If you completed the first step of identifying the room for improvement in your sourcing and procurement functions and defined the basic value generating levers, FULLSTEP has the tools and experience to make change happen, ensuring the success of your purchasing optimization project.
FULLSTEP’s key processes to efficiently improve procurement
FULLSTEP’s purchasing optimization methodology has been designed to maximize success, increasing efficiency and ROI through the implementation of a new sourcing model, with the organization, processes and tools required for success. Correctly understanding the Top Procurement Processes and managing their optimization timing is an essential success factor. In this article, we explain FULLSTEP’s solutions to handle these processes.
The first step: Spend analysis
In all purchasing optimization projects Spend analysis should be the first step. Analyzing spend is analogous to drawing a map. It outlines and describes your sourcing environment classifying spend according to parameters that will allow you to set the best strategy to optimize the type of spend. This classification and the available optimization strategies will allow you to estimate the costs and benefits of the actions to be carried out. This in turn will allow you to prioritize actions according to potential benefits (Potential savings – Estimated costs).
At FULLSTEP we analyze spend in detail in the early stages of our cooperation with clients. We do this through in depth data analysis and thorough client interviews. The tools data analysis tools we use are based on Excel files in small to medium size companies, and specialized Business intelligence tools in companies with hundreds of thousands of records and multiple sites, geographies, and systems.
We profile spending by volume, category, supplier, internal user, cost center, product or service complexity, supplier market, and strategic influence of the purchase in the client organization.
Part of this data classification, such as volumes, suppliers or cost center distribution, is obtained by the analytical treatment of data provided by the client with adapted tools. Other factors such as complexity, supply market and strategic influence in the organization are obtained through interviews with the client’s staff combined with the result of the data anaylysis. FULLSTEP’s knowledge, accumulated during our practice years and permanently updated through the projects we carry out in different clients and sectors, helps us organize all the data in a detailed optimization plan.
Fig. 1: example of material file part of the purchasing analysis
The output is a spend classification report with category data record forms that include details such as volumes, timings, savings potential and resources needed in order to carry out the optimization strategies.
Actions such as global sourcing, competitive bidding, value analysis, specification review, process reengineering, supplier production optimization or aggregate volume negotiation, to mention some of the strategies, are evaluated together with the client’s optimization team - buyers and users - in order to decide on the suitability of the available optimization levers.
We commonly use an adapted “Kraljic analysis matrix” to position categories according to strategic influence of the product or service and the supply market characteristics, in order to help us map the initial optimization options.
In later stages of the optimization project we automate procedures with systems and tools so as to make the spend analysis a continuous and permanent process supported by the right data structure and tools.
The second step: Strategic Sourcing
At FULLSTEP we approach Strategic sourcing holistically, assessing the reporting structure of the sourcing team in the company, as well as the staff’s assigned functions and responsibilities, together with the purchasing policies and procedures deployed in the company. Confirming or adapting your Strategic Sourcing Model should be the second step in a purchasing optimization project.
Once the model has been designed, and potential benefits have been assessed, according to defined strategies and actions, the resources needed to carry out the strategies and actions can be estimated. Evaluating cost against potential benefit allows us to decide on the timing for the actions and thoroughly define the plan.
This is analogous to the defining the route on the map. At this stage we have drawn the map describing the environment in detail, set up the expedition team, assigned responsibilities for each team member, and drawn the route on the map. It is time to start the expedition.
The first year of the Purchasing optimization project should focus on thoroughly benchmarking all the main (most strategic) products and services purchased by the company. In order to correctly benchmark a product or service we need accurate and detailed specifications of each product or service. Once detailed specifications are assembled, RFPs (Requests for Proposals) should be sent to the market, allowing most or all potential suppliers to submit detailed offers.
Proposals should be thoroughly analyzed between buyers, users and other stakeholders. A negotiation strategy should be set, and negotiations carried out with the selected supplier short list. Decisions should be taken by consensus by the decision team members. Purchasing committees should be set up to streamline and supervise the decision making process.
