The Importance of Procurement in Supply Chain Management - Assignment Example

The Importance of Procurement in Supply Chain Management Procurement represents one of the largest expenses in a firm’s expenditure. Procurement is the process of acquiring goods and services by an organization. Today due to reasons such as outsourcing, the quantity of procured goods has risen. This is why procurement has become of strategic importance in multinational companies in recent years as supplies of critical commodities have become difficult and prices have risen (BCG, 2008). Global procurement poses certain challenges as inventory is continuously being pushed back up the supply chain. Focus on procurement has risen as it helps to reduce the cost of goods and services. Changing consumer preferences have also altered the procurement process of the organizations, thereby enhancing its importance in the supply chain management. As globalization has opened new markets, companies have access to suppliers outside their domestic market. Moreover, as they have global sales, they also need global suppliers because it helps them to achieve economies of scale (McGinnis & McCarty, 1998). This has impacted the way companies approach procurement. Most industries and especially the health care, utilities, transportation and retailing are going in for volume purchase, which enables them to demand lower prices. Technology has enabled companies to track and consolidate purchases across the entire organization. Organizations are even able to benchmark certain suppliers based on their performance. The market has become demand-driven which cannot ensure forecast accuracy. The buyer’s responsibilities have moved beyond finding the right materials and services at the best price. Buyers’ role is enhanced as they are responsible to ensure flow of information and materials through the supply chain (Oracle, 2006). Shortages have to be prevented and inventory investment has to reduce. The procurement managers have to spend time on developing strategic relationship with the suppliers. Apparel and automobile sector The procurement process in the SCM of the automobile sector and the apparel sector has great importance. Many renowned apparel brands such as Gap Limited, Dillard’s, and Liz Claiborne have outsourced their supplies to low-wages countries such as China. A Chinese company has set up a ‘supply-chain city’, which may probably be the largest manufacturing facility in the world (BCG, 2008). The benefit to the apparel brand owners is that this ‘supply-chain-city’ works as their own set up where they come and work as their own office. The Chinese company sizes the market, designs the product and produces the product. If the brand owners want the product redesigned, a prototype can be produced in a matter of few hours, and approved by the brand owners immediately. This process used to take a few weeks to go round the iteration loop. The apparel is a very cost-driven industry and the buyers will move production even for a few pennies. This method of procurement substantially reduces the cost to the buyers. Zara, in the apparel sector, maintains its own unique procurement process and efficiently manages it supply chain. With changing customer preferences, demand uncertainty prevails in the industry. As such, Zara does not follow the global push-based supply chain which is ineffective but cost effective. It follows the local, pull-based supply chain which offers the company speed and flexibility to delay the procurement till the last moment, to cope with the demand uncertainties and to be able to make changes till the last minute (Diaz, 2005). With the help of hand-held devices or PDAs, they are able to keep track of the total order fulfillment process. This includes planning the procurement and production requirements, monitoring warehouse inventories, allocating production to various factories and other suppliers, and keeping track of shortages and oversupplies (Ferdows, Lewis & Machuca, 2004). Thus, in their entire supply chain, through effective procurement process, they are able to customize their products, offer high quality and low prices (Heyden, 2007). This thus enables them to compete in maintaining quality, designs, logistics, flexibility and political and stability issues. This gives them an edge over competitors as their manufacturing and procurement is close to the market, they are able to respond to the changing demands. They do not have to hold high inventory and neither do they have to protect themselves against supply disruption. With shorter product life cycles it has become important to respond to the changing customer tastes. Due to this efficient procurement process, they never have a stock-out situation and hence no lost sales opportunities. In the automobile industry also, a similar procurement process is used to maintain an efficient SCM. Toyota maintains a unique supplier system. They do not rely on one supplier but have several vendors. It thus has both flexible and multi-layered network of suppliers (SD, 2006). Their regular procurement practice involves collaborating with the suppliers and other external agencies which enables continuous improvement and this starts early on in the design process itself. They maintain this efficiency through all the stages of the product development, manufacturing and distribution. This has helped them reduce the number of faulty parts delivered. Like Zara, they too do not have their suppliers geographically dispersed. They keep their suppliers close at hand. At Texas, for instance, they have a supplier park, which accommodates 