2.3 Global Procurement Processes and Best Practices
5 min read•july 30, 2024
Global procurement is a complex process that spans multiple stages, from identifying needs to managing supplier relationships across international borders. It involves , tender processes, and contract negotiations that account for unique global factors like currency fluctuations and varied legal jurisdictions.
Best practices in procurement include developing a clear strategy, conducting thorough spend analysis, and implementing standardized processes. Leveraging technology for automation, integration, and advanced analytics can significantly enhance efficiency and decision-making in global procurement operations.
Global Procurement Process
Stages of Global Procurement
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- The global procurement process involves identifying needs, sourcing suppliers, negotiating contracts, placing orders, expediting, and managing supplier relationships and contracts on an international scale
- Strategic sourcing is the process of developing channels of supply at the lowest total cost, not just the lowest purchase price
- It involves identifying, evaluating, and selecting suppliers that are in alignment with the organizational goals
- Factors considered include supplier capabilities, quality, delivery, innovation, and risk
- The tender process involves preparing and issuing tender documents to potential suppliers
- Documents include Request for Information (RFI), Request for Quotation (RFQ), and Request for Proposal (RFP)
- Bids are evaluated based on price and other predetermined criteria (quality, delivery, service) to select the best supplier
- Contract negotiation in global procurement needs to account for additional factors
- Currency fluctuations, tariffs and duties, payment terms, , and dispute resolution mechanisms across different legal jurisdictions
- Aim to allocate risks and rewards fairly between buyer and seller
Managing Contracts and Suppliers
- Effective contract management involves monitoring supplier performance against (SLAs)
- Identifying and mitigating risks, managing change requests, and building collaborative supplier relationships
- Regular supplier business reviews help identify issues and improvement opportunities
- Procurement closure involves completing all deliveries, making final payments, documenting lessons learned, and transitioning to contract maintenance mode
- Ensures all obligations are met and provides insights for future procurement cycles
- Building long-term, collaborative relationships with strategic suppliers can lead to improved quality, innovation, and risk sharing
- programs can help segment suppliers (strategic, preferred, transactional) and tailor the engagement approach
- Joint improvement projects, gain sharing, and early supplier involvement are examples of collaborative practices
Best Practices in Procurement
Procurement Strategy and Spend Analysis
- Developing a clear, well-defined procurement strategy aligned with organizational goals is critical
- The strategy should outline the procurement organization structure, systems, processes, and Key Performance Indicators (KPIs)
- It should consider the supply market, risk appetite, and stakeholder needs
- Spend analysis provides visibility into global procurement spend across categories, business units, and regions
- It helps identify opportunities for consolidation, cost reduction and process improvements
- Techniques include ABC analysis, Kraljic matrix, and should-cost modeling
- Strategic sourcing decisions should consider (TCO), not just purchase price
- TCO includes costs of ordering, holding inventory, poor quality, delivery, and disposal
- Life-cycle costing and can be used to optimize TCO
Standardization and Supplier Management
- Implementing standard procurement processes and templates ensures consistency and compliance
- Templates for RFx, Purchase Orders (POs), and contracts streamline the procurement process
- Deviations should be justified and approved through a formal process
- Conducting due diligence on global suppliers is critical to assess their capabilities and compliance
- Financial stability, quality standards, ethical practices, and compliance with laws and regulations (FCPA, UK Bribery Act)
- Site visits, audits, and references can be used to verify supplier claims
- Putting in place a supplier performance management system with KPIs and scorecards
- Monitors quality, delivery, cost, and service levels
- Metrics can include (DPMO), (OTIF), and (COPQ)
Technology for Procurement
Automation and Integration
- eProcurement systems automate the procure-to-pay process and provide an online portal for suppliers
- Improves efficiency, transparency, and compliance
- Modules include e-catalog, e-RFx, e-auction, e-PO, e-invoicing, and e-payment
- eSourcing tools streamline the RFx process by allowing online posting of tenders, receipt of quotes, and bid evaluation
- Reverse auctions can be used for price discovery
- Optimization tools can evaluate complex bids with multiple criteria
