If offered the resources and opportunity, what if your procurement department was able to cut your expenses by 10%; reduce your current lead time by 25%; reduce your cost of non-quality by 40%; reduce your current inventory level by 50%; improve your cash flow & reduce your risk?
Your procurement department, if managed effectively and if given the proper support, could probably achieve this and more. So – how could they achieve this?
Procurement cuts expenses by:
1. Regularly undertaking benchmarking exercises and using the results from comparing total acquisition costs as a basis for negotiation and launching joint improvement projects with supply chain partners. It is critical that this type of exercise is undertaken by knowledgeable staff. It is recommended that you create a clear guiding template beforehand which participating suppliers are required to complete. It is also important that you stipulate a deadline by which responses must be submitted.
2. Consolidating activities to obtain benefits from economies of scale;
· Standardizing components across multiple product lines
· Consolidating repetitive processes
· Collaborating with suppliers and clients
· Reducing the number of suppliers you regularly deal with, which in turn reduces the indirect cost associated with managing each individual supplier
3. Removing non-value add or wasteful activities and optimizing processes. This includes unnecessary reporting. If a report is not being used for decision making purposes, the time spent to collect that data, can be spent more effectively by doing something more value adding.
4. Approving alternative components, materials and service providers. Ensure that you perform thorough quality and reference checks as part of your assessment process.
5. Re-using, reducing and recycling materials.
Procurement reduces lead times by:
1. Effectively implementing smart purchasing initiatives where appropriate
2. Sharing information to allow suppliers to react quicker
Procurement reduces cost of non-quality by:
1. Effectively managing the performance of suppliers
· Key Performance Indicators need to be agreed upon, accurately tracked and the results regularly discussed with suppliers. Involve supply chain partners in setting improvement targets and jointly work towards these improvements.
· It is critical that the root cause of quality issues is identified and addressed. Merely returning goods for replacement is not an effective long term solution. Eventually the cost of these rejects will be worked into the price you are paying for your goods, or even worse, your supplier’s business will cease to exist.
Procurement reduces inventory levels by:
1. Providing input to the forecasting process and timely communication of the most updated forecast to supply chain partners
2. Planning and scheduling reliably – for incoming flows, conversion processes and distribution
Procurement improves cash flow by:
1. Reducing expenditure and optimizing inventory levels
2. Negotiating extended payment terms – which must be honoured without exception
3. Implementing smart purchasing initiatives like consignment stock
Procurement reduces risk by:
1. Having multiple sources of products and services approved. This should also take into consideration the financial stability of the suppliers you rely on, making use of various transportation methods and sourcing from different geographical areas in the event of a natural disaster.
2. Having a thorough and updated Business Continuity Plan in place
3. Effectively managing suppliers and inventory to reduce the risk of inventory outages and production downtime
If you fail to acknowledge the potential value of your procurement function and if you fail to support your procurement function properly, you will also fail to realize the benefits it could yield. Key to your procurement department’s success is:
1. Appointing the right staff – ensure that they are knowledgeable and experienced, trust worthy, good at building and maintaining relationships, with a high level of attention to detail
2. Ensuring that you delegate the appropriate level of authority to them, to enable them to perform effectively
3. Ensuring that they receive the necessary support and co-operation from other departments
Invest in the success of your business by valuing and supporting your procurement function.
Contributed by: Su-Mari du Bruyn, Director at Adapt To Change
