Procurement seems pretty straightforward: A company needs something, and the procurement department figures out where and how to buy it. The difference between surviving and thriving as a company, however, is in how strategic and intelligent your procurement process is.
Intelligent procurement, or the strategic process by which companies manage their vendor-related spend, is key for companies that are looking to succeed, particularly in a macro environment defined by uncertainty.
As companies look to an unpredictable future, they should prioritize the implementation of intelligent procurement, which helps them cut costs, reduce inefficiencies, and mitigate risk.
What is procurement?
Procurement is the process a company follows to obtain the supplies and services it needs to run its business.
There are two main types of procurement: direct and indirect. Together, these account for most of the purchases made within the company. Effective direct and indirect procurement require a strategic process and transparent oversight of organizational spend.
What are the types of procurement?
Direct procurement: Direct procurement (also known as direct spend or direct cost) is, according to GEP, “the process of obtaining raw materials, resources, goods and services that are utilized in the core operations of a business.” If you run an ice cream shop, for example, the cost of ice cream and cones would be considered direct procurement. Companies optimize direct procurement by strategically sourcing the most reliable and cost-effective vendors, automating purchases of frequently used items, and buying in bulk to achieve the lowest possible unit price.
Indirect procurement: According to SutiSoft, indirect procurement involves “the expenses incurred for materials, services and maintenance required to operate [your] business.” At that same ice cream shop, the cost of freezers, air conditioning, and email marketing software would be considered indirect procurement. According to McKinsey, “most companies do not have mechanisms to monitor indirect categories and reflect their performance on financial statements.” Without the ability to identify exactly where employees and departments are spending money, companies cannot hope to control and curtail that spend. Thus, effective indirect procurement processes require organization-wide spend visibility for procurement teams.
What procurement isn’t
Procurement is often used interchangeably with “sourcing” or “purchasing,” but it shouldn’t be. Each is a distinct component of the overall procurement process. Both sourcing and purchasing are most effective when implemented as part of a holistic intelligent procurement process.
Procurement vs. sourcing
Sourcing is one component of procurement. It refers to the process of selecting a supplier or vendor. Identifying an item or service to meet a business need, culling a list of vendors, and comparing prices across vendors are all part of the sourcing process. The ultimate goal of sourcing is to minimize purchasing costs so the business can achieve its ultimate goal: maximizing ROI.
Sourcing is most effective when combined with intelligent procurement, which eliminates repeat purchases across departments, centralizes sourcing tasks, and automatically compares costs across vendors. Strategic sourcing, which allows companies to identify cost-saving opportunities and mitigate risk, is a key element of intelligent procurement. Order’s software helps companies source strategically.
Procurement vs. purchasing
Purchasing is another component of procurement and refers to the distinct act of buying goods and services for your business. It does not refer to a formal process or policy, like procurement does. Purchasing can add costs and inefficiencies to the business when conducted independently of a strategic procurement plan. Impulsive purchasing by various employees who have not conducted appropriate cost comparisons or due diligence can lead to cash leaks, data security breaches, and even business-continuity disruptions.
Like sourcing, purchasing is most effective—and most controlled—when combined with intelligent procurement. Intelligent procurement tools like Order streamline haphazard purchasing, add controls on employee spending, and improve the purchasing experience for all parties. By implementing Order’s single catalog and cart for all its purchasing, for example, Be Relax was able to achieve 96% faster ordering and ensure perfect spend compliance.
Procurement = sourcing + purchasing
At its core, procurement is the combination of sourcing and purchasing. It is, according to Thomasnet.com, an “all-encompassing strategic array of processes that includes both purchasing and sourcing.” The development of a strategic procurement process implements safeguards—like strategic sourcing and controlled spend—that protect against some of the risks inherent to sourcing or purchasing alone.
