Today, supply chain management is like the lifeblood of a business, and its importance is on the rise. As for procurement, as a key boss in the supply chain, it tightly drags the cost control and profit margin of the enterprise, and it is the key embodiment of the company's strategy.
What role can procurement play in supply chain management? What does the supply chain procurement process look like? Today's article will give you a clear step by step from the initial demand identification, to the intermediate supplier evaluation, and then to the final procurement decision and follow-up management. Our goal is to improve the overall operational efficiency of the enterprise through procurement management. Next, I will disassemble the supply chain procurement process into 8 steps, and I hope to have new inspiration for friends in the procurement industry!
1. The role of procurement in the supply chain
Procurement, as a key link for enterprises to obtain raw materials, parts, products, services and other resources, is not only a collection of a series of business processes, but also a far-reaching strategic art. In the product cost structure, decisions at the design stage often account for up to 80% of the cost, emphasizing the importance of supplier involvement in the design phase. Through design collaboration, suppliers and companies can work together to shape the future of products and ensure that design proposals flow effectively among all parties involved.
When the product design plan is determined, the procurement is transformed into a process of delivery by the supplier according to the order requirements. The mission of purchasing is to achieve the on-time order and delivery of products at the lowest cost. The essence of procurement planning and analysis is to evaluate the costs of different suppliers and their components, and to identify the potential to reduce overall costs.
An effective procurement process can improve a company's profit margins and supply chain efficiency on multiple levels. When making purchasing decisions, it's critical to identify and identify the key drivers that drive profits. There are many benefits to a good purchasing decision:
- As the volume of orders increases, businesses can enjoy the benefits of economies of scale.
- An efficient procurement process can significantly reduce overall procurement costs, especially for the purchase of large quantities of low-value products.
- Design collaboration helps create products that are easier to produce and distribute, which in turn reduces overall costs, especially for cost- and value-valued supplier products.
- An optimized procurement process improves coordination with suppliers, improves the accuracy of forecasts and plans, reduces inventory, and enhances the matching of supply and demand.
- A reasonable supplier contract can share the risk and increase the profits of both parties.
- Through competitive auctions, businesses are able to reduce the cost of purchase.
2. Supply chain procurement process
The procurement process is a series of orderly steps for a business to obtain the products, raw materials, and services it needs. It is a comprehensive business process that covers all aspects from identifying requirements, clarifying the details of requirements, evaluating and selecting suppliers, making decisions on supplier selection, negotiating transaction terms, and subsequent management to ensure supplier performance. The diagram below gives us a detailed overview of the procurement process.
Before we dive into the procurement process, there are two key points worth noting:
- The level of effort a business puts into these processes will have a direct impact on their effectiveness. For example, the same $30 billion for emergency relief supplies has a very different process and urgency than for regular government stockpiles.
- Companies must outperform their competitors at every step of the procurement process to gain a competitive advantage. Many companies automate the ordering of routine purchases through information systems, which are often referred to as e-procurement tools; Others are using cross-functional teams to improve the efficiency and effectiveness of supplier evaluation and selection.
1. Demand identification
The starting point of the procurement process is the identification of requirements. Procurement comes into play when a company's production activities require raw materials, components, assemblies or finished products, or even services such as consulting or maintenance. Procurement not only involves the acquisition of material products, but also an important part of the internal information flow of enterprises.
Describing requirements is a critical step in the procurement process. Companies must communicate the needs of users to potential suppliers in the clearest and most precise way.
(1) Standardized products
For standardized products, it is often most efficient to use a market-grade or industry-standard description method.
(2) Methods of expressing special needs
For products or services with special needs, more detailed specifications, performance characteristics, or model examples may be required.
- Specifications focus on the physical properties and production process of the product, such as the detailed requirements of the United States National Aeronautics and Space Administration for space shuttle heat shields.
- Performance characterization focuses on the customer's needs and expectations, rather than the construction or manufacturing process of the product, such as the service level agreement provided by Dell Computer.
- Models or example descriptions provide an intuitive way to communicate the key features of a complex product or service, which is especially common in the procurement of software or information systems.
