Cost Saving Through an Efficient and Effective Procurement Process

Cost Saving Through an Efficient and Effective Procurement Process - The year 2021 is a year full of challenges for the industrial world. During the COVID-19 pandemic situation and increasingly complex business competition and while we know that the prices of goods are increasing, fluctuating and very volatile, companies must be smart in managing their expenses.

According to a survey conducted by Bain & Company, it is stated that the cost of procuring goods/services incurred by the Procurement division reaches 25% - 60% of the total company costs, depending on the type of industry.

A very fantastic amount, of course, which implies that Procurement needs to be managed comprehensively to obtain optimal savings. The Procurement function must be in line with the company's business strategy and be able to align the needs of the organization and the market's ability to supply goods.

A good Procurement process does not only focus on low prices but must be able to generate value by considering several factors, namely cost, quality, and timeliness of delivery, so that the objectives of effective and efficient Procurement can be realized.

Efficient, in this case, means the procurement of goods/services based on Q - C - D (Quality, Cost, and Delivery) which is carried out using minimal costs and resources to achieve optimal targets in a short time.

While effective, it means that the procurement of goods/services is managed according to predetermined needs and can provide optimal benefits to users of goods/services.

3 elements must be done to support the achievement of an effective and efficient Procurement process, namely:

1. Responsiveness, which is a fast response in fulfilling requests. It is undeniable that the dynamic of customer demand often has an impact on urgent needs with short deadlines and changes in demand that must be addressed by the Procurement department with alacrity to avoid customer complaints.

2. Leanness, namely eliminating waste in the Procurement process. It is often not realized that in the process starting from the analysis of needs to the arrival of goods, many wastes arise in the process. For example, waiting in line for documents, repetitive administrative work, and so on.

3. Agility, is agility and agility in achieving the optimum cost structure.

Benchmarks for the success of Procurement can be measured by 5 criteria, which is to provide the required goods with the right quality, right price, on time, right service, and right quantity. The five criteria are related to one another.

By its function, which is to contribute to generating value, to obtain optimum cost savings, the Procurement process needs to be dissected in more depth. Often we are trapped with administrative and tactical work, thus ignoring strategic processes, as a result, cost savings are difficult to achieve.

For that, we need to look at the Procurement process holistically and end to end with an emphasis on each part according to its scope. The Procurement process, in this case, is divided into 2 loops, namely Strategic Sourcing in the upstream area and Operational Procurement in the downstream area.

In upstream activities, the Procurement process is carried out before the contract is made and approved with an emphasis on creating value, while in the downstream part it focuses more on capturing value which ensures that everything related to orders can run according to the agreed contract.

Strategic sourcing in upstream activities starting from needs analysis to contract is a systematic vendor selection process based on data and facts to get the best products and vendors to optimize the supply chain and increase the overall value proposition of the company.

The approach taken in best-in-class sourcing is to focus on the total cost of ownership through collaboration and building partnerships with vendors who prioritize customer needs and organizational goals.

Cogs When the best vendor is selected, the service and quality requirements that must be provided by the vendor are outlined in a contract.

After that, the Procurement activities are continued by the Operational Procurement process which manages the process on a day-to-day basis by making a Purchase Order, monitoring the accuracy of arrival, the accuracy of payments, and ensuring conformity to contracts and keeping transactions running efficiently and effectively. Each stage in this loop runs regularly and systematically.

Some argue that in this Procurement process, Strategic Sourcing is a more important part of the Operational Procurement process. This opinion assumes that Strategic Sourcing can provide savings to companies through negotiations, while Operational Procurement is more of an administrative nature with minimal contribution to savings in dollar.

Of course, this opinion is not true. Input from the downstream part to the upstream part is very helpful so that the vendor chosen is the vendor with the best performance and the product purchased is of prime quality.

Each one contributes according to its function and the two parts are equally important and interrelated. To get optimal Procurement performance, these two parts must participate, be in harmony and synergize.

No matter how good the performance is managed by the Operational Procurement department, if it is not supported by the selection of reliable vendors, it will not end in vain. Likewise, even though the selected vendor has met the criteria, if there is no performance monitoring in the daily process and there is no feedback, the vendor's performance will not be optimal.

source: https://supplychainindonesia.com/ (With some Adjustment)