Curious about procurement best practices and how you can implement them to improve your skills or to build a high-performance procurement function? Well, you’ve come to the right place, so read on!
Procurement Best Practices Resources
In implementing procurement best practices, you’ll need five critical resources.
First, the free Procurement Maturity Model, containing over 60 procurement best practices. The model is Excel-based, contains instructions, and is easy to use.
Second, a good foundation for your procurement organization is critical. You’ll need to know how to build and shape your procurement organization such that you can maximize its effectiveness. For that, you’ll need The Vendor Management Office: Unleashing the Power of Strategic Sourcing.
Third, to document, communicate, and optimize your procurement organization’s processes, you’ll need a structured procurement methodology. The premier standard is the Project Management Institute’s Project Procurement Management processes. The book, Project Procurement Management: A Guide to Structured Procurements, will take you step-by-step through building robust yet real-life procurement processes.
Fourth, to facilitate the speed and efficiency of your procurement processes and to ensure that your getting the most favorable price, terms, and conditions, you’ll need a portfolio of your own contract templates (don’t use the vendor’s contract template!). You can download (for free) Procurement Contract Templates, which contains over a dozen buyer-favorable contract templates.
Finally, to help understand the nuances of your contract templates and to ensure that you and other procurement staff are highly trained on negotiation ploys and tactics, you’ll need The Contract Negotiation Handbook: An Indispensable Guide for Contract Professionals.
Procurement Maturity Model
The Procurement Maturity Model (PMM) was developed to assist procurement professionals in implementing procurement best practices as a means to improve organizational performance and professional skills. The PMM enables users to easily select, in a spreadsheet format, example current practices in order to compare themselves against over 60 best practices. The intent of the model is to provide procurement professionals with practical and actionable practices to improve procurement performance.
Procurement as a Profession. While procurement has been a recognized career field since the days of the World War II materials shortages, there has been a rapid acceleration in recent years pushing procurement toward a full-fledged “profession.” Universities are now offering bachelor’s, master’s, and doctorate degrees in procurement, contracting, or supply chain. The Institute for Supply Management has recently invigorated their premier certification in the form of the Certified Professional in Supply Management, which reflects the expanded knowledge, skills, and abilities needed to be a successful supply management professional. There are also standard terminologies and professional codes of ethics posited by the various procurement-related trade associations. Most telling, employers are increasingly requiring of prospective employees a degree, professional certification, and involvement in the profession, such as speaking or writing. In culmination, procurement organizations are coming under increasing scrutiny to raise their standard of performance.
Factors Affecting Organizational Performance. In the procurement profession, there is a broad set of external factors which directly affect organizational performance: customers, policy, staff, processes, vendors, tools, and organization. Regardless of whether the external factors are enabling or inhibiting, the procurement function must deliver value—usually in the form of cost savings, enhanced vendor performance, and mitigated legal and operational risk.
Traditional Measures of Organizational Performance. For a procurement organization, there are a variety of imprecise means by which to measure performance: customer satisfaction surveys, vendor surveys, employee feedback surveys, achievement of business goals, and the achievement of internal performance metrics. While such efforts to measure performance are admirable, they are materially flawed in that they only compare the elements of an organization against itself.
Benchmarking. To truly gauge organizational performance—and therefore, value—the best measure is to compare an organization against other, best-in-class organizations. The object of such a comparison is to identify “benchmarks,” which represent standards of best practice in measuring areas such as quality, value, or performance. The process of comparing one organization against another and then adopting (or adapting) identified benchmarks to achieve improvements is known as“benchmarking.” Benchmarking identifies where major changes to enhance performance are required or possible, prioritizes opportunities for improvement, and acts as an incentive to accelerate the cycle of change.
Strategic Planning for Improved Organizational Performance. While some benchmarking may result in improved performance at little or no cost, truly impactful best practices commonly have some sort of adoption cost. Clearly, the value resulting from a desired best practice must exceed the adoption cost. Assuming so, a procurement professional will likely then have the next hurdle of obtaining organizational buy-in (in the form of resources) to implement the desired best practices. To improve the odds of success, the best vehicle to “sell” the investment in best practices is a near-term (three to five year) strategic plan. The strategic plan should be high-level, including summaries of the best practices with corresponding implementing initiatives, with the understanding being that supporting business cases and detailed cost justifications are prepared as a part of annual, tactical business plans. Thus, buy-in is obtained more easily at the strategic level with needed resources (such as budget) obtained on a case-proven basis at the annual, tactical level. An excerpted example of a strategic plan [with explanation in brackets] which seeks to improve organizational performance through the increased use of automation follows:
- Automate Existing Processes [The high-level summary.]