- Contract management software provides a central repository for all contracts
- Enables tracking of key terms, milestones, and compliance requirements
- Can also automate notifications and workflows for approvals and renewals
- Supplier portals provide suppliers real-time visibility into POs, deliveries, invoices, and payments
- Allow suppliers to update their information, certifications, and performance scorecards
- Enable collaboration on forecasts, quality, and innovation
Advanced Analytics and Emerging Tech
- (RPA) can automate repetitive, rule-based procurement tasks
- PO and invoice processing, data entry, and reporting
- Chatbots can handle routine supplier queries and requests
- Analytics and Artificial Intelligence (AI) tools can analyze large volumes of procurement data
- Provide insights and recommendations for decision making
- can forecast demand and identify potential supply risks
- can automate tactical buying tasks
- Blockchain has the potential to transform procurement by creating tamper-proof records
- Enables smart contracts, and enhances traceability across the supply chain
- Can streamline processes like order tracking, invoice reconciliation, and conflict resolution
International Logistics Management
Global Supply Chain Design
- Designing an optimal global supply chain network involves strategic decisions
- Facility location, transportation modes, inventory positioning, and outsourcing
- The goal is to balance cost, service levels, and risk
- Techniques include network optimization, simulation, and scenario planning
- Evaluating different international transportation options is important for balancing speed, cost, and reliability
- Modes include air, ocean, rail, and road
- Consolidation and cross-docking can be used to optimize loads and reduce handling
Trade Compliance and Risk Management
- Harmonized System (HS) codes are used to classify internationally traded products
- Accurate HS codes are required for determining tariffs and duties and ensuring customs compliance
- Misclassification can lead to delays, penalties, and reputational damage
- Incoterms define the division of costs and risks between buyers and sellers for international shipments
- Choosing the right Incoterm (EXW, FOB, CIF, DDP, etc.) impacts pricing and risk exposure
- Factors to consider include transportation mode, cargo value, and insurance
- Implementing a global trade management (GTM) system can help automate compliance checks
- Calculates landed costs, manages export/import documentation, and streamlines customs clearance
- Ensures adherence to preferential trade agreements and restricted party screening
- Establishing a network of bonded warehouses and foreign trade zones (FTZs) can help defer or avoid duties and taxes
- Bonded warehouses allow duty-free storage of imported goods until they are sold or re-exported
- FTZs allow duty-free manufacturing and distribution, with duties paid only when goods enter the domestic market
- Managing global supply chain risks requires proactive identification, assessment, and mitigation
- Risks related to suppliers, geopolitics, natural disasters, economic conditions, and logistics disruptions
- Strategies can include multi-sourcing, buffer inventory, and scenario planning
- Monitoring tools like supplier risk scorecards and real-time event alerts can provide early warning
Key Terms to Review (28)
CIPS Certification: CIPS Certification refers to the qualifications offered by the Chartered Institute of Procurement & Supply, which aim to enhance the skills and knowledge of procurement and supply chain professionals. This certification is recognized globally and signifies a commitment to best practices in procurement processes, helping individuals and organizations improve their procurement strategies and operational efficiency.
Cognitive Procurement: Cognitive procurement refers to the application of artificial intelligence (AI) and advanced analytics to improve procurement processes by enabling better decision-making and efficiency. This innovative approach allows organizations to analyze vast amounts of data, predict outcomes, and optimize supplier relationships, enhancing the overall procurement strategy.
Competitive bidding: Competitive bidding is a procurement process where multiple suppliers submit proposals to win a contract for goods or services. This process encourages price competition and quality improvement, ensuring that the buyer receives the best value for their investment. It is often utilized in global procurement to streamline sourcing, enhance transparency, and foster a competitive market environment.
Contract compliance: Contract compliance refers to the process of ensuring that all parties involved in a contract fulfill their obligations and adhere to the terms and conditions outlined in the agreement. This concept is essential for maintaining accountability and transparency in global procurement processes, as it ensures that suppliers deliver goods and services as promised while meeting legal and regulatory requirements.
