There is a new awareness of the purchasing function and it is an emerging function in many companies. In an increasingly competitive environment, preserving margins is a priority. Achieving gains in terms of productivity, as well as in purchasing, is becoming more and more a key strategic focus. In order to remain competitive in sales, companies have a strong interest in taking advantage of this competitive universe in purchasing. An update on the 6 steps of the purchasing process, to identify areas for improvement.
Step 1: Identification of the need
When faced with an issue, the company identifies a need, which results in the purchase of a product or service.
Internally, the company may, for example, need new equipment in order to launch a new product. It may also want to replace a machine that has just broken down or simply seek a better quality/price ratio. The need may also arise externally: the buyer may have the idea for an acquisition at a trade fair, by seeing an advertisement or by listening to a representative present a new product.
To improve an existing product or to innovate, to reduce purchasing costs by seeking the best value for money: the identification of the need is dictated by a policy of performance gains. At this stage of the purchasing process, it is a question of making the need emerge so as to be able to source suppliers capable of solving the problem.
Step 2: The description of the product characteristics
Specifying the need allows the company to establish exhaustive and rigorous specifications. This document serves as the basis for the rest of the purchasing process. At this stage, it is a question of detailing the characteristics and technical specifications sought in order to address the problem in the best conditions. This process involves a number of questions:
- Does the research relate to a standard or complex product ? In the case of a complex product, the opinion of third party experts may be necessary to determine precisely the expected characteristics, and to prioritize the selection criteria – price, lead time, longevity, etc. – in order to determine the best solution…
- What are the core components of the product and which components can be standardized ? The goal is to detail the technical specifications required, using the value analysis method. The company examines the product in its technical specifications and evaluates the order of importance of the individual components. At stake: cost reduction. Some components can be modified, standardized or manufactured more cheaply without affecting the overall quality of the product. In order to visibly reduce costs, it is important to look at the most expensive components and at those with a life expectancy that exceeds that of the finished product.
Step 3: Drafting the specifications
Is it necessary to issue a tender ?
Conducting a call for tenders is a cumbersome and costly procedure that should be used sparingly. If the purchase is for a strategic product, a major purchase offering substantial profit potential, it is advisable to launch a call for tenders. This will challenge the usual suppliers, who will have to question their offers and business practices. The call for tenders is also relevant in the context of a new purchase, or to look for new technical solutions. The call for tenders should contain the terms and conditions, according to your needs, and a questionnaire in order to obtain additional information about the company.
The preparation of an invitation to tender leads to the drafting of the specifications. The more precise and informative the specifications are, the easier the next steps in the purchasing process will be. A good specifications document (Statement of Work = SOW) should allow suppliers to offer several solutions. In all cases, the SOW should clearly specify the expectations that the product or service must meet, an estimate of the annual volume and a description of the context (problems encountered, services involved, budget allocated). Depending on your needs, the specifications can take different forms :
- A technical specification that describes a request in terms of solutions and means of implementation. This document can detail precisely everything that is expected from the product or service, through general and individual specifications.
- A functional specification that describes the demand in terms of needs and expected services. This document describes the function expected by the product or service, leaving the door open to various technical solutions.
In both cases, you can rely on the 5W1H method: who, what, where, when, how, how much, why, to describe your requirement from every angle.
Step 4: Supplier sourcing
Sourcing must allow the selection of the best suppliers. In this context, it is important to gather all the information necessary to have a good knowledge of the market.
- Draw up an exhaustive list of referenced suppliers, extending to potential suppliers not identified. Internet, professional directories, supplier catalogue… All means are good to identify potential suppliers by country. To assist you in this market prospecting, it may be useful to have a subscription to sites providing access to professional directories, or a subscription to professional journals.
- Submit RFIs, requests for information, to the potential suppliers previously identified, in order to collect more information about them.
- Monitor supplier approvals. This step involves sending additional RFIs and conducting supplier audits to minimize financial risks and ensure technical reliability and logistical capabilities.
Also read : What is sourcing ? Definition !
Step 5: In-depth analysis of applications
With or without a call for tenders, you now have several candidates to meet your needs. These must now be screened against the elimination criteria, before the remaining offers are analysed in more detail.
