When the Norwegian company Sønnico implemented Lean Management in the organization, one of the first business process that was standardized was the Procurement process.
Why did Sønnico decide to have a formal procurement process?
A formal procurement process is sometime seen as cumbersome or bureaucratic but for any procurement exercise it is important to follow a few key steps. If you are not a procurement expert, you will make mistakes. No doubt you will learn from them but why learn from your mistakes when you can learn from someone else’s. For Sønnico it was important to standardize all the procurement process for all the five regions.
For Sønnico the procurement process template provided a model and a framework for all the five region to work within to:
- Save time; ensure that the region get the right solution to meet the business needs;
- Ensured that each region paid the right price (that’s the right price, not necessarily the lowest price!);
- Ensure that each region avoid overlooking vital steps that may come back to haunt the organization later.
By standardizing the procurement process within Sønnico, each of the five regions experienced that the suppliers became familiar with the procurement steps in organizations. The suppliers knew what to expect and knew that they were dealing with a professional organization.
A few words of warning.
Every project is different (Sønnico have several ongoing project at one time). Some procurement projects are small and every step of a formal process may not be required. Alternatively, some projects are highly complex or regulated and a generic framework will not be appropriate or sufficient. Despite this, every procurement project follows the same broad process . The key thing to remember is to adapt the process to fit the project.
The Procurement Process
What is procurement?
The procurement process can be divided into five steps.
Define the business need
The procurement employees, in the case of Sønnico it was generally a project manager, they need to understand what the fundamental business requirement is. At this point, it is important to understand the difference between a requirement and a solution.
Develop the Procurement Strategy
Depending on the scale of the organizations project, there could be a very wide range of potential solutions and approaches to the organizations business need and a number of ways of researching the market and selecting a supplier.
Supplier Selection and Evaluation
After researching the market and establishing the organizations procurement approach, one need to evaluate the solutions available. This may involve a formal tender process or an on-line auction. The company’s criteria for comparing different solutions and suppliers are critical. Weight the key criteria heavily and don’t attach too much importance to aspects that will have little impact on the solution.
Negotiation and award.
Even when the organization have selected a supplier it is important that detailed negotiations are undertaken. This is not just about price. Think in terms of Total Cost of Ownership. A cheap product is not so cheap if the carriage costs are huge or if the maintenance contract is onerous.
Consider carefully the process by which the goods or services will be ordered and approved; how they will be delivered and returned if necessary; how the invoice process will work and on what terms payment will be made. Considering the whole Purchase to Pay process (P2P) at the outset can reduce costs and risk significantly
Induction and Integration
No goods or services should be ordered of delivered until the contract is signed, but this is not the end. It is vital that the supplier is properly launched integrated. The P2P process needs to be in place and need to be understood on both the buy-side and the supplier side. Any service levels that have been agreed need to be measured and KPIs put in place. Regular reviews should be established.