Buying products and services for your company is an important discipline to develop. Outsourcing, offshoring and increased specialization in the economy are all factors driving demand for this skillset.
Use these 8 best practices to improve your procurement. These recommendations are informed by my professional experience, study and research. Some readers may find some practices basic. Yet, there are regular reports (e.g. a Colorado construction company paid a $500,000 fine in 2016 for, ” illegally taking over government contracts that were meant for small, disadvantaged businesses”) showing that these best practices are not universally followed.
Managing And Controlling With Invoices
The invoice is a key operational document in managing a procurement effectively. As a buyer, it is your obligation to understand the invoices you are paying and question unusual items. These three best practices make it easier to monitor and control invoices effectively.
1. Implement an invoice schedule
When invoices are received on a recurring schedule, it is much easier to monitor them. Following a set schedule for invoice release also makes it easier for the vendor to be paid on time.
Tip: If you expect to receive an important vendor’s invoice by the 10th calendar of the month, write a recurring reminder on your calendar. That way, you can easily follow up if it is not received on schedule.
2. Validate the invoice’s prices and price changes
How do you know if the invoices you are paying are correct? Inspecting the bottom line cost is not enough. Use these tips to validate invoices on an annual basis or more frequently as conditions warrant.
- Compare invoice pricing to the contract. For example, if the contract defined a $100 per transaction price for “electrical repairs”, does that same price and description appear on the invoice? If so, then you have just validated that the invoice is correct.
- Compare invoice price changes to the contract. It is common to have price changes in multi-year contracts. Ensuring that prices are only changed as per the agreed contract is an important discipline.
Using the above methods to validate invoices tends to find errors and potential cost savings. Demonstrating control over invoices and following up in errors is a great way to demonstrate your professionalism.
3. Complete regular invoice data analysis
Without an invoice database, it is very difficult to forecast expenses and detect unusual expenses. Fortunately, a simple invoice database is relatively easy to build and maintain in Microsoft Excel. Here are some tips on building an effective invoice database.
- Request invoice data files. Invoices are typically delivered in PDF format or in paper. That process may be required for payment processing. In order to build an invoice database, ask the vendor to supply data files (e.g. Excel files or CSV files) that display all of the invoice elements (e.g. item, unit price, volume, tax, cost and grand total).
- Build a full year of invoice data. With a full year of invoice data, it is much easier to detect and understand seasonal trends (e.g. does the vendor have higher expenses due to winter weather?)
- Build a PivotTable. A PivotTable is a great Excel feature to summarize and display data: it is a useful way to see trends and perform ad hoc analysis.
Managing The Sub-Contractor
Whether you are building a house, an ERP application or a submarine, it is a common practice to use sub-contractors. For the buyer, sub-contractors pose special questions and challenges. The sub-contractor may not have a clear understanding of the buyer’s situation because they are a few steps removed from the situation. Use these best practices to reduce sub-contractor risks.
4. Exercise sub-contractor oversight
In high risk situations such as work with live products or customer data, seek additional oversight over sub-contractors. For example, I have seen contracts that request that all sub-contractors be required to go through the same background and/or security evaluation process. In other cases, buyers request the right to review and approve sub-contractors before they become involved.
5. Request sub-contractor right to audit
For risk conscious organizations such as banks and governments, it is a common practice to seek a right to audit sub-contractors. The details will vary depending on the situation. It could include the right to visit and review a sub-contractor’s facility or perform a cybersecurity review.
6. Apply organizational standards to the sub-contractor
Many organizations have defined standards and policies that govern their activities. These documents cover areas such as records retention, privacy protection, a general code of ethics and many other areas. Seek to obtain sub-contractor agreement to these provisions. One cannot outsource risk management responsibility to a third party after all.
Managing The Bid Process
A poorly run bid process creates a host of problems. In government and the public sector, mismanaged bids are often the topic of negative media attention. In other situations, auditors and managers may ask about how and why you made the purchases you did. These are fair questions to ask and it makes sense to be prepared to answer them.
7. Review the organization’s procurement requirements
Before you contact a vendor or start to write a bid, start by understanding your organization’s requirements. How exactly do you find these requirements? Use these resources and tips to learn the baseline requirements.
- Search the intranet. Most large organizations have an intranet (an internal website) that contains standards, templates and other documents. Take 10-15 minutes and search for procurement resources here.
- Meet with the procurement department. In projects, you may go through large procurement activities once or twice per year. At that frequency, it is difficult to develop skill and remember all of the steps. Given that reality, it makes sense to meet with your company’s procurement staff (also known as “sourcing” or “strategic sourcing”) for advice.
8. Document your buying decision process
At the end of the procurement process, it is time to make a decision. It is important to document your buying process because you may receive questions about it later. Points to include in this documentation include: your scoring process, who was consulted on the purchase and why other vendors were declined.
Further Resources For Procurement
Here are a few resources to continue your procurement studies and learn additional best practices.
- Purchasing B2B. A Canadian publication on purchasing activities.
- Procurement Leaders. A magazine, blog and other resources addressed to procurement leaders.
- Procurement Asia. An online publication that covers strategy, manufacturing and related points on procurement.
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