Smarter Procurements - 1 by Swar Gattani
How to get about realising the best procurement practices for your company !
Procurement is quite a relevant term for everyone in business, either trading or manufacturing. However, only those who have been through the procurement process know its importance, complexity and the criticality of getting it right the first time. For an industry, the varying categories of requirement create challenges often with limited specialisation in only a few of them. Errors in the process mean huge costs in terms of maintenance, shutdowns, loss of precious time, etc. The challenges during procurement are not about finding the right product or authorised vendor for a particular category, but much more than that like basis of negotiating for the best prices, getting in time delivery, optimising freight costs, obtaining credit, maintaining cordial relations to ensure priority over other customers, and eventually be in a win – win situation for both the parties. Procurements can be simplified using few basic rules.
Planning your procurement gives you an edge in terms of lead time for delivery. Timely dealing with requirement gives you enough time to call on multiple quotes and negotiate with them in detail. Planning will also help budgets and release of vendor payments appropriately, so that vendors take more interest. Once vendors start taking interest in supplying, you can immediately try to redeem your buying power and start negotiating terms with the vendor. Planning is also interlinked with savings in terms of optimising freight costs, minimising vendors, reducing ordering costs, tax calculations, etc.
Standardise your requirement – Standardisation has an advantage of getting better discounts for same brand. Today, almost all major brands cater to complete range of requirements and choosing one brand for a category, will help you minimise maintenance issues too since only one is to be involved for it.
Minimise vendors and develop reliable vendors – This has its own advantages since you reduce your ordering costs, follow up costs, documentation costs, and develop reliable vendor base by giving good business to a vendor. Maintenance of category wise vendors creates better awareness among those involved and helps timely resolution of those issues. Vendor also knows your requirements and their usage pattern, which helps him, maintain the required inventory. Working with good people has its own advantages, when we need their help in times of distress. Maintaining vendor base has its own challenges when we try to get quotations from multiple vendors and release purchase orders for only a few of them based on L1 (lowest cost) parameter everytime, obviously after making an apple to apple comparison.
Prefer high quality products; consider procurement as an asset building exercise. High quality products have their own value and prove useful, prevent frequent shutdowns and thus lower maintenance costs. Quality also ensures high value for end products.
Optimise logistics by defining minimum order value every time you place an order. No one gains the freight costs, neither buyer nor supplier. Always look for better options considering the urgency associated with requirements. While a flight courier may take around Rs.200 a kg, a road transport agency will take between Rs.3-Rs.10 per kg as freight charges. Appropriate planning helps optimise logistics in a much efficient manner.
Tax calculations too play an important role while deciding on vendors. Tax structure varies across different businesses and across different geographies. As an example, while the standard norms are for 2% CST against ‘C’ form, for some vendors from eastern states the CST applicable is only 1%. Also, if you have a unit in Uttar Pradesh, ordering from outside the district, even within the same state, attracts 1% entry tax in addition to all the other taxes. The entry tax cannot be claimed for refund under any procedures too. Such complex tax structure may not be easy to deal but quite important even if your requirements are small or if you are running a comparably smaller unit. As you grow bigger in size, even though the taxes are of not much value and you may not evade them intentionally, adherence to rules is crucial because the goodwill takes a harsh beating in case of a tax raid by relevant authorities. And in this tech-savvy world, no one will spare us right from family members to all types of media. This may be unintentional, but no one considers ignorance as an excuse once you are caught.
Keep up with latest technological advances since we are always in competition. Using outdated technology for long will result in higher costs and eventually non competitive products / services.
Finally, again, better vendor payments will always get you that extra bit of advantage from vendors’ confidence and market reputation. Goodwill has its own value and this value will help you enhance your buying power.
Each aspect on smarter procurement is related to the other and therefore interlinked to deliver combined results. Planning goes hand in hand with optimising overheads, similarly developing reliable vendor base shall help use the tax benefits at different locations. So implementing one idea also helps implement the other one and so be smarter in all aspects at once.
Eventually, on analysis, a rupee saved through procurement results in repetitive savings, considering finance costs, processing costs, taxes, working capital limitations, credits, insurances and other overheads. Try calculating it once and you will understand its importance over a period of time as to what values have you eventually realized through efficient procurement processes.
For someone who says marketing is difficult, request them for handling procurement once and they shall never complain about their jobs. No one asks for reason when you sell your products and achieve targets, but everyone would and even you will ask yourself as to why should you be buying from a particular vendor instead of others for a particular product. Then you also have to satisfy your audit teams and bosses for same to maintain your prestige and dignity at workplace. It is very easy for everyone to come up and say “what is your commission in this purchase order?” and go unconvinced at an answer that commission is not your style of working. The only way to convince is to challenge them better your prices. No wonder you will start being appreciated soon!
So let us opt for smartness in procurements!