Effective procurement doesn’t need to be complicated. It’s essentially the combination of a few important steps:
- Evaluating spend across the business
- Identifying opportunities for cost-savings
- Creating policies and controls around future purchasing
- Establishing a system for approvals
- Implementing a vendor selection-policy
Companies that complete these necessary steps are on their way to developing an intelligent approach to procurement. Businesses that utilize intelligent procurement optimize sourcing and purchasing, mitigate risk, and cut unnecessary costs.
What is intelligent procurement?
Intelligent procurement is the process by which companies manage all aspects of their vendor-related spend in one central digital place so they can gain a holistic view of that spend. Companies that implement intelligent procurement gain better insight into and control over their spend.
Digital transformation has accelerated the rise of intelligent procurement by leveraging software and automation to reduce costs and risks with minimal human oversight. Intelligent procurement platforms like Order connect businesses to thousands of vendors via one centralized platform, implement rules and restrictions to reduce rogue spending, streamline invoice management, automate ordering, and more.
Intelligent procurement protects against supply-chain risk and empowers companies to become more sustainable.
Transparent, holistic insight into total spend makes procurement easier. Procurement departments that know where and how the organization spends money can more easily cut costs, make decisions, and identify potential problem areas. The ultimate result of better control over organizational spend? Greater efficiency, lower costs, and reduced risk.
To their detriment, most companies do not apply an intelligent, dedicated strategy to their procurement process. Most companies handle spend in silos, which creates confusion, inefficiency, and unneeded expense for the organization.
Why is intelligent procurement so important?
The main benefit of intelligent procurement is to save companies money. This, however, is far from the only upside of an intelligent procurement process. When applied strategically, intelligent procurement also protects against supply-chain risk and empowers companies to become more sustainable.
Intelligent procurement helps companies save money
By definition, procurement is a massive cost center: it is the hub of corporate expenditure. But managing spend more intelligently has multiple benefits. Companies that implement intelligent procurement can improve their bottom line.
Moreover, intelligent procurement helps protect companies from macro trends and events that create uncertainty for the business. According to McKinsey, companies with high-performing procurement departments have historically recovered from economic crises more quickly. The companies succeed thanks to their ability to respond to supply-chain disruptions, reduce costs through automation, and make more agile business decisions due to insights gleaned from digital tools.
As procurement leaders at The Future of Customer Engagement and Experience write, unpredictable events happen—the past 10 months exemplify that fact all too well—and businesses should prepare for them: “The solution is not planning for every possible contingency. How could we? Rather, it’s gaining visibility into your systems—increasing efficiency and flexibility—to create resilience.”
Intelligent procurement mitigates supply-chain risk
Supply-chain management is a critical responsibility of the procurement department. Intelligent procurement can ensure business continuity when the supply chain is disrupted.
Supply chains are inherently risky. According to McKinsey, “today’s complex and long supply chains are almost inevitably subject to disruption.” Multiple factors—from trade disputes and natural disasters to human error and shortages caused by events like the COVID-19 pandemic—cause these disruptions. Then, because every supply chain comprises multiple links, a domino effect of trouble (and costly delays) occurs when even one is disrupted.
How intelligent procurement creates an efficient, risk-free supply chain
To minimize risk, companies need a holistic view of their spend and their vendors in order to identify the origin of supplies and make adjustments as needed in the face of disruptions. Intelligent procurement platforms like Order provide this transparency, which enables agile action by procurement departments when business continuity is jeopardized.
Intelligent procurement helps protect companies from macro trends and events that create uncertainty for the business.
Moreover, intelligent procurement tools allow procurement teams to immediately identify and cost-compare new or replacement vendors so unexpected hiccups don’t result in exorbitant costs. Order’s intelligent procurement solution, for example, connects businesses to thousands of vendors and automatically sources out-of-stock or lost items from comparable sellers with comparable prices, ensuring business continuity even amid disruptions.
Plus, intelligent procurement platforms keep track of deliveries, so companies can easily identify delays and problem-solve more quickly.
