Common Challenges in Procurement
Last updated: February 21, 2022
To perform its function or fulfill its mission, your organization needs to purchase certain products and services. Procurement is the process of obtaining those services and goods and is much more than simply placing an order. It includes sourcing goods, negotiating with suppliers, purchasing items and keeping tabs on shipments and inventory. The procurement process allows you to maximize value while purchasing competitively priced goods and services.
With the right management, your company's procurement process can make your organization more profitable. Keeping tabs on procurement means recognizing common procurement issues and knowing what to do if they come up.
Challenges to the procurement process have evolved with time, and as needs and expectations have changed, so have the available solutions for enhancing procurement. For example, some procurement challenges arose during the COVID-19 pandemic that weren't encountered previously. In some cases, changing expectations, such as a demand for more environmentally conscious processes, have introduced new challenges to the procurement process. Take a look at some of the top procurement challenges today's companies face.
Developing an effective procurement process can be a considerable hurdle for some companies. Ideally, your company's purchases will be a mix of planned and urgent ones, with the urgent situations not accounting for a considerable percentage.
But if there isn't enough attention paid to developing an effective procurement process, things can veer off course. For example, your company might have established a procurement schedule that works with your budget and allows you to take advantage of discounts and incentives from vendors. But if you need to make more unplanned purchases than expected, you can miss out on those discounts and incentives.
While you can't always predict your company's needs with 100% accuracy, streamlining procurement as much as possible is ideal.
The companies that supply yours with services and goods in the procurement cycle are much more than vendors. Your company and your suppliers work together to enjoy shared success in an ideal situation. You require your suppliers to get the products and services you need when you need them and for the right price. In turn, your suppliers require your continued purchases to keep their business afloat.
Supplier management is the art of relationship building. It can often mean more than taking your vendor out for a coffee or sending them holiday greetings. It's a precise practice that involves letting your suppliers know how much they mean to you.
It also involves identifying the suppliers who can benefit your company the most, whether by offering you the best price or the most timely shipments, and weeding out suppliers who miss orders or send shipments late.
The procurement process isn't without risks, such as issues with fraud, sourcing and compliance. Developing a risk management and mitigation plan will help your company deal with the challenges these risks present while maintaining a competitive advantage.
Risk management can take several forms. One option is to do what you can to avoid risks. For example, you can evaluate a potential situation and decide whether to proceed with it based on the risks involved. One plan of action might be preferable to the other based on its risks and how well you can mitigate them.
Another option is to minimize risks or find ways to protect your company should a harmful situation occur. For example, if theft is a concern, insuring a certain shipment or multiple shipments helps your company avoid a financial loss. Having your suppliers sign longer or shorter contracts is another way to reduce the risk of having the terms change on you unexpectedly or getting stuck working with a supplier that's ultimately not a good match for your company.
Limited or lacking transparency can make it challenging for your company to make decisions about its purchases and suppliers. In some cases, little transparency comes about because your company doesn't have effective methods to keep track of its data. You might be using spreadsheets or a system that's not updated as frequently as it should be. You might have gotten to a point where the amount of data your company has about its suppliers is more than your system can handle.
An audit can help increase transparency in your procurement process. During an audit, you can confirm that your suppliers are following the contract terms. If that's not the case, you can take steps to get them back on track and renew the terms. During an audit, you can also correct issues with your inventory management, delivery schedules and invoicing process.
Sustainability is more than a buzzword these days. It's a viable way of doing business that appeals to customers and helps companies reduce the size of their ecological footprint. Adopting a sustainable procurement process or seeking ways of making procurement more sustainable can improve your company's reputation, reduce your costs and pave the way for the future.
Being sustainable is desirable but isn't without its challenges. One potential challenge is limited information or knowledge about sustainable practices. In the beginning, you might have to educate your suppliers on the best sustainable practices. You might get some pushback from suppliers about adopting certain practices, too. One option you can try is to seek suppliers who have already committed to sustainable or eco-friendly practices so you don't have to nudge them toward it.
You might have to educate your team internally about sustainability and lead an initiative that encourages the company to adopt practices that focus on reducing resource usage. If that's the case, determining applicable local and federal requirements for sustainable practices and aligning your ideas with those is an essential first step in making your company greener.
When you benchmark something, you measure it against a standard to see how it compares. Benchmarking can make your procurement process smarter and more effective. Many companies don't do it, though, or find it challenging to do because of the amount of data points required.
Dryden Group offers indirect procurement benchmarking services to our clients. We collect data from the procurement marketplace during benchmarking and use it to find the best rates for your company. We can help you determine whether the prices you currently pay or the agreements you now have with suppliers are in line with the market. You'll gain access to market intelligence that helps improve your company's overall bottom line.
