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Procurement Solutions: What Might Work For You

Procurement, know in the past as 'Purchasing', was once viewed as an unglamorous back-office function. It included negotiations with suppliers, procuring the parts and ensuring they were sent to the manufacturer of the products. Today, procurement's status in the supply chain includes a wide array of requirements, encompassing everything from determining client requirements, to a global sourcing strategy. Here is a look at how technology and its application can help improve your company's growing procurement practice.

by Christopher D. Norek and Donavon Favre

Background

One of the recent significant trends in supply chain management is the upgrade of the traditional purchasing process from its perceived status as routine and a "back office" function to a more strategic and visible area. Particularly, the traditional term of purchasing has been expanded and renamed procurement, which encompasses more than the tactical process of filling out purchase orders. procurement includes determining customer needs, understanding the industry and the entire global supply base, determining a sourcing strategy, selecting suppliers and managing those suppliers over time. This article will cover the technology options to help your company improve its sourcing/procurement process and give executives some advice to consider while making these decisions.

Procurement Solution Functionality

Strategic Sourcing/eRFX/Reverse Auction - used to standardize and automate the sourcing process

Transactional Procurement - used to automate the tactical process of day-to-day orders to suppliers

Data Management - used to manage and analyze procurement data

Transportation Procurement - using automated solutions to select carriers with which to negotiate and then choose the lowest rate for individual shipments

Which of these solutions should you consider?

Strategic Sourcing solutions should be considered for any entity which has a significant amount of spending with outside suppliers (over $50MM total). The spend should also be segmented into categories (i.e., sheet steel, contractor services) and sorted in descending dollars so only the top dollar spend categories are candidates for a strategic sourcing solution (the number of significant categories will go up for firm's with a larger amount of spending). For smaller companies, a hosted solution (software run by the software company, behind their firewall) is less expensive and more manageable. For larger companies with higher usage, the software is typically purchased outright.

Transactional procurement systems are typically used to reduce the time and effort associated with the tactical aspects of procurement, such as requisition and purchase order creation as well as, the approval and payment processes. Companies with 10,000 purchase transactions or more per year should consider transactional procurement solutions. Companies with fewer transactions who don't purchase a solution outright can take advantage of supplier internet sites for business-to-business transactions - for example, ordering office supplies or work gloves directly from a supplier's website using a purchasing card.

Data management and analytics are valuable for medium to large companies with a large number of part numbers and supplier information. They are especially valuable for companies with multiple locations and/or divisions where data is not currently managed centrally. With data standardization, companies can find common suppliers and items across divisions and locations, allowing them to aggregate spend volumes and achieve discounts.

What Executives Should Know and Do

Benefits of Improving Procurement

Procurement has become very popular because most companies can realize savings between 5 and 15% on material and service cost reductions (including price, inventory, and payment terms). Additionally, a focus on procurement results in improved supplier management including measurement, continuous improvement, and supplier relations.Lastly, by using employing procurement automation, your employees can become more efficient and effective with more time available for strategic procurement activities. With millions or even tens of millions of potential savings available, procurement will continue to be an area of increased focus.