Intelligent procurement can lead to sustainable procurement
When you implement intelligent procurement, you’re more likely to reach sustainable procurement, which, as we said in our piece on the topic, ensures all the way down the line that “your suppliers—and your suppliers’ suppliers—are proactively seeking ways to minimize waste and reduce their carbon footprint.”
It’s important to aim for sustainable procurement because, according to IBM research, a full 62% of consumers would be willing to change their shopping habits to support more sustainable businesses. That effectively means that companies cannot afford not to be sustainable. Those companies that pursue short-term savings might find themselves losing revenue when discerning customers and investors take their dollars elsewhere.
Sixty-two percent of consumers would be willing to change their shopping habits to support more sustainable businesses.
Companies can augment their approach to sustainability by taking a long-term view of their procurement efforts. Business leaders tangibly demonstrate their values to key constituents when they source from sustainable companies and institute sustainable practices.
How intelligent procurement can help achieve sustainable procurement
Companies can achieve sustainable procurement by leveraging procurement tools to identify and cost-compare sustainable vendors. An intelligent procurement system, which gives companies holistic insight into their spend, reveals which vendors are sustainable and allows companies to track that information in one central place, so they can more readily source and purchase from such vendors going forward.
Sustainable procurement is an excellent example of the necessary teamwork between intelligent procurement tools and the intelligent humans who compose an effective procurement department. Individual employees can leverage the benefits of intelligent procurement platforms to make needed department-wide policy decisions that bolster a company’s reputation, generating value that transcends simple dollars and cents.
How to achieve intelligent procurement
There are several components of an intelligent procurement process. To achieve it, procurement leaders must do the following:
Deploy an effective procurement strategy and process
Intelligent procurement requires strategic planning. Leaders need to devise an effective procurement strategy — a plan for purchasing business supplies that achieves two core objectives: risk reduction and cost-efficiency. Then, they must implement a repeatable procurement process.
Why is an effective procurement strategy and process important?
Procurement is inherently risky. Procurement departments necessarily rely on third-parties over which they have little control. Without an effective procurement strategy, procurement departments find themselves constantly putting out small fires: recurring purchases made by an employee who has since left the company, for example, or duplicate purchases made by members of different departments. They may find themselves navigating relationships with unreliable, noncompliant, or cost-ineffective vendors. They may be constantly policing maverick spend among employees. And, inevitably, they will devote more of their own team members’ time to handling inefficient manual processes.
A defined strategy and process help mitigate these risks. Moreover, an effective strategy helps the department run more smoothly by keeping information organized, simplifying invoicing, and creating a transparent spend management environment. Perhaps most importantly, an effective procurement strategy helps build a lean operating model that decreases wasteful ad hoc spend.
How to craft an effective procurement strategy
Procurement departments need to first identify all sources of spending within the organization. Spend management software like Order can help companies organize their spending sources in one central place, so they can easily identify and analyze spend across departments.
Procurement departments can more easily predict future costs and identify opportunities to reduce them once they’ve identified sources of spend within the organization. Order’s software lets teams automatically compare prices across vendors, so they can guarantee they’re getting the best value for each product and service they purchase. They can also implement policies that control maverick spending by employees and grant the procurement department greater control over the organization’s total spend.
Without an effective procurement strategy, procurement departments find themselves constantly putting out small fires.
Companies can devise a strategy that safeguards against unknown expenses by gaining a comprehensive understanding of the organization’s costs and identifying potential risks that could increase them. Effective procurement departments work closely with finance teams to allocate budgets to various departments while making sure to include a cushion that protects against unknown future expenses.
Today’s best procurement strategies incorporate technology, which increases efficiency by minimizing human busywork (and associated human error) and reduces costs. Automation improves procurement strategies in multiple ways: by easily comparing costs across vendors, bundling orders, organizing information, and reducing time spent on purchasing, among other benefits.
Leverage procurement technology and procurement software
Technology is perhaps the single most important contributing factor to an intelligent procurement department. Procurement technology and software drive efficiency by automating processes and providing holistic insight to spend across the organization.
