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5 Steps to Creating Vibrant Procurement System

Procurement is a strategic process, not only for day-to-day livelihood, but also for competitive advantage. Supply Chain IQ, a provider of conferences and training courses for the supply chain sector, surveyed procurement professionals in 2010 about the challenges they are facing and the major challenges presented by the economic climate.

The survey revealed three top three concerns: managing supplier relationships, commodity price volatility, and managing shareholder expectations. Meanwhile, the economic climate has brought challenges across the board in terms of the competitive landscape, cost volatility of raw materials, and general volatility. A business process management (BPM) solution that helps procurement managers optimize processes and includes reporting and dashboards of key performance indicators (KPIs) can be a valuable asset in helping companies overcome these challenges.

Take two competing firms — one whose procurement process is more efficient than the industry average and one whose process is less efficient. Everything is the same except the procurement process. Could the procurement process be the strategic, competitive advantage that makes the first company the dominant player? That seems to be the case when you consider examples like Amazon.com, Dell, and Wal-Mart.

Consider these five steps covering the lifecycle of a purchase order (PO) from creation to vendor compensation. The goal is to provide the CFO a framework to drive the requirements and policies for building an effective and automated procurement process.

Create
Traditional procurement systems provide end-users with static forms to interface with back-end systems. Static forms are passive by nature and do not provide the PO creator with information regarding the following steps. Furthermore, the forms do not reflect the PO's financial impact on the business unit or the company in general.

The creating aspect of the procurement process has to do with building intelligent POs. These are dynamic forms that are built as the user enters information into the system and provide immediate feedback on the PO creation process. This feedback reflects policies set by the CFO and financial intelligence. Here are examples of intelligent POs giving their creator information on the product and the approval process without constant consultations with the accounting team or the CFO:

  • As users add products to the PO, the system can provide them information regarding price estimation, reviews, and feedback by other business units and users. This can help users choose more suitable products.
  • A procurement system that is context-aware of employee budgeting requirements can show only products that fit the constraints.
  • Before submitting POs, users can get information regarding similar POs in the system and their statuses. For example, you can see a list of similar POs that were rejected, the reasons for the rejection, and suggestions to get your PO approved.

The advantage of giving users immediate feedback via intelligent POs is leveraging the domain knowledge and expertise of the users to find alternatives that benefit the company. For example, the scientist or the technician creating the PO may know of alternative materials that have the exact same effect but can be purchased at lower prices. Since the procurement process deals with every PO in the organization, leveraging the domain knowledge and expertise of employees submitting POs to purchase more efficiently can have a substantial impact on the bottom line.

Compare
The goal of this aspect of the process is to provide a benchmarking framework that can enrich the PO's content for better decision-making. The system compares the content of the PO with industry pricing and terms. For example, you can compare pricing information across a list of approved vendors and then with the industry average.

The benchmarking framework can be leveraged in the following ways:

  • You can evaluate suppliers' performance against industry rates — for example, the labor rate of a specific job function (e.g., database administrator) in reference to industry standards.
  • The CFO can evaluate the effectiveness of the supplier selection process. Criteria may include certification and customer references. Understanding the prices and terms may help you modify the selection process to include rate ceilings.
  • You can leverage benchmarking data to negotiate better terms and conditions with your suppliers.
  • Benchmarking data can enrich the PO with information to be leveraged in the following steps of the process. For example, providing the “policy engine” and “approvers” with price comparison might allow for better policy enforcement.

Comply
Once the PO is enriched with data from the comparing stage (pricing, terms, user reviews, etc.), a compliance check can be performed before approval. The purpose of this aspect of the procurement process is to create a compliance mechanism with administrative, operational and financial rules.

Administrative rules are usually set by approvers to enforce policies that benefit the strategic goals of the relevant business unit or the company in general (depending on the approval level). An immediate supervisor might put in a rule that prevents employees from submitting POs containing materials unsafe for the work environment. The general manager might put in rules that prevent POs from containing items already available in the company's warehouse or items from certain category of suppliers.

Operational rules are for complying with other systems in the company, like the inventory management system and other aspects of the ERP.

Financial rules are set up by the CFO and the accounting team — budgetary limits, SOX compliance, suppliers exceeding industry average pricing by multiple folds, etc. The challenge for many companies in building a financial compliance mechanism is that most of these policies are either written in text-based documents or are “tribal knowledge” (e.g., a document that describes the travel expense policy for the professional services team). Therefore, companies have to depend on the approvers, the accounting team, and the CFO to enforce such policies manually. In addition, many companies face the challenge of enforcing rules that are situational or cyclical.

Collect approvals
The previous three steps of the procurement process are for creating and enriching the PO with information that helps approvers make more informed decisions. The process of collecting approvals must at least ensure that the following conditions are satisfied.

  • The PO is delivered to the right approvers. An Approvers Committee must be defined with detailed information about each approver (spending limit, geography, purchase category, etc.). BPM can take the Approvers Committee information, build rules out of it, and then route the PO accordingly.
  • Approvers have the right information. The procurement system should provide sufficient information regarding the PO. Having a holistic view of the PO will help approvers make better decisions.
  • The approval process is well coordinated. The system must be able to deal with issues such as having multiple approvers (Approvers Committee), PO escalation, and PO routing.

Compensate suppliers
The goal of this aspect of the process is to allow the CFO to enforce policies on the process of compensating suppliers. The CFO and the accounting team can drive the compensation process by doing the following:

  • Oversee the process of matching POs and invoices.
  • Enforce policies when paying suppliers. For example, a net 10-term may be associated with a certain discount percentage.
  • Enforce a supplier accreditation processes — for example, requiring suppliers to be insured and bonded.
  • Building proper procedures to update the accounting system: accounts payable, forecasts, etc.

The sister document to this whitepaper, “Procurement Solutions for Solution Architects,” explores how BonitaSoft BPM enables matching POs and invoices, dealing with multiple payment option for multiple suppliers, and policy enforcement via Decision Tables. The document includes sections dedicated to BonitaSoft BPM and Dashboards capabilities in providing a holistic view of cash flow and forecasting.

2 comments on “5 Steps to Creating Vibrant Procurement System

  1. Daniel
    March 12, 2012

    “The survey revealed three top three concerns: managing supplier relationships, commodity price volatility, and managing shareholder expectations”

    Miguel, truly these are the main constrains and I think commodity price volatile is a major factor that can disrupt any relation. Once we have entered to any agreement for the supply of components, then most of the vendors are not ready to make any changes in pricing according to the volatile in market. There itself the friction starts because companies need the supply in a lesser price quote and the vendor needs to sell out in maximum profit.

  2. stochastic excursion
    March 13, 2012

    Of the three, managing supplier relationships is the one procurement professionals have the most control over.  Success in this area can go a long way in buffering negative impact from the other two.

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