In a business environment, the procurement function is one of the most critical functions as it provides the input for the organization to convert into output. Materials today are lifeblood of industry. They must be available at the proper time, in the proper quantity, at the proper place, and the proper price.
Company costs and company profits are greatly affected by them as normally, a manufacturing organization spends nearly 50% of its revenue in purchasing.
Procurement vs. Purchasing
In the broadest sense procurement includes the entire process by which all classes of resources (people, materials, facilities and services) for a particular project are obtained. Since purchasing is a unique function, it differs a bit from procurement in the sense that while procurement, with the same objective has a wider domain, purchasing with the same objective is included in it.
Objectives of Purchasing
The classical definition of objectives of purchasing is to buy materials and services of the right quality, in the right quantity, at the right place, from the right source and at the right time.
However, in general management terms the objectives of purchasing are:
- To support company operations with an uninterrupted flow of materials and services.
- To buy competitively and wisely
- To help keep a minimum Inventory
- To develop reliable alternate sources of supply
- To develop good vendor relationship and a good continuing supplier relationship
- To achieve maximum integration with the other departments of the firm
- To train and develop highly competent personnel who are motivated to make the firm as well as their department succeed
- To develop policies and procedures which permit accomplishment of the preceding seven objectives at the lowest reasonable operating cost
Inventory management is the process of efficiently overseeing the constant flow of units into and out of an existing inventory. This process usually involves controlling the transfer in of units in order to prevent the inventory from becoming too high, or dwindling to levels that could put the operation of the company into jeopardy. Competent inventory management also seeks to control the costs associated with the inventory, both from the perspective of the total value of the goods included and the tax burden generated by the cumulative value of the inventory.
Inventory control is concerned with minimizing the total cost of inventory. The three main factors in inventory control decision-making process are:
- The cost of holding the stock (e.g., based on the interest rate).
- The cost of placing an order (e.g., for row material stocks) or the set-up cost of production.
- The cost of shortage, i.e., what is lost if the stock is insufficient to meet all demand.
In search of cost savings, companies are looking for ways to standardize and automate their operational processes. Standardization combined with automation of the operational procurement processes relieves the purchasing department of a huge administrative burden. Not only does this lead to a reduction in operating costs, it also frees up time in the purchasing department, which can then be spent on more strategic tasks (spend analysis, supplier evaluation, sourcing projects, etc.).
The P2P process consists of many sub-processes from sourcing, ordering, receipting, payment through to contract and relationship management. Through automation, components of the process can be either removed or deskilled improving efficiency and reducing costs.
Technological advances in ERP and web-based procurement systems have provided the tools for purchase and supply management professionals to consolidate information, reduce costs and increase service. This has been the most significant development for P2P maturity.
The evolution of supplier relationships from one off or adversarial, to strategic alliance and partnerships has influenced P2P development. Buyer and supplier work collectively to add competitive advantage in the supply chain for mutual benefit.
Read more about the Competences:
|Strategy Development||Category Management||Finance Management|
|Cost Management||Sourcing Process||Negotiation|
|Legal||Performance & Contract Management||Operational Procurement|