In order to organize Strategic Sourcing, we use the FULLSTEP purchasing model adapted to the client´s company and sector, together with the FULLSTEP Platform’s Global Sourcing Module, which allows us not only to efficiently handle the RFPs, negotiation and decision processes, but to structure procedures, roles and responsibilities with the support of information systems that ensure the compliance with the established model in an efficient and cost effective way.
FULLSTEP’s specialized buyers and consultants support the deployment of our strategic sourcing projects by providing clients with sometimes needed extra support or specialized know-how.
The third step: Purchase to Pay (Ensuring that goods and services purchased are based on negotiated contracts and conditions)
Purchase to Pay helps us ensure that goods and services are procured by the company from negotiated contracts and according to the conditions established by the sourcing team with the awarded suppliers. It should also be a means to streamlining the purchase order process, helping users easily order the products and services needed, eliminating double data entry, and ensuring data consistency.
In an optimized purchasing model, Sourcing should mainly be handled by the sourcing team, which, in most cases; should have a high degree of centralization and specialization. This will allow the organization to maximize aggregation helping to optimize purchasing conditions.
On the other hand, most procurement should be decentralized. Orders should be managed directly from the source of the need and should be supported by adequate paperless systems that streamline and automate the ordering process. This helps ensure that users concentrate on the important tasks of deciding what, how much, and when to order, as well as the important task of confirming the correct reception of the ordered goods and services.
At FULLSTEP we deploy Purchase to Pay by integrating our Platform’s modules with the client’s ERP (Enterprise Resource Planning) systems. ERPs are often the most adequate tool for handling purchase orders; especially when orders can be automated according to sales plans, production plans, or changes in inventory.
On the other hand, we support the ERP’s procurement tools with our Electronic Procurement module -an internet based catalogue that can be used to procure both direct and indirect products and services, catalogued or off contract- by managing those orders where ERP handling has room for improvement.
We close the Procure to Pay cycle, by ensuring users acknowledge correct receipt of the product or service, and order conditions are integrated in the ERP and validated against invoices. A thorough integration environment can significantly optimize the administrative tasks and processes related to purchase order management.
Finally: Contract Life Cycle Management and Supply Base Management
Once the machinery is running at good speed -with the main contracts revised and renegotiated, and with the tools to ensure purchases are made according to purchase conditions and decisions- we have to set up our monitoring and control processes and tools.
Both Contract Life Cycle Management and Supply Base Management are follow-up and monitoring processes that help us track and confirm that things are running according to expected conditions. Tracking information and alerts must be sufficient to trigger corrective actions as soon as deviations occur.
At FULLSTEP Contract Life cycle management starts with tools that support contract generation from decisions made and according to the closure of negotiated processes. Document templates are available for users to help automate the contract generation process, and specific workflows can be configured to support the revision, approval and formalization processes. Contracts can be assigned key words and automatic alerts can be configured for expiration or renegotiation. Orders against a given contract are recorded, and compliance with service level agreements tracked. These functionalities allow improved contract follow-up and management.
Supply Base Management must monitor and classify suppliers according to their performance. At FULLSTEP we mainly use our Quality Assurance module as a means to establish classification formulas and variables and to track incidence and non-conformity reporting and management.
Together with Contract management, Supply Base management allows us to track performance and concentrate on TCO (Total Cost of Ownership) as the main cost tracking frame.
And start all over again
The above explained processes are continuous processes that should be revisited yearly. Spend analysis should be made a continuous process and reviewed periodically and at least once a year. Strategic sourcing must also be periodically revised and optimization levers revamped or simply developed to later optimization stages. Procure to Pay should focus on capturing as much of the purchasing volume as possible and handling the administrative process as efficiently as possible. Both Contract Life Cycle Management and Supply Base Management extended to all key categories and revised to better adapt to the client business strategy. Optimization projects are the beginning of a never ending journey.