Procurement fundamentals

Procurement buys everything a company doesn’t make: components, packaging, freight, IT, even office supplies. For many manufacturers that’s well over half of total cost, which is why a few percent saved in buying can matter more than a big sales push.

There are two cycles, one inside the other:

Source-to-pay (S2P) is the strategic cycle: analyse spend, set a strategy per category, find and qualify suppliers, run sourcing events (RFI, RFQ, RFP or auction), negotiate contracts, then manage supplier performance.

Procure-to-pay (P2P) is the transaction cycle that runs every day within those contracts:

1. Need: MRP or an employee identifies a requirement.
2. Purchase requisition: an internal request, approved by value.
3. Purchase order: the legally binding order to the supplier.
4. Goods receipt: the delivery is checked and booked into stock.
5. Invoice verification: the three-way match compares PO, goods receipt and invoice: did we order it, receive it, and get billed the agreed amount for it?
6. Payment: on the agreed terms, often in a batch payment run.

The controls matter as much as the steps. Segregation of duties means the person who raises an order shouldn’t approve it or pay for it. Maverick spend (buying outside contracts) and tail spend (thousands of tiny purchases) leak money and need watching. Payment terms link procurement to working capital: paying in 60 days instead of 30 frees cash, as long as suppliers stay healthy.

Spend analysis: knowing what you buy

Every category strategy starts with a spend cube: who buys what, from whom, for how much.

1. Collect purchase orders, invoices and payments from every system and business unit.
2. Clean supplier names, so “ABC Packaging Pvt Ltd” and “A.B.C. Packaging” count as one supplier.
3. Classify each line into categories, often using a standard taxonomy such as UNSPSC.
4. Analyse: the Pareto of spend by category and supplier, the number of suppliers per category, prices paid for the same item, and spend outside contracts.

The result shows where money is concentrated, where volumes can be pooled, and where the same item is bought at different prices.

The three-way match in practice

Tolerances let small, legitimate differences such as rounding pass automatically; anything above them waits for a person to check.

Payment terms are working capital

Days payable outstanding (DPO) measures how long a company takes to pay its suppliers. A company buying ₹120 crore a year that moves from 30-day to 60-day terms keeps about ₹120 crore × 30/365 ≈ ₹9.9 crore of cash, once. The same money comes out of suppliers’ cash, so stretching terms on small suppliers can push them into trouble, and in India, payments to registered micro and small enterprises are legally limited to 45 days.

Measures that matter

• Spend under management: the share of spend covered by contracts and category strategies.
• Contract compliance: the share bought through agreed contracts (the rest is maverick spend).
• Savings, split into real price reductions and cost avoidance, and checked against the budget.
• First-time match rate and purchase-order cycle time.
• Supplier OTIF and quality.

From purchasing to supply management

Kraljic’s 1983 article was titled “Purchasing must become supply management”, and the shift it called for is still under way: from processing orders and squeezing prices to managing supply markets, risks and relationships. Modern procurement teams work by category, with category managers who own the strategy for a group of purchases across the company, from market analysis to contracts and supplier performance.

Savings that never reach profit

Procurement often reports savings that finance can’t find. Common reasons:

• Volume: a 5% lower price on a part whose volume doubled still means higher spend.
• Specification creep: the cheaper item gets upgraded later.
• Leakage: buyers keep using old suppliers or off-contract purchases, so the negotiated price never applies.
• Cost avoidance counted as savings: holding a price when the supplier wanted a 10% rise avoided cost, but the budget didn’t fall.

Good practice agrees with finance how savings are calculated, tracks them against budgets, and separates reductions from avoidance.

Paying small suppliers on time in India

Under the MSMED Act, 2006, buyers must pay registered micro and small enterprises within the agreed period, and no later than 45 days, with interest due on late payments. From the 2023–24 financial year, section 43B(h) of the Income Tax Act adds a tax consequence: if such a payment is made late, the buyer can deduct the expense only in the year it is actually paid. Stretching payment terms on these suppliers is therefore a compliance problem as well as a relationship one.

Supply chain finance

Instead of squeezing suppliers’ cash, some buyers help them get paid early through reverse factoring: a bank or platform pays the supplier soon after the invoice is approved, at a discount based on the buyer’s stronger credit, and the buyer pays the bank on the original due date. In India, the RBI-regulated TReDS platforms let MSMEs discount invoices from large buyers this way.

Digital procurement

E-sourcing platforms run tenders and auctions; catalogues and guided buying steer employees to contracted items; automated P2P matches invoices and routes exceptions; and AI tools classify spend and extract contract terms. The gains come from compliance and speed, but only if master data (suppliers, materials, prices) is clean.