Today, businesses of all sizes must focus on making their procurement initiatives as efficient and cost effective as possible to ensure they have a competitive edge in their industries.
This guide will give you some insight into procurement best practices which can then be implemented in your small business.
Procurement is the process of obtaining goods and services from preparation and processing of a requisition through to receipt and approval of the invoice for payment. The procurement cycle follows specific steps for identifying a requirement or need of the company through the final step of the award of the product or contract.
It commonly involves purchase planning, standards determination, specifications development, supplier research and selection, value analysis, financing, price negotiation, making the purchase, supply contract administration, inventory control and stores, and disposals and other related functions.
Procurement basics for SMEs
Procurement strategies are more a part of a business's success than ever before. Not only has technology given companies the opportunity to truly make purchasing more efficient and inexpensive, but companies are now spending a larger percentage of their revenue on products and services than they were thirty years ago.
As a result, more companies need to put in place some best practices that can guide their purchasing decisions and that can help them make their business a success.
Understand cost drivers
Before evaluating any best practices, companies need to have a handle on a key aspect of their business: the cost drivers. Cost drivers are all the elements that determine the total cost of a business process. Companies that have developed best practices always know in detail all elements of their cost structures and take actions to drive costs lower all the time. They also continuously collect and analyze data and other information on the costs of the suppliers that comprise their supply base.
Pick a number of suppliers
In the past, buyers and sellers related to each other in a confrontational way. Buyers chose suppliers as they were needed, based on costs, and moved on to a new supplier next time. Today, that type of approach is often too short-sighted to be effective.
Instead, focus on picking a number of suppliers who provide reasonable prices and quality materials and forge a long-term relationship with them. In this way, you will secure your line of goods and you can put an end to the extra costs and delays of finding new suppliers all the time.
Use technology wisely
Many businesses make the mistake of buying costly and complicated new technology, then leaving their employees to learn how to use it and to adjust to the changes. They also wrongly view the implementation of new technology as a procurement strategy – it’s really just a tool that enables a strategy to be rolled out successfully.
Before new technology is brought in to the purchasing picture, a sound supply strategy needs to be determined. Only then should you bring in the technology to implement it.
Take a team-based approach
Companies should take a team-based approach to procurement. The purchasing department should not be solely responsible for making the company's strategy a success. Instead, it should involve people from all departments so that people can work together to achieve the larger goals identified by the business's procurement strategy.
Companies that have achieved best practices in procurement do not stand idle and admire their accomplishments. At all levels, they seek to learn from others and to continuously advance their practices and processes.
Support from top management
Perhaps the most important factor in maximising supply value is active support from top management. As a business owner, you need to understand the value of supply to company success, develop supply management talent within the business, and ensure that all employees at all levels are fully committed to excellence in supply management.
Supplier vetting which provides objective and independent external assurance for your supplier’s business systems and financial background is important because it helps to ensure that your chosen supply partners are scrupulous and will have the ability to deliver, when needed. The best way to do this is to obtain a credit check from a company like Experian to help you gain a full view of your suppliers’ credit activity and behaviour.
Putting a supplier contract in place helps you to get the most out of the supplier relationship. A supplier contract should include all of the sections, standard terms and conditions of acontract. It’s a legal agreement between your business and an external supplier for the delivery of a defined set of products and services.
It is used as the basis upon which to measure the supplier’s performance. In addition to listing the items to be supplied, it should include the timeframes, responsibilities, pricing and payment clauses needed to administer the relationship. Specifically, it should include the following:
- Deliverables to be provided by the supplier
- Training, documentation and support to be provided
- Responsibilities of both parties
- Performance criteria and review process
- Pricing schedule and invoicing process
- Contractual terms and conditions
Procurement in South Africa
In terms of the Codes of Good Practice on Broad-Based Black Economic Empowerment, the compliance requirements for B-BBEE varies according to the size of the business entity, as measured by annual turnover.
If a business’s annual turnover is less than R5 million per annum, the business is classified as an Exempt Micro Enterprise (EME):
- It is classified as a Level 4 or Level 3 Contributor to B-BBEE
- Its clients can claim at least 100% of their procurement spend with that company towards their own B-BBEE scorecard
To confirm your own EME status the Department of Trade and Industry (dti) will e-mail you a template of a letter that you can have signed by your auditor, accounting officer or verification agency to confirm that your annual turnover is less than R5m.
You simply send the signed letter back to the dti to complete your EME B-BBEE compliance. The letter will be uploaded to the dti B-BBEE Registry and can be accessed by clients, potential clients or business partners using your URN. This service is provided free of charge.