Operational procurement: Benefits and how to implement in 10 steps
Discover the key benefits of operational procurement and learn 10 simple steps for implementing this buying approach to boost your profitability.
As organizations scale, it becomes necessary to segment procurement roles into distinct categories. Rather than having a whole team of procurement professionals who each work on the same type of purchasing, having individuals who specialize in a particular form of procurement is generally more effective.
In operational procurement, such specialists focus on sourcing and purchasing the goods and services specifically required to maintain the ongoing operations of a business.
Read on to discover the key benefits of operational procurement and learn ten simple steps to implement this buying approach and boost profitability.
What is operational procurement?
Operational procurement is a type of procurement that focuses specifically on sourcing and purchasing the goods and services required to maintain the day-to-day operations of your organization.
Within operational procurement, the exact goods or services you purchase will differ significantly based on the nature of your company.
Examples of operational procurement
Consider a business that provides company cars for lease. The operational procurement team is responsible for buying items such as light bulbs, oil, wiper blades, and other service-related products.
A procurement manager at a company that sells corporate fire protection solutions might also purchase these items. But because they are used to service their company vehicle and aren’t necessary to the actual operation of their business, they don’t fall under the banner of operational procurement.
Software is typically not considered operational procurement, though it can be in certain circumstances. For instance, social media and email automation platforms would be operational purchases for a marketing agency but not the mentioned lease company.
Benefits of operational procurement
Higher profit margins
One of the most significant benefits of investing in operational procurement is improved profit margins.
In operational procurement, your company uses the products and services you purchase frequently and abundantly, meaning even a slight reduction in per-unit cost can hugely impact profitability.
Reduced vendor risk
Every vendor relationship involves some form of risk, such as financial or reputational risk. The financial risk might include the possibility of a supplier's company going bankrupt. The reputational risk might involve the possibility of a damaging public relations scandal involving a vendor.
These risks are even greater for strategic vendors—those that you rely on for the day-to-day running of your business.
If you’re a marketing agency and your digital ads supplier goes out of business, for instance, you will be temporarily unable to deliver on your client contracts.
Focusing specifically on operational procurement practices allows you to reduce risk by carefully vetting strategic vendors and maintaining regular contact through vendor performance review meetings.
Enhanced supplier diversity
Supplier diversity is vital for minimizing supply chain risks and maximizing your ability to scale quickly.
When you specifically dedicate resources to operational procurement, that team can focus on increasing supplier diversity where it counts: those sources you rely upon most heavily.
Improved operational efficiency
Focusing on operational procurement helps deliver greater efficiencies through diversifying supplier partnerships, minimizing supply chain interruptions, and enabling strategic contract negotiations.
For instance, a smartphone manufacturer might negotiate an express freight agreement with a key supplier of CPU chips. By doing so, they’ll receive this critical component faster, which minimizes supply chain disruptions and speeds up production.
How operational procurement works
1. Determine strategic sourcing needs
The first step in the operational procurement process is to understand and clearly define the actual needs of a department.
Let’s say, for instance, that you’re sourcing a new fleet management system for your product delivery team.
Even if you're an expert at procurement—vetting suppliers, negotiating contracts, etc.—you’re unlikely to have the same experience as the fleet operations manager.
As such, a critical activity in this phase is meeting the stakeholders involved and defining the specific needs beyond “find a new fleet management platform.”
Ask questions like:
- How is our current solution insufficient?
- What features do we need to prioritize in this purchase?
- Which functions are a must-have?
- How will we define successful procurement in this case?
Additionally, meet with your finance or senior leadership team to approve an upper budget limit for this purchase.
2. Identify potential vendors
Next, begin your market research process to identify potential vendors.
The previous step sets out the blueprint for this stage. If, for example, a given vendor doesn’t offer all the features your stakeholders have defined as non-negotiable, that vendor doesn’t proceed to the next phase.
You don’t need to dig too deep at this stage. Simply pull together a high-level list of suitable suppliers.
3. Meet with vendors to discuss your requirements
With a list of potential options, arrange a meeting with each vendor to discuss your company’s needs.
It may be helpful to involve your department stakeholder in this conversation, as they know to lead the conversation from a technical standpoint.
4. Issue a request for quotation
Once you’ve held these initial discussions, meet internally to cull any unsuitable suppliers.
Create and send an RFQ (request for quotation) to the remaining options.
RFQs allow you to collect pricing information on relevant vendors and refine your consideration list by eliminating any who fall outside your predefined budget.