An effective procurement strategy requires companies to strive for excellence at every step of the procurement process, maximizing cost-effectiveness and supply chain efficiency through meticulous demand management and precise supplier communication.
2. Supplier evaluation
Identifying and evaluating suppliers is a critical part of a company's procurement process. Once a company has decided to go with outsourcing, the next task is to screen and evaluate potential suppliers. This process usually begins with a list of potential suppliers, which may come from multiple sources such as market research, corporate databases, industry reports, etc.
While it is difficult to obtain comprehensive information about suppliers, the information available is sufficient for companies to conduct an initial assessment to select the right suppliers. The evaluation dimensions include, but are not limited to, the following:
(1) Production and design capabilities
It is important to understand the strengths and limitations of your suppliers in terms of production and service. Especially when suppliers need to be involved in product design, their design capabilities directly affect the length of the new product development cycle.
(2) Management ability
Assessing a supplier's level of management is a complex but indispensable step. Companies can be evaluated by management's commitment and performance in areas such as process optimization, quality control, employee relations, and cooperative attitudes.
(3) Financial position and cost structure
Assess the financial health of suppliers to avoid affecting the stability of the supply chain due to suppliers' financial problems. At the same time, understanding the cost structure of a supplier can help judge its operational efficiency.
(4) Planning and control system
Understand your supplier's production planning, scheduling, and control systems, the effectiveness of which directly impacts supply chain performance.
(5) Compliance with environmental laws and regulations
Assessing suppliers' compliance with environmental regulations, including hazardous waste disposal, is not only a matter of compliance, but also a sign of corporate social responsibility.
(6) Long-term cooperation potential
For suppliers who have key technologies or can help them expand into new markets, companies may consider long-term relationships.
During the assessment process, companies need to identify some key issues, such as supplier management experience, personnel stability, quality management commitment, financial transparency, R&D investment ratio, etc. In addition, the compatibility of the supplier's planning and control system with the company's own systems and the smooth exchange of information are also important aspects of the evaluation.
3. Supplier determination
Once the supplier has been thoroughly evaluated, the company moves on to the selection of the final supplier. In some cases, companies maintain a list of preferred suppliers who have the right of first refusal to receive new orders based on past performance. These suppliers have already demonstrated their production strength through previous contracts and are therefore a natural choice in the selection process.
The procurement team quickly identifies the final partner based on the production capacity of these preferred suppliers. However, if a preferred supplier is not available, the supplier is usually selected through competitive bidding or direct negotiation.
(1) Competitive bidding
It's a process of sending out invitations to multiple interested suppliers to submit offers based on established terms and conditions. The purchasing manager first issues an invitation to quote to a qualified supplier, and then evaluates it based on the quote.
Competitive bidding is particularly effective when companies can clearly define the desired product or service, purchase volumes are large and require a sound cost-benefit analysis, and when there is no preferred supplier. Government agencies also tend to use this type of tendering, especially when the evaluation criteria are primarily based on price.
(2) Negotiation
This is a more personalized, potentially costly approach to selection when the product being purchased is a new and complex product, a consensus needs to be reached on the details of the product's performance, the company wants the supplier to be involved in product development, or the supplier needs additional information to assess the risks and costs. Negotiation allows both parties to have an in-depth discussion on the specific terms of the contract to meet their respective needs and expectations.
The following figure shows a supplier management dashboard created using FineReport, through which you can evaluate supplier status, risks, etc., and view the overall ranking of suppliers.
4. Preparation for purchase and ordering
After signing the order contract, the company enters the preparation stage of purchasing the order. At this point, the business will send regular notices to the supplier clarifying the delivery requirements for the desired product or service. This process is often carried out through an order form, which is a formal document that details the key terms of the transaction, including price, delivery deadlines and quality standards. With the development of information technology, order forms are increasingly in the form of electronic data interchange (EDI), which enables supply chain members to exchange data quickly and efficiently between information systems, greatly reducing the time of traditional paper document delivery, improving response times, reducing inventory levels, and facilitating coordination among supply chain members.
