Small business owners wear many hats, and a multitude of demands (staffing, financing, inventory management, marketing, and customer service) quickly consume their time, focus, and daily operations. As a result, procurement tends to be an afterthought — when it should be approached strategically.
Small businesses spend between 45 and 65 percent of sales revenue on procurement of inputs. Therefore, procurement should be considered a viable opportunity to reduce costs and improve efficiency.
Small businesses are most often viewed as simply being smaller versions of big firms. However, research on small business buying behavior suggests they face a unique set of challenges. For instance, small businesses have informal organizational settings, less specialization in business functions, and fewer available resources. Management in smaller organizations tends to focus more on the overall operations and less on specific business functions such as procurement. However, an entrepreneurial venture can benefit from acting like bigger organizations when appropriate.
The following are five strategies that can help small- and mid-sized businesses in nearly any stage of their procurement efforts.
1. Leverage Technology
Technological improvements give companies more time and information while allowing for easier integrations. Faster devices operating on improved connections allow business tasks to move more quickly than ever. For example, small business owners are increasingly subscribing to cloud-based software services, with spending on such technology up 7 percent from last year, and 85 percent of small businesses planning to spend more on software over the next five years.
Other examples of how technology can assist with procurement include integrated ERP and accounting systems, supply chain management software, warehouse management system, and supplier management systems.
Studies have shown that the right technology can have a positive influence on a business’s strategic purchasing, logistics integration, and business performance. However, technology can falter and be difficult to learn, and small businesses face greater financial challenges and risk when adopting new processes and tools. Well-developed, proprietorial ERP are expensive to implement. Entrepreneurs should seek open-source software (OSS) as a viable means of acquiring procurement tools.
2. Build And Maintain Strategic Partnerships
Strong supplier relationships for both direct and indirect spend categories provide great benefit for small businesses. To this end, small firms should seek strategic partnerships with key suppliers. Purchasing from fewer suppliers saves time and resources while building trust. A small business owner can talk openly with a strategic partner and ensure the company is not overspending due to unnecessary costs.
Additionally, if there are avoidable costs, the supplier will likely be motivated to assist in eliminating them as it likely makes their business operate more efficiently, too. For example, neither party benefits from unnecessary customization when a standard product serves the same purpose. Strong supplier relationships lead to increased bargaining power in negotiations, as these discussions should revolve around mutually beneficial outcomes.
3. Improve Internal Procurement Processes
In addition to improvements in technology and supplier relationships, entrepreneurs should seek internal structural changes in their procurement process.
By evaluating suppliers within a standardized system, a small business can track supplier performance over time in terms of flexibility, on-time delivery, costs, and quality. This process will make apparent any inefficiencies and help create an ordering calendar for each individual category. The data collected here can be used to evaluate the company’s supply chain as a whole and locate any opportunities to shorten it.
Procurement efforts should also include annual analysis of spend and demand, with supplier pricing reviews occurring semi-annually or even quarterly. Use spend analysis to detail all costs and terms associated with procurement and demand analysis to define essential needs with a focus on improving cost and quantity.
Overall, internal procurement processes should try to resemble bigger businesses with rules in buying and structured employee training. Standard buying practices help control costs, provide accountability, enable tracking and monitoring of spend, make reporting easier, and set the stage for growth.
4. Organize With Others To Increase Buying Power
A small business with the latest and greatest technology, improved procurement processes, and strong strategic partnership with suppliers can still fall short of optimal purchasing savings due simply to their relatively small size. That's because small businesses inevitably have less purchasing power due to lower volumes.
The solution to this challenge comes in the form of purchasing consortiums. Partnering with other small businesses can yield volume discounts and achieves savings. Consortiums put the benefits of economies of scale into effect for small businesses that would otherwise be left paying premiums.
5. Outsource Procurement Needs
Due to the hectic nature of roles in small businesses and the time and expertise required to successfully complete a procurement initiative, an entrepreneur should consider outsourcing the work to specialists which may ultimately save the company money and produce greater savings.
These recommendations are to be considered together. Great technology is ineffective without a strong internal procurement process. Likewise, trying to organize with a buying consortium will not go over well if the company has not clearly analyzed and defined its own requirements. A small business should be wary of generic procurement rules of thumb should. Instead, each project should receive its appropriate diligence.
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