Procurement: Overview of a Strategic Function

industrial procurement

With the manifestation of communication technologies, more parts of the world become connected and the phenomenon of “global village” is getting closer to reality. This idea besides its advantages including lower costs for products and access to new markets has created a few challenges for industry players. The never-seen-before competition that these days takes place between suppliers all over the world to attract the customers is a direct result of globalization that places considerable pressure on suppliers. On the other hand the customers are in a never ending search for finding the right vendor who can meet their needs in terms of cost, quality and deadlines and provides the best commodities and services. Based on what has been stated, nowadays sourcing or procurement is one of the main challenges that the industrial players have taken on and in this article we will enumerate a few strategies to tackle them. 

What is Industrial Procurement?

Procurement can be defined as the process of obtaining or sourcing goods and services with a competitive price and quality to run day to day operations of businesses. In some businesses the term only refers to the actual process of buying goods and services while in others the word procurement indicates the entire activities that lead to the purchasing of goods and services including but not limited to monitoring the market, negotiating with suppliers, sending purchasing orders and signing contracts. In this process two entities are involved: first the company that buys and second the vendor which sells and buyers must consider a few precautions that will be elaborated following.

Important Precautions before Procurement

industrial procurement

Considering the importance of procurement in the day to day running of businesses and the substantial damages that any error in this cycle might impose to the companies’ resources, it is necessary that a few factors be taken into account before going any further to source the materials. Here you can find a list of steps that should be considered:

Minimizing the Costs

The final price of a product or service depends on various external factors including but not limited to the cost price which can be defined as the sum of direct and indirect costs of its production and distribution. Businesses calculate their profit by deducting the cost price from their turnover, so it can be comprehended that costing has an important role in measuring KPIs which is why companies need to carefully choose the suppliers and consider various factors in finalizing the contracts. Second comes the raw material indexes that can significantly affect the final price of products and services. As the indexes of oil, plastic, rubber and steel are fluctuating all the time and this can have dramatic effects on the prices of commodities, companies can ask for an indexation clause to be included in their negotiation for the contract. The third item that has to be considered before industrial procurement is the market price; in other words, it is recommended that companies compare the prices that their supplier has set to the prices set by their competitors and find the optimal vendors.  

Pay for Technology

Placing purchasing order which is commonly referred to as PO is one of the important steps in industrial procurement and is followed through various steps. After creating a PO, companies need to send out multiple requests for vendors to receive their quotation (RFQ) and then analyze the responses from their suppliers and select the best offer. In this stage the buyer will contact the seller to negotiate on the final price and finalize the contract. Thanks to the advances in technology, the paper-based procedures for the processing of purchase requests have been replaced by IT solutions like business management software. ERP which stands for enterprise resource planning is one of the commonly used solutions to manage data from various business activities including the procurement. The system which consists of a suite of applications and usually is integrated with CMMS (stands for computerised management systems) connects to a database which is regularly updated with data from various departments about cash, raw material, production capacity, PO and payroll and whenever there is a shortage it automatically places order requests. These requests are then validated by the industrial buyer to assure that the shortage is real. In the next step the system will find the best supplier based on the aforementioned factors (including price, quality and due deadlines).

Choosing the Right Supplier

As it has been stated the whole process of placing PO can be done automatically to save the time and prevent any possible human errors in estimating the needs of businesses but companies must have a directory of trustable suppliers so that the aforementioned system can automatically connect to them and place a purchasing order request. Here a question may arise on how a buyer should find a trustable supplier?

There are various methods including putting the contract out to tender, attending industry exhibitions or through specialized platforms like SOURCEME which is a hub for suppliers and buyers to either source their required products or showcase their services and goods. Here vendors can find new business opportunities, access high value RFQs, gain visibility in multiple industries and expand their digital reach. Buyers, on the other hand, can visit trustable suppliers at SourceMe and confidently purchase their required commodities in a short period of time and with a high efficiency. 

Who is an Industrial Buyer?

Industrial Procurement

The whole process of procurement is managed by an industrial buyer. An industrial buyer or purchasing agent is a person who makes decisions about buying raw materials, equipment, goods and commodities for businesses. Buyers have considerable negotiation skills and before finalizing any contract with suppliers, they usually check the inventory of the company, monitor the market trends and competitors’ strategies to get an extensive understanding of the situation, assess any possible improvement of the products together with the R&D departments and finally make a short list of suppliers to choose from. In the next stage they will contact suppliers to resolve the price and quality of the order and reach an agreement on the deadlines for product delivery.

