Procurement in Supply Chain Management — Everything You Should Know

How does procurement work in your supply chain management?

In general knowledge, procurement plays a vital role in supply chain management that drives a business to success. However, a lot of people do not really know what it does to help keep the supply chain flowing seamlessly.

Understanding Procurementand Supply Chain Management

Procurement is generally the process of sourcing and acquiring goods, services, and raw materials required for a business operation. It involves selecting suppliers, negotiating contracts, managing supplier relationships, and even ensuring timely delivery of products. In simpler terms, procurement is a process of getting the right things from the right people at the right time and at the right cost. 

On the other hand, supply chain management is a wider spectrum. It involves the coordination of different processes, including procurement as its beginning. It also includes production, distribution, and logistics. Moreover, it has 2 primary goals: to ensure the smooth flow of goods from suppliers to consumers and to optimize said processes for overall efficiency.

Procurement’s Rolein Your Business’s Success

Effective procurement tactics can directly affect your business’s bottom line. For example, if you need a new supplier to provide a long-term service like social media management, your procurement team helps you choose the supplier that best suits you and your budget.

Furthermore, it saves you time, money, and the risk of dealing with incompetent suppliers. It also promotes collaborative relationships with your chosen suppliers that can lead to innovation through shared ideas, technological advancements, and joint development efforts.

Lastly, robust procurement strategies can enable you to quickly adapt to changing market demands and seize new opportunities.

Importance of Procurementin Supply Chain Management

Procurement is the foundation upon which your supply chain is built. Here are 4 reasons why it holds much relevance:

1. Cost Efficiency

Effective procurement tactics can lead to cost savings by identifying cost-effective suppliers, negotiating favorable terms and deals, and minimizing expenses at the same time. 

2. Risk Mitigation

Procurement teams are in charge of choosing your suppliers and overseeing the acquisition of your products. They help you manage the best quality for your goods and services and avoid risks like supply disruptions and price fluctuations. In addition, they are also responsible for making contingency plans and ensuring your suppliers that they do their end of the bargain.

3. Quality Control

Concerning the previous point, your procurement team is responsible for evaluating your suppliers, ensuring that only the best products are integrated into your supply chain.

4. Supplier Collaboration

Your procurement team bears the power of creating relationships with your suppliers. Thus, with strong partnerships, you can foster collaboration and continuous innovation that will lead to mutual growth and success.

Typesof Procurement

There are mainly four types of procurement. Usually, it can either be classified as a direct or indirect type of procurement. Then, it can also be specified as either goods or services.

• Direct Procurement involves the acquisition of goods and services that are directly incorporated into a company’s end products. This type of procurement is common in manufacturing industries where raw materials are sourced to create finished by-products.
• Indirect Procurement, on the other hand, involves purchases that are necessary for daily business operations. 
• Goods are material or immaterial products that also include application and software subscriptions. Goods procurement can either be direct or indirect.
• Services type of procurement, on the contrary, emphasizes hiring people for services. This classification can also be a direct or indirect type of procurement.

HowProcurement Works

The procurement process involves several interlinked stages that ensure your business obtains the right resources at the right time and value.

Here’s a general breakdown of how procurement works: 

First, procurement teams identify what resources are needed for your business to grow. They take note of demands, stemming from internal departments, market, inventory shortages, and new projects. Moreover, the budget is finalized in this step.

Once the needs are identified, the second step is to find suitable suppliers. This stage involves researching potential vendors. Comprehensively, you need to evaluate them based on a suitable criterion to easily shortlist those that align with your requirements.

The third step is to select the best supplier from your list. You can assess them by factors like quality, cost, delivery, reliability, and past performance. Your goal in this step is to choose the supplier that offers the best value for your business.

The fourth step is probably the most crucial one in the process. This is where you negotiate. This step involves discussing prices, delivery schedules, payment terms, and other relevant contractual details.

After the negotiations, the fifth step involves drawing up a formal contract that outlines the terms and conditions agreed upon by both parties. This will serve as a legal document that governs the business relationship.

The sixth step is placing orders with your selected supplier. A purchase order form, reflecting details like the product quantities and delivery dates, is drafted.

After that, the seventh step is to inspect goods and services to ensure they meet the agreed-upon quality standards and specifications.

Then, once you are satisfied, the eighth step is to process invoices and make payments according to the agreed terms.

Lastly, you should guarantee to foster an ongoing collaboration with your suppliers. You must nurture healthy bonds and communication so that you wouldn’t have any problems in addressing potential issues.

Conclusion

A business without effective procurement processes cannot function well. It also plays a pivotal role in supply chain management because it is where it begins. Furthermore, from identifying needs to establishing strong supplier relationships, each step contributes to the seamless flow of resources within the supply chain.

Thus, you can achieve cost savings and gain a competitive advantage by mastering the art of procurement. Although it may be a long and tedious approach, you can position your business for sustainable growth and success.