Best Procurement practices

Best Procurement practices

For most distributors and manufacturers, cost of goods sold is the main component of the total cost of sales. Therefore, optimizing purchases through procurement practices is a most. In this article I will explain the differences between procurement and purchasing and highlight the 5 procurement practices that the most successful companies have implemented.

Procurement vs Purchase

Even though these two terms are used indistinctly by many companies, they are two different processes. Procurement relates to strategic definitions for purchases, whereas purchasing is the actual process of buying something from someone based on the procurement practices and definitions. The figure below illustrates this idea pretty well.

Best procurement practices

There are 4 procurement practices that I have found in companies that have managed to implement a stable purchasing operation fully integrated with the operation.

Procurement framework

Before you can begin to address any inefficiency in your procurement process, you need to establish a strong procurement management framework. Take in consideration the following issues.

• Define strategic procurement policies: Your procurement/Purchase policies should focus on optimizing the ROI of your purchases, optimizing the cash flow cycle and must be aligned with your company’s mission.
• Constantly monitor and update your supplier lists: Make sure your existing suppliers information and conditions are updated and keep looking for new and alternative vendors.
• Have simple but robust procurement agreements: Make sure your agreements cover all risks and clearly state the quality required of vendors.
• Define your strategic Procurement KPIs: Evaluate your supplier performance of regularly and make sure they add value to your operation.

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Centralize your purchases

The worst thing you can do when coming to purchasing is have purchases silos. I have seen this mainly in large companies where category buyers report to different departments. This usually results in multiple procurement policies, duplicate purchases, and mixed information.

Focus on the management of the Inventory

Inventory management is one of the key elements to having an optimized distribution operation. Keeping inventory at an optimal level is an essential practice. Planning purchase quantities to minimize product expiration, while delivering on customer expectations, is game of careful balancing. Your inventory should rotate smoothly and regularly, lowering overall risk and unnecessary expenses.

The following indices can help you to check if your inventory is optimized:

• Average inventory rotation
• Rotation of the 20% the best-selling items
• Average out of stock
• Average out of stock of the 20% best-selling items
• Are all purchase orders in sync with inventory levels?

Use the right technology

Technology and automation is a most in any distribution operation and purchasing must be part of the system. However, there are so many companies offering software applications that it is easy to pick the wrong set of solutions. The most commonly mistakes a distribution company make are:

• Select a system that does not adapt to your company. Too many companies select software that they hope will make them more efficient, but end up changing their workflows and processes around the solution purchased.
• Purchase individual systems that cannot be integrated to simplify your overall process. When this happens you find yourself manually entering data output from one system to another.
• Buy a system that does not integrate the purchase and/or does not conform to your procurement policies.

Have a system to manage changing reorder points

In other articles I have written about how a buyer needs changes depending on the time of the year or external events. Most companies base their purchases on fixed max-min values; thus, when peak demands come, they are unprepared, leading to dissatisfied customers and loss of sales.

I hope this article has been helpful to you. I will continue to post information related to warehouse management, distribution practices and trends, and the economy in general. If you are interested in this article or want to learn more about Laceup Solutions, please subscribe to stay updated on future articles.

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