What Is Operational Procurement? A Complete Guide
Operational procurement is the backbone of any successful business. It ensures that the goods and services needed for daily operations are acquired in a timely, cost-effective, and efficient manner so that the company can focus on its core business activities. Without a well-managed and optimized operational procurement process, businesses can face delays, increased costs, and inefficiencies in their operations.
In this article we'll break down everything you need to know about operational procurement, its importance, its working mechanism, and how you can streamline and optimize it with automation tools.
So, let's start with the basics.
What Is Operational Procurement?
Image source: storyset
Well, it's an obvious question that comes to mind. What is operational procurement? So, the simplest answer goes something like this: operational procurement refers to the process of purchasing goods and services that are necessary to sustain the day-to-day operations of a business. It is often referred to as MRO purchasing, which stands for maintenance, repair, and operations because these purchases are critical to keeping the business operating smoothly.
Many people tend to confuse operational procurement with strategic procurement. However, the two are very different. So, let's clear up the confusion between operational procurement vs strategic procurement.
Operational Procurement vs. Strategic Procurement: The Key Difference
Operational procurement focuses on the short-term procurement of goods and services that are required for daily operations. It is a reactive approach, where purchases are made based on immediate needs. The main goal of operational procurement is to ensure that the business has access to the materials and resources it needs, in the right quantities, at the right time, and for the best possible price.
On the other hand, strategic procurement (or strategic sourcing) takes a more long-term approach. It focuses on procuring goods and services that are critical to the organization's core objectives. It is proactive in nature and looks beyond simple cost-saving measures. It involves developing category strategies, monitoring supplier performance, and establishing long-term agreements to ensure a timely supply of necessary goods and services. The main goal of strategic procurement is to add value to the organization and contribute to its long-term success.
In simpler terms, operational procurement is about keeping the business running smoothly on a day-to-day basis, while strategic procurement is about driving long-term growth and success.
Why Operational Procurement Matters
Image source: Freepik
Now we know what operational procurement is and how it differs from strategic procurement. But why does it matter? What makes it so crucial for businesses to get it right? Well, the answer is simple. Operational procurement is vital because it directly impacts the day-to-day operations of a company. If things go wrong here, it can have a ripple effect on all other business activities.
Here are some key reasons why efficient and professional operational procurement is important for organizations:
1. Improved Supplier Management
Managing supplier relationships is crucial for successful procurement operations as it impacts the quality, reliability, and cost of goods or services acquired for operational purposes. By having efficient operational procurement processes in place, organizations can better manage their suppliers, negotiate favorable terms and conditions, and ensure timely delivery of goods and services. This can lead to improved supplier performance, reduced costs, and increased trust between both parties.
2. Reduced Risk
When it comes to vendor relationships, they do not come without risk. This can include financial risks, like supplier bankruptcy, operational risks, like quality or delivery issues, or reputational risks, like a supplier using unethical practices. And what about your strategic vendors who play a key role in your daily business operations? Well, the risks just magnify in that case. Imagine your main software provider were to go out of business or suffers a major security breach:t could bring your entire business to a halt.
However, when operational procurement practices are carefully implemented, businesses can mitigate these risks. By thoroughly vetting potential vendors, maintaining open communication, and regularly evaluating supplier performance, organizations can ensure that they are working with reliable partners. This reduces the chances of any major disruptions or negative impacts on business operations.
3. Improved Compliance Process
One of the biggest challenges in procurement operations is keeping up with changing regulations and laws. These regulations not only vary by country but also by industry. This makes it essential for organizations to have efficient operational procurement processes in place to ensure compliance with all relevant laws and regulations. Failure to comply can lead to hefty fines and even damage to the organization's reputation. By having a well-defined and regularly reviewed procurement process, companies can ensure that their operations are compliant with all relevant laws and regulations. This not only helps to avoid legal and ethical issues but also promotes a positive image for the organization.
Source: PWC
How Operational Procurement Process Work
Now that we understand the importance of operational procurement, let's take a look at how it actually works. While the specific steps of operational procurement may vary from business to business, here are the general steps that are involved:
1. Know The Demand
The first step in the operational procurement process is to identify the demand. This involves taking the time to understand what materials or services the business needs to keep its daily operations on track. Once the company's needs are clearly defined, it's time to identify the sources for these goods or services. In this stage, the procurement team will answer questions like, who can deliver the products to the desired location? Where will they be utilized? The outcome of this phase is the creation of a purchase requisition, which is then submitted for approval to the designated approver or department head based on the organization's hierarchy.
2. Select The Supplier That Best Suits Your Needs
The next step is to choose the supplier that best suits your business's needs. It's crucial to make supplier selections based on current purchase time, quality, and quantity. If there is no existing contracted supplier to meet the requisition's requirements, the procurement team can solicit bids from potential suppliers through a Request for Quotation (RFQ). This allows them to assess and compare the terms and conditions offered by different suppliers for that specific order.
Suppliers that are able to fulfill the demand will offer a quote that details their exact terms and conditions for that order's delivery. These quotes become the initial binding documents of the operational procurement process. If the quote is accepted but the terms aren't aligned with it, it is deemed a breach of contract, which may lead to legal issues. The procurement department will compare all the quotes received and choose the best offer based on factors like affordability, quality, and timely delivery.
3. Order Monitoring
After selecting a supplier, the next step is to convert the purchase requisition into a purchase order. This document serves as a legally binding agreement between the business and the supplier; it specifies the terms and conditions of the purchase, like quantity, delivery date, and payment terms. Once the purchase order is created, it is sent to the supplier for processing.
