Are you interested in optimizing your purchases? This article will help you analyze your planning and sourcing activities with the aim of identifying possible inefficiencies in your procurement process.
Why it's important for your business
Purchases from external vendors can represent a large category of spending for your company. The Business Development Bank of Canada estimates that small businesses spend between 45 and 65 percent of their sales revenue on procurement of raw materials or services. Therefore, it is important that you put as much effort into your procurement operations as you do into other business functions like marketing or sales. Analyzing your procurement processes and procedures, such as how you plan purchases and source from suppliers, can help you identify inefficiencies and reduce the cost of future purchases.
Efficient and effective planning and sourcing activities will help you:
- Increase transparency and accountability
- Get the best value with your purchasing funds
- Better plan, monitor and control your purchases
- Avoid unwanted or unnecessary purchases
Where do you stand?
The following questions can help you with your own assessment:
- How are procurement needs identification done?
- Do you have a procurement plan?
- Who is the person responsible for purchasing?
- How are purchasing requests made and approved?
- How do you qualify and identify new suppliers?
- Do you conduct supplier market research on regular basis?
- Who decides on the sourcing method to be used for a purchase, and how is the decision made?
- Who defines purchases’ evaluation criteria and how?
- Who is responsible for and involved in the supplier selection process?
- Who negotiates with suppliers?
For example, you may find out that your company does not have a procurement planning system in place, that too many employees are involved in the sourcing process, or that internal procedures are not well defined or understood by your staff.
Step by step diagnostic
Let's have now a closer look at the purchasing or procurement cycle steps depicted in the above diagram. This will help you be more precise with your own analysis.
- Step 1: Identify procurement needs [what and when]
- Step 2: Conduct supplier market research [from whom and at what cost]
- Step 3: Determine the procurement method [how]
- Step 4: Create the bidding documents
- Step 5: Conduct the request for bids/solicitations
- Step 6: Select, negotiate and award the contract
- Step 7: Monitor project execution
- Step 8: Accept and verify deliverables
- Step 9: Make final payment and close contract
Let’s focus on analyzing the planning and sourcing activities (Step 1 to Step 6).
Your purchasing department should perform a procurement needs assessment and develop a procurement plan at least once a year.
The following are the key activities to plan procurements:
- Determine what goods, works and services need to be purchased
- Determine when goods, works, and services need to be purchased
- Start preparing your procurement plan
Supplier market research is an important activity that you need to conduct on a regular basis. Both your purchasing department and individuals requesting the purchases need to conduct supplier market research, especially when the needed items are non-standard. Supplier market research helps you with:
- Defining the requirements of your purchases
- Identifying and assessing potential suppliers and their market saturation
- Estimating the costs of your future purchases
Determine the procurement method for the purchase of each category of goods, works and services. The table below explains the three most commonly used procurement methods that you may want to consider, including advice about when to use them:
Main advantages:- Promote competiton, transparency and accountability
- Maximize the possibilities of getting the best value for money in your purchases, as you have a greater choice of suppliers
Main advantages:- Non-bureaucratic process that usually takes less time to process and involves less paperwork than a competitive method
Request for Proposal (RFP)
Request for Quotation (RFQ)
Sole-sourcing or direct-sourcing
Definition: includes an invitation to potential suppliers to bid, followed by an evaluation process and a contract award. In some cases, there is an invitation to express interest to shortlist potential suppliers before the RFP is issued.
Definition: simplified bidding process used to solicit the price of standard goods or services from external suppliers. An RFQ may involve not only the price per item, but additional information such as the delivery method and date, or the warranty.
Definition: limited process of soliciting from and negotiating with only one supplier. If you use this method you will not go through Steps 4 and 5 of the sourcing process.
| || || |
Create the bidding documents according to the procurement method chosen. Usually the bidding documents will be prepared by the purchasing department together with the units requesting the purchase, depending on how complex the purchase is.
Publicize the request for bids, according to the bid publication method chosen. Your purchasing department should conduct the request for bids. You should aim to receive a minimum of three offers before taking any final purchasing decision.
Choose the supplier that offers best value for your business, according to the established evaluation criteria. Often, offer selection is conducted by at least two people: a procurement specialist (a person from the purchasing department) and a person from the department requiring the purchase. Depending on the importance of the purchase, management may also get involved.
Conduct the purchase
A Purchase Order (PO) is a purchasing document that your purchasing department sends to a supplier to confirm the order of a product or service, in a determined quantity and agreed price. Once the seller accepts the PO, it becomes a binding contract agreement between your company and the supplier. A PO is also used to better plan and control your purchasing expenses, and it can be used as a substitute of a contract between you and a supplier, depending on the type of purchase.
Putting it all together
When defining your procurement planning and sourcing activities, you should make sure to:
- Plan for purchases.
- Conduct market research frequently.
- Use an RFP when purchases are critical or high risk to your business,
- Compare at least three offers from different suppliers before making a purchasing decision.
- Train your staff on your company’s procurement procedures.
- Provide training to people responsible for procurement on procurement methods, evaluation methods, market research, and negotiation techniques with suppliers.
For a more detailed explanation of procurement planning and sourcing activities, please refer to this document.
Copyright © 2000 - 2017, International Finance Corporation. All Rights Reserved.
2121 Pennsylvania Avenue, N.W., Washington, D.C. 20433, www.ifc.org
The material in this work is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. IFC does not guarantee the accuracy, reliability or completeness of the content included in this work, or for the conclusions or judgments described herein, and accepts no responsibility or liability for any omissions or errors (including, without limitation, typographical errors and technical errors) in the content whatsoever or for reliance thereon.