Industrial buyers typically have a business/commercial or manufacturing/engineering university degree or have acquired the required knowledge and expertise in these fields through professional channels. It is a merit if buyers have a master’s degree in business administration (aka MBA) or have obtained their CPSM (which stands for Certified Professional in Supply Management). 

Required Skills for an Industrial Buyer

Every industrial buyer must have a combination of skills to best suit the job. Here is a list of required skills:

  • Strong interpersonal and communication skills to build effective relationships with stakeholders and suppliers

  • Strong negotiation skills to cut the prices and successfully conclude the contracts

  • Analytical mindset with strong problem solving capabilities 

  • Good understanding of purchasing software and platforms to analyse the expenditure, manage the information regarding the supplier chain and contracts. There are various procurement software in the market including but not limited to Jaggaer, Procurify, Zycus, Coupa, Xeeva and tradeshift that buyers can use to automate end to end organizational purchasing functions and acquisitions.

  • Good at math and calculation

  • Comprehensive knowledge of legal issues and laws. 

What about Soft Skills?

Together with the aforementioned skillset- that are a must for an industrial buyer- and the preferable academic background discussed above, every procurement agent should have the following soft skills to fulfill the objectives of their affiliated company. 

1- Anticipation

Those who work in the procurement departments must be proactive instead of being reactive; that is, they should be able to anticipate the market trends and arrive at a wise decision before it is too late.

2- Resilience

Buyers must plan their steps down to the last details but sometimes, things do not go as planned earlier and buyers need to adapt themselves to new situations and find good alternatives for the previously planned steps.

3- Rigorous

Buyers should be extremely thorough and accurate in their expenditures and managing their staff because any errors in their decision could incur massive loss on the transactions. 

4 Creative

Procurement agents must be good problem solvers and in this regard they should always try to think out of the box and provide creative solutions to break through barriers and produce impressive results. 

5- Curious

Industrial buyers must have an extensive knowledge of the fields they are working in and always search for new products introduced to the market. They should be curious about their competitors, suppliers, index prices and new solutions to meet the needs of their affiliated company. 

Strategic Sourcing Process

industrial procurement

The primary goal of procurement is getting the best equipment, goods and services with the right price, though it is a while that companies seek to implement the principles of strategic sourcing in their business. Sourcing strategically means that companies develop channels of supply to secure the best possible total cost. The channels embrace all activities that happen within the procurement cycle to continuously evaluate purchasing activities of businesses and improve them accordingly. 

In 2001 a prominent management consultant firm in the USA proposed a seven-step strategy for procurement and since then, the strategy became the golden standard referred to by industrial buyers to plan the resourcing and its steps are as follows:

1- Understanding the Spend Category

Buyers should have a thorough understanding about every category of products and the commodities in each category; that is, they are aware of the quantity, types and sizes of products that are being used. In addition, procurement agents must know the users of the commodities, their location and all of the stakeholders who are involved in the supply chain and accurately document the data with as much details as possible.

2- Analysing Supply Market

In the second step, buyers must identify local and global suppliers and analyse their marketplace to learn more about possible opportunities and risks. They should also consider all of the factors discussed earlier that can affect the total price of commodities (factors including raw material indexes, labor and transportation expenses and market prices).

3- Develop Strategy for Procurement

In this stage, the industrial buyers must acquire a sufficient understanding about their buying power, specify the available sourcing methods and try to maximise savings. They should always have alternative suppliers in case they could not reach an agreement. 

4- Recognize Qualified Suppliers

As stated earlier there are various ways to identify the right suppliers including putting the contract out to tender or attending industry exhibitions but the best safe solution would be using online sourcing platforms like SourceMe which is a hub for suppliers and buyers to either source their required products or showcase their services and goods.

5- Negotiate Suppliers

After requesting proposals from suppliers and analyzing the costs and legal conditions, buyers can create a shortlist of trustable suppliers and after negotiating with the best one, they can develop an agreement. 

6- Communicate and Implement

Buyers must make sure that every person who is involved in the process of delivery has the required tools and equipment to collaborate in the process and everyone has a thorough understanding of their roles.

7- Benchmark

In the final step, the buyer must ensure that the supplier meets the requirements that have been specified in the contract.

Written by Maryamsadat Mousavi

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