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The importance of a supply chain perspective in procurement decisions

Supplier: apicsAU
22 June, 2012

The concept of procurement, the acquisition of goods or services, has been around for thousands of years.

While the objectives in procurement have not dramatically changed, the ability to acquire a product or service at lowest possible costs while meeting the buyer's needs in terms of quality, quantity and time, has become increasingly complex. This is often due to a variety of issues that are intrinsically related to the supply chain. These include:

Sustainability:

Transport is the fastest growing source of greenhouse emissions and is estimated to be responsible for less than 20 per cent of carbon dioxide emissions in the future. With the introduction of the carbon tax the costs to supply could change dramatically.

Globalisation:

Products are being sourced globally to take advantage of such elements as labour rates and specialised manufacturing, impacting lead times and inventory requirements (see exhibit 1).

Vulnerability:

Business decisions to dramatically reduce working capital, consolidate the supply base and outsource operations reduce "buffers" to react to unplanned changes. This is in a time where the risk of environmental issues (e.g. natural disasters) appears to also be increasing.

Product proliferation and reduction in life-cycles:

The variety of products offered often increases the number of inputs and suppliers (see exhibit 2), while the typical life cycle of a product has decreased causing increased product (and material) write-offs/downs.

Business alignment:

Customer requirements (e.g. multi-channel, many variants) often conflict with internal objectives (e.g. lean) and supplier capabilities requiring procurement to play a balancing act with stakeholders.

For these risks to be properly managed Procurement needs to first gain a better understanding of the supply chains for the various products and services it is acquiring. This includes:

  • Understanding the demand and supply characteristics of the product - is demand highly variable? Is supply reliable?
  • Mapping out all of the steps to get the product from the supplier to customer, identifying areas of potential waste and risk
  • Determining strategies that could be utilised to mitigate risk or reduce waste for discussion with key stakeholders
  • Utilising (or developing) metrics to measure and communicate areas of performance (and risk) to the broader business

Once this knowledge has been acquired, Procurement can work more closely with Supply Chain in determining the total cost of ownership and managing the inherent risks that various options provide. The table below outlines how Supply Chain and Procurement can effectively work together across various activities (exhibit 3).

Keys to success

For this to be successful procurement needs to take the initiative in a number of areas, including:

  • Take a lead role on sustainability for products and services procured and understand the implications of various supply scenarios
  • Train the procurement team (and the rest of the business) in total cost of ownership
  • Raise hand to assist in off-shoring/outsourcing activities to ensure a comprehensive view is established
  • Conduct workshops identifying vulnerabilities/volatility in inbound supply chain and action them (this could include the supplier)
  • Develop contingency plans and strategies based on potential outcomes

Engage key stakeholders across business in pursuit of goals. Timely, cross-functional meetings need to become part of the culture.

Conclusion

These challenges will only intensify in the future and it is important that your organisation's Procurement function understands the diverse product and service supply chains that exist and work closely with key stakeholders to address and manage the various risks involved.

Those that do it well are less likely to be impacted by the various challenges of today's operating environment and quicker to react when unforeseen events occur.