5. Vet supplier options
At this point, you should have a shortlist of three to five vendors that meet your needs regarding functionality and pricing.
Now it’s time to vet each potential supplier against your internal policies.
Assess each potential vendor for:
- Financial stability
- PR risk (any previous negative press)
- Data handling procedures (such as their GDPR policy)
If any potential service providers fall outside your compliance requirements, remove them from consideration.
6. Choose the most favorable option
In this stage, assess each of your remaining supplier options on the following scales:
- Vendor risk
- Suitability and capability
Your preferences and priorities will guide this step. For instance, minimizing risk might be more important than securing the lowest price possible.
Determine which vendor appears most favorable here and move forward with them.
7. Initiate negotiation conversations
Negotiating vendor contracts is a critical step in the operational procurement function.
Not only is it essential for keeping costs low—the better you can negotiate pricing, the higher your return on investment and profitability—but it’s vital for reaching an agreement on terms like customer support expectations and delivery timeframes.
8. Formalize the relationship
With the final terms of your procurement agreed upon, formalize the relationship by signing an agreement and beginning the contract management process.
Follow your internal approval workflow to maintain compliance with purchasing policies.
9. Integrate with your existing supply chain or tech stack
Procuring operational goods and services doesn’t happen in a vacuum. That new thing you sourced must work well with your existing operational processes. Otherwise, it's going to wreak havoc on efficiency.
As such, it's crucial to design an implementation and integration plan at this stage.
Let’s say you’ve just sourced a new email marketing software platform. You need to:
- Migrate data from any existing platforms or spreadsheets
- Set up real-time integrations with your CRM, social media automation, ERP, project management, and any other software tools used for marketing purposes
- Create new business processes that define the use of these tools together
10. Put a vendor management framework in place
The final step is to design a plan for monitoring and managing the ongoing relationship with your new supplier.
Define the KPIs (key performance indicators) that measure success and design a method for tracking performance against these metrics—for instance, a dashboard in your vendor management system.
Set up regular supplier performance review meetings—quarterly will be sufficient in most cases—to review any concerns with your vendor and implement action plans for improvement.
How to optimize operational procurement
Find the balance between centralized and decentralized procurement
In all forms of procurement, operational included, there are two broad approaches teams can take:
- Centralized procurement, where a single central business is responsible for all purchasing duties
- Decentralized procurement, where branch or business unit leaders are given authority to purchase for their respective teams
Each has its pros and cons.
The centralized approach allows companies to take advantage of economies of scale and helps minimize procurement risk by reducing the number of employees with the authority to buy. It's typically a more cumbersome approach, however, and doesn’t always give department or branch managers the ability to secure goods and services that are more relevant to their needs.
The opposites are true for the decentralized model: greater operational efficiency and flexibility but more inherent risk.
A good middle ground would be centralizing the procurement of goods and services that all teams use equally (office supplies like paper are a good example) while allowing department heads to buy what is necessary for their teams (relevant software tools, for instance).
Learn more about the two approaches in our guide: Decentralized purchasing: Benefits & differences from centralized purchasing.
Use automation to manage purchasing workflows
One way to speed up procurement operations is to use the automation functionality built into your purchasing platform.
For instance, you might build an automated approval workflow so that when department leads raise a request to purchase a new software platform, it's routed automatically to the proper decision-making authority.
Leverage help from strategic sourcing experts
The strategic sourcing process can be cumbersome, especially if you’re looking for a product you’ve never bought before, such as a CRM.
In such cases, it's always a good idea to call in the experts.
For instance, if you use Vendr to manage SaaS purchasing, you can leverage the expertise and experience of our software-buying experts, who can recommend platforms according to your organization’s specific needs.
Focus on supplier diversity
Operational procurement focuses on those goods and services that are imperative to regular business functioning.
For example, if one of your vendors is suddenly not an option (maybe due to a supply chain management issue or going out of business), you’ll have a problem.
To mitigate against this risk and to keep procurement operations running smoothly, it’s a best practice to work on improving supplier diversity. This means you have a backup supplier or two for all business-critical purchasing.
Regularly audit and review existing vendor relationships
Lastly, a well-optimized operational procurement department performs regularly scheduled reviews of all vendor relationships.
Annually is going to be a good cadence for most companies and vendors, where you should review the following:
- Cost and competitiveness
- Historical performance against expectations
- Current business needs
- Supplier risks and mitigation procedures