- Implement an eRFx System to Automate the RFx Process (2011) [This and the subsequent two bullets are the implementing initiatives.]
- Implement a Contract Risk Level Tracking System (2012)
- Implement a Vendor Portal that Permits Vendor Qualification and Certificate of Insurance Administration (2012)
Using the Procurement Maturity Model. The Procurement Maturity Model (PMM) facilitates the process of benchmarking by pre-defining over 60 procurement best practices. These best practices are contained in the table following this article. The PMM was developed by a large not-for-profit organization, the National Rural Electric Cooperative Association, that was seeking to improve its procurement organization by comparing itself against best practices. Initially, a broad set of external elements were identified that have a high correlation to procurement performance: customers, policy, staff, processes, vendors, tools, and organization. After a significant amount of research into procurement best practices, key best practices were then associated with each of the external elements. In turn, for each of the key best practices, a range of common current practices were identified. All of these elements, best practices, and current practices were then combined to create a simple spreadsheet model. The model can be easily manipulated by a user to select a current practice and compare the current practice against the corresponding best practice. The model then performs a gap analysis, identifying and prioritizing measures that the user can undertake to implement best practices and improve organizational procurement performance. The PMM consists of five worksheets:
- PMM Rating Input and Scores
- Graphed Measurement Area Scores
- Graphical PMM Comparison
The PMM Rating Input and Scores worksheet is comprised of columns as explained below:
- Measurement Area – Identifies the broad elements of Customers, Organization, Policy, Processes, Staff, Tools, Value, Vendors
- Measurement Element – Further categorizes each Measurement Area into topical classifications
- Current Practice – Represents a choice of current practices; the number corresponding to each current practice represents a numerical rating and not the order of the Current Practice
- Your Rating – The user selects the “number” of the Current Practice that most closely approximates the user’s practice for the Measurement Area/ Measurement Element
- Your Calculated Score – Represents a calculation of Your Rating, weighted by a pre-determined level of Measurement Area / Measurement Element importance
- Best Practice – Describes the associated procurement best practice
- Best Practice Score – Represents the score value of the indicated best practice
- Significance of Gap – Based on the difference between Your Calculated Score and the Best Practice Score, a qualitative description of the gap significance is displayed:Substantial Gap, Significant Gap, Minimal Gap, Best Practice Achieved
Once completed, the PMM Rating Input and Scores worksheet provides the user with a prioritized gap analysis (based on the result in the Significance of Gap column) that guides the user in the development of a strategic plan and supporting business cases. Additionally, the user is provided with a graphical representation of the gap analysis by Measurement Area.
Procurement Maturity Levels
In addition to providing an actionable gap analysis, the Procurement Maturity Model (PMM) graphically plots the subject procurement department against six pre-determined levels of procurement organization maturity: Inhibiting, Performing, Enabling, Optimizing, Best in Class, and World Class. For each of the maturity levels, there are generalizations that represent certain attributes or characteristics of the procurement function. These generalizations are described, by maturity level, in the following illustration.
Procurement Best Practices
The following table describes the best practices contained in the Procurement Maturity Model.
