Previously in our ‘Moving from Purchasing Thinking to Procurement Thinking’ series, we explored the concept of procurement thinking and discussed priorities, challenges, and trends impacting procurement professionals.
Now, we’re asking the big question: Is your business ready to take its purchasing to the next level? How do you know it’s time?
More and more business owners are aware of procurement’s strategic importance, yet many struggle to identify disorganisation and inefficiency in their purchasing processes. These inefficiencies result in a waste of time, resources, and money – longer term, these costs add up to significant financial and reputational losses.
Below, we have compiled a list of common issues businesses experience when their purchasing and procurement operations, processes, and systems are affected by inefficiencies and resource waste. These common problems signify deeper bottlenecks, which might be caused by a single computer, system, person, or an entire department.
Every hour lost to a bottleneck translates to an hour your business falls behind. The good news? With the right approach, you can level up your purchasing, clear blockages, and reclaim lost time, money, and resources. Let’s get started.
Common Indicators Your Business Is ‘Procurement Thinking’ Ready
In today’s business environment, things move fast. An efficient and streamlined procurement process is crucial for success. However, many businesses still rely on traditional, manual-based approaches to sourcing, procuring, and selling goods and services, which can lead to a range of common purchasing system and workflow problems. These could signify a business’s readiness to evolve its approach to purchasing.
Here are some of the most common indicators that you are ready to adopt procurement thinking:
- Not enough stock: This suggests your business is facing a shortage of goods or raw materials required for production, leading to delays and missed delivery schedules. A procurement thinking approach can streamline the ordering process, ensuring stock levels are monitored and replenished efficiently and according to accurate demand forecasting.
- Too much stock: Excessive inventory can tie up cash flow and take up valuable warehouse space, increasing costs. Procurement thinking can keep inventory levels in check, as purchasing is based on forecasting and demand planning.
- Idle equipment: This indicates the underutilisation of assets, leading to increased maintenance and storage costs. A procurement thinking approach will optimise the use of equipment and reduce costs.
- Reduced productivity: Poor procurement processes can lead to delays in supply chain management, which can negatively impact production schedules and employee morale. Switching to procurement thinking ensures that goods and services are delivered on time, enabling your business to meet production targets.
- Increased customer complaints: Poor procurement processes can lead to late deliveries, incorrect orders, and poor-quality products, resulting in increased customer complaints. Procurement thinking can help ensure that high-quality products and services are delivered on time, enhancing customer satisfaction.
- Large and growing ‘Days Outstanding’ debtors: Delayed payments can lead to cash flow problems and negatively impact business operations. By streamlining the payment process, a next-level purchasing strategy pays suppliers on time and mitigates the risk of payment delays.
- Elevated production costs: Poor procurement processes can lead to increased production costs due to inefficient purchasing and inventory management. Procurement thinking, on the other hand, reduces production costs by optimising the process and minimising waste.
- Minimal repeat business: Disorganised or inefficient procurement can lead to poor-quality products or services, resulting in reduced customer loyalty.
- Too many administrative staff: A high administrative workload can increase costs and reduce efficiency. Procurement thinking reduces this workload through automation and process optimisation.
- Too many shop floor staff: In a workshop burdened with production delays, additional shop floor personnel are required to navigate and alleviate bottlenecks.
- Lack of visibility into business measurables and performance: Disorganised procurement makes data analysis challenging – if not impossible. Leaders and team members cannot make data-driven decisions without reliable performance metrics. Instead, they rely on assumptions.
- Poor DIFOTQ rating: Late deliveries or incomplete orders can lead to poor a Delivery In Full, On Time, and in Quality (DIFOTQ) rating, negatively impacting customer satisfaction.
- Raw material wastage: Poor procurement processes can trigger the over-ordering of raw materials, leading to waste and increased costs. Procurement thinking ensures raw materials are ordered based on accurate forecasting and evidence-backed demand planning.
- Variations not managed correctly: Variations in products or services require tailored purchasing processes. If these variations are not managed correctly, businesses may over- or under-order, resulting in delays, wastage, and poor customer experience.
- Subcontractors and suppliers are paid twice or not at all: Manual handling of accounts payable can lead to errors in the payment process. Both overpayments and non-payment to subcontractors and suppliers have far-reaching consequences – budgets are blown, relationships are fragmented, and the company’s reputation and professionalism are questioned.
- Penalties due to delays: Poor procurement processes can lead to delays in delivering goods and services, which may result in penalties and fines.
- Reconciliations and ‘end-of-month’ demand significant time and effort: Poor procurement processes often come with high administrative workload at the end of the month, leading to delays in financial reporting and increased costs. Procurement thinking can streamline these administrative tasks, reducing the end-of-month workload and improving financial reporting efficiency.
Does any of the above sound familiar? It’s time to implement a procurement thinking approach. A well-designed procurement process gives you more control over purchasing, allowing your business to plan and forecast its spending accurately.
How Costly Can Manual Purchasing Processes Be?
Manual purchasing processes can be incredibly costly for businesses, impacting their bottom line and leading to delays and other inefficiencies.
We recently conducted an in-depth analysis of a medium-sized manufacturing and fabrication business to understand how their manual procurement process impacted their operations. Our findings show that their manual process significantly contributed to delays and higher production costs. In particular, we evaluated their Purchase Ordering process and identified several manufacturing bottlenecks driving up expenses.
Let’s look at the details.
First, the business had nine different steps in its manual Purchase Ordering process, and each step had significant inefficiencies. The purchase requisition creation and approval process for approximately 300 purchase orders a month was disorganised and time-consuming, with multiple layers in the approval chain that pushed out delivery times.
Additionally, approvers could not approve a purchase request when they were not in the office, and the requestor was unable to see where the request stood in real-time. Once the purchase requisition was approved, the purchase order had to be manually created and sent to the supplier, adding further time delays.
Furthermore, the current process prevented someone from receiving their own order, which burdened the receiving dock. In addition, purchase orders were not consolidated, giving the business little leverage to qualify for quantity discounts from suppliers.
Next, we wanted to calculate the actual cost of these inefficiencies. We analysed the total cost of Purchase Ordering for this business, including the people involved in the process, the salary of those people, their time spent on each purchase order, and the average number of purchase orders per month. We found an inefficient Purchase Ordering process costs this business around $172,000 a year – or a staggering $860,000 across five years. These figures could be similar in your business.
The Purchase Ordering process is just one element of procurement. When combined with the cost of performing other business functions within the current procurement framework, inefficiencies and manual handling had a major impact on the business’s bottom line.
We recommended digitalising, streamlining, and automating the business’s manual procurement processes through Enterprise Resource Planning software with integrated requisition management tools to address these inefficiencies. This approach resulted in meaningful efficiency gains and resource wastage reductions, enabling the business to take its purchasing to the next level.
In our next ‘Moving from Purchasing Thinking to Procurement Thinking’ series article, we’ll take a closer look at the benefits and obstacles of digitalising and automating the procurement function.
Inspired to Act?
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