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by Laurus Nobilis
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Supply Chain

Supply Chain Management:

Procurement (E)

Supply Chain Management


What was the evolution history of supply chain management? What are the main components of supply chain? How big is the importance of supply chain integration?


Posted: Jul 2011

Procurement is the Supply Chain sub-department where the process of materializing of finished goods begins. Procurement process is the precondition for the manufacturing, since the raw materials and semi-finished goods are necessary. Purchasing is generating a single largest point of business expense. Therefore procurement is subject of constant monitoring and improvement. Procurement leads directly to the success or failure of a company, since the procurement cost efficiency influence the overall business performance of the company.
Supply Chain Components

Procurement involves all of the components of the supply chain: manufacturers are purchase from suppliers, Distributors purchase from manufacturers, Retailers are purchasing from distributors. Consumers are usually purchasing from retailers. Still, the main focus of supply chain procurement is on suppliers and manufacturers, since purchasing of material by manufacturers from suppliers is one of the critical starting points in the supply chain process.

ProcurementPreviously, purchasing was mostly a clerical activity. It contained well-established and defined procedures, such as creating purchase orders and communication with suppliers to get pricing information and other product related information. Now days, procurement is strategic part of the supply chain process.
The procurement activity involves the purchasing of all necessary materials for the production: component parts, raw materials, operating suppliers, support equipment, process equipment, and different services. This is a wide range of different products and services.
For example, food manufacturers are purchasing following categories of materials, in order to produce food.

  • Ingredients. Food main igredians, spices, additives.

  • Packaging. Cans, glass, plastic, and cardboard.

  • Utilities Chemicals, pallets, electricity, general suppliers, ...

Supply chain management plays a very important role within the company. The supply chain generate most of the costs of the company, due to the width and complexity of the function (manufacturing, warehouse, distribution). Any inefficiency can create tremendous negative impact to the company. On the other hand, good supply chain management can bring huge benefits and competitive advantage to the company.

In order to be efficient, but at same time to keep the quality and service level, the procurement department needs to pay attention to the following areas

  • Focusing on total net-landed costs
    Companies need to look carefully at more than just the initial purchase price of material when determining what suppliers to work with. They need to determine the total cost of having that product delivered. This is very sensitive area since the “silo thinking” can create additional cost. Procuring the cheap item that will need extra processing is passing the cost to other department within the company. This is inevitably increase the ultimate cost of the final product.

  • Utilizing the capabilities of information technology
    Finished good manufacturers are trying to establish closer ties to their suppliers. One of the ways they can do so is through utilization of information technology. The various information technologies ( such as SAP ) can be used for different purposes such as inventory status, order status, VMI, financial transactions...

  • Supplier relationships
    Companies are working to establish partnership relationships with their suppliers. These partnerships are designed to provide benefits to both parties. True supplier partnerships involve components such as joint planning, joint operating controls, communications, risk/reward sharing, trust and commitment to each other's success, and joint investment in financial, technological, and employee fields.

Consolidation of suppliers
Previously, the firms used to have large amounts of suppliers. This was based on idea that multiplication of suppliers can give the better price and terms. Today, the companies are narrowing down their list of suppliers to a select few that will hopefully provide them with top quality service and good prices, while building the higher level of partnership at same time.


Continue Reading:

Overview of Supply Chain Components
Historical Development of Supply Chain
Traditional and Modern View to Supply Chain
Supply Chain Activities
Order Processing
Demand and Supply Planning
Inventory Management
Customer Care
Integrated Supply Chain
Financial Resources
Integration vs. Non-Integration

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