Thanks to benchmarking, you gain leverage. If an agreement with a supplier doesn't align with the market, you have the evidence needed to present them to get better terms or a better price.
When it comes to data, you get low-quality results out if you put the same in. You need accurate data to make informed decisions.
Inaccurate data can come from many sources. Someone could make an error when inputting information into a spreadsheet. Another source of inaccuracy can be conflicting product descriptions or names across suppliers. Supplier A might call a lightbulb "frosted," while Supplier B uses the term "hazy." The two bulbs might be identical but can end up in separate categories due to the name differences.
Inaccuracy also comes up when a product number gets retired or a supplier introduces a new edition of the product. Suddenly, your system might end up with long lists of the same products, and you might not be sure which ones you currently use. Taking the time to evaluate and merge records as needed helps improve your procurement data's accuracy and reduce confusion.
If data inaccuracy comes from typographical errors, one way to manage the issue is to ensure every entry is double-checked. One person can easily miss a typo, but two people reviewing the same information are much less likely to miss it.
Technology can help streamline the procurement process by automating specific tasks and minimizing the chance of human error. Using older technological methods or no technology can complicate procurement.
For example, an outdated piece of procurement software might not have the security features needed to keep your company's data safe. It might also not be able to handle the volume of suppliers you work with, which significantly impacts your productivity.
If you take care of some parts of procurement by hand, such as recording purchases and contracts manually, it's easy for information to get lost in the mix or be subject to common errors.
Keeping your technology up to date and adopting technological solutions that will best serve your business helps to ease the strain of many procurement issues.
In some circumstances, procurement issues stem from a lack of strategy company-wide. Departments at your company might be siloed, meaning each one is responsible for its purchasing and procurement. That approach can lead to higher costs and greater inefficiencies.
For example, Department A might purchase paper from Company B, and Department B might buy paper from Company C, spending twice as much as Department A for essentially the same product. Keeping the departments separate also means your company might miss out on bulk purchasing discounts.
Ideally, creating a streamlined procurement strategy will involve getting the participation of each department. The various sections of your company will need to work together to negotiate contracts and plan purchases in a way that benefits the organization as a whole, not just a single department.
Another part of developing a procurement strategy involves building relationships with suppliers and sharpening your negotiating skills. By doing both, you can land better deals and form lasting, beneficial business partnerships with your vendors.
Both buyer and seller can be negatively affected by a bad contract, but it's often the buyer who pays the biggest price. For example, your company might have signed a contract with a supplier when you were first getting started. At the time, that supplier might have had the best terms to offer you, since your business was new. Over the years, you've continued to renew the contract and might feel somewhat loyal to the supplier, since it took a chance on you.
But it might turn out that by continuing to renew the contract without evaluating it, your company pays more than it needs to for the supplies. Or you might be missing out on discounts or other perks, which you could get if you renegotiated the contract or switched suppliers.
If you don't feel comfortable negotiating contracts on your own, Dryden Group can do it for you. We perform research of the marketplace, gaining a clear understanding of the supply chain environment and what it means for your contracts. We help you get an outcome that benefits you and your suppliers.
Sometimes, purchases take place outside of the procurement process. When this occurs, it's known as dark purchasing. Dark purchases can be expensive and lead to duplication.
They can also create security risks for a company, particularly if the purchases are made with an unknown vendor. The vendor could be illegitimate and pretending to sell products to capture company credit card information. Or, it could be selling counterfeit or stolen items.
More directly, dark purchasing makes it challenging for your company to get a grasp on how much it's spending. It can also affect your business's revenue.
Conducting a spend analysis is one way to get dark purchasing under control. During a spend analysis, you examine the who, what, when, where, why and how of your purchases. This process can help illuminate any purchases that were previously in the dark.
You can also implement a purchasing policy stressing that all purchases need to be approved and made through a confirmed, legitimate vendor. Outline the steps to take if a vendor isn't on the approved list to minimize the chance of an employee breaking protocol and making a purchase anyway.
One thing that became abundantly clear to companies over the past few years is that sometimes global challenges can disrupt their procurement processes. Those challenges can range from a lack of transparency in the supply chain to shipping disruptions.
Your company can create a contingency plan to put into action in the chance of global disruption. That can mean having backup suppliers in case your preferred vendors can't deliver the products you need or having a Plan B in case your overall Plan A goes off course.
Dryden Group wants to help you improve your company's bottom line and procurement process. We partner with you to help improve your indirect procurement process, lowering your costs and enhancing overall accuracy for more streamlined operations. Contact us today to learn more about how we can help you overcome procurement challenges.