Category: Procurement

Procurement

6 Key Procurement Challenges and How to Overcome Them

Many businesses have procurement processes down to a fine art. However, there are procurement challenges that can affect even the most efficient procurement department. 

Procurement professionals are nearly always trained and skilled negotiators however, procurement processes differ significantly. We’ve taken a look at the 6 key procurement challenges and how to resolve them.

Procurement Challenges

1. Risk Mitigation

Whether it’s supplier relationships or general supply risk that procurement departments need to contend with, there’s always an issue of how to mitigate this to maintain business functionality. Risks such as fraud, bad product/service quality or delivery issues, to name a few, can be some of the challenges that need to be mitigated by efficient procurement strategies and processes.

2. Dark Purchasing (Also Called Non-PO Spend)

You may not recognise the phrase, but you’ll certainly have seen the consequences. This type of spend can often lead to unintentional challenges causing issues within a procurement function.

Dark Purchasing is purchasing which is usually made outside of a standard procurement function and process. Things such as ad-hoc travel spending, entertainment, small value general office supplies, etc can be classed as “maverick” or non-purchase-order spend. This type of spend can often erode the efforts a procurement team is making to manage overall spend leading to surprises and profit margin erosion. 

Uncontrolled spending ideally needs to be managed as soon as the issue arises. having a clear, company-wide plan to limit the budget and have full visibility of all ad-hoc spending should help to resolve these issues.

3. Lack Of Transparency

The benefits of individuals with strong skill sets and extensive experience can sometimes be offset by the issue of having multiple pieces of information stored in different places. Staff members, through no fault of their own, may have different spreadsheets, full of data that isn’t readily available to all team members. This lack of data access, which can become worse as a team grows, can make it difficult to quickly find information. Reduced visibility can lead to over-reliance on individuals and subsequently poor quality negotiation preparation.

Errors due to a lack of transparency and too much data stored in various places can result in costs to business deals, suppliers and clients. This is something which can be mitigated by having a centralised data repository, which all procurement team members should be able to have access to.

4. Inaccurate Data

Inaccurate data often goes hand in hand with a lack of transparency and data governance issues. This inaccurate data can have severe impacts on the function of a procurement department. Inaccurate data causes multiple issues impacting profitability, supplier governance and corporate risk.

5. Failure To Adopt Technology

As many of the manual data entry tasks within a procurement department are completed by employees, this can understandably lead to human error. Failure to implement systems which can assist team members with data entry or tasks which can be automated can have a severely negative impact on a procurement team. The SaaS market is now full of applications targeted at sourcing/procurement/purchasing functions. To navigate this minefield, you may need to engage a specialist consultant.

6. Supplier Relationship Management (SRM)

One of the key roles of a procurement function is supplier relationship and performance management. For an organisation’s top 20 suppliers, there will often be an SRM programme in place. These SRM programmes are complex and require dedicated resources to design and set-up the programmes for success.

How To Overcome These Procurement Challenges

Plan For Uncertainty and Manage Risk

In times of economic uncertainty, procurement needs to have the contractual rights to flex up and down supply/costs rapidly. The risk of supplier failure increases in times of economic uncertainty making it ever more important to be able to assess and manage risk.

Diversify Your Suppliers

The old saying “don’t put your eggs into one basket” is very accurate in this instance. Relying on just one favourable supplier is tempting if there is a great relationship and high quality supply. However, there are many issues which could unexpectedly affect your main supplier, which would leave a business exposed. Having a good relationship with different suppliers who can supply similar products is often a little more work for the team, but is very worthwhile.

Locally Source Products

Supply issues are common with out-of-country product supply. Looking into sourcing these products locally, if possible, is a great way of avoiding the issues that can occur when transporting products across borders involving complex supply chains. This method may also allow a business to have an edge over its competitors if the supply of products is in short supply.

Embrace Digitization

Embrace the many opportunities presented to procurement teams through the adoption of SaaS based technologies. Making use of digitization can help a business utilise their team much more efficiently and take away much of the human error which can sometimes happen.