Why use procurement technology and software?
Historically, procurement requires a lot of time and manpower. The work of sourcing, reviewing and approving purchases, managing vendor relationships, and keeping track of invoices is both necessary and repetitive. When conducted manually, these tasks monopolize employees’ time and introduce more opportunities for human error.
Procurement technology automates much of the unwieldy and inefficient manual work that claims so much of employees’ time. Moreover, implementing technology reduces risk by eliminating human error.
Ultimately, companies that leverage procurement technology and software can reduce their overall spend. Technology automatically compares vendor costs, identifies instances of duplicate or off-budget spending, and offers detailed analytics that allow companies to evaluate their spend in real-time. According to a BCG study, companies that use digital procurement tools can decrease their annual expenditures by an average of 5% to 10%.
Technology is perhaps the single most important contributing factor to an intelligent procurement department.
The rapid pace of technological innovation has yielded a bevy of tools that procurement teams can add to their arsenals. Today’s companies face an unprecedented need to manage their spend and maintain control over an increasingly distributed workforce. Technology and software can help.
Procurement departments that automate elements of the procurement process can reallocate their employees’ time to higher-value initiatives that help protect the business from risk. Truly intelligent procurement combines technology’s speed and scale with humans’ instincts and knowledge to yield a process that’s efficient, cost-effective, and risk-reductive.
How to implement the right procurement technology and software
To choose the best tools for the business, procurement teams must first identify their overarching procurement challenges. Common obstacles include the following:
- Too much or not enough time spent on sourcing
- A fragmented, inefficient purchasing process
- Management of multiple vendors
- Confronting and reducing maverick spend
- Vendor errors that risk disruption of business continuity
Once they’ve identified their main challenge or challenges, teams can more easily research and select the technology needed to solve those problems.
Most teams will face more than one challenge. Rather than purchase multiple tools and cobble them together in a fragmented way, procurement departments can rely on Order to confront each of their concerns. Among industry-leading solutions, only Order’s platform can automate and improve every element of the procurement process, from strategic sourcing and vendor API integrations to purchasing and invoice reconciliation.
Companies that have decided to purchase procurement technology need to feel empowered to implement the tool(s) in a way that maximizes ROI. Even the best procurement technology would be ineffective if it could not integrate with a company’s existing tech stack.
Before deciding to purchase any procurement software, procurement departments should first consult the IT team to ensure API compatibility, then confirm company data-related vendor guidelines with the compliance team. Once they’re assured that their preferred tool can integrate seamlessly with the company’s API and that it will not violate data security policies, procurement teams should prepare to ask the right questions of vendor sales teams. To help in this endeavor, we’ve created this Decision Matrix, which helps procurement teams quantify their choices and make a data-driven decision when selecting procurement technology.
Intelligent procurement is key now and in the future
Effective procurement is anything but simple in modern companies. For one thing, 81% of nonexecutive employees can influence purchasing decisions, according to Think With Google. Additionally, oversight of increasingly distributed teams has become difficult, and unprecedented macroeconomic uncertainty threaten business continuity in new and unexpected ways.
The result, at most companies, is a siloed procurement process. Purchasing is fragmented and haphazard across the organization, which steadily increases unnecessary costs and exposes the business to needless risk.
81% of nonexecutive employees can influence purchasing decisions
It doesn’t have to be this way. Procurement can be a tool businesses deploy to help them become leaner, more efficient, and more risk-proof. Forward-looking companies can use procurement to protect their organizations and bolster their bottom lines.
To get there, companies need intelligent procurement. They need the tools and technology that streamline systems, offer organization-wide oversight, and automate historically inefficient procurement tasks. Companies that implement intelligent procurement can cut costs, increase efficiencies, reduce risk, and operate more sustainably. Order can help.
Procurement is a vital component of healthy, efficient, and cost-effective organizations. Companies that take a thoughtful, strategic approach to procurement will be more likely to succeed—both now and in the future.