5. Follow-up work and promotion
The next step is to follow up and progress the order. Procurement or materials managers need to oversee the status of all open order forms and, if necessary, may need to urge suppliers to expedite production or delivery to avoid potential shipping delays. The company ensures a smooth and efficient ordering process by selecting the best suppliers and establishing a reliable in-house forecasting and ordering system.
6. Receipt issuance and inspection
When the product arrives at the company, it is followed by the issuance of receipts and the inspection of goods. When receiving the goods, the enterprise should check the quantity of the goods and the condition in transit to ensure the accuracy and completeness of the goods. This information will be entered into the inventory database and become part of the company's inventory. Any delivery delays are also recorded as a basis for evaluating supplier performance.
7. Issue invoices and make payments
After the product or service is delivered, the business will issue an invoice to the supplier and complete the payment through the finance department. Increasingly, these processes are carried out electronically, such as electronic transfers, which automatically transfer payments from a company's account to a supplier's account. Many businesses have begun to adopt integrated electronic systems for the unified electronic management of orders, receipts, and payment activities.
8. Maintain records
Finally, records maintenance is an integral part of the procurement process. Once the supplier has completed the delivery of the product or service, and the business has completed the payment, all important events and data related to the purchase will be recorded and stored in the supplier performance database. This data provides businesses with valuable information about the long-term performance of suppliers, helps procurement departments analyze supplier performance trends, and plays an important role in future negotiations and problem handling.
By the way, I would like to share with you a supply chain control tower construction solution, which integrates all supply chain-related business system data to create a comprehensive supply chain management platform with two centers and three modules, realizes the storage, analysis and visualization of full-link information, monitors the threshold of key indicators, reasonably allocates resources, and controls costs.
The Supply Chain Control Tower Management Center consists of four modules:
- Supply chain data master control platform
This module monitors key indicators of the whole supply chain from the aspects of procurement, production, logistics, marketing, and customers. From assets to receivables and payables, risk fluctuations can be comprehensively displayed and monitored.
Realize the monitoring of key indicators of the whole supply chain of the supply chain management platform, the perception of capital risk fluctuations by the supply chain management platform, the 3D perspective drilling of the supply chain management platform, and the perspective of the model.
- Procurement data control platform
The module monitors the implementation of each node according to the procurement process, obtains a transparent information flow from the initial order to the delivery information, and grasps the financial information of the supply chain in real time to ensure the quality of goods.
So as to achieve procurement management, procurement process node monitoring, procurement analysis, real-time analysis of procurement amount, supplier management, supplier collaboration and quality management.
In addition, Finesoft also provides a comprehensive procurement analysis dashboard, which comprehensively displays the purchase application, order confirmation, contract entry into force and warehousing. In addition, the visual charts on the dashboard dynamically show the changes and achievements of key procurement indicators, providing intuitive data support for the formulation of procurement plans.
- Inventory data control platform
The module visualizes the color gradient of the map and the data carousel, showing the details of the group's warehouse distribution, operation management, inventory security and other related details. Realize the visualization of warehouse managementKanban Group's warehouse distribution, warehousing HSE safety control, and warehouse actual volume control
- Sales data control platform
This module focuses on the sales and profit of core products: from the perspective of sales price, market popularity, etc., analyze the comprehensive market performance of products; From the perspective of the number, distribution and concentration of stores, the distribution of downstream channels in the country is analyzed. Realize the analysis of core sales indicators, the analysis of comprehensive market performance of products, and the analysis of the national distribution of downstream channels.
III. Summary
In short, the importance of procurement cannot be overstated. With every aspect of the procurement process carefully designed and optimized, businesses are able to ensure that the resources they need are obtained at the lowest cost, while improving responsiveness and service quality.
If you want to know more about the solutions for supply chain management in the manufacturing industry, you can click on the card below to get the "Supply Chain Control Tower Analysis Solution" rapid manufacturing supply chain management solution suggestions. https://s.fanruan.com/wni05 "Links"