A Complete Overview of Procurement Management

Almost all businesses need to buy goods or services in order to create whatever goods and services they themselves offer – from the lemons, sugar, and water needed for a lemonade stand to the lithium, nickel, cobalt, manganese, and graphite needed for electric vehicle batteries.

Every business has some kind of procurement process. As small businesses grow, they can build more efficient and effective processes. A top-notch procurement operation can become a real competitive advantage.

There are six core responsibilities of procurement managers:

• Understanding business needs
• Supplier management
• Placing purchase orders
• Managing logistics
• Paying suppliers
• Iterative improvement

What Is Procurement Management?

Procurement management is the planning, execution, and oversight of buying physical things and services needed for a business’s ongoing operations.

For a startup, this might mean sending someone to the store periodically or placing ad hoc online orders. For a global corporation, the procurement management operation might be larger than most whole businesses and include jobs for data analysts, logistics experts, lawyers, and more.

Regardless of its size and complexity, procurement management requires balancing competing priorities, starting with the obvious ones like price and quality.

A business making a single purchase may only care about the cost, delivery speed, and quality of what it’s getting. Across multiple rounds of purchasing, however, a business needs to consider additional priorities, such as the long-term reliability of its supply chain strategy and its ability to evolve and grow with changing business needs.

You don’t have to make every part of your process perfect all at once, but an efficient and effective procurement process can provide your company with resilience and a competitive edge in tumultuous times.

Some organizations use terms like “purchasing” and “sourcing” interchangeably with procurement. Some might define “sourcing” as identifying and building relationships with suppliers and “purchasing” as placing the orders and handling logistics with those suppliers. There are other breakdowns of these terms as well. What’s important is to understand the concepts involved and synchronize your vocabulary throughout the organization so everyone is speaking a common language. If your organization is just getting started, you can define terms however you like – just be consistent across the company.

Just as vocabulary can differ amongst organizations, the steps to implementation can vary as well. Let’s walk through a step-by-step guide to procurement management, with some tips along the way for improving your procurement operations.

A Guide to Procurement Management

1. Understand the Business’s Needs

Before you start identifying and purchasing things for a business, you must understand the needs of the business. This goes beyond simply asking every department what they need now and what they think they’ll need soon. Understanding why they need things, what problems they’re trying to solve, and the driving forces behind the quantities and frequencies of their needs will help procurement managers do a much better job of staying one step ahead.

Take it to the next level: Information should be a two-way street. Good procurement managers may do fine only gathering and acting on information from all parts of the business. But great procurement management operations funnel information about what’s going on in the supply chain back to the rest of the business. Are shortages or delays expected? What good deals are available? What new products and innovations are being offered? Proactively communicating such information can help the rest of the business save money, plan for and react to changes, and innovate better.

2. Effectively Manage Suppliers

Supplier management is an ongoing process. Within supplier management, procurement managers should:

1. Identify suppliers that fit the business’s criteria and are capable of meeting its ongoing and evolving needs.
2. Select from among the qualified suppliers using a documented process that can be verified and repeated as needed.
3. Negotiate terms of purchases, going beyond price to include responsibilities for both parties, such as information sharing, responsiveness, and required lead times. This can be part of the selection process as well and gets more important the larger and more complicated business operations get. The “negotiation” process for a startup buying a single computer, for example, might be as simple as “I want this one, but can you help carry it to my car?” A bigger company buying computers for employees may run a formalized process in which they collect proposals from information technology vendors and subject the finalists to an interview process and detailed negotiations involving procurement managers, IT professionals, and attorneys.
4. Manage contracts, making sure your organization upholds everything it agreed to and is entitled to. Use a lawyer who is paid by your organization and has your best interests in mind.
5. Suppliers are important business partners, and having a solid relationship will help keep your business running smoothly. Good relationships can make a meaningful difference if you need some flexibility, if you’d like advance notice of upcoming issues (like changes, shortages, or even good deals), or if you want to be one of the first customers access new products.

Take it to the next level: Be thoughtful about using overseas suppliers and supplier diversification and revisit decisions regularly. There can be benefits to diversification, which include becoming less dependent on one organization, adding redundancy to the supply chain, and developing more contacts and sources of information. But giving your best suppliers more business has advantages too, such as the better prices that come with higher volume and the special service and flexibility that comes with loyalty. It’s easier to build deeper relationships with a smaller and more select group of suppliers.

Note that most of these variables are changing constantly and no individual business can do much to impact them. Businesses can only respond by making course adjustments, and good supplier relationships can add meaningful protection to the business.

3. Place Purchase Orders Consistently

This is what most people think of first when they think of procurement management – buying stuff! For procurement managers who completed the previous steps, this will not only be one of the most intuitive parts of the job, it will also be one of the easiest. You just need to make sure those orders get placed far enough in advance to get what you need in time. Sometimes these tasks can even be automated.

Take it to the next level: Purchase orders can be a valuable source of data. Great procurement managers thoughtfully gather their own data, know what it can and can’t do, and share that knowledge and the data with the rest of the business. For example, they can study purchase history to identify patterns in business activity and resource consumption. They can strategize to place larger orders when prices are low. 

4. Manage Logistics

When I place an order for a box of tea, I don’t really think about it again until it shows up at my home. Corporate procurement managers, however, don’t have that luxury. One good rule of logistics is to avoid surprises. Procurement managers should know where their orders are, when they’re going to reach their destinations, and what the backup plan is if something goes wrong. When items arrive, you need to be ready to accept delivery, process the shipment, and make sure you received the items you ordered in the quantity you ordered at or above the agreed-upon quality. You want to know when to pay for expedited shipping, when you need extra staff on-hand at a delivery site, and where deliveries go once they arrive.

Take it to the next level: Many companies use software, GPS trackers, radio ID tags, and other add-ons. Logistics oversight can become unmanageable with spreadsheets and human monitoring alone, and humans are rarely able to be as detailed or proactive on their own.

5. Pay Vendors Promptly

Details on payment terms and processes should be spelled out in the agreements procurement managers make. Then the important thing to manage is the sequence of events. A common chain of events is: “place the order, receive the order, inspect the order, pay for the order,” a sequence that allows the business to confirm it receives what it‘s paying for first. Whatever the sequence is for your agreements, you want to make sure you’re staying on top of things, paying for exactly what you receive, and not leaving suppliers waiting for payments.

Take it to the next level: It might be tempting to hold onto cash a little bit longer, but don't overlook the value of maintaining good supplier relationships. It can be key to pay your suppliers on time to continue good-faith relationships.

6. Improve as You Go

Good procurement managers are going to be doing almost all of the above over and over, again and again, year after year. They turn their procurement management process into a well-oiled machine that runs efficiently – and are constantly on the lookout for small savings that add up. They also monitor the business’s evolving needs and relevant markets and supply chains. It sounds insurmountable at a glance, but you can do it by making steady progress. You don’t have to make every part of your process perfect all at once, but an efficient and effective procurement process can provide your company with resilience and a competitive edge in tumultuous times.

Take it to the next level: Good data collection can be the gift that keeps on giving. Invest today in data collection, even if it might not pay off for months or years. When that time comes, you can use it to better forecast the future. Integrate procurement data collection and management with the rest of the company too; having procurement management data is good, but having it as part of a company-wide analytics effort is even better.

The Takeaway

An effective procurement process can be key to resolving issues and keeping supply chains working smoothly, even during challenging times. A company's process can evolve over time based on current business needs and priorities.

Photo: Getty Images