April 28, 2023 | Procurement Strategy
Procurement leaders trying to define procurement processes often have to confront a bunch of complex challenges — from contract negotiations to supplier relationships to risk management, and so on. Bringing procurement transformation can be a complex process and sometimes a frustrating endeavor, where pitfalls must be avoided. This blog explores some of the common procurement pitfalls and tries to provide expert insights on how to avoid them.
Procurement is a fast-paced domain and overlooking risk management can spell disaster when you are least prepared for it. Procurement organizations need to be aware of the potential risks — supply chain disruptions, fluctuating prices, and quality issues — that come with the procurement process.
To mitigate risks, a solid risk management strategy must form the core of any procurement organization’s plan. This could mean identifying potential risks, assessing their impact, and developing effective strategies to minimize them. Neglecting risk management could be the downfall for even the most robust procurement process. Therefore, risk management should always be the top priority.
The recent global pandemic resulted in procurement professionals dealing with unprecedented supply chain disruptions. Only those who were able to identify the risks and develop contingency plans were better prepared to navigate the challenges than those who could not.
Cutting corners is never a good idea. A common procurement pitfall is failing to conduct proper market research or may be simply avoiding it for some or the other reason. Procurement leaders need to have a solid understanding of the market they are operating in, including their suppliers and the products or services they offer. Lack of this information could end up in enterprises paying higher prices or selecting suppliers that don't completely meet the defined requirements.
Avoiding this pitfall requires the procurement organization of an enterprise to conduct thorough market research before starting the procurement process. Researching potential suppliers, comparing prices and quality, and analyzing market trends are part of the process.
Communication and collaboration go hand in hand and form a critical component of any procurement process. Failing to establish good relationships with suppliers can lead to significant problems at the worst of times. Be prepared. Establishing a clear line of communication with suppliers should be a priority, ensuring that they understand the organization's needs and expectations. Procurement professionals should also ensure that suppliers are able to provide feedback and work with the organization to resolve any issues that arise.
At times, involvement of other stakeholders such as legal or finance departments in the procurement process is a must — necessitating good communication and collaboration with these stakeholders to ensure smooth functioning.
Supplier diversity is increasingly gaining prominence in procurement. Failing to consider it can be a significant pitfall. Enterprises that do not have a diverse supplier base will likely miss out on opportunities to work with minority-owned or women-owned businesses, which means definitely missing out on unique perspectives and value.
Procurement organizations should ensure that supplier diversity is a priority in their procurement strategies — including setting goals for supplier diversity, working with diverse supplier organizations, as well as tracking supplier diversity metrics.
For the majority, price is the decisive factor behind most decisions, but focusing solely on price can be a significant pitfall. There are other factors that procurement organizations need to consider — such as quality, reliability, and supplier relationships. The lowest-priced option may not always be the best; it’s the quality of goods supplied and reliability of the supplier that should matter.
The best way out is to take into consideration the total cost of ownership or TCO when evaluating suppliers. TCO includes price as well as factors such as delivery costs, maintenance costs, and any potential risks associated with a particular supplier.
Negotiations are an essential part of the procurement process, and failing to negotiate effectively could mean a failure of the procurement function. Procurement professionals need to be skilled negotiators with the ability to define fair terms and conditions with suppliers. A solid understanding of the process also empowers you to walk away from a deal if the terms and conditions don't look favorable.
Procurement is a complex and challenging process. And to effectively navigate the procurement process, the common pitfalls have to be avoided. Incorporating the key strategies of procurement — risk management, market research, communication and collaboration, sustainability reporting, supplier diversity, understanding of factors beyond price, and effective contract negotiation — can help you drive goals such as cost savings, enhanced supplier relationships, and improved product quality. Procurement pitfalls can undermine these goals, leading to higher costs, lower quality, and supply chain disruptions.