1.2.3
All activities that are required in order to get the product/service from the supplier to its final destination’ (1)( 2005, p. 14).
Procurement usually involves the acquisition of goods, works, or service which is required either as a raw material or for operational purposes for a Note’s company or individual. Vendor development is a key function in procurement. Sourcing and vendor development are some skill sets required to be developed by Procurement team. The procurement function works closely with procurement logistics or inbound supply chain.
This is clearly illustrated in Figure 3. The relationship of the procurement process and other related concepts is laid out, and it can be seen that procurement and supply chain management interact and overlap. Procurement can encompass the purchasing function, stores, traffic and transportation, incoming inspection and quality control and assurance, although the functions under the control of procurement will vary from organisation to organisation.(2)
Key aspects of procurement:
Procurement is a critical aspect of supply chain management (SCM). It involves the process of acquiring goods and services that a company needs to carry out its business activities, ensuring that materials, products, and services are sourced in the most efficient and cost-effective way. Here’s a breakdown of some key aspects:
- Procurement and Supply Chain Integration:
Procurement is closely integrated with other functions in the supply chain, such as production, logistics, and distribution. Efficient procurement ensures that materials are available at the right time, in the right quantity, and at the right price to meet production demands.
- Types of Procurement
Direct Procurement: Refers to sourcing raw materials or components used directly in the production process. These materials are crucial for creating the final product.
Indirect Procurement: Involves acquiring goods and services that are not directly related to production, such as office supplies, IT services, or maintenance.
- Strategic sourcing
This involves a long-term approach to procurement, focusing on building relationships with suppliers, analyzing the total cost of ownership, and identifying the most advantageous sources for materials. The goal is to optimize costs, quality, and efficiency.
- Supplier Relationship Management (SRM)
Managing supplier relationships is crucial to ensuring quality, delivery performance, and cost efficiency. Strong SRM includes negotiating contracts, monitoring supplier performance, and fostering long-term partnerships for mutual benefit.
- E-Procurement and Technology
Many organizations are adopting e-procurement systems, which use digital platforms to automate and streamline the procurement process. This reduces paperwork, speeds up transactions, and provides greater visibility into supplier activities. Technologies like ERP systems (e.g., SAP, Oracle) help manage procurement activities across various departments.
- Risk Management in Procurement
Procurement is subject to various risks, including price volatility, supplier reliability, geopolitical issues, and supply chain disruptions. Companies must develop risk management strategies, such as diversifying suppliers or building strategic inventory buffers, to mitigate these risks.
- Sustainability and Ethical Sourcing
Increasingly, procurement focuses on sustainable and ethical practices, ensuring that suppliers meet environmental and social responsibility standards. This can enhance a company’s reputation and reduce risks related to non-compliance with regulations or consumer backlash.
Procurement strategies
Effective procurement strategy to support supply chain operations requires a much closer working relationship between buyers and sellers than was traditionally practiced. Specifically, three strategies have emerged: volume consolidation, supplier operational integration, and value management. Each of these strategies requires substantial collaboration between supply chain partners and should be considered as stages of continuous improvement.
1. Volume consolidation.
Volume consolidations include four aspects:
- Supplier Reduction: The strategy involves reducing the number of suppliers a company works with, consolidating purchases into fewer, but larger, orders.
- Increased Leverage: Focusing on fewer suppliers gives the buyer greater negotiating power, as a larger share of the supplier’s business increases their dependence on the buyer.
- Supplier Benefits: Consolidating volume helps suppliers achieve economies of scale, spreading fixed costs over a larger output, and encourages them to invest in improving capacity and service.
- Risk vs. Efficiency: While reducing suppliers increases dependence on fewer partners, the benefits of cost savings, improved supplier performance, and service improvements can outweigh the risks.
When using a single supplier, the risk increases. To mitigate this, supply base reduction is usually paired with strict supplier screening, selection, and certification processes. Procurement teams often collaborate to develop certified or preferred suppliers. Volume consolidation doesn’t always mean relying on a single supplier, but rather working with fewer suppliers than before. Even with a single supplier, having a contingency plan is crucial.
The next stage of development occurs when buyers and sellers begin to integrate their processes and activities in an attempt to achieve substantial performance improvement. Such integration typically involves alliances or partnerships with selected suppliers to reduce total cost and improve operational integration. Such integration takes many forms.(1)
2. Supplier Operational integration
- Detailed Sales Information: Providing suppliers with detailed sales data helps them better plan and reduce costs by avoiding inefficient practices like forecasting and expediting.