|Measurement Area||Measurement Element||Best Practice|
|Customers||Engagement||Formal process exists which facilitates the involvement of staff early in the customers’ project cycle such that an effective competitive bidding process can be conducted.|
|Customers||Procurement Instructions||Documented procurement instructions manual (or catalog), which describes means by which internal customers acquire goods or services, made electronically available to internal customers.|
|Customers||Relationship Management||Procurement department staff understand the essential need of customer relationship management, and actively and purposefully cultivate and maintain relationships with customers beyond the framework / lifespan of a transaction.|
|Customers||Satisfaction||Regularly-scheduled (no less than annual) customer satisfaction survey actively used by procurement department to identify deficiencies for which corrective action is subsequently taken. Customers made aware of survey results and corrective actions planned / taken.|
|Customers||Status Reporting||Regularly-scheduled reports, provided to customers in a sortable electronic format, that provides current and accurate status of negotiated purchases (such as RFx and contract negotiations).|
|Organization||Best Practices||Documented objectives directed toward achievement of identified, externally-developed best practices.|
|Organization||Business Plan||Documented annual business plan developed with department staff input and purposeful thought, aligned with the vision and mission of the procurement department. Business plan items are specific, measurable, actionable, relevant, and time-bound.|
|Organization||Executive Support||Strategic plan is supported by executive management, and support is evidenced by the allocation of resources, such as budget, headcount, and training opportunities.|
|Organization||Mission Statement||Documented and current mission statement that department staff can either recite or easily locate for reference.|
|Organization||Strategic Plan||Documented and current strategic plan, containing relevant and quality content, approved and resourced by executive management, that department staff are familiar with.|
|Organization||Structure||Highly centralized procurement department which is responsible for at least 90% of all company spend on procurement spend.|
|Organization||Vision Statement||Documented and current vision statement that department staff can either recite or easily locate for reference.|
|Policy||Approval Authority Levels||Documented, formal approval authority levels that are both reasonable (meaning few) and financially prudent.|
|Policy||Business Continuity Plan||Documented, formal business continuity plan that identifies mission critical vendors and procedures for acquiring products and services in the case of a business disruption. Mock scenarios are conducted with vendors no less than annually to assess the capabilities of vendors as well as the accuracy and comprehensiveness of the plan. Procurement department staff are cross-trained and have the ability to work remotely to performance critical job functions.|
|Policy||Delegation of Spend||Involved in at least 95% of the total spend profile. Where spend categories or commodities are excluded or delegated, such exclusions or delegations are documented and formalized.|
|Policy||Procurement Authority||Defined, formalized, and documented procurement accountability and authority.|
|Policy||Procurement Policy||Documented and current procurement policy, containing relevant and quality content, that department staff and internal customers are familiar with.|
|Policy||Procurement Standards||Documented and current procurement standards, containing relevant and quality content, that department staff are familiar with and adhere to.|
|Policy||Record Retention||Documented and formalized record retention policy, consistent with organizational and / or regulatory requirements, and compliance verified.|
|Processes||Audit||To ensure compliance with policies, procedures, and processes, procurement department is routinely audited (no less than annually) by an independent party.|
|Processes||Competitive Bidding Plan||Documented competitive bidding plans created (annually) and resourced to identify and address potential opportunities for expiring / terminating contracts, re-bids, and new purchases.|
|Processes||Cost Reduction Plans||Documented cost reduction plans created (annually) and resourced to identify and address potential opportunities for cost savings related to pre-existing procurement spend.|
|Processes||Forecast||Documented spend forecasts created (annually) and resourced to identify and address potential opportunities for costing avoidance on projected procurement spend.|
|Processes||Negotiation Planning||Negotiations planned for majority of procurements, using a formalized structure for negotiation strategy development. Negotiation planning process tends to be inclusive of internal customers and seeks their input.|
|Processes||Purchase Order Generation||Purchase orders generated electronically, and cover 80% of all procurement spend.|
|Processes||Spend Profile||Spend profile is extracted (no less than quarterly) from a financial system and indicates spend by vendor and major commodity. The spend plan is used to identify opportunities for savings, vendor rationalization, and driving low-value procurement to automation.|
|Staff||Certification||C.P.M. or other industry-relevant certification required for procurement department staff (subject to job level).|
|Staff||Commodity Training||Procurement department staff received twenty-four or more hours of commodity training annually.|
|Staff||Customer Engagement||Customers view procurement department staff as virtual extensions of their own staff, engaging procurement department staff in customer-specific processes, such as customer staff meetings.|
|Staff||Employee Engagement||Third-party surveys conducted annually to determine level of procurement department staff employee engagement; results are benchmarked against other organizations and are acted upon to improve survey results.|
|Staff||General Training||Procurement department staff receive twenty-four or more hours of general training annually in the areas of customer service, “soft skills,” and tools-based skills.|
