Best practices in procurement management

Procurement management is an operational aspect of business that has long been underestimated. In light of the economic relevance of procurement and the strategic impact of suppliers, companies need extensive expertise as well as the right tools to deal with supply chain, partners, value and risks.

Procurement management was the topic of two different research outputs which both underscored the central role of the function as a critical component of effective organizational management. The first, published in 2004, was entitled Strategic Procurement Management: Current Best Practices. The focus here centered on the basic choices underpinning critical procurement processes and how they build competitive advantage. These organizational decisions involve, among other things, whether to make or buy; partnerships with suppliers; the degree of insourcing or outsourcing for procurement; marketing procurement and its main levers; sourcing formats and strategies (also with an eye to emerging markets); and the structure of procurement activities.

A second 2005 publication, entitled Purchase Products and Services Processes, Approaches and Managerial Solutions, fleshes out the earlier study, exploring indispensable operational choices for procurement management. These choices are analyzed from the standpoint of the short-term effects arising from the application of appropriate methodologies and tools, which are selected to specifically address the problem of procurement. This study offers a comprehensive illustration of managerial practices used to deal with the supply chain for direct and indirect materials and services, detailing all operational processes: managing the procurement process and the Total Cost of Ownership approach; arranging and purchasing direct and indirect materials and services; ICT tools; the role of virtual marketplaces and criticalities in using Electronic-Reverse Auctions; models for assessing and selecting suppliers; criticalities and methods for building an accurate performance evaluation system for the procurement office.

A number of critical observations emerge from both studies. The importance of procured goods (profit impact) and the complexity of the supply market (supply risk) directly affect corporate strategies and the proper functioning of the procurement office. Companies that have not yet set up a clear procurement structure risk losing ground to their more evolved competitors. The solution would be to focus more on new positions at the level of corporate strategy and culture, shifting toward a more proactive leadership open to collaborating with external players. This is especially true today, when procurement processes are attracting a great deal of attention and undergoing major changes.

First, the crises triggered by the Covid-19 pandemic and the scarcity of critical components for entire supply chains underscore how procurement decisions must align with managerial approaches to business continuity, in an attempt to balance cost objectives with flexibility, service and resilience. Many companies have completely overhauled their performance measurement systems for procurement to factor in relevant variables for their business.

Second, due to digitalization processes, managing procurement now means mastering new technologies, introducing a variety of operational models based on complex systems such as Artificial Intelligence. What proves relevant in such projects is not only the capacity to evaluate technologies in terms of how they can upgrade efficiency and effectiveness, but also the ability to guide and shape the change in people and organizations that these technologies bring about.

A relevant evolution which was not revealed in the 2004-2005 research has to do with procurement’s contribution to sustainability. Environmental and social impacts were already embedded in procurement policies at that time. But because of the strategic nature and the visibility that these aspects are taking on today at various levels, every procurement management team is working to implement measures to improve the performance of the entire supply chain.