Conclusions

Recognise that procurement faces a number of challenges in managing complex supply chains (products and services) in times of uncertainty. Seek regular feedback from your procurement team to gain insights into supply challenges and technology opportunities. Invest in areas that enable procurement to more effectively manage risk and improve your business outcomes.

For more support and advice to streamline your procurement process, read our expert blogs.

Procurement

What’s the difference between Direct and Indirect Procurement? Why should you care as a sales person?

As a seller, it’s important to know your “procurement onions”! One of the key things to understand is the difference between Direct and Indirect Procurement people. The headline is:

  • Direct Procurement: They buy everything that their customers use/consume. For example, fruit if you’re a retailer
  • Indirect Procurement: They buy all the stuff that their customers don’t use/consume. For example, marketing services, IT, buildings’ infrastructure, etc.

“McKinsey calculates that globally, indirect spend is growing around 7% per year”. When indirect procurement costs rise, net margins fall. Historically, when the going gets tough, direct procurement are very good/creative at lowering direct costs. However, indirect procurement is often the poor cousin. It typically suffers from under-investment in people and technology.

This guide to Direct vs Indirect Procurement is intended to help you and your team to understand the intricacies and differences between them. You need to know this because:

  • Your preparation for negotiating with procurement needs to include an understanding of their role.
  • If you’re negotiating with an indirect procurement person, and they’ve just moved from direct procurement, they’ll be formidable negotiators.
  • To build empathy, understand who you’re dealing with.

What Is Direct Procurement?

Direct procurement involves spending on goods, services, and materials. This is the stuff that their customers use/consume. They’re at the heart of driving performance, profit and competitive advantage. Companies often regard this type of spending as critical as every $ saved is a $ to the bottom line. And if you’re a big retailer, that’s a LOT of $s!

Examples Of Direct Procurement: 

  • Machinery – Things such as picking and packing machinery, machines to convert raw materials into finished goods, and trucks to deliver items.
  • Raw Materials – Products that will be used to create a final product that the business can sell. For example, things such as raw meat, vegetables, steel, oil, etc. 
  • Subcontracted Labour – If the workforce isn’t large enough to complete a specific job (often seasonal), companies subcontractors/temp-labour. They can also be necessary where specialist skills are required.
  • Products For Resale – Even products which haven’t been manufactured by a business, but are bought for resale, are classed as direct spend procurement.

Why Direct Spend Procurement Is Important

The importance of Direct Spend Procurement doesn’t just start and end with the amount of money that is spent on specific goods and services. 

This type of spending is critical as it usually involves goods that will eventually make their way to a customer. Spending money on high quality goods and materials is obviously vital when dealing with an end customer. Utilising direct spend on these high quality goods and services is essential when trying to build a brand. Making significant cost savings within direct spend procurement isn’t always the objective. Cost cutting initiatives need to also ensure that goods and service quality levels are maintained. 

What Is Indirect Procurement?

While it’s true that the majority of a business’ spending is usually direct procurement, indirect procurement has a key role to play.

Indirect Procurement includes things such as marketing, IT, buildings infrastructure, insurances, recruitment, etc. Items within an indirect spend category are equally as important as those within a direct spend, as they keep the business running day-to-day and support growth.

Examples Of Indirect Procurement: 

  • IT Support – Vital to the running of the business and supporting growth. Deep, specialist, technical knowledge is required to negotiate these types of contracts.
  • Insurance – Often overlooked as an important category – but when you need it, critical to business survival.
  • Office Supplies – Again, this contributes to the day to day running of a business. Clearly isn’t classed as essential when it comes to producing a product for an end user.

Why Indirect Spend Procurement Is Important

Although indirect spending can sometimes seem like an expense that businesses should try to minimise, it’s essential to surviving and thriving. 

Reducing indirect spending too much can affect not only the running of the business but can also affect staff morale and standard of the working environment. Remember that the end customer isn’t the only person that should be considered when trying to manage both direct and indirect spend. 

Why does all this matter to you as a seller?

Because, if you’re dealing with big, enterprise companies, you’re bound to meet procurement at some point. Don’t bury your head in the sand and don’t avoid them. Understand their objectives and roles in order to negotiate better deals with them.

As an ex-procurement director, here’s a simple tip: Stop selling and start negotiating when you meet procurement!

