How Manufacturers Can Use ERP to Improve The Procurement Process?
Manufacturers often procure large quantities of different raw materials in rapid frequencies to keep their production units continuously operational. While procuring from external sources, they need to be careful about the material’s quality, quantity, lead time, and delivery location. When producing en masse, availability is as important as quality. Therefore, manufacturers need to build resilience in their procurement infrastructure to shield themselves against risk events like supply chain disruptions, material shortages, global trade barriers, and inflation.
It is also important to note that procurement can’t operate as a stand-alone function in a manufacturing business. Successful procurement operations need to coordinate with different business activities like operations, finance, logistics (transport and inventory), supply chain, and vendor relationships. The process is repeated so frequently that it only makes sense to automate the entire endeavour. With an automation software like ERP, manufacturers can integrate all the associated business functions and ensure seamless execution at every stage.
ERP System can help manufacturers streamline the purchasing process by keeping tabs on purchase requests, managing inventory levels, and tracking vendor relationships. It automates many processes like creating tracking numbers, filing orders, receiving material, tracking purchase history, coordinating with suppliers and so on. On top of it, ERP also furnishes reliable and actionable data for managers to make informed decisions about the procurement process. All these reasons collectively make a strong case in favour of ERP as an all-encompassing procurement software.
What are The Steps in Procurement Process with ERP?
With multiple vendors for each material, multiple steps for each process, and multiple approvals for each action, the procurement process can run into multiple difficulties. However, ERP can help in automating and streamlining the complete process by standardizing the responses to certain organizational stimuli and creating fixed methods for conflict resolution. Many manufacturers claim to have standardized their procurement without using business software, but they don’t realize the perils of paper/spreadsheet-based processes.
The Process of Procurement Contains the Following Steps:
- Purchase Requisition – When material quantities are short, procurement personnel can raise a request on the ERP, which automatically forwards the request to the concerned department manager.
- Requisition Review – The manager receives a notification on the ERP dashboard, reviews the request, and checks it against the available budget, before deciding to approve or deny it.
- Solicitation – A purchase order (PO) is generated automatically, as soon as the requisition is approved. The ERP proceeds to send out Request-For-Quotations (RFQs) to approved vendors.
- Evaluation & Contract – ERP can evaluate different quotations and come up with the best alternative. After vendor selection, a PO is created and the contract is activated.
- Order Management – As soon as the order arrives, it is checked for quantity and quality. Once accepted, the inventory levels are updated in the system automatically. If any issues are found, the vendor is notified for the same.
- Return – If the received products doesn’t suffice the quality standards, a return is initiated and the material is send back to the vendor.
- Record Keeping – Before payment processing, purchasers review the invoices and approve them on the ERP module. It helps with automated accounting and record-keeping of every PO.
What are the Benefits of ERP for Procurement?
If you already have a procurement process in place, you can replicate it on your ERP system and even make some changes suggested by the software. If you are starting from scratch, ERP has a built-in framework derived from industry best practices to help you set up your process. After designing and automating your procurement cycle, ERP will take on the responsibility to execute every step diligently and track the progress of all the requisitions that are punched into the system.
Below are some Significant Benefits of ERP for Procurement :
- Task Automation – Manufacturers can set re-order points (ROPs) for materials, so that when a particular item falls under the set threshold, ERP automatically issues a purchase quote. This helps in cutting down the inventory carrying costs of the business. Further, subsequent steps are automatically triggered upon the completion of the previous step, and approvals are automatically redirected to managers for faster responses, resulting in short cycle times. ERP can also regulate supply agreements and implement policies by automating the selection of suppliers.
- Purchase Order Management – ERP has an intensive planning module. It plans purchases based on the inventory on-hand, inventory at other warehouses, and upcoming demand to ensure the availability of ingredients and packaging materials to support production orders. Once these plans/suggestions are approved, the purchase quotation gets automatically created with a single click which can be transformed to an order after approval. Alternatively, purchase orders can be directly created and sent to the vendors via print, mail, fax, or e-mail. Returns are also handled dynamically with the immediate creation of return orders available for future tracking. This data is appended in the history information and aids in ranking the vendors based on their service.
- Greater Visibility – ERP gives a clear picture of the available inventory and work-in-progress jobs and alerts the manufacturer about any possible disruptions in production. It also allows managers to find secondary suppliers to obtain materials if the primary sources are experiencing shortages or delays. Companies can track the status of their purchase orders in real-time, which allows them to take necessary actions to prioritize or expedite the delivery of certain urgent materials. ERP also provides visibility toward any anomalies, mitigating the risk of fraudulent activities.
- Better Supplier Relations – Transparency is essential to maintain cordial relations with your suppliers. ERP allows you to enter into blanket agreements with your suppliers. It ensures the execution of specific contracts with particular suppliers every time a purchase is made. This results in a better understanding between both parties, helping you to create better and more open relationships.
- Supplier Validation – Supplier validation is a mandate in many industries now. It helps you store the FDA validation certificates of the vendor. When selecting a vendor for procurement, the system gives first preference to the certified vendors. The system also alerts you when any of the vendor certifications near expiry while barring the ones whose certificates have already expired. ERP will also increase the negotiating power of the purchasing department by comparing various vendors on the basis of pricing, lead times, quality, etc., giving managers more ability to select the best vendor, and ultimately save money.
- Real-World Purchase Transactions – Various purchase transactions are automated with ERP. Manufacturers can manage downpayment requests from vendors and process them with or without an invoice. The system lets you decide whether you want to create appropriate accounting postings or just record it. Additionally, ERP also allows you to calculate the purchase price of merchandise by allocating various landed-cost elements like freight, insurance, and custom duties. What’s more, ERP can process AP transactions by issuing payment to suppliers by acting on journal entries. ERP quickly furnishes the data required for the particular credit memo from the original invoice.
Moreover, ERP gives manufacturers the freedom to receive material deliveries at the same or even different manufacturing locations. ERP can link good receipts to a purchase order, which means that the purchase order quantity can change if the received quantity does not match the original order amount.
An ERP software for procurement management integrates essential modules with advanced features and customizations to help manufacturers achieve their business goals. It saves time by automating the procurement cycle, facilitates the ongoing quest for efficiency and improved profitability, and creates an ecosystem that facilitates strong supplier relationships and timely procurement.