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Everything to know about Procurement

What do you about procurement?

Are you being part of a supply chain?

The answer should be yes if you are buying even a single product from the nearest retail shop or from the supermarket. If you are working in a manufacturing or a distribution industry your involvement in the Logistics and Supply chain work is connected in another way.

Still have doubts on your involvement in the Supply chain? Don’t Worry, have a look at the following.

Logistics and Supply chain can be explained as the process which involves the activities from acquiring raw materials to consumers receiving the final product and back to the supplier. Procurement is one of the major activities in the said Logistics and Supply Chain process. In other words, a process or theory according to scholars associated with the Supply Chain.

According to traditionalists Supply chain is a subset of procurement, Supply chain and procurement are in the same set according to relabeling people, Procurement is a subset of supply chain according to unionists and according to interactionists supply chain and procurement is intersecting.

Though different perspectives present different angles, we need to identify that procurement plays an important role in succeeding a supply chain.

what is Procurement

Procurement involves a set of activities related to obtaining goods and services which is essential to support day to day operations such as sourcing, negotiating, goods receiving and quality checking and keeping records.

Procurement helps the supply chain in different ways. This includes making decisions on in-house production, outsourcing, sourcing and suppliers appraising, Supplier base rationalization, supplier potential development, involvement and partnerships, benchmarking, and monitoring the performance of the suppliers.

Ordering & calling off, inventory maintenance, Payment arrangements, expediting and supply receiving & storing are some of the strategic procurement decisions.

It will be worth observing the stages of the procurement process as it helps to make the procurement process productive.

Procurement Process

Identifying the needs help a business to draw plans for procurement in the first place. A company has different departments to engage in these different activities. In general, the market demand/ trends and the company’s product supply requirements are identified by the marketing/sales/commercial or trading department.

Once the requirement is identified, a purchase requisition is raised. A Purchase requisition (PR) includes a brief of product, quality, quantity and special notes. Once the PR is approved or shared with the procurement department, the procurement team starts their work.

Some companies select suppliers/ vendors on annual basis. For special items, there may be only one vendor in the market, where the supplier has to be selected without supplier analysis. If the vendors are freely available and there are no special restrictions in the selection, can call for quotations to do a vendor analysis.

Tenders and bidding are too used when procuring high-valued products which we will study separately.

From the quotations received procurement team can identify the best supplier. For critical and high-valued items, vendors and clients prefer to sign a contract. Some go ahead with the procurement only with a purchase order (PO).  Do remember, a signed PO has a legal value in a dispute.

The process looks simple, thus so much of work to do in order to make sure the procuring meets the company’s best interest. The procurement team has to make sure, the product meets the anticipated lead time, in the right quantity and most importantly in expected quality.

If the materials do not arrive within the expected period company may run out of materials for production.  And the production plant may idle. Further, delay in starting production further delay the production complete time. Delay in production complete time shorten the time period to send the product to market or to the client. Sometimes, the company has to airfreight the products bearing a huge cost which is usually sea freight in order to meet the client’s delivery cut off time.

If few productions are lined up, the production line with a delay in receiving materials has to wait until other productions are completed to start production.

Further, contract/PO terms should be negotiated.

This process may differ depending on company policies. And mostly whether the procuring is done locally or internationally. You may read the article on domestic trade vs. international trade to understand local and international trade.

Sourcing

 The Sourcing process contains identifying and evaluating the different suppliers in order to select the best supplier who offers the product to meet the company’s requirements including quality/ price and delivery time. The sourcing can be done locally and internationally.  

Local sourcing means sourcing products and raw materials from the home country or within the country’s territory.  While global sourcing means sourcing from other countries or from a global supply chain.  Both options have their own pros and cons.  

Increasing the reliability of the products, predictable delivery time often and serving the local economy are some of the major benefits while quality issues, and problematic situations when changing the supplier are drawbacks of the local sourcing.

When it comes to global sourcing, substantial cost saving, able to get unique, hard to find products, the flexibility of working and able to get international market experience are some major advantages and currency exchange fluctuations, complex procedures, different industry standards and import & export restrictions of the associate countries are some drawbacks.

You can select either local or international sourcing evaluating the benefits to your company by both sourcing strategies. Thus, the cruciality of having local vendors for sourcing during the COVID pandemic was well known.

Globally, the sourcing is associated with the import and export industry which has a strong connection with Incoterms, international payment terms, and trade documents.

Types of Procurement

Here we will see the procurement types which can conclude as direct, indirect, goods and services.

Direct

Direct procurement speaks on the materials procure for production. For example, let’s consider a garment factory. To cater to an order of winter jerseys, the factory has to procure jersey cloths. Here the jersey cloths come under direct procurement

Indirect

Indirect procurement is the items procured to support the production of items in direct procurement. For example, a garment factory requires to procure tables to keep the sewing machines. These tables consider under indirect-procurement. Further, office furniture requires to manage the administrative work. This too comes under indirect procurement.

Goods

Goods are the physical items to be procured. These goods could be both direct and indirect requirements.  

Services

Services are the non-physical procurements which support the production. For example, a garment factory may get a consultancy service from a Logistics firm in order to streamline their logistics activities.

Why Procurement is Important to Business

  • Procurement plays a crucial role in every business. Failed procurement policies could lead to loss of clients, reputation, and revenues. Hence managing procurement is important. We will see why procurement is important to a business.
  • Procurement looks for the best materials for production which ultimately requires to meet the customer’s expected quality.
  • It further involves in negotiating with vendors to reduce material prices, and shipping line/ NVOCC/Freight forwarders to minimize freight rates.
  • Buffer stock levels, managing warehouses, and sourcing strategies depend on procurement.
  • Enabling products at the customer’s doorstep is linked to procurement decisions.

Good Procurement Strategies:

  • Increase the company’s profit margin
  • Reduce risks associated with the Logistics and Supply Chain of the company
  • Build up long term strategic partnerships with vendors and customers
  • Helps in brand reputation
  • Backup strategies like lean management and JIT

Objectives of Procurement

  • Total Cost of Ownership
  • Risk mitigation
  • Relationship with vendor

Procurement Vs. Purchasing

Procurement and purchasing, are they the same or different? Most of the people consider procurement and purchasing the same. And prefers to use the word purchasing for procurement activities wise-versa. Thus, you should remember that these are two different words.

Procurement covers a broader area where purchasing is a small area of procurement.

The main objective of purchasing is to reduce the cost of order while procurement focuses on the total cost of ownership, strategic business relationship with suppliers, risk mitigation, contract management, cost reduction etc.

Purchasing does not worry on supplier evaluation or on the long term relationships. It just focuses on one time buying from a supplier from an existing supplier basis. Thus procurement focuses on a long term win-win relationship.  Further, the prominence given to the supplier relationship is high in procurement.

Technology in Procurement

Due to the importance of procurement in an organization, the requirement of minimizing errors in the procurement process is crucial. These errors include failing to place orders on time to avoid stockouts, unsold goods which are expired/obsolete, sales losses, and unaffordable transport costs.

Most of the companies in the industry use software or ERP (Enterprise Resource Management System) systems for better procurement management.

SAP, Oracle, Precoro and Kissflow are a few major ERP systems for procurement.

If we speak a little on SAP, SAP links the systems of both vendor and the customer. Once the customer places the order, the vendor receives the order through the system without a delay enabling a faster procurement process.

VMI or the Vendor Management Inventory is too a similar model, where the vendor itself manages the stocks of the customer.

Traditional Vs Strategic Sourcing

Traditional sourcing is the purchasing we all are aware of. And strategic sourcing is the so cold procurement.  

Get three quotations, and go for the lowest quotation. Done and Dusted…

Yes, that is traditional sourcing friends… 🙂

Thus, strategic sourcing or procurement concerns on the value of items/products rather than the price of the items/products.

Terms Associated with Procurement

Incoterms

If you are going for international procurement, INCOTERMS is a must to know.

International Commercial Terms (incoterms) are set of internationally recognized which explain the seller’s and buyer’s responsibility in the export transaction. This set of 11 rules has been issued by International Chamber of Commerce (ICC).  Incoterms clarifies the responsibilities, costs and risks which should be borne by the shipper and the consignee. The latest update of incoterms was taken place in 2020.

For further information, you may go through the article on INCOTERMS.

Payment terms

The payment term is another aspect to be vigilant. Cash in advance, Letter of credit (L/C), Documentary collection (D/C), Open Accounts (O/A) and consignment are major payment methods highlighted in international trade.

Jump into the International Payment Terms to have a quick glimpse of the subject.

The next part of the procurement is to plan the logistics activities which relate to the shipping (sea freight/ air freight), Freight forwarding and customs clearance.

 Freight Forwarding

Freight forwarding includes the planning and execution of the logistics activities related to the movement of goods on behalf of the shippers. Freight forwarder requires the expertise knowledge in 360 knowledge on cross-border customs standards and protocols which may differ from country to country. And to cater on the spot issues and the sense to develop networking with other relevant parties.

 Further, a valid CHA (Customs House Agent) license is a must. The article on Freight forwarding and NVOCC will help you to understand their roles and the job scope.

Conclusion

Shipment tracking, customs brokerage, warehousing, negotiation, scheduling of cargo space, freight consolidation and cargo insurance come under the scope of the procurement team in most of the companies.

Procurement decisions have a big say in a company’s overall performance. Hence be vigilant when making procurement decisions. It may be sourcing options, agreeing to Incoterms, payment terms or selecting the freight forwarder.

Your smart decisions could be a game changer in your company!

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