Procurement performance has a direct impact on a company’s profitability. Procurement is more than just managing the supply chain: it is a strategic activity. It must meet real business and operational goals. Procurement optimisation is thus essential for companies. Why and how is it done? What are the benefits of procurement optimisation? How do you measure its performance? Find out more in this article.
Why optimise procurement?
To understand the benefits that procurement optimisation offers, it is first necessary to examine the role of the procurement department.
What are the 3 goals of procurement?
Procurement aims to fulfil 3 goals:
- Reduce the costs of purchasing goods, thereby increasing the company’s margin;
- Increase the quality of goods purchased from suppliers;
- Keep the company informed of supply chain issues or other incidents.
Procurement thus plays a strategic role within a company. It is responsible for providing the materials needed for production, while at the same time focusing on cutting costs and improving stock management, which makes it a key player in managing the company’s profitability. Procurement is involved in actions at the financial, commercial and strategic levels.
Its responsibilities cover the entire spectrum, from sourcing to stock management. Each stage of procurement has a cost and a risk. The stakes are high. If there is even just one hiccup in the process, the company will pay the price.
For example, a delay in delivery can push back the entire production chain. A defect in a basic component can affect the quality of the finished product. This then impacts the company’s image, with all the repercussions it entails: a drop in profitability, reputation, confidence and turnover.
For this reason, procurement optimisation is a key part of a company’s strategy.
What are the risks of a procurement process that is not optimised?
When procurement processes are not optimised, the procurement department will have trouble doing its job. Problems can come from many places. Here are a few:
- Lack of communication within one department or between several departments, leading to oversights or duplication of work;
- Poor order tracking, resulting in untracked delivery delays;
- Trouble finding documents (invoices, orders, contracts, etc.), causing employees to waste a lot of time;
- Poorly defined supplier selection criteria resulting in products or services that do not meet the company’s requirements;
- Multiple orders placed without any oversight or optimisation, leading to increased purchasing costs;
The consequences of non-optimised procurement are far from negligible in terms of cost, efficiency and production.
For companies, what are the benefits of optimising procurement?
It is in a company’s best interests to invest in optimised procurement management, if only for the following five benefits.
Employees who are aware of the company’s procurement policy are more inclined to ask themselves what they really need. Orders that are placed are thus under control.
Also, intelligent sourcing allows the procurement department to identify new suppliers and put them in competition to get the best possible value for money.
Reduced spending generates savings that give the company real leverage. Just cutting costs results in a much higher gross margin than if turnover had gone up.
Centralising activities using digital procurement tools simplifies interactions and boosts productivity:
- Request management integrated into the ordering and negotiation process;
- Approval of requests compared with the allocated budget;
- Delivery notes linked to purchase orders;
- Supplier evaluations;
- Invoices linked to third-party data;
- Payments automatically managed within the tools.
Procurement optimisation helps mitigate a certain number of risks. It ensures that deliveries are properly monitored and that there are no breaks in the supply chain. It also ensures that suppliers are paid on time, thereby avoiding disputes. Budget overruns or breakdowns in the system can be identified and dealt with quickly.
The procurement department creates value, and lots of it! This is especially true in companies that practise procurement optimisation. It creates an entire ecosystem that serves the company’s interests, whether it is by delivering quality products or services, adopting a CSR strategy or using one of the solutions mentioned above.
How can business procurement be optimised and measured?
Adopting an optimised procurement procedure involves two main steps: implementing the process and monitoring its performance.
How can procurement be optimised?
Procurement optimisation can be broken down into 5 key actions:
- Carrying out a procurement audit to ensure a single frame of reference that measures and collects purchasing;
- Creating categories for spending using the type of purchase and volume to identify potential savings;
- Searching for offers that can reduce costs;
- Centralising requests and automating the procurement process;
- Sharing the strategy to raise awareness among employees.
Optimising procurement is done through accurate tracking of orders, defining a clear procurement policy, implementing efficient stock management, creating a supplier database as well as buying better.
Once the optimisation is in place, it is important to measure its performance in order to adjust the strategy if necessary.
How do you measure a procurement department’s performance?
Setting clear goals for suppliers is the first step. The quality of the goods, the price, and the delivery times must be taken into account in the performance plan.
But procurement also works with every department in the company: the employees, the finance department and management. To solidify the company’s overall strategy, procurement must therefore set KPIs that are aligned with the other departments.
Tools are very helpful in doing this. Dashboards allow users to monitor and measure the procurement department’s performance from start to finish. Here are some key indicators to keep an eye on:
- Number of orders;
- Average cost of purchases;
- Sales margin;
- Supplier compliance;
- Compliance with CSR criteria;
- Number of suppliers per item.
In conclusion, companies can reap many benefits from implementing procurement optimisation within their teams.
For more information, please watch this video on procurement optimisation.