Cost analysis: Cost analysis is the process of evaluating the costs associated with a business operation or project, focusing on identifying, quantifying, and analyzing both direct and indirect costs. It helps organizations make informed decisions by comparing costs against the benefits of procurement choices and supplier engagements. This method aids in optimizing spending, improving efficiency, and ensuring value for money in procurement processes and supplier selection.
Cost of poor quality: Cost of poor quality refers to the total costs incurred when a product or service fails to meet quality standards, which includes costs associated with rework, scrap, warranty claims, and lost sales due to reputation damage. Understanding this cost is crucial in procurement processes as it highlights the financial impact of quality issues and emphasizes the need for effective quality management practices throughout the supply chain.
Cost savings: Cost savings refer to the reduction of expenses in various operational areas of a business, leading to improved profitability and efficiency. This concept is critical in procurement and sourcing strategies, as organizations aim to minimize expenditures while maximizing value and quality from suppliers. By effectively managing costs through strategic initiatives, businesses can enhance their competitiveness and sustainability in the global marketplace.
Defects per million opportunities: Defects per million opportunities (DPMO) is a quality measurement that indicates the number of defects in a process for every one million opportunities for those defects to occur. This metric helps organizations assess the effectiveness of their processes and identify areas for improvement, particularly in the context of quality management and continuous improvement initiatives. By quantifying defects relative to opportunities, businesses can better understand performance levels and set benchmarks for quality improvement efforts in procurement and supply chain operations.
E-procurement: E-procurement is the process of using electronic methods, particularly the internet, to purchase goods and services. This method enhances efficiency in procurement by automating processes, facilitating real-time communication, and enabling better management of suppliers, thereby optimizing the entire procurement lifecycle.
E-sourcing tools: E-sourcing tools are digital platforms that facilitate the procurement process by enabling organizations to source goods and services electronically. These tools streamline communication, enhance collaboration with suppliers, and provide access to a broader range of sourcing options, ultimately improving efficiency and reducing costs within global procurement strategies.
Global sourcing strategies: Global sourcing strategies refer to the methods and approaches organizations use to procure goods and services from international suppliers. These strategies aim to optimize costs, enhance quality, and improve overall supply chain efficiency while considering factors like market dynamics, geopolitical influences, and cultural differences. The effectiveness of global sourcing relies on selecting the right suppliers and managing relationships to align with organizational goals.
Harmonized System Codes: Harmonized System Codes are internationally standardized numerical codes that classify traded products, allowing for uniform identification and regulation across countries. These codes facilitate global trade by providing a common language for customs and trade officials, ensuring that products are classified consistently and accurately, which is essential for effective procurement processes and best practices in supply chain management.
Incoterms: Incoterms, or International Commercial Terms, are a set of predefined rules that clarify the responsibilities of buyers and sellers in international transactions. They provide a standardized way to define key aspects like delivery, risk transfer, and shipping costs, which are crucial in facilitating global trade. Understanding Incoterms helps businesses navigate logistics, customs procedures, and cost allocations effectively.
ISO 20400: ISO 20400 is an international standard that provides guidance on integrating sustainability within procurement processes. It emphasizes a strategic approach to sustainable procurement, helping organizations make informed decisions that consider environmental, social, and economic impacts throughout the supply chain.
Just-in-time purchasing: Just-in-time purchasing is a strategy aimed at reducing waste and improving efficiency by receiving goods only as they are needed in the production process. This approach connects closely with global procurement processes and best practices by ensuring that inventory levels are minimized, thus lowering holding costs and enhancing responsiveness to market demands.
On-time in-full: On-time in-full (OTIF) is a key performance metric in supply chain management that measures the efficiency of delivering products to customers at the right time and in the correct quantities. This concept emphasizes both the timeliness of deliveries and their completeness, ensuring that customers receive exactly what they ordered without delays. Achieving OTIF is crucial for maintaining customer satisfaction and optimizing supply chain processes, reflecting effective planning and coordination among various stakeholders involved in global procurement.