21 of its suppliers. They maintain close relationship with their suppliers but at the same time do not divulge personal information or do not get too familiar. Parts are made and delivered only when necessary at the next stage in the production process (Driel & Dolfsma, 2009). This efficient procurement process has enabled inventory control and also the ability to respond to the changing customer demands, in addition to reducing losses and not having to maintain intermediate stocks. The Bull-whip effect As the supply chain moves upstream towards the suppliers, demand variability increases. When orders to suppliers have larger variance than sales to the buyer, the distortion propagates upstream and this is known as the Forrester’s bull-whip effect (Vorst et al., 1998). The Forrester’s bull-whip effect has considerable cost implications. This leads to increased inventory, increased manufacturing expenses due to excess capacity, inefficient utilization of capacity and overtime (Buxmann, Ahsen & Díaz, 2008). Bull-whip effect can occur due to non-zero lead times, demand signal processing, price variations, rationing and gaming, and order batching. For effective SCM, there has to be cooperation through the entire supply chain between the members. Information exchange has to be based on trust and collaboration as it can help the organizations to anticipate demand fluctuations and avoid the bull-whip effect (Vorst et al., 1998). Saturn Corporation, in the automobile industry has been able to avoid the bull-whip effect as it manages its inventory jointly with its dealers. Its service supply chain strategy is able to meet the urgency of customers’ needs. They have been able to match the parts supply critical to customer needs and this has increased after sales satisfaction (Dawson, 2004). Because of demand variability, Saturn Corporation has adopted the pull system. It does not hold stock at the dealers as per forecast but replenishes on one-for-one basis. This method of procurement leads to fair trade policy. Saturn determines what the dealer should stock and if the stock lies with the dealer for more than nine months, Saturn buys it back. Saturn also bears the cost of search in case the part is not available among the local dealers. Such fair trade enhances the confidence at each level thereby positively impacting the performance of the supply chain. It also reduces risk due to visibility and control. Agricultural sector Many industries have entered into manufacturing from agricultural resources but as the shelf life of these products is short and the prices of agricultural products are time-sensitive, shortage of stock could result in loss of sales as demand is not carried forward (Du, Leung, Zhang & Lai, 2009). This implies that the procurement process in the supply chain has to be properly managed. It is challenging that the perishable products should reach the consumers in perfect condition. Besides, it is essential to deal with shortages and overstocking. The authors hence applied the collaborative planning, forecasting and replenishment (CPFR) as a framework to develop an agricultural product procurement system. CPFR has been able to transform relationship among the supply chain partners, reduce costs and increase revenues. Under CPFR, both parties are informed of exceptions, which generate collaboration mechanism. This is not possible under the traditional procurement mechanisms. Under CPFR, discrepancies come to light when operating at a large scale. Collaboratively production and delivery is scheduled under this system. Based on the forecast received the work order for each manufacture in the supply chain is prepared. Each manufacturer generates his own delivery data. It is also possible to generate a complete timeline for production. Exceptions may occur if there is s difference in delivery data provided by the manufacturer and that prepared by the collaborative team. Collaborative software helps to inform the manufacturer of the exceptions and how to handle the situation. Technology has to be used for collaborative forecasting and replenishment. This would ensure products reach the consumers in perfect condition, the retailers do not face stock-out situation and nor are they burdened with over stock. Thus, the CPFR model, in the agricultural sector offers the following advantages in the procurement process: increases the chance of generating income, decreases inventory, improves return to assets and enhances distribution efficiency. It helps both buyers and sellers to minimize waste and reduce costs and risks. The procurement process at NHS has been designed to meet the needs of their customers (NHS Supply Chain, 2008). They have adopted a competitive bid contract process that accommodates public procurement requirements. The process also ensures that the products are reviewed by the Product Councils and Product Task Forces. They have an eight-step contracting process for suppliers, which meets the proprietary and legal requirements along with the best procurement practice. It also gives confidence to the supply chain customers that the procurement process followed by the NHS Supply Chain has followed a consistent and customer-driven contracting process. All the supplier tenders are evaluated using various financial and non-financial criteria. The ultimate benefit has been designed keeping in mind the end-consumer. E-procurement practices Cost reduction pressure has compelled the companies to resort to internet enabled technologies to achieve supply chain management (SCM) efficiencies to gain competitive advantage (Angeles & Nath, 