Procurement Vs Supply Chain Management
In today’s industry-driven environment, we have often come across the terms procurement and supply chain management. Even though we have heard it many times, many of us still don’t have a clearer understanding of these terms and often get confused and end up using the two words interchangeably. So today we are going to dig in a little deeper into the two and find out what exactly these two words stand for in the industry.
So let’s begin by defining Procurement first.
What is procurement?
In plain words, procurement is an array of activities and functions that are important for a firm to bring in necessary products, materials/services from the best vendors in the market at the most competitive prices. Procurement refers to the methods used by a firm to classify its entire procurement process to achieve the organization’s goals while saving costs and building meaningful vendor relationships.
Problems in the procurement yield firms a large number of financial losses in the way of delayed purchases, missed discount deadlines from suppliers, and transaction and billing disputes among stakeholders.
Direct and indirect costs occurring to a firm are taken care of by the procurement. Now let’s define direct cost and Indirect cost. Direct cost is the cost incurred in production of a good/service to the company. Proceeding with indirect costs, Indirect costs are expenses that cannot be traced back to a single source.
Now let us define what a Procurement process is.
What is the Procurement Process?
Any procurement process in any industry starts with the procurement department securing trustworthy suppliers and agreeing on terms to work with them. Negotiation here is important for a firm to achieve the most competitive prices out there in the market.
The steps included in the procurement process is as follows :
Realizing the needs of good/services :
This is the foremost step in the procurement process, recognizing the need for the product is important to determine its purchase urgency.
Searching for suppliers :
The second step taken by a procurement department is about searching the right suppliers with the capability to deliver as per the firm’s conditions and requirements. At this stage, the valuation of suppliers is kept in mind.
Requesting proposals :
When a number of vendors are selected at the above stage, it becomes necessary to communicate with them by sending them requests for proposals(RFP). In this, all the terms and conditions and requirements of the company regarding the goods/service it wants are stated clearly to the vendors.
Bargaining with vendors :
Once a vendor is selected on the basis of his proposal, its time to negotiate with them. Negotiation with vendors in terms of pricing, quality, and other related services is a must in order to ensure a cost-effective method. Most vendors in need of work in the market are ready to work with big companies at any terms, so if you are a giant in the industry it can help you a lot.
Agreeing on terms :
Once the bargaining stage is done, it is necessary to clearly state the terms and conditions for the successful implementation of the contract. The terms can be based on the quality of the supplies by the supplier or regarding delivery timeframes or any other thing which the company treats to as its dearest in its functioning. The vendors can also put forward certain terms and if required the firm should agree on them too. Agreement of terms should be documented legally in order to prevent future discrepancies.
Arrangement and receiving of goods and services :
After the contract being signed, it is time for the vendor to start the arrangement of goods to supply to the firm. At this stage, it is the firm’s responsibility to create arrangements for receiving and storing goods ordered as soon as possible. This is when the vendor emphasizes on delivering the goods/services at the stipulated time.
Carrying out quality checks :
Inspection of goods on arrival is an important part of the procurement process. When the ordered goods are received by the firm, it is the responsibility of the managers at the procurement department to carry out checks in accordance to the previously specified quality conditions in the contract.
8)Analyzing results :
The results obtained in the previous stage are to be recorded and analyzed with the promised qualities. If there are no deviations found in the results, it is safe to proceed with all the processes a firm wants to do with the received goods/services.
Why is the Procurement process important?
The procurement process is important to keep track of an enterprise’s spend in the field of purchasing.
It helps to reduce internal costs.
It benefits advanced process management.
It helps to overcome the risks associated with the supply chain.
It will increase the chance of meeting business objectives.
So now after clearly understanding what procurement is, let us begin with understanding the second word that is Supply Chain Management.
What is Supply Chain Management?
In simple words, Supply Chain Management is the wide scope of activities necessary to plan, control and execute a product’s flow from raw materials to production to distribution of the products in the most cost-effective way possible.
Supply Chain management has only one goal as to make operating of a firm as smoothly as possible. Efficient Supply Chain Management helps to remove conflicts arising in a company’s supply chain process.
It is a wide-ranging process that relies on every stakeholder of the company starting from suppliers to distributors and beyond them.
Importance of Supply Chain Management :
Proper Supply Chain Management can improve customer handling for a firm.
Supply Chain Management helps to decrease the operating costs of a company.
Supply chain management can help to identify enterprise problems even before they occur.
Supply Chain Management helps to sustain human lives by delivering basic necessities on time when needed.
Efficient supply chain management decreases the firm’s need of large fixed assets.
Benefits Of Supply Chain Management :
Reduces the risk of negative public relation :
An efficient supply chain management ensures in the timely completion of all the processes in a company and helps to relate better with the customers and their problems if any, it helps in quick delivery of finished products to the customers.
Creation of new opportunities :
Well planned supply chain management helps to create an effective and longlasting impact of the firm in the market, resulting in the development of the firm as a brand itself. When the firm grows like this, it is surely possible for it to create new and better opportunities in the market without working out much.
No delays in processes :
Supply chain management facilitates communications in a large firm easily, hence it can help you tackle delays taking place due to ineffective communication. Supply chain management makes people working in the company understand the common objective very easily. It also helps suppliers to understand the needs of the firm and how actively the firm relies on their performances.
Decreases Costing :
The best supply chain management strategies help businesses to decrease costs in different sectors of the business and help improve their profits significantly. It improves your inventory system and makes it more organized. It helps you manage and maintain relationships with the concerned suppliers, distributors, and other stakeholders.
Steps in Supply Chain Management Process :
In the first step of supply chain management, planning is done. This is the time when an organization develops a working strategy for its supply chain. This plan should basically include how the company would deal with the orders it will receive and how will it proceed in order to fulfill those demands and orders of its valuable customers.
The organization should emphasize on developing a strategy that should help to gain it the maximum profit.
At this stage, the firm looks out in the market for competent suppliers. The firm emphasizes on creating longlasting relationships with the suppliers of the helpful raw materials. Companies need to scrutinize the best available vendors from the marketplace in order to ensure that they get the best prices.
Here the supply chain managers are required to create policies for the delivery of goods, quality of goods required and storage as well as payment for the goods.
The third stage is composed of the manufacturing of products from the obtained raw materials from different suppliers. It is in this stage when every product is designed, produced, tested, packaged and rolled out for delivery to the customers.
At this stage delivering of the manufactured products is done to the customer, at the locations mentioned in the orders, or at the predecided locations of the supplier. At this stage, the firm looks out for logistics firms that can deliver the products swiftly and economically to the customers. This is the stage when the firm collaborates with other firms to complete its chain.
The final stage in the supply chain management process is the return phase. In this, the faulty and defected products if delivered to the customers are returned to the firm. This stage is often problematic for companies because receiving goods back is not always cost-effective.
Summarizing up the topic with a short clearer definition between the two
Procurement is the way toward getting the materials your organization requires, while the Supply Chain Management is the broad framework expected to get you those products. Supply Chain Management should be considered as a responsibility of the Procurement process. Once your firm gets the control over materials the procurement process stops and it is here when the Supply Chain Management function starts.