Perform a pre-screening
Start by defining elimination criteria. These can be a particular technical skill, geographical location or the search for a specific industrial equipment. This initial selection can then be followed by a multi-criteria analysis to evaluate the remaining candidates.
Carry out a detailed analysis of each proposal
The buyer establishes a list of criteria, ranked in order of importance, and evaluates the performance of each company on each criterion. Of course, depending on the situation encountered, the importance of the criteria fluctuates. For routine purchasing products, for example, timeliness and price are key attributes, followed by the supplier’s reputation. Conversely, for products that require a change in internal operating methods, the priority criteria are technical assistance, the supplier’s adaptability and the reliability of the product.
It is then advisable to find out the overall cost of acquisition and commercial conditions by asking suppliers for detailed costing. The terms of payment requested should be acceptable and the proposed Incoterms advantageous, depending on the geographical location. Finally, it is important to ensure that the timeframe is appropriate and under control.
At this stage, you should also take into account the adaptability, financial security and sustainability of the company!
The list of objective and subjective criteria to be taken into account
- The price
- Geographic location
- Terms and conditions of payment
- Respect of delivery times
- Ease of operation or use
- Ease of maintenance
- Relevance of the product/service to the user’s needs
- Reliability and product quality
- The technological maturity of the solution
- Technical specifications
- The existence or not of technical services offered
- The existence or not of training offered by the supplier
- Duration of training required
- The after-sales service
- Pre-existing relationships
- The supplier’s prestige and reputation
- Perceived competence
- The personality of the interlocutors, the professional “feeling”.
How many suppliers for the same product ?
Today, companies tend to drastically reduce their number of suppliers. The strategy of increasing the number of interchangeable suppliers is thus being abandoned in favour of other strategies such as using two suppliers in parallel. In this way, the buyer avoids over-dependence. Rather than using a single supplier, it is possible to choose a preferred supplier, which will be used in 80% of the cases, relying on a second supplier for the rest.
Step 6: Preparing for the negotiation
With the information gathered in the previous phase, you should be able to develop a negotiation strategy. If the buyer has a lot of information about a registered supplier, a new supplier may be more difficult to approach. The focus should then be on its economic situation, its business forecasts, its production resources and its competitive positioning.
Technical preparation of the dossier
This stage consists in determining the administrative and technical clauses to be negotiated, as well as the objectives to be achieved. The buyer needs to prioritize: to know on which clauses he can agree to make concessions to the seller. He must set realistic and ambitious objectives.
In addition to enquiring about the characteristics, performance and final positioning of the product, it is necessary to find out about the supplier’s dependency rate. Knowing the share of company purchases in the supplier’s turnover will make it possible to assess the balance of power and use it as leverage during negotiations.
Opting for sequential negotiation
Rather than negotiating en bloc, addressing all clauses at the same time, it is recommended to negotiate sequentially. With this approach, the buyer does not move on to the next clause until it has achieved its objective on the first clause. It is then better to start with the easiest points, before finishing on the most sensitive ones.
Negotiation helps to reinforce the stakes and to identify the risks. It is also an opportunity to lower the cost and to lay the foundations of a relationship of trust with the supplier, in order to move towards a partnership. In this sense, it is preferable to carry out an individual interview with each supplier consulted. This approach will enable the proposal to be revalidated, whether in terms of quantity, price or lead time, but also to assess the risks: stock shortages, production planning, substitute products, etc. Finally, it is an important step in renegotiating pricing conditions, by acting on the purchase volume, payment terms or transport.
At the end of this process, a contract is signed. This must include the following elements: quantity, price, deadlines, price revision, compensation clause, as well as mentioning the competent jurisdiction in case of dispute.
Conclusion: A successful purchasing process requires careful work. This is a crucial exercise, as selecting the wrong supplier can jeopardize your entire business. To help you with all or part of this process, you can rely on the sourcing expertise of ISP Group. As an organisation entirely dedicated to reducing and optimising purchasing costs, we have been helping companies with their purchasing issues for more than 15 years. As an international expert with in-depth knowledge of the market, we are able to identify and interview the best suppliers for you, in accordance with your requirements in terms of quality, price and deadlines, – of course – but also in terms of risk management. In addition to saving you time and tedious work, ISP Group enables you to increase your performance while establishing a long-term relationship with your new business partner.