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The Path to Greater Procurement Efficiency

Published Date

Estimated reading time: 5 minutes, 35 seconds

(Source: Murrstock/Stock.adobe.com)

Published October 17, 2024

Electronic component procurement is a highly competitive, fast-paced, and rapidly evolving industry. Industry experts acknowledge that many inefficiencies exist from various sources, and procurement professionals must identify, understand, and eliminate them to not just keep up with the market but to stay proactively ahead of it.

Common Inefficiency Sources

From the top down, supply chain management plays a significant role in the electronic components industry. Globalized supply chains, along with unexpected world events such as inflation, geopolitical tensions, natural disasters, and rapidly evolving regulations, join normal and abnormal market fluctuations that threaten the delivery of electronic components from suppliers to manufacturers and end customers. Efficient and effective supply chain management is critical to the industry’s resilience.

Inefficient planning results in supply disruptions and longer lead times. In normal conditions, efficient planning is a must. However, the lack of planning is magnified when combined with unforeseen national, global, or even local events. Excess inventory, stockouts, last-minute sourcing, and increased operations and transportation costs affect the bottom line and the relationships of all involved.

In many cases, the lack of clear communication results in confusion about requirements and specifications, which can lead directly to errors, delays, and quality issues. Miscommunication often results in electronic components that are incorrectly ordered or manufactured, delays, rework, elevated costs, and even product failures. Poor communication also affects efficient decision-making, coordination, and supply-chain agility.

A more hands-off approach is better in procurement since hands-on means more significant use of manual processes. Paper invoicing and manually matching invoices to purchase orders are still being used, but at a cost. In Jaggaer's The State of Procurement 2024, 42 percent of respondents said that highly manual processes and not enough time to think strategically are holding procurement back.[1] While many corporations understand the value of automating as many procurement processes as possible, automation still represents something “out there” in the future for others. Given that artificial intelligence (AI) is increasingly being used in procurement solutions, the technology gap is only widening for these companies.

When examining common inefficiency sources, how many steps are you asking the participants—from procurement pros to vendors—to perform? Ask yourself and the team how these inefficiencies can be reduced.

Using an Audit to Identify Inefficiencies

One way to ensure efficiency, effectiveness, and compliance in your procurement procedures is to perform an audit. An audit encompasses internal controls, supplier solicitation, negotiation, selection, purchase order and contract management, contract adherence, and operational efficiency.

Audits take time and must be recurring. The audit team is tasked with reviewing contracts, purchasing records, phases of the existing procurement process, bid assessment, contract management, discrepancies and why they occurred, and bottlenecks. The audit aims to ensure that your organization is meeting regulations, minimizing risks, and refining procurement practices to improve consistently.

When preparing for the audit, gather documentation such as updated procurement policies and procedures, vendor contracts and agreements, purchase orders (and supporting documentation for each), invoices and payment records, goods received and delivery records, vendor profiles, and vendor performance assessments. Other helpful files may include evaluation criteria and vendor scoring records, correspondence, and internal process-control documentation such as authorization processes, actions taken (or not yet taken) as a result of previous audits, and procurement budgets.

After gathering documentation, audit steps should include the following:

  • Define the audit team by appointing a lead auditor and delegating authority to team members.
  • Conduct interviews with stakeholders.
  • Identify procurement process problems.
  • Perform in-depth procurement analytics.
  • Review vendor relationships, agreements, contracts, and ethical vendor selection practices.
  • Examine existing internal controls.
  • Investigate out-of-process spending.
  • Evaluate training.

The resulting analysis should ensure that procurement aligns with policies, standards, and legal requirements. It should identify workflow barriers, assess control effectiveness for optimal procurement efficiency, and evaluate the use of resources—personnel, technology, and budget—to maximize productivity while maintaining quality. Additionally, it should include risk identification and assessment.

One of the most valuable assets in procurement is the procurement staff itself. They should be engaged in identifying pain points they experience in component sourcing, surveyed to gather their valuable insights, trained on best practices and new technologies, and challenged (in a positive way) to embrace improvements.

When the analysis is finished, present the report findings and recommend trackable and updated methods for going forward.

Procurement analytics provide a way to understand the past while guiding the future. In the not-too-distant past, procurement analytics concentrated on history, such as past procurement spending and supplier performance. The focus is now moving to automated and prescriptive decision-making that meets the growing needs of procurement organizations facing digital transformation. Procurement analysts now include data from outside the procurement organizations.

The benefits of procurement analytics include improved forecasting, budget management, risk mitigation, and disruption management. Analytics allow for performance benchmarking and further delving into quality management and performance development. Finally, they unveil future opportunities for consolidation, prioritization, and focus.

Automation and Digitalization

Misusing technology (or neglecting it entirely) can hinder procurement efforts. Extracting large amounts of valuable data is challenging, but extracting it from various internal and external sources can make it more difficult. Therefore, evaluating and choosing procurement software is the first step if you haven't yet automated or are in the early stages. Here's a short list of items to pay attention to:

  • Avoid a primary focus on spend classifications and master data management and move toward gaining strategic insight.
  • Take a high-level view of procurement, but also be able to view details. Choose dashboards that provide data transparency down to transactions.
  • Take the time to review customer references.
  • Align with your organization's departments, including IT, legal, and finance, and make sure they are involved in evaluating the software.

To reach a true level of efficiency, your procurement process must be automated. But where do you start?

The three procurement processes easiest to automate are invoicing, accounts payable, and payment reconciliation. But that's just the first step. By moving toward digital transformation, you can discover, interpret, strategize, streamline, and communicate procurement patterns, allowing you to tap into accurate, real-time data.

Procurement software and digital tools are at the forefront of the digital transformation that drives efficiency and successful outcomes. They include electronic procurement systems, supplier management platforms, contract management solutions, and spend analysis. Pay close attention to software and tools that involve bringing AI to your procurement efforts. AI-based digital transformation brings new opportunities for efficiency, innovation, and strategic value creation.

As electronic component procurement continues to evolve, digital technologies will represent a defining factor in the competitiveness and resilience of your organization.

 

Sources

[1]https://www.jaggaer.com/download/ebook-guide/state-of-procurement-2024