At a high level, procurement is the act of acquiring goods or services as part of a business’s operations. Because many businesses rely on procurement to function, procurement and procurement processes require a significant amount of resources to manage.
The procurement market size is massive. In 2020, the market size was valued at $5.78 billion with an expected annual compound growth rate of 8.2% between 2021-2028. To meet the growing demands of the services, procurement management creates strategic planning to purchase certain materials or services to determine the profitability of the company’s operations.
In some cases, businesses are on both sides of the procurement aisle. For example, OEM suppliers are buyers of the raw materials and tools to create components, but they are also sellers of components to the businesses in the industries that they serve.
In manufacturing, procurement management helps manufacturers with a number of business factors to drive success, including:
- Supplier engagement and relations
- Managing compliance
- Addressing ever-changing customer demands
- Driving profit
- Reducing overall supply chain risk
Within each complex supply chain network, procurement plays a significant role — but following a poorly managed procurement plan can negatively impact your customer relations and profitability. In this article, we take a deep dive into the importance of procurement in supply chains, as well as the benefits derived from an effective procurement process.
How does procurement impact the supply chain?
In manufacturing, procurement falls within the scope of the supply chain. You might better understand the difference between procurement and supply chain management by noting these factors:
- Procurement offers the inputs needed for a business to run day-to-day operations and exists as one of many branches within the supply chain structure.
- Supply chain management oversees the outputs, or how the acquired supplies are manufactured, to create the finished products and deliver them to the customer.
A supply chain management role includes procurement activities. Although the tasks of supply chain management in the manufacturing industry are many, here are four primary functions of the role:
Purchasing Products or Raw Material
Purchasing is the key task in any procurement role, yet the purchase of a product isn’t the extent of the task. Procurement professionals must monitor market trends, predictions and customer demand, and ensure legal compliance under company policy.
Managing Internal Processes
Similarly, managing the procurement process involves managing the internal structures and tasks, such as adding new suppliers into the system. This can also include vendor negotiations to ensure cost-savings on product purchases.
Maintaining Supplier Relationships
Although cost-savings is one of the primary goals of procurement, many of supplier-buyer relationships reap optimal benefits with long-lasting relationships rather than one-off purchases. Maintaining supplier relations ensures both parties are satisfied and delivering on their promises and price.
As mentioned, procurement is only one of many phases within the supply chain. In some supply chains, supply chain management oversees the transition from procurement to the manufacturing of the component to distribution.
To ensure these functions are optimal in an organization, it is important to implement effective procurement processes.
What can effective procurement processes do for your business?
Implementing an effective procurement process is tantamount to the overall success of the supply chain. According to the Further Education Library of Procurement, procurement assists in streamlining processes, reducing raw material costs and identifying better sources of supply. Consider procurement the foundation of the supply chain.
Here are four ways effective procurement processes can positively impact your business:
1. Reduce Total Costs Across the Supply Chain
First and foremost, implementing an efficient and effective procurement process can provide timely and tangible cost improvements to increase the quality and movement of the supply chain. Value is delivered by lowering operational costs through purchasing supplies and materials at the best available price. Professionals in procurement roles find these prices through warranties and discounts that are either forgotten or not managed.
Outside of direct purchasing, procurement departments seek total visibility of an organization’s purchasing activity to gain insight into potential reductions in purchasing, sustain trust with stakeholders and better understand purchasing patterns to improve financial wellness. Controlling costs allows procurement to make products more cost competitive when they arrive in the market.
2. Create Greater Efficiency
To gain a competitive advantage, procurement professionals utilize the external market and suppliers. This means every sourced product, including price and quality, should contribute to competitive positioning.
To optimize efficiency, a procurement strategy should provide the following:
- Eliminate redundancies in operations and create beneficial collaborations with suppliers to create a robust portfolio of suppliers that align with an organization’s overall purpose and intention
- Provide an organization with economies of scale that reduce costs of supplies and production
- Determine a supplier’s capabilities, interests, competitiveness and financial viability, which weeds out under-performers
3. Incorporate Innovation
In addition to the many duties required of the role, procurement professionals find innovative ways to gain a competitive edge. In our increasingly technology-reliant world, the amount of available data information seems endless. A lot of innovation within procurement departments seeks to improve communicating the insight derived from gained data using intelligence tools.
In a recent report from the Chartered Institute of Procurement & Supply, 95% of the firms involved in the study reported adapting to cloud computing and Internet of Things (IoT) technologies to enhance innovation, efficiency and productivity.
4. Decrease Supplier Risk
Supplier risk is the potential that a supplier will fail to deliver their commitments in the agreed-upon contract. Typically, supplier risk events happen in four general areas:
To manage risk, procurement departments incorporate risk mitigation strategies that are continuous and evolving in order to address all risks associated with an organization’s activities. Without a sustainable method of identifying and solving these risks, an organization’s ability to compete can be compromised.
Discover quality components at a competitive price.
As an OEM supplier, we at VPIC have experienced both sides of the procurement process. As buyers, we have established supplier relationships that have provided us with cost-effective yet quality materials. And as suppliers, we are committed to providing the highest-quality components for businesses in a number of industries, including automotive, sports vehicles, healthcare and more.
Ready to start the process of working with a world-class producer of high-quality components? Contact us today.