How to prepare in advance of meeting them

Whether you’re meeting direct or indirect procurement, here are some tips to get the most out of your meeting/negotiation:

  • Look at their LinkedIn profile. How long have they been in procurement? What kinds of goods/services have they bought?
  • Plan your negotiation strategy thoroughly. They’ll have done their homework.
  • Hone your negotiation skills
  • Have a strong BATNA
  • Start out with the intention to “grow the size of pie”, not simply carving up a “fixed pie”

Conclusions

Hopefully this guide has highlighted:

  • The differences between direct and indirect procurement
  • Why it matters to you as a seller
  • How to prepare before meeting them

Read our other guides for more support and ways to engage with procurement.

Negotiating with Procurement, Procurement

The sellers’ guide to the procurement process

Engaging with procurement can be daunting, even for the most seasoned sales professionals. It can often feel like you’re having to re-sell to procurement, but that’s rarely the case. Once you engage with procurement around a meaningful discussion, you’ve typically been short-listed as the (or one of two) preferred vendors subject to negotiations and contracts. However, unless you understand their processes, systems and objectives, your likelihood of success is low.

Procurement teams in large organisations are trained negotiators, with tools and methods that can be intimidating. The first step to successfully navigating this territory is to take some time to understand the procurement process. Remember, the process is there to drive efficiency, consistency and auditability. Once you know the framework, you’ll be in a stronger position to ensure that not only are you in the final two, you’re blowing the other party out of the water. 

Procurement Process

In this article, we’ll cover:

  • What stages are typically included in a procurement process?
  • The difference between public and private sector procurement.
  • How to ensure you get beyond the final two or three after an RFP.
  • How to protect your profit margins.

You might also enjoy: The Ultimate Guide to Negotiating with Procurement and What Does a Procurement Professional Do? 

What is a procurement process and why is it important to sales professionals?

Just like sales teams have a sales process, procurement people have procurement processes (yes, more than one). 

As a theme, procurement people tend to be data-driven, rational and process-oriented. They like spreadsheets, processes, assessment criteria, scoring mechanisms, risk management and frameworks. So it follows that they’d have a well-documented process in order to help them source vendors cost-effectively and efficiently.

(Find out more about the psychology of procurement professionals in this post about who they are and how they operate).

Tip: Often, large organisations will publish their procurement policies so you can see the steps to become an approved vendor. 

Examples of procurement processes:

  1. Source-to-Pay (S2P)

This is an end-to-end process, typically used by large companies, that covers sourcing, negotiating, contracting, purchase orders and paying for goods/services. Procurement teams can use S2P software to drive efficiency using advanced tech and big data, e.g. Basware, Ariba, Coupa

  1. The Seven-Step Strategic Sourcing Process

This is likely the process you’ll be involved with most often as a sales professional:

  • Step 1 – Identify Goods or Services Needed.
  • Step 2 – Consider a List of Suppliers.
  • Step 3 – Negotiate Contract Terms with Selected Supplier. 
  • Step 4 – Finalise the Purchase Order. 
  • Step 5 – Receive Invoice and Process Payment.
  • Step 6 – Delivery and Audit of the Order.

Source: A T Kearney

3. Savings Delivery Process

Just like sales teams have a sales pipeline, procurement teams have a savings pipeline. This is where they’ll track all the possible savings opportunities that they have identified, and where each opportunity is in the pipeline. 

As part of this process, they’ll be analysing spend, reviewing who they’re spending money with, how often, and why.

Tip: If you’ve been identified as a key supplier with significant spend, and your contract hasn’t been tendered or renegotiated for three years, you’ll likely be in the cross-hairs of procurement.

Our advice? Be proactive and engage with procurement ahead of the end of your contract term or notice period (typically 6 months ahead). Think about new commercial models that deliver savings and improvements in quality/efficiency and negotiate a renewal that works for both parties. 

Without this intervention, you may be pushed into an RFP process or simply issued with a termination notice.

How does the procurement process differ between private and public sectors? 

The procurement process for public and private sectors is broadly the same — but there are differences in how they are funded and regulated.