During this stage, it's vital to monitor and track the progress of the orders. This involves keeping an eye on the delivery schedule and ensuring that all terms and conditions of the purchase order are being met. Once the goods or services are received, the team will confirm that everything is as specified in the purchase order. If there are any discrepancies like poor quality, damaged goods, or incorrect quantity, the procurement team will work with the supplier to resolve them. In case the supplier fails to cooperate, the procurement team will take appropriate action, like returning the items, seeking reimbursement, or initiating legal action if necessary..
4. Issue an Invoice
Once the goods are received and verified against the purchase order, the next step is invoice processing. The invoice is the final document in the procurement process; it outlines the details of the goods or services received, including quantity, price, etc. The payment should be processed promptly after receiving the order receipt from the supplier, according to the agreed-upon terms in the contract. If payment is not made in a timely manner, it can damage your relationship with the supplier, which can result in costly late fees and delayed orders. Once the invoice is settled, the procurement process is complete, and the goods can be used for production or resold.
Streamline Your Operational Procurement with turian
Operational procurement is the heartbeat of a business. It keeps the supply chain running smoothly. It helps maintain efficient and cost-effective operations, ensures compliance with regulations, and reduces risks, but only if managed effectively. At turian, we understand the importance of operational procurement and have developed a comprehensive solution to streamline your entire procurement process so you can focus on growing your business.
Our AI Assistant for procurement uses the latest AI technology, including large language models (LLMs) with custom business rules and advanced data querying techniques to ensure an efficient, accurate, and reliable procurement process. With turian procurement software, you can automate a broad range of tasks in your operational procurement process. Our solution can extract data from emails and attachments, validate purchase orders against contracts and policies, compare suppliers based on the best offer, and handle requests for quotes (RFQs).
Your procurement team doesn't have to spend hours processing emails, validating purchase orders, or manually entering data into ERP systems. Our AI Assistant intelligently determines the next actions, such as updating the ERP and purchase order system, requesting missing information, or user confirmation. Plus, turian can generate responses to emails in a human-like manner as it understands the context and the intent of the incoming email through NLP techniques. This streamlines the communication process and reduces turnaround time for procurement-related tasks.
With turian, you have complete control over your procurement process. You can set custom rules for the AI Assistant to follow or have a human-in-the-loop for sensitive transactions. You can also manage access controls and generate real-time analytics to gain valuable insights into your procurement operations. With turian user-friendly interface, you can monitor and manage all your procurement tasks in one place.
And what's even better is that our AI-backed procurement solution can integrate seamlessly with your existing systems (such as ERP or CRM systems) and email platforms (Outlook,Gmail, etc.) without disrupting your current workflow. turian is flexible and scalable and can be up and running in less than 2 weeks.
Currently, executives within procurement of over 400 companies have listed AI as the top emerging technology expected to impact procurement in the following years, with 96% having said they have already made some progress in implementing AI, meaning that AI has become a cornerstone of modern procurement (Source: KPMG).
So, if you want to streamline your operational procurement processes, cut costs, and increase efficiency, it's time to switch to turian. We offer a free proof of concept (PoC) so you can see for yourself how our AI solution can benefit your business. Let turian's AI Assistant take over the repetitive and time-consuming tasks in your procurement process while your team focuses on more strategic tasks.
{{cta-block-blog}}
Say hi to your
AI Assistant!
Lernen Sie Ihren KI-Assistenten kennen!
.avif)
FAQ
Operational procurement is crucial for day-to-day business activities as it ensures the timely and efficient acquisition of goods and services needed for smooth operations. By effectively managing the procurement function, businesses can reduce the risk of stock shortages, maintain quality standards, stay compliant with regulations, and achieve cost savings. When best practices are applied in operational procurement, a company can streamline workflows, improve supplier relationships, and generate reports on various key performance indicators (KPIs) related to the entire procurement process.
The operational procurement process involves a series of steps that are essential in managing the acquisition of goods and services required by an organization to carry out its operations. These steps include identifying the need for goods or services, sourcing suppliers, placing purchase orders, receiving and verifying goods, monitoring order status, processing invoices, and making payments.
There are four different types of procurement: direct, indirect, goods, and services. Each type serves a different purpose in an organization and is essential for the operation and success of a business.
Here's a breakdown of each type:
- Direct procurement: It involves purchasing resources that are critical for the production of a company's end product. Examples include raw materials for manufacturing or direct labor costs for service-based companies.
- Indirect procurement: It involves purchasing items that don't directly contribute to the production process but are necessary for the overall functioning of a business, like office supplies, marketing services, or furniture.
- Goods procurement: It refers to the material procurement of actual items like raw materials, office supplies, and other physical goods. Good procurement can fall under both direct and indirect procurement, depending on how goods are used.
Services procurement: It involves procuring people-based services that help run a business, such as hiring staff or paying contractors. Similar to goods procurement, services procurement can also fall under both direct and indirect categories.
Operational procurement can be optimized by implementing automation solutions, like turian. By automating repetitive tasks like data extraction, purchase order validation, supplier comparison, and communication with suppliers, businesses can reduce manual errors, save time and labor costs, and improve the overall efficiency of their procurement process.
Plus, turian offers real-time analytics and customizable rules so businesses can continuously improve their procurement operations for better results. It is also important for businesses to regularly review and update their procurement processes to ensure they are aligned with industry best practices and constantly evolving business needs.
