Procurement Process Improvements Can Lead to Increased Shareholder Value
Many people view buying as purchasing – a necessity of business – and, thus, discount its ability to positively impact margin. However, the procurement - or buy - process has a distinct role in securing products and materials as a critical integrated component of the supply chain - see the illustration below.
It is this integration that makes procurement a significant cost and value driver. Procurement has the potential to deliver the best price, the highest quality, and the best availability through the development of an agile supply base.
Procurement Process to Deliver Best Price
Clearly, favorable pricing lowers the cost of goods and contributes to improved margin. The best ways to do this, however, are not so clear.
Aggregating volume is typically the first step to improved pricing. However, many companies lack visibility to what they are spending with each supplier. The procurement process should pursue spend analysis (gather all purchase order details and segment these purchases into commodities and groupings) to gain visibility and control over purchases. Selecting two or three suppliers to source particular goods will increase volume and gain additional leverage to negotiate better pricing through a larger quantity purchase per supplier.
Procurement Process to Deliver Best Quality
Poor quality often leads to rework, more labor, additional shipping, recalls and even money spent in reparations. In turn, these issues result in elevated cost and, therefore, should be minimized and avoided. Visibility into supplier quality can have significant impact.
Until a company pulls all operational components together between the supplier and customer (purchase order acknowledgement, on-time delivery, correct quantity, correct quality, and accurate invoicing) the true cost of the supplier-customer relationship be cannot be determined.
Suppliers that ship the incorrect quantity or invoices incorrectly cost the company additional resources. Procurement can serve as the stewards of the supplier-customer relationship, monitoring all interactions and communicating back to the supplier. This level of relationship management can detect both administrative and product quality drifts, and proactively address them – minimizing impacts and additional costs.
Procurement Process to Deliver Best Availability
Customers would almost always prefer 100% availability from their suppliers. Yet as the service level requirement increases, so does the cost to the customer as well as to the supplier.
The supplier maintains the appropriate inventory to guarantee the desired service level; thus the price of the product/service is higher due to the imbedded inventory carrying cost. However, a knowledgeable procurement organization can help minimize demand variability by engaging with suppliers and sharing accurate forecasts, business strategy changes, production schedules, and product launches that significantly impact changes in demand.
Lowering demand variability helps a supplier plan for a more accurate demand, enabling improved service levels. This improved service level can have a significant effect on internal operations in which a more stable flow of goods/services can be planned for and executed more efficiently.
Reduced demand variability equates to higher service levels and can translate into lower supplier inventory, which will result in lower pricing for goods and services.
Procurement Process to Deliver an Agile Supply Base
The ability of a company’s supply base to quickly respond to changes (e.g., change in demand, shifting of quality requirement, and changes in taxation) can help a company gain margin or minimize cost. Unfortunately, this agility is not an inherent trait of most supply chains and, thus, must be developed to a mature, effective state.
A skilled procurement organization develops the business intelligence that alerts it to early failures, warns of changing demand and signals the magnitude of potential interrupts. It also performs risk analysis and develops secondary and tertiary supply alternatives.
These proactive steps not only minimize time and resources lost during interrupts, they also reduce the cost associated with such events by preplanning and negotiating before the crisis to eliminate price gauging during high-demand, low-supply scenarios. Procurement manages information flow and supply chain risk that helps prevent margin erosion and minimizes impacts of supply chain interrupts.
Procurement should be the steward of a company’s supplier relationships and the broker of operational and supply chain information. Procurement's unique position to interact with all supply chain processes allows it to obtain valuable insight into operational and supply details. This visibility can be leveraged to gain significant margin reduction through reduced pricing, improved quality, and maintained availability through variable demand.
By establishing the right strategy, designing efficient processes, staffing the right skills, enabling with the right technology and designing an effective organization, procurement can achieve an agile supply base that can deliver the best price, best quality, and best availability - and help achieve shareholder value in the supply chain.
For more, download the White Paper:
Leveraging the Supply Chain for
Increased Shareholder Value
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