Business Process Analysis - Procurement

All businesses need to procure something even if it's just office supplies to for their own use.  Manufacturing businesses need material to turn into sub-assemblies and finished product.  Service businesses need material and parts to perform the service task.  Retail business needs product on the shelf to sell.  Procurement has a profound effect on the business.  The time to get material in house (lead time) effects promise dates for deliverables   The procurement cost effects the bottom line of the business.

To analyze the procurement process, follow the same procedure used on order entry.  Ask questions of yourself and/or the people doing the procurement.  Drill down into the fine details of the process.  The following are some of the questions that should be answered but certainly not all.  With each discovery, new questions probably come to mind.  Make sure they get asked and the answer recorded.

The procurement analysis should begin with your own processes to make sure everything works as well as it can.  Afterward, it may be necessary to analyze vendor relationships and their processes to assure you're getting the best service from them.

What triggers the procurement process, how do the procurement people know when it's time to buy?  Going back to questions asked previously, are needs yelled across the room?  Passed on by handing off a piece of paper, generated by a computer report?  Are procurement needs generated by incoming orders or inventory balances?

Who within your organization procures material?  Where does the material come from?   How are purchases tracked between the time ordered and time received?  Is there something in place to know something is on order and with whom?  Is there a confirmation procedure in place to know that a vendor has received and is processing the order?  Is there a procedure in place to trigger action if an order isn't received when promised?

Here's a very important question.  Has lead-time for commonly purchased items been determined and recorded?  The importance of knowing lead times cannot be emphasized enough.  You can't keep delivery promises to your own customers if you don't know how long it will take to bring in material to build their order or service their equipment!  This is a don't assume, situation!  Know!

Is material purchased to inventory or as needed?   Fast moving inventory material can be purchased to inventory if it has known usage and frequency of delivery.  This is common in retail and less common in manufacturing.  If material lead time is a problem (long lead time), purchasing to inventory can shorten delivery lead-time to customers.  There are risks involved but they are minimized if the material is commonly used.  The higher the usage the lower the risk.  Service companies often have a local supplier with an inventory of commonly used parts that can be obtained quickly.  If that's not the case, they may carry their own inventory.

If material can be purchased from a supplier out of their stock that lessens your need for inventory.  If you can predict your needs it may not be practical to pick up for each order so a small inventory may be desirable.

Can sufficient material be purchased at once to obtain a volume discount?  Buying material in volume can often save in cost but may extend lead-time slightly.  One way to obtain a volume discount is to work with vendors on an estimated annual usage.  To get business vendors will sometime discount across a period of time if you commit to buying a certain amount from them.

Procurement can be a difficult proposition for small business.  On one hand, small quantities ordered may be delivered from vendor stock on short lead-time.  On the other hand, small quantities don't give the business owner leverage to get the best prices that are available to larger companies.  Look for vendors who maintain stock and are willing to work with small business.  See if the vendor will provide discounts for longer term commitments.