April 15, 2019 | Miscellaneous
Procurement’s one very obvious function is to save costs. But that’s really an understatement. A mature procurement division is akin a juggler tossing many balls up in the air and slickly catching them all without a miss. And that’s no easy job, any juggler or supply chain executive can tell you.
For direct procurement teams – those responsible for acquiring at the best possible rates raw materials that a business needs to create its product or service – the stakes are especially high. The company’s reputation, the customer’s satisfaction, the business’ bottom line are tied up with its performance. Drop a ball and you’ve lost control.
Here are some of the major challenges that direct spend teams contend with:
Handling complex processes
Direct procurement teams have to manage many multi-layered processes, all of which have a direct impact on the final product or service that the business is selling to its customers. From managing a precise and streamlined Bill of Materials (BOM) – the product blueprint with a specified list of raw materials, sub-components, parts, and quantities of each needed to manufacture a product – to tracking demand and analyzing demand patterns, maintaining visibility of inventory for sufficient but not surplus stock, and tracking and fulfilling sales orders, direct spend teams have to keep tight rein on a lot of complex processes.
These processes are heavily dependent on availability and accuracy of information, access to intelligent technologies, and the involvement of the team far beyond sourcing, which is not necessarily what happens in many companies.
Supply chain risk management
Maintaining sufficient stock and product quality are crucial for direct spend teams as they impact customer satisfaction, business reputation and credibility. While globalization gives businesses more choices and better rates when it comes to goods and materials, it has complicated the procurement process by heightening potential risks and limiting the team’s control.
Now, teams have to manage a diverse, extensive supply chain that operates across many national borders. The more complex and spread out the supply chain network design, the higher the risks. New areas mean new legal and trade requirements; more coordination with suppliers and even governments; and all the complications of shipping orders across borders, such as documentation, customs clearance, etc.
Direct procurement teams must think on their feet, build in buffers and have contingency plans to handle the global supply chain while maintaining competitiveness.
Cost optimization, on-time delivery, consistent quality, right quantity, continuity of supply, sufficient inventory – all of these are linked to suppliers. The less reliable the supply chain, the higher the risks involved, so supplier performance management is a huge and critical task.
While managing processes involving suppliers is important, direct procurement must also build strategic, collaborative partnerships with them to foster loyalty and encourage innovation, which play a strong role in both financial and business growth.
One of the most important factors that affects supply is the vendors’ financial health, so businesses must conduct supplier risk assessment regularly. They also cannot afford to lose sight of their suppliers’ industry status and safety practices as these can affect their company’s reputation.
Accurate and real-time data from various internal business functions is essential for smooth supply chain management. But for a variety of reasons – security issues, lack of cooperation, lack of data tracking – information is not always easy to come by. Professionals managing the direct procurement process should team up with key internal departments so there is better understanding of the process, more transparency and easy access to relevant information.
Often, the supply chain is littered with different types of procurement software and applications. There may be modern cloud-based systems incorporating machine learning, artificial intelligence and blockchain; there will be the old, cumbersome ERP systems; and there may be only email and spreadsheets. Making divergent platforms compatible is a big challenge, especially when there are a huge number of suppliers and no geographic boundaries.
For direct procurement, the challenge is not just their own business adopting best practices and automation, but also the suppliers’ capability and willingness to do so.
Keeping costs low and savings high
As savings have a direct impact on the organization’s bottom line, it’s always in focus. But when the supply chain planning is already efficient and direct materials are being sourced competitively, the effort to deliver higher cost savings is a challenge. Inevitably, rates tend to gradually rise as suppliers incur higher costs on their end. The solution cannot always be to switch to a low-cost supplier as this comes with its share of risks, besides damaging the relationship with a reliable, trusted vendor.
Many companies now specifically measure cost avoidance as direct procurement dedicates a fair amount of time and effort to it.