Predictive analytics: Predictive analytics is the process of using statistical algorithms, machine learning techniques, and data mining to analyze historical data and make predictions about future events or trends. It helps organizations anticipate outcomes, optimize decisions, and enhance operational efficiency in various domains.
Procurement software: Procurement software refers to digital tools designed to streamline the purchasing process, enhance supplier management, and improve the overall efficiency of procurement activities. These solutions help organizations automate their procurement tasks, from sourcing and contract management to invoicing and payment, leading to reduced costs and improved compliance. By leveraging procurement software, companies can gain better visibility into their spending patterns and supplier performance.
Purchase order management: Purchase order management is the process of creating, processing, and tracking purchase orders to ensure that goods and services are acquired efficiently and effectively. It involves overseeing the entire procurement lifecycle, from issuing purchase orders to receiving goods and managing supplier relationships, ultimately contributing to better inventory control and financial planning.
Robotic process automation: Robotic process automation (RPA) is a technology that uses software robots to automate repetitive and rule-based tasks typically performed by humans. This technology is essential for streamlining processes, enhancing efficiency, and reducing errors within various operational frameworks. By mimicking human actions, RPA can significantly improve productivity in areas such as procurement and supply chain management, leading to more effective and responsive operations.
Service Level Agreements: Service Level Agreements (SLAs) are formal contracts between service providers and their clients that outline the expected level of service, including quality, availability, and responsibilities. They serve as a benchmark for measuring performance and ensure that both parties have a clear understanding of their obligations in the procurement process.
Strategic sourcing: Strategic sourcing is a systematic process that organizations use to optimize their procurement activities, aiming to acquire goods and services at the best possible total cost while maintaining quality and supplier relationships. This approach involves assessing the overall supply chain and making data-driven decisions that align with the organization's long-term goals, which encompasses everything from supplier selection and evaluation to cost management and best practices in global procurement.
Supplier performance metrics: Supplier performance metrics are measurable indicators used to evaluate the efficiency and effectiveness of suppliers in fulfilling their obligations. These metrics help organizations assess supplier reliability, quality, delivery performance, and overall contribution to supply chain success, enabling informed decision-making for strategic sourcing and procurement processes.
Supplier relationship management: Supplier relationship management (SRM) is the systematic approach to managing an organization’s interactions with its suppliers, aimed at optimizing the value derived from those relationships. SRM involves assessing supplier performance, facilitating communication, and fostering collaboration to improve service delivery and reduce costs. This strategy enhances procurement processes, aids in strategic global sourcing, and serves as a critical component in driving success in global supply chain operations.
Supplier risk assessment: Supplier risk assessment is the process of identifying, evaluating, and prioritizing potential risks associated with suppliers that could impact a company's operations or supply chain. This process helps organizations understand various risk factors, such as financial stability, compliance issues, and geopolitical risks, allowing them to make informed decisions about supplier selection and management.
Total Cost of Ownership: Total Cost of Ownership (TCO) is a financial estimate that calculates the complete costs associated with the acquisition, use, and maintenance of a product or service over its entire lifecycle. This concept emphasizes that the initial purchase price is just one component of overall expenses, as ongoing operational costs, maintenance fees, and potential disposal costs can significantly impact the bottom line. Understanding TCO helps in making informed sourcing and procurement decisions by evaluating long-term value rather than just upfront costs.
Value Analysis: Value analysis is a systematic method aimed at improving the value of a product or service by assessing its functions and costs. This approach focuses on maximizing the function of a product while minimizing its cost, ensuring that necessary features are retained without unnecessary expenses. The process emphasizes collaboration among different stakeholders to identify opportunities for cost savings and enhancements, making it a vital practice in procurement and sourcing strategies.
Vendor selection: Vendor selection is the process of evaluating and choosing suppliers who can provide the necessary goods or services to a company. This process is crucial for ensuring that the organization partners with vendors that meet quality standards, cost-effectiveness, reliability, and compliance with regulations. A strategic vendor selection process can enhance overall procurement efficiency and contribute to the company's competitive advantage.