When Should My Small Business Create a Procurement Function?
Tips for small business owners on how to implement a procurement function as your organization scales – and before it’s too late.
By Hugo Britt | May 2, 2023
If you know anyone who is launching a small business – perhaps a family member or former colleague – you could do them a huge favor by explaining why they need to create a procurement function as early as possible.
Why? Because in our experience, small business owners inevitably reach for the procurement lever waaaaay too late. Like the anthropomorphic dog in the This is Fine meme, they’ve been denying the need to get to grips with their business spend despite a conflagration consisting of out-of-control costs, spiraling regulatory risk, and messy supplier relationships.
Instead of launching procurement in a reactive panic, a lot of stress (and money!) could be saved by taking a proactive approach to procurement. But when, exactly, is the right moment for a small business to create a procurement function? And with limited resources, what should that function tackle first?
Kelly Barner, host of The Sourcing Hero podcast, asked these questions in discussion with global supply chain thought-leader Chandhrika Venkataraman, Founder of Source Refresh LLC (check out the full podcast here).
The basics of small business procurement
“Realistically, a company should consider putting formal procurement in place as they scale up, [although] scaling up could mean different things for different businesses.” says Chandhrika.
“Think about every area of business where a procurement professional can make an impact: cost; quality; assurance of supply; regulatory, compliance, financial risk, and innovation. If a business is at a stage where any of these parameters become relevant, then I’d say it’s time for you to invest in a formal procurement process.”
If this sounds a little abstract (after all, most businesses will be concerned about cost and quality from day one), don’t worry – Chandhrika broke her argument down into four rule-of-thumb decision points.
"A company should consider putting formal procurement in place as they scale. If a business is at a stage where [a procurement professional can make an impact], then I’d say it’s time to invest in a formal procurement process.”
- Chandhrika Venkataraman, Founder, Source Refresh LLC
1. Supply-base growth
Are you at a point where you now have way more suppliers than what you started out with? As a business grows, their supply base must grow so they can ensure that they have a diversified supply base. This would be a key indicator that it’s now time to develop and implement a formal supplier relationship management program.
Having more suppliers lead to more risk exposure, more communication, more transactions, and more headaches including regulatory compliance. Without a dedicated resource or platform to manage these relationships, the situation can quickly become unmanageable and end up endangering your operation.
2. Transaction growth
“Similarly, if you find yourself at a point where whatever systems you are using are not robust enough for you to handle the volume growth of your transactions, then you need a formal – maybe a P2P – system in place,” adds Chandhrika.
Transaction growth can rapidly swamp your finance/payments team (which may consist of only one person in a small business) and carries risks including human error, late payments, and cash-flow problems.
3. Supply chain length and complexity
The third rule-of-thumb involves supply chain length and complexity.
Very small businesses can get away with sourcing products from a distributor. But as businesses grow, you will probably want to start going to origin if you’re importing, or going direct-to-source. As businesses start going direct-to-source, their supply chains begin to lengthen. With that increase, the complexity that you bring into your supply chain also increases.
“When you find yourself at that point, you know it’s time to bring an expert in so you can get your category strategy right, then analyze and understand the risks in your supply chain,” Chandhrika advises.
4. Market complexity
“Lastly, I would say it depends also on the complexity of the market that you are in,” she says. “I’m not talking about the market where you are selling your products – I’m talking about the buy-side market. How complex is that?”
If the market you are buying from is extremely complex, then you will need a procurement expert to put a formal strategy in place.
“In my experience, the best place to start - and the one with the highest value delivery - is spend analytics. If you can track every dollar you spend on your business, you can run some quick analyses to figure out patterns in your spend."
- Chandhrika Venkataraman, Founder, Source Refresh LLC
Where to begin
Small companies can’t do everything at once when launching a new procurement function. They need to be realistic and pick a place to start – but where?
“In my experience, the best place to start (and the one with the highest-value delivery – is spend analytics”, says Chandhrika. “Even if you don’t [yet] have a procurement team, if you can track every dollar you spend on your business, you can still run some very quick analyses to figure out patterns in your spend. Sometimes – and I see this happen with my clients – a business is so small that they believe they know exactly where every single dollar is going – but they are often surprised.”
Spend analytics will show small businesses how much they are spending with each supplier, providing insights into risk exposure, waste, and potential opportunities to cut costs.
It’s sound advice, but many small businesses are held back by the fear of the costs and time involved in investing in a spend analytics software platform.
“I know it can be overwhelming, but I’m a huge advocate for just getting the process going,” says Chandhrika. “Just get started with basic Excel – it will do the job well enough to meet your needs at first, and means you can get started analyzing spend patterns. Once you have a handle on how your spend is going, who your main suppliers are, what your key commodities are, and what your key services are that you are spending all this money on, it will naturally lead you to the next step – which is your category strategy development.”
Request a free cost consultation with Una
If you’re still feeling overwhelmed, there are resources available to help small business owners identify spending habits and analyze costs. As a group purchasing organization, Una offers this service as part of our onboarding process with new members.
We leverage billions in buying power to establish pre-negotiated contracts with the nation’s top suppliers, delivering unprecedented value and savings to our members. After an initial discovery call, our sourcing advisors will conduct a free spend analysis to determine the best starting point for you. You’ll then be able to pick the suppliers that best meet your needs, and quickly capitalize on the savings available through the GPO’s contracts. At Una, membership is always free and there are never any purchasing requirements or obligations.
For more insight into determining when your small business should implement a procurement function, listen to Chandhrika’s full episode of The Sourcing Hero here: