A certain level of trust is placed in every employee to ensure basic continuity of operations and commerce.

According to research from Tungsten, Over a fifth of buyers blamed supplier failure for higher insurance premiums, damaged reputation, loss of customer trust and significant regulatory fines. By conducting adequate due diligence, these issues would not have arisen.

 

A Fear of Technology

A fear of technology may be costing your company a substantial amount of time and money. Take digital invoicing, for example. By switching over to a digital format, you can save money when you calculate the savings in processing, delivery, printing costs, and administration. You can also put a positive PR spin for your company by “going green” and dropping paper invoicing.

An added benefit of choosing a digital delivery for your invoices is they often lead to a faster payment cycle: speeding up your income is something we shouldn’t shy away from. Procurement is evolving, and to ensure your enterprise isn’t left in the dark ages, look at your current functions to determine where technology might be the right decision.

Outdated procurement management systems struggle to stay ahead of the challenges faced by supply chains today. Utilization of the available technology to streamline processes is imperative for further growth.

So if you have not already, procurement teams of all sizes should really consider transitioning from manual, methods of measuring supplier performance and capabilities to digital, automated supplier performance management and risk management solutions.

 

Focusing Only on Price Instead of the Total Cost of Ownership (TCO)

One benefit of strategic sourcing is that it shifts the focus from looking only at the initial purchase price to understanding the total cost of owning or consuming a product or service.

For large spend areas, teams from companies that run procurement well are abandoning the outdated practice of receiving multiple bids and selecting a supplier simply on price. Instead, they consider many other factors that affect the total cost of ownership such as operating costs, training, maintenance, warehousing etc.

The true cost is always more than you think and much more than the vendor will let on. It’s like buying and then reselling a car. If you’re going to sell after five years, the total cost is the price plus five years of maintenance and repairs insurance and running costs minus the expected selling price, and when everything is factored in, a more expensive car that costs more but retains its value might be worth more than a cheap car that loses the majority of its value and costs four times as much to maintain. When you are looking at what your potential suppliers are offering, bear this analogy in mind.

 

Even though there are many more than just 4 pitfalls in procurement, we thought we’d share these with you, as from research these are the ones that seem to appear repeatedly. Being aware of these will hopefully allow you to avoid them in the future.

Post by: Koble
08/31/2017