|Staff||Job Qualifications||Documented job qualifications for procurement department staff, staff seeking mid- to senior-level positions required to have one or more professional designations / certifications, bachelor’s degree in a relevant discipline, involvement in the procurement industry, and significant procurement experience.|
|Staff||Performance Management||Formal, documented performance management process, with at least semi-annual reviews, where employee’s past and current performance is reviewed and corrective action is discussed openly.|
|Staff||Performance Objectives||Annual, documented performance plans that align with annual procurement department strategic plan and business plan.|
|Staff||Procurement Training||Procurement department staff receive twenty-four or more hours of formal and external procurement training annually.|
|Staff||Training Plan||Documented, formal training plan in place for procurement department staff, closely followed, and training objectives included in annual performance plan. Training described by the plan comprises no less than seventy-two hours annually.|
|Tools||Contract Approval Workflow Automation||Contract approvals and workflow are managed using a third-party automated system.|
|Tools||Contract Labor Sourcing System||Where contract labor exceeds 100 contractors annually, an automated third-party system exists to intake contract labor needs from the end customer based on labor profile templates, routes the need to approved vendors, and intakes proposals / resumes from the approved vendors.|
|Tools||Contract Management System||Automated third-party system exists to manage contracts, from the point of intake, through negotiation, and to record retention. System allows for input of vendor and contract data, identification of key issues, documentation of cost savings / avoidance, input of scanned items such as executed contract, and reporting.|
|Tools||Contract Templates||Substantial number of contract templates exist, and procurement department staff are trained on their use, to address at least 80% of possible procurement scenarios.|
|Tools||eRFx||Third-party eRFx system used for 80% of competitive bids.|
|Tools||External Website||Dynamic external website exists, provides information to vendors and access to e-procurement systems such as a vendor portal (for activities such as vendor registration).|
|Tools||Internal Website||Dynamic internal website exists, provides information to internal customers and access to e-procurement systems such as an e-catalog.|
|Tools||P-Cards||P-cards widely used, and a card issuer rebate has been negotiated where p-card related spend exceeds $1,000,000.|
|Tools||Procure-to-Pay Process||Fully automated procure-to-pay processes, through which a significant portion (50% or greater) of procurement spend flows.|
|Tools||Requisition / Purchase Order System||Fully automated requisitions and purchase system, through which purchase orders are generated for a significant portion (80% or greater) of procurement spend.|
|Tools||Reverse Auctions||Online reverse auctioning frequently used for commodity purchases, and guidelines established for use of the tool.|
|Tools||RFx Templates||Standard RFx templates exist and are actively used by procurement department staff. Procurement staff follow a standard process for conducting RFx projects.|
|Tools||Third-party Research||For commodities requiring research, procurement department staff have required access to third-party research.|
|Tools||Vendor Profile System / Vendor Portal||Vendors are provided with an external portal using a third-party automated system to permit vendors to conduct certain administrative functions (such as submitting a W-9, certificate of insurance, or financial information).|
|Tools||Vendor Relationship Management System||Vendor information, such as account contact information and metrics (such as service levels), are actively maintained and utilized using a third-party automated system.|
|Value||Contract Disputes||1% or less of all contracts executed result in a contract dispute within the 12-month period following contract execution.|
|Value||Contract Risk Level||Risk level of contracts are objectively determined using pre-defined criteria, with the risk level being recorded in a contract management system.|
|Value||Contract Template Ratio||80% or more of all contracts executed using procurement department contract templates.|
|Value||Contract Turn-around Time||80% or more of all contracts negotiated and executed within 30 calendar days, with 95% or more of all contracts negotiated and executed within 60 calendar days.|
|Value||Cost Avoidance / Cost Savings||Cost avoidance / cost savings defined, measured, annual goal approved by management, and goal met.|
|Value||RFx Turn-around Time||80% or more of all RFx projects completed and contracted within 60 calendar days, with 95% or more of all RFx projects completed and contracted within 90 calendar days.|
|Vendors||Approved Vendor List||Formal, current, and documented approved vendor list exists, and is used to ensure that 75% or greater of spend is through approved vendors.|
|Vendors||Measurements and Metrics||Vendor performance is objectively measured using pre-defined metrics, with performance recorded and tracked in a contract management or related system. Vendor performance measurement may be related to procurement-specific metrics (such as RFx win rate) and / or contract-specific metrics (such as service levels).|
|Vendors||Vendor Categorization||Formal hierarchy of vendor categories exist, with vendors assigned (via a system or documentation) to the categories. Customers understand the process, and use the process for decision-making purposes.|
|Vendors||Vendor Qualification||Prospective vendors are qualified using a formal, automated process.|
|Vendors||Vendor Rationalization||Vendor rationalization program exists where the vendor base is reduced subject to program criteria and the vendor base is pro-actively managed to the pre-defined level.|
|Vendors||Vendor Recognition||Vendor recognition program exists where vendors are selected (based on quantitative and qualitative criteria) and recognized (with some sort of formal recognition, such as a press release) for their performance.|