Why You Should Rethink Handling Procurement Internally

Hand placing coins on a coin stack with upward arrow - Income and asset growth concept

For many companies, purchasing decisions are handled in-house. With the possible exception of an assistant, the job often rests on the shoulders of one person: the procurement manager. This purchasing professional has tremendous responsibility. He has a heavy hand in determining the length of the expense list for your business each month.

Hand placing coins on a coin stack with upward arrow - Income and asset growth concept
Hand placing coins on a coin stack with upward arrow – Income and asset growth concept

Does your business need new computers or printers? How about network equipment? Maybe it’s new desks, company cars, or simply office supplies. The list quite literally goes on and on.

Once you’ve determined what products you need and what your budget allows, it’s up to that individual to negotiate with suppliers or manufacturers. Of course, he can only speak to one supplier or manufacturer at a time, so the process will most definitely be time-consuming. And if he’s only buying a small quantity of a particular item, he’s probably paying a premium for those products.

Don’t get me wrong. It’s entirely acceptable to manage purchasing decisions internally, but it always leaves me with one question: Why?

For many businesses, it’s far cheaper and a better use of time to outsource procurement. Companies that do so can expect operational costs to be reduced by 15 to 20 percent, thanks to the process improvements and efficiencies that purchasing companies can offer. What’s more, companies that outsource purchasing see improved contract compliance by an average of 31 percent.

In short, outsourcing procurement can save your company valuable time and money. So let’s get down to business. How, exactly, can you reap those benefits?

1. Look at what’s driving the internal costs of your business. Many companies decide to outsource procurement without assessing the current state of their purchasing. If you aren’t familiar with your current purchasing costs, there’s no way to know whether you’ll actually benefit from outsourcing.

Get an idea of spending by category. Within each category, note the types of spend, such as catalog and on-site. Then, look at the volume of these transactions and how often you’re purchasing each item. You’ll need this information to determine whether you might be able to get a better price on your purchases or purchase a better product for a similar price.

2. Shift the focus of your procurement department. Get it out of your head that you’ll be laying off your purchasing professionals. Instead, redefine their roles from purchasing goods or services to managing procurement activities or otherwise assisting with production. Someone will need to oversee the outsourcing of this business function.

3. Ask hard questions of procurement companies. As you review your outsourcing options, ask candidates about how they conduct product selection, their fulfillment rates, any incentives or discounts you might qualify for, their payment terms, and how long service commitments are. Determine whether they work with manufacturers or suppliers, and request some references. You’ll want to be sure they consistently satisfy their customers before you strike a deal.

4. Review your procurement objectives. The capabilities of the procurement company should align with your company’s objectives. If you’re looking to reduce costs, the company should have a proven track record of helping similar companies achieve lower supply costs. Similarly, if streamlined purchasing or better products are your goals, you’ll need to find out whether the procurement company has successfully attained these goals for other companies.

5. Think about how you’ll manage the transition. Above all else, you want to minimize the disruption of business as you transition to outsourcing procurement. Set aside some time for the vendor to get to know your business. Meet with your current procurement manager to understand what needs to be handed off before you take the outsourcing leap. Detail which categories will now be the vendor’s responsibility, and set a date for the transition.

Many companies can’t afford to hire the right personnel to improve the efficiency of their purchasing departments, and it’s dangerous to risk underfunding purchasing.

While outsourcing purchasing isn’t right for every business, it can lead to substantial savings if executed correctly. Take a hard look at your purchasing operations. Is it time to hire some outside help?