2007). This is done with special focus on procurement. The authors conducted a study to understand the e-procurement practices in business-to-business environment. Data was collected through a survey questionnaire and the study revealed that e-procurement leads to better supplier and contract management, success in end-user behaviour and e-procurement business processes, and enhanced information and e-procurement infra-structure. E-procurement can help to reduce the number of suppliers and business processes can be redesigned. However, certain challenges also emerged. There was lack of system integration and standardization issues, the market services were immature and there was resistance from end-users, and finally there was difficulty in integrating e-commerce with other systems. In the industrial sector, the supply chain can be enhanced and the supplier could derive strategic benefits if the hub customer firm initiates the e-procurement system. Supplier trading partners with enhanced technological capabilities can help increase the benefits of an order processing system both for the customer as well as for themselves. Services industry Procurement is critical even in the services industry. IBM and Korea Exchange Bank (KEB) have entered into a five-year strategic outsourcing agreement (Anonymous, 2009). Such strategic arrangements allow the bank to focus on its core competencies. KEB would thus be able to achieve cost savings while improving industry compliance and internal control. IBM will handle the entire procurement including areas such as information technology, marketing, services, facilities and supplies. IBM is responsible to establish and support the entire procurement process of KEB. They would also deal with the suppliers and be responsible for payments. The different departments in the bank had their own purchasing teams and performed their own purchasing functions. This made supplier negotiations difficult because the bank did not get the benefit of volume purchase. Besides, there was no transparency in information. With IBM, as the procurement process becomes centralized, the bank would save in costs and enhance management efficiency. To have such agreements, it is always beneficial to have an organization that has expertise in supply chain and procurement management. This would also help KEB in its purchasing requirements for its overseas operations. Procurement professionals The role of the procurement professionals has undergone change and they can make a powerful implication on the business performance. Their role has undergone as customer demands on procurement have become more diverse and complex. Procurement has to be in alignment with the changing business requirements. The process must be able to not only adapt to these changes but also accelerate change implementation to capture opportunities before the competition steps in (Hochman & Boll, 2009). The essence lies in being able to align the customer segments with right products and services and to develop adaptive supply chains. These are the value-added contributions that an efficient procurement process is expected to deliver. Assessment of Excellence in Procurement (AEP) – a study conducted by AT Kearney found that 73% of the procurement activities of the companies that are considered as leaders in procurement were strategic in nature. The other group or the “followers” had just 49% of the procurement activities that could be described as strategic. Organizations have to break the constraints of transaction process overloads. An effective procurement process can reduce vendor invoice discrepancy and this could be automated as well. Unless the process is fully automated, the procurement professionals would be spending valuable time in determining the procurement expenses. They would not thus be able to achieve strategic performance levels. Procurement organizations also have the responsibility to manage key supplier relationships. This is because there is an increase in the importance placed on becoming a ‘preferred’ customer for key suppliers. Conclusion Thus it can be seen that procurement has become of critical importance to the firm’s position in the industry and the global market place. Strategic procurement is essential to be able to handle the different situations that have brought about changes. Most organizations focus on a customer-oriented strategy as customer satisfaction is of prime importance. While the entire supply chain is important and different companies give importance to different areas in the supply chain. The procurement process has its own benefits. It focuses on the customer and since demand uncertainty prevails in every sector, procurement has to be economical and effective. In the apparel sector, the buyers have achieved economies of scale while reducing the costs. Risks can be mitigated through effective procurement planning and it also allows capturing other opportunities. Information flow and communication between the supply chain partners can be enhanced. Trust between partners is enhanced as collaboration and mutual benefits can be perceived. New markets, new suppliers, better sourcing opportunities, changing customer preferences can all be used for a better procurement process, which enhances the quality of the supply chain. Even in the service sector, the procurement process can reduce the costs while enhancing customer services as it leaves the organization free to focus on core functions. Thus, procurement impacts the total supply chain and can improve the overall efficiency. 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