Private Sector Procurement

Procurement serves a strategic purpose in the private sector, with goals including:

  • Improving profitability
  • Driving supplier innovation
  • Improving output quality
  • Focusing on ESG/D&I
  • Managing risk and improving auditability
  • Improving flexibility/agility

Procurement teams support the business to improve processes, focus on cost-quality management and identifying new/innovative sources of supply. Some businesses opt to have their Chief Procurement Officer (CPO) on the executive board, which underlines procurement’s strategic significance.

Public Sector Procurement

In the public sector, there are no shareholders’ dividends to pay out or publicly declared profit/loss announcements to make. However, spending is under significant scrutiny, due to the obligation to deliver social and economic benefits to the wider public. As a result, the procurement process has to be managed differently and is far more transparent than private sector procurement. 

There are clear principles about the way in which procurement award contracts including:

  • Transparency
  • Strong governance
  • The Most Economically Advantageous Tender (MEAT)
  • Accountability
  • Impartiality/objectivity

Post-Brexit in the UK, Public Sector Procurement is going through a significant review process.

What’s the difference between indirect and direct procurement? 

  • Direct procurement refers to purchasing any part of a product/service that is purchased or consumed by the end-customer. These costs sit between Sales and Gross Profit in the P&L (often called Cost of Goods Sold). For example, bricks for a house, fabric for garments, ingredients for recipes, promotional items/rewards. Direct materials are easy to identify, measure, and are directly linked to the cost of production/sale.
  • Indirect procurement involves purchasing anything — goods and services — that isn’t for resale (GNFR). These purchases are necessary to support the business’ day-to-day operations. Examples here include marketing services, office supplies, IT equipment, etc.

One of the big differences between buying goods and services is quality control and delivery. It’s much easier to audit the integrity of a supply chain with physical goods.

In services procurement, there needs to be a multilayered QA process, often involving answering these questions:

  • Have all the services been delivered? (Cross-check with SoW)
  • Were the outputs delivered on time?
  • Were the outputs to the agreed quality?

Procurement Process Flow 

There are two types of big-picture procurement processes typically:

  • Source to contract (more strategic): This is where procurement (or sourcers as they’re often called) work with the business to appoint suppliers (existing or new) to deliver against targets.
  • Procure to pay (more tactical): This is where procurement manages the flow of requisitions through to supplier payment. A lot of this is often embedded in systems and automated workflows.
Source: McKinsey

The buying stages of procurement 

Back in 2001, A T Kearney developed the seven-step sourcing model. To this day, procurement people still refer to it as their model for Source-to-Contract processes.

When do procurement use RFPs?

You’ll generally find that stakeholders in bigger brands (e.g. £300m+ revenues) will engage the procurement category lead when the budget is material: e.g. 100k+ per annum to run a formal tendering process. There are a number of reasons for this:

  • The increasing need for strong governance: i.e. an objective and controlled way of selecting and managing suppliers.
  • The adoption of a rigorous process, with an audit trail to ensure money is being spent wisely and professionally. This is especially important for PLCs, public sector bodies and charities.
  • Because sourcing, negotiation and savings delivery are specialist disciplines (just like marketing, IT and HR are for example).

RFPs are a procurement tool that encompasses a process and a template. It’s a way of enabling procurement to consolidate all the client’s requirements and specifications into one document and run a consistent and, hopefully, fair process. The RFP document is distributed to several potential suppliers and a rigorous process is run to get from longlisted providers to the final selected supplier via a negotiation.

Tip: Before you fill in any RFP, you must score your likelihood of winning. This can save hundreds of person-hours (literally) writing tender submissions. Score your RFP here with our handy tool.

Reminder: procurement’s typical objectives 

  • Increase savings. There are very specific definitions of savings from a procurement and finance perspective.
  • Maximise ROI for the business. They need to get the best outcome at the optimal price.
  • Supply chain innovation is key to driving profitable growth.
  • Quality and reliability of product/service delivery is critical.
  • Supply chain diversity, inclusion and ESG are all now key priorities for procurement.
  • Reduce risks, increase flexibility and improve auditability. Note: risk comes in many different forms, e.g. reputational, operational, financial, etc.

