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Without logistics, the world stops.
Dave Waters
You are browsing Amazon, and you like a pair of socks. You add it to your cart and complete the purchase, and in a few days, it's at your doorstep. For an end customer, the entire process is just a matter of a few clicks; behind the scenes, however, a lot is going on.
The cotton is picked from the fields, cleaned, and then sent to the mills to be turned into yarn. After that, it's dyed and knitted to form socks. A similar process is used to create the packing materials necessary to pack the final product. Once you place your order, a series of intricate steps are put into motion to deliver the socks to your doorstep.
This entire process, from start to finish, in essence, is what is called a supply chain. Procurement in supply chains is the foundation of the entire process. It involves everything from finding the right cotton farmers to obtaining the best quality product at the best prices.
By definition, the supply chain refers to the entire process involved in getting a finished product to the customer. The individual "links" of this chain include everyone from the producers (in this context, the cotton farmers), the vendors, the manufacturers, the distributors, the retailers, the logistics providers, the supply chain managers who oversee the entire process, and finally, the end customers.
The fundamental links in a supply chain are as follows:
There are primarily three supply chain models in use today.
As manufacturers, the industry you serve and the type of product you produce will decide which of the above models would work best for you.
For instance, the continuous flow model would be most suitable for manufacturing standardized products such as FMCG. The fast-chain model is best suited for industries with short product life cycles, like fast fashion. If you are involved in the production of bulk commodities, the efficient chain model would aid in minimizing costs through economies of scale.
No matter which supply chain model you choose, it all begins with material procurement—this will determine the quality of the raw materials and the price you pay for them.
While this sounds straightforward, the procurement stage in a supply chain involves a lot of expertise:
The first step of the procurement process is to identify all the raw material requirements for the manufacturing process. This process involves discussions with all relevant business departments to discuss factors such as quantities, technical specifications, delivery frequencies, and so on.
Once the procurement team has all the information they need, their next step is to find and source the right suppliers for the needed raw materials. While quality and cost are essential factors, the procurement team also needs to take into account factors like the capacity to supply the needed raw materials, turnover times, reliability, and reputation, as any lapses here will have a cascading effect down the entire supply chain.
Also Read: An Extensive Guide to Preferred Vendors, Agreements, and What to Look for
Once suppliers are shortlisted, the next phase is to request a quote and negotiate with them to land the best deal. Discussions at this phase focus on the price, volume, delivery, and payment timelines.
Once favorable terms have been reached, the procurement teams send out Purchase Orders (POs)—a formal/legal document that confirms the purchase and all the terms of the agreement.
Once goods start arriving from suppliers, the next step of the procurement process involves inspecting them to ensure that:
After the goods have been inspected and accepted, the procurement process shifts its focus to financial closure. The invoice is verified against the PO and the Order packing list or Good Received Note, a process known as three-way matching. Discrepancies, if any, are followed up on and resolved upon which invoices are approved for payment.
Over and above the core activities, procurement in supply chains also involves the following:
Procurement is never a one-off exercise. As is the case across all businesses, good relationships with essential business partners will have a profound impact on your bottom lines. In the context of suppliers, maintaining healthy business relationships will most likely improve the ease of working with them and get you better terms.
Depending on the type of industry or product being manufactured and the scale of operations, businesses may need to work with a large number of suppliers simultaneously. Large-scale operations work better with vetted, approved, legally binding contracts. In such instances, the procurement team also has the onus of maintaining said contracts, recognizing terms as and when required, and ensuring that terms are upheld.
Also Read: Procurement Contracting: Significance, Types, and Best Practices
As we touched upon earlier, procurement is the foundation upon which a supply chain is built. Due to this fact, Procurement is responsible for strategic goals such as:
Procurement lays the foundation upon which manufacturers can function efficiently and deliver their end products to customers at competitive prices without a drop in quality. Remember, while this blog exclusively dealt with products, software and IT procurement is also very much a Procurement function, with equally critical impact on supply chains, as evident from the recent CrowdStrike issue.
Handing multiple suppliers, POs, and contracts is not easy without the right software. Manually managing procurement processes can lead to a breakdown in your supply chain. Hubler's Procure to Pay software can help you manage and streamline your entire procurement process, including your workflows, POs, GRNs, payments, and suppliers.
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