How to Optimize Your Procurement Cycle Time
When organizations are in the start-up phase and economic times are prosperous, you will often find that procurement cycle times are quick, efficient, and whatever is needed is easy to obtain. This is because organizations are chasing revenue and trying to grow as quickly as possible - so the procurement culture has a “just get what we need” mindset.
As businesses mature, revenue slows, and the economic landscape takes a negative turn, you may have started to witness a swift change in procurement practices. The most common procurement strategy to implement during this stage is to set up a “multi-user approval” system, in which now purchase requests (PRs) have to go through multiple users before execution. This has contributed to a much longer PO execution timeframe and further prolonged lead times. This affects all individuals involved, trickling down to the customer who is now stating they are falling behind on their project. Business owners no longer seek to go through procurement as lead times are simply too long.
While this is a problem, this is a common shortfall that many organizations fall victim to and can be cured. With that being said, you may be wondering - how can I reign in company spending while also optimizing my procurement cycle time?
Understanding Your Procurement Processes and Cycle Times
You will need to thoroughly understand your procurement processes and cycle times for each process. Considering looking into standard operating procedures (SOPs) and creating process flow charts for all procurement processes. You may even want to time each step and identify which takes the longest. This will be key in identifying bottlenecks.
The key processes will include new vendor setup, infosec data security validation, sourcing, contract, procurement request (PR) submission to purchase order (PO), and invoice. Ensure that the process owners fully comprehend the critical path items impacting cycle time. Each process owner should have a quarterly metric that measures actual cycle time.
Some procurement processes may be optional, so it is essential to understand the filter process on determining whether process steps can be skipped. The three optional process steps include the following:
New Vendor Setup
Infosec
Contract
The key here is to have clear insight into whether or not process steps are required. For example, let’s say a business owner wants to hire a bus transport company for a social event. Infosec policy states it needs to go through a data security process, and after three weeks the infosec team says that security assessment is not required for this spend. This means three weeks were lost without any true value or gain, which would be frustrating for the business owner. Therefore, be sure to understand/refine the filters to ensure when these optional processes are actually required.
Comparing “Estimated” to “Actual” Cycle Time
A key metric to implement would be the comparison between “estimated” and “actual”, as these two may be drastically different. “Estimated” may be automatically computed based on spend request variables entered by the business owner, or completed manually upfront at the time of spend request by a procurement analyst.
Let’s say that the “estimated” cycle time is eleven weeks, while the “actual” cycle time comes in at fourteen. That is almost a month’s difference between “estimated” and “actual”. An analysis can be conducted each quarter showcasing these results and aid in the decision of what to do moving forward. Not to mention that it will allow team members to speak to what caused the “actual” cycle time to be much longer than the “estimated”.
The issue with most procurement organizations is that the “estimated” cycle time is not messaged to the business owners at the time of spend request. Business owners often have no idea how long a procurement request is going to take, which puts a strain on relations when the customer has no idea how long it will take to PO execution.. This makes procurement easy to blame, as the procurement request sat in their bucket for weeks and the business owner thought execution would be in a much smaller timeframe.
This is why procurement providing the “estimated” cycle time helps with building credibility to business owners and also sets expectations on when they likely will get a PO executed. Procurement needs to ensure that they take full responsibility for comparing “estimated” to “actual”, or there will surely not be an improvement in procurement cycle times.
Weighing the Benefits of Procurement Policies
When there are procurement governance issues, you will very often see that procurement policies will change and be implemented. For example, let’s say that a key supplier has gone out of business and has a material impact on the company’s revenue. Internal audit will then implement a financial viability assessment for all suppliers at the time of new supplier setup and then repeat every twelve months. This is a reactive policy and makes sense, but the cycle time impact to do the financial assessment on private companies results in additional weeks to the cycle time.
The more complex your procurement organization becomes, the more policies will be implemented - meaning longer lead times for everyone involved. Therefore, be sure to take a look at all policies in place and really consider the benefit of them being in place. In this case, the benefits of this process change to assess financial viability may be overweighed by the additional cost of adding weeks to the cycle time.
Optimizing Your Procurement Cycle Time
Procurement organizations need to instill a strong emphasis on procurement cycle times to ensure that they can meet business owners' expectations. Priority one should always be to meet the business needs of each spend requirement, with an emphasis on timely execution.
Mike Glass runs GPC (Glass Procurement Consulting), a procurement consulting firm focused on optimizing a company's spend. Mike has worked in senior procurement management positions at NVIDIA, Google, Meta, Fitbit, and Flextronics. Mike would enjoy getting your insight on any procurement topic, feel free to contact Mike at mike@glassprocurementconsulting.com.
