“An effective inventory management process includes the sharing of inventory data between buyers and suppliers. Procurement Managers use the total cost method when purchasing and inventory analysts anticipate and understand demand trends (collaborate with Marketing to understand customer purchasing behavior and trends) and share this information with suppliers.”
Many clients bring me in to audit their expenses and identify inefficiencies in their procurement and Accounts Payable processes. Generally, a procurement process involves the following factors:
- Current business need to purchase raw materials and supplies
- Vendor research and price comparison, including the development of a quality plan
- Approving the vendor and authorizing the purchase
- Purchasing the needed items
- Receiving an invoice
- Delivery of goods
- Inspection of goods before using (random sampling)
- Paying the supplier after quality, delivery and contract agreements have been met
From my experience, errors and waste start to creep up during the Sourcing stage as many Procurement Managers are focused on price per unit instead of the total cost. This is never the best course of action because these vendors will have to recover their costs by lowering quality, not delivering on time, et cetera. It is imperative that when conducting a procurement process audit you use random sampling to analyze purchase orders, invoices and contract agreements to ensure quantity, item description, prices, discounts and any other relative information matches. Sometimes a third party may be liable for the payment of the purchase and it was paid by the company instead which results in an unnecessary expense.
In addition, the company may have entered into a contract agreement with a freight carrier that states a guaranteed delivery, if this is not being met then the company is not liable to remit any payment.
In regards to vendors, it is also imperative that you familiarize yourself with the company’s internal controls for approved vendors. You should audit their vendor profile database in their accounting software to ensure they are legitimate and compare addresses with employee addresses to detect fraud. You should also ensure early pay discounts are being taken advantage of and that the correct discount is being applied.
It is also important to actually view the process in action and write notes about what you see. You should also speak with the employees who actually performing the activities in the process to truly understand bottlenecks and pains. After you gather this information, you should collaborate with them to create a process map to further detect inefficiencies and improve the process.
Further reading on reducing procurement costs:
Happy Friday! Hope you all had an amazing week!
Today, I want to discuss the 12 most important factors you should consider when choosing a supplier. These are important because they ensure supplier selection success and help you realize quality opportunities. Without further ado, please read below for the top 12 factors to consider when choosing a supplier, and as always, remember, “Success is continuous improvement.”
- Type of product (new tech vs mature product)
- Quality Assurance (certifications, audit processes)
- Delivery Capability
- Lead times
- Financial stability
- Length of time in business
- Relationship strength
- *Of course, you can always add to the list based on your business requirements*
To elaborate further on previous article, “Price focused Sourcing is bad for Business”, I have created a list of procurement hacks for realizing savings.
1) Audit invoices and purchase orders to identify unapproved vendor charges, price discrepancies, and unapproved purchases.
2) Audit vendor database to ensure accurate data, remove duplicate information and ensure vendor has proper approval.
3) Share sales demand and budget data with procurement team.
4) Share inventory data with suppliers and have them do the same.
5) Develop a quality plan.
6) Focus on total cost instead of price.
7) Build strong supplier relationships by working with vendors to improve quality, delivery and logistics; and encourage the use on long-term contracts with quality stipulations and year by year locked in prices.
Are your procurement expenses deteriorating your bottom line? Could your sourcing process use a re-design? Contact me now http://bit.ly/2prHowW
We live in a capitalist society. It’s understandable that companies want the best prices on supplies and materials to make their products or provide a service.
When your procurement team is only motivated by price instead of the total cost, quality, delivery and logistics is lost.
For example, your Procurement Manager may think, “Hey, we just saved 12% by switching to a new handbag manufacturer but then it comes to your attention that their workers are not as skilled as your former provider and the bags are in poor quality. Now you have to pay workers overtime to fix the issue and deliver to customers on time. Since they were focused on category savings they spent more money on zippers for the bags, in turn, going over budget for materials. That 12% did not save you much at all.
It is also important that accounting, sales, marketing, and procurement teams actively share data so that smart decisions and better forecasting can be made. For example, if the accounting team had made budget data available to the procurement team they would not have ordered more zippers.
Therefore, instead of focusing on price encourage your procurement team to engage suppliers in a several years contract with quality stipulations and locked in year by year price. Savings can also be realized by auditing invoices/Purchase orders to identify unapproved vendor charges, purchases and price increases.
In short, don’t look at price but the total cost.
1) Encourage suppliers and clients to re-use containers/boxes
2) Decrease lot sizes
3) Actively share demand forecast and inventory data with suppliers to ensure efficient purchasing and timely inventory replenishment
4) Develop a quality plan and actively (Quarterly checks) ensure supplier is meeting quality requirements by conducting an on-site visit
5) Use total cost method and mutually beneficial long term contracts to build strong partnerships with vendors
6) Integrate a customer service chat feature on your website
7)Utilize electronic billing