- Process Redesign: Buyers and suppliers collaborate to identify and redesign processes, improving efficiency and reducing costs.
- Direct Communication: Establishing direct communication reduces order time, minimizes errors, and enhances coordination.
- Eliminating Redundancy: Integration efforts often focus on eliminating redundant tasks performed by both parties, streamlining operations.
- Logistical Integration: Approaches like vendor-managed inventory and continuous replenishment programs are common ways to achieve integration, reducing the total cost of ownership (TCO).
- Cost Reduction and Synergy: Operational integration aims to cut waste and enhance mutual improvements through shared creativity, offering savings of 5 to 25% beyond volume consolidation benefits.
3. Value management
This involves creating a deeper, more sustainable relationship with suppliers, focusing on more than just operational processes.
Value management includes four key aspects:
- Value Engineering: Examining materials and components early in product design to balance cost and quality, reducing the total cost of ownership (TCO).
- Early Supplier Involvement: Engaging suppliers early in new product design to leverage their expertise, enabling cost reductions and design improvements before changes become difficult and expensive.
- Design Flexibility: Early stages of product development allow easier design changes, while later stages (like prototyping) make changes costly.
- Cross-Functional Cooperation: Value management requires collaboration between internal teams and suppliers to achieve a more integrated approach to cost savings and innovation.
Sourcing strategies
Sourcing strategy and the procurement process are related but distinct.
Sourcing strategy focuses on planning and building a competitive supplier base, aligning with the company’s broader objectives in areas like finance, marketing, and distribution. It defines procurement, pricing strategies, and supply chain requirements.
On the other hand, the procurement process is more operational, focusing on managing and ensuring procurement performance. Sourcing involves continuous evaluation to optimize supplier selection, technology use, and cost reduction.
Outsourcing can occur at three levels:
- Transactional outsourcing
- Tactical outsourcing
- Strategic outsourcing
Organizations now recognize the crucial role suppliers play in the supply chain, leading to a shift in how supplier relationships are valued. Factors driving this change include complex global business models and increasing market demands. To stay competitive, companies are setting up manufacturing or assembly facilities near markets and in areas with lower conversion costs.
Lean manufacturing and the focus on reducing cost per unit push managers to lower procurement and logistics costs. Collaborative relationships with suppliers allow buyers to delay inventory ownership until consumption, with suppliers holding inventory at the buyer’s location. Preferred suppliers now follow buyers globally, offering value-added services like warehousing. Companies have realized that to succeed globally, they must develop strong supplier partnerships, invest in supplier capabilities, and foster collaboration. Supplier management has evolved from being purely transactional to a strategic partnership.
Shift in Sourcing Strategic Approach
Having realized that suppliers play a key important role in the supply chain network of the business, there has been a change in the way organizations perceive an approach supplier relationships. Several factors have contributed to the shifting of the perceive value of a supplier partnerships. Complex business models at global scales coupled with market demands have necessitated companies to set up manufacturing or assembly facilities closer to markets as well as in locations where conversions costs are relatively cheaper. (2)
Third-Party Provider (3PL)
Third-Party Logistics Provider (3PL) is defined as, “the services offered by a middleman in the Logistics Channel that has specialized in providing, by contract, for a given period, all or a considerable number of the logistics activities for other firms.”
A middleman could be a broker, a freight forwarder, Shippers’ Association etc.
How is a 3PL Distinguished from a Transportation Provider?
Transportation provider gets product from point A to point B and could be believed a 3PL. However, a transportation provider carries out just one function of logistics, whereas a 3PL provider assists in multiple functions.
Types of 3PL Providers
Transportation-Based: Here, the Services extend beyond transportation to offer a comprehensive set of logistics offerings. There can be two types of Transportation-based service providers-leveraged and non-leveraged.
Examples: Leveraged 3PLs use assets of other firms, whereas Non-leveraged 3PLs use assets belonging solely to the parent firm.
Leveraged 3PL: C.H. Robinson (uses assets from various firms).
Non-Leveraged 3PL: UPS Supply Chain Solutions (uses its own fleet and infrastructure).
Warehouse / Distribution-Based: Many, but not all, have former warehouse and / or distribution experience. Transition to integrated logistics has been less complex than for the transportation-based providers.
Example 1: DHL Supply Chain (offers warehousing and distribution services).
Example 2: XPO Logistics (provides integrated logistics with warehousing expertise).
Forwarded-Based: These service providers are fundamentally very independent middlemen extending forwarder roles. These are Non-asset owners