Actions to take to make the shortlist (or keep your contract)

  • Check an organisation’s procurement policies 
  • Take time to understand procurements’ needs and goals
  • Prepare thoroughly. 80% of your success will depend on your preparation
  • Align your services to procurement goals
  • Proactively engage procurement before the end of your contract
  • Score your likelihood of winning an RFP 

Beyond the shortlist

So you’ve made the shortlist. Hooray! But now is where the real negotiation begins… prepare by reading our Ultimate Guide to Negotiating with Procurement.

About the Author: Mike Lander

Mike Lander is a successful entrepreneur and expert negotiator, with a proven track record of buying, growing, and selling businesses for seven-figure sums.

He has a uniquely valuable perspective on negotiating commercial deals, having worked on both sides of the table as a Procurement Director and an entrepreneur.

He now uses his specialist knowledge and experience negotiating hundreds of deals worth £400m+ to empower leaders and sales teams to negotiate more profitable deals with procurement.

Mike Lander

Download our FREE guide to negotiating with procurement professionals

Procurement

What does a procurement professional do?

What does a procurement professional do

In a nutshell, the primary role of a procurement professional is to purchase goods and services for their business in a way that creates the most value at the lowest risk. This involves establishing the needs of the organisation, understanding the supply market, running RFPs, sourcing and vetting providers, negotiating contracts and pricing and measuring/reviewing KPIs during delivery.

So, now you know — broadly — what they do, you need to understand the typical traits of people who do this job and what motivates them. Whether you’re considering a career in procurement, or want to know more about the procurement process as a seller, this article will tell you everything you need to know about the process from a procurement perspective.

By the end of this article, you’ll have a deeper understanding of the skills and traits required to be a procurement buyer, the role and responsibilities, as well as the role of procurement during a typical sales process.

Here at Piscari, we have extensive experience in both buying and selling, across a wide range of enterprise companies. We’ve refined these insights over hundreds of deals negotiated worth over £400m, with experience on both sides of the table.

Who Are Procurement Professionals? 

Procurement is a department, just like finance, sales or marketing. Inside procurement departments, there are different roles that require different skills and experience. 

Here are some of the common roles in a procurement department:

  • CPO: Chief Procurement Officer. This is the head of the department, and often reports to the CFO, COO or occasionally the CEO
  • Category Leads: These people run big categories of spend, for example, IT, Marketing, HR, etc
  • Sourcing Specialists/Buyers: They often focus on categories and sub-categories where they have specialist market knowledge. These are the people that analyse spend data, build requirements and specifications, run RFPs and negotiate with suppliers.  
  • Contract Administration (usually only found in very large organisations): They ensure that all contracts are loaded onto the supplier management system, manage the renewals calendar and administer contract variations.
  • Procurement Administration: Often look after purchase orders, matching issues and supplier queries.

You’ll also often hear the following terms used interchangeably: procurement professional, buyer, strategic sourcing, category lead. Although there are distinct differences (see above), every business is different and will have its own set of specific duties for each role. 

Responsibilities of Procurement Buyers

The buying role differs from industry to industry but usually includes:

  • Reviewing the quality, reliability and spend-trends of existing suppliers
  • Making recommendations and decisions on new product/service suppliers
  • Business needs analysis
  • Stakeholder management
  • Market monitoring, testing and insights
  • Category planning
  • SLA reviews
  • Ad-hoc RFPs and tendering
  • Sourcing suppliers
  • Negotiating with suppliers
  • Contract negotiation
  • Managing supplier relationships
  • Building and managing the cost-savings’ pipeline
  • Proposing savings ideas to finance and budget holders
  • Savings delivery and reporting
  • Attendance at industry events

The Two Types of Procurement Professional

There are, broadly speaking, two types of procurement professional:

  • Those that focus on direct goods and services. They buy everything between Revenue and Gross Profit on the P&L. They almost always have deep category expertise. And they have a direct impact on profitability, so tend to be extremely well-trained and savvy negotiators. Every penny counts, after all. For example, in a retailer, they’d be buying fruit, vegetables, meat, etc
  • Those that focus on indirect goods and services (also called Goods Not For Resale or GNFR). They buy everything between Gross Profit and Net Profit on the P&L. They tend to be spread quite thin across multiple categories (unless it’s a global corporate), so they may not have in-depth category expertise. For example, categories typically include IT, Marketing, Professional Services, etc.

Although there are no generic traits for procurement people, there are some themes. They tend to be rationalists, very analytical and almost always highly trained negotiators. They are tough-minded and come across as emotionally detached.

The Priorities of a Procurement Professional

Deloitte’s Global 2021 Chief Procurement Officer Survey is conducted annually to understand the needs and priorities of procurement functions. The ranking of the priorities below changes, but the patterns are always very similar:

  • Savings/cost-reduction/operational-efficiency
  • Innovation
  • Risk management and governance
  • Sustainability, diversity, inclusion
  • Digital transformation/enablement including data analytics
  • Supplier collaboration, partnering and supply chain integration

What is a Procurement Process?

Just like sales have a sales process, procurement have procurement processes (yes, more than one!). 

As a general rule, procurement people tend to be data-driven, rational and process-oriented. They tend to like spreadsheets, processes, assessment criteria and scoring mechanisms.

Although there are many sales processes we could mention, we’ll stick to the major ones:

  • Source-to-Pay (S2P). This is the key, big-picture process, that defines the major activities undertaken by a procurement department, typically in a big company. This process involves everything from broad requirements definition and stakeholder engagement, running RFPs, supplier selection and negotiations to contracting, purchase orders (PO), invoicing, goods and services receipt-matching and payment.
  • The 7-Step-Strategic-Sourcing-Process. This describes how procurement (sourcing professionals) review the performance and spending of their existing supply base, document specifications, decide on the best way of getting the right suppliers in place, conduct the supplier selection and negotiation process, prepare supplier transition and onboarding plans and measure performance.
  • Savings-Delivery-Process. Just like sales have a sales pipeline, procurement has a savings’ pipeline. This is the golden source of all the savings opportunities that procurement has identified, and where each savings opportunity is in the pipeline. Spend analysis is linked to this process — this is where procurement reviews who they spend money with, how much and how often. A book that we’d recommend on this is Spend Analysis by Pandit and Marmanis.

The Future of Procurement 

The procurement process has been undergoing a period of transformation over the last 10 years — there is pressure now to leverage technology to make the process more strategic and user-centric. 

Gartner’s Top Trends for the Future of IT Procurement predicted that, by 2021, 55% of technology procurement staff will require additional business, digital, and analytical skills to realise business innovation and growth.

In the past, tech procurement leaders were focused on minimising costs and mitigating risks. But with the rise of cloud services and the digitisation of business, the procurement professional’s job description has expanded somewhat, to include generating revenue, driving innovation and retaining customers.

In Conclusion

Procurement professionals are strong negotiators: analytical and more rational than emotional. A successful procurement professional is business-minded, data-driven and process-oriented. They are focused on:

  • Increasing savings. There are very specific definitions of savings from a procurement and finance perspective.
  • Maximising ROI. They are tasked with getting the best outcome at the optimal price.
  • Environment, social and governance (ESG): Ensuring the buying organisation is acting responsibly and inclusively.
  • Supply chain innovation. Identifying high quality, innovative supply chain partners
  • Quality. They need to ensure the supply base can deliver the quality and reliability of service required by the business.
  • Mitigating risks. Reputational, operational, financial, etc.

Are there any other key traits or responsibilities of procurement professionals you’d include here? Let us know in the comments 👇

Are you a seller looking for tips on engaging with procurement professionals? Then you might enjoy this guide on selling to procurement. 

About the Author: Mike Lander

Mike Lander is a successful entrepreneur and expert negotiator, with a proven track record of buying, growing, and selling businesses for seven-figure sums.

He has a uniquely valuable perspective on negotiating commercial deals, having worked on both sides of the table as a Procurement Director and an entrepreneur.

He now uses his specialist knowledge and experience negotiating hundreds of deals worth £400m+ to empower leaders and sales teams to negotiate more profitable deals with procurement.

Mike Lander

Download our FREE guide to negotiating with procurement professionals