Purchases in manufacturing companies are often not done correctly. This is not due to the loss of key business requirements, but because the entirety of what can be affected by it is ignored. With direct and indirect materials making up at least 50% of typical manufacturing costs, the procurement function can be reimagined so that companies can be more responsive to customer demands and more flexible when dealing with supply chain challenges. As a recent article points out:
“For procurement to lead the way, companies will want to reimagine not only what the job does but how it works and the new capabilities they will need.”
(McKinsey – Reimagining Purchasing for the Next Normal)
The current focus is on procurement
If many purchasing managers are asked about their work, they will say that they ensure that orders are placed correctly, that they control inventory and make sure they have stock on hand so that the plant does not stop. They have a contract with a supplier who delivers on time and charges acceptable rates. This caters to all of their key performance areas.
What this response shows is that they do not fully understand the impact of purchasing on inventory.
- If their main concern is that manufacturing doesn’t stop due to lack of inventory, they are almost certainly toiling in stock.
- Procurement is not integrated with how materials are consumed in production, nor does it have insight into how quantities and batches are stored and used, so there is minimal information about inventory and potential obsolescence.
- Focusing on one supplier means that there is a high risk if the supplier closes its doors.
The purchasing process does not start with raising the purchase requisition and sending it to the supplier. It starts before that. For a company to reimagine and transform the purchasing process, it needs to examine how key processes from source to contract and procurement to payment are carried out in an integrated way, and not only how procurement is performing, but also how other functions within the company are affected.
The first stage of reimagining procurement is to consider sourcing strategies. The two main pillars of sourcing will be alternative suppliers and alternative pricing. The best way to ensure this is working properly is to automate the Request for Quotation (RFQ) process via the Supply Chain Gateway.
Requests for quotations provide a formal invitation to suppliers to submit bids for the supply of goods or services. Automation of this capability simplifies the process of creating an RFQ from the initial order and allows suppliers to service the RFQ online. Submitted proposals are stored in the online supply chain portal. The automated RFQ process provides transparency of the bidding process and helps buyers make informed purchasing decisions quickly and easily as they can compare offers from different suppliers. Reducing manual processes also reduces manual workload.
A supply chain portal simplifies cooperation between buyers and suppliers and reduces document processing. Employees from different departments, and from customer and supplier companies, can interact on the platform, facilitating information flow and availability. This will also reduce the risk of fraud.
In the event of a supply chain disruption, automating this part of procurement can speed up the repair process for a broken supply chain and provide buyers with the agility needed to manage unreliable logistical situations or sources.
To ensure that the right materials are ordered, there must be a way to anticipate what will be required so that the plant remains able to operate and so that suppliers can adequately plan what will be ordered. This is usually done by forecasting based on historical data. With an integrated system that links manufacturing and procurement, historical data about the raw materials that production consumes can be entered into a forecasting model to create a set of future orders.
With the order forecasting mode, the ordering process can be simplified so that only unplanned material requirements need to go through the approval process.
Knowing how future orders will be, this information can be passed to suppliers to help them plan how to run their operations to meet expected orders. Furthermore, with this order information, it is easier to negotiate delivery agreements and pricing based on volume.
If inventory is ordered correctly, at an agreed price, and contracts are in effect, the accounts payable process becomes easier as there are no arguments about payments. The integrated system enables the ordering system to improve warehouse efficiencies by routing stock receipts to designated stock bins.
Procurement’s ability to quickly update orders in response to a sudden change in a customer’s order is simplified if previous steps are already in place. For example, if a customer moves an order forward, the near-term delivery agreements can be updated with suppliers to get the raw materials sooner. Combining the safety stocks held by a manufacturer with those held by its suppliers will allow purchases to work agile and ensure that stock is available for production.
Procurement can be an important driver of an organization’s efforts to recover from the pandemic. Looking to the future, companies should look at how to equip procurement with technology solutions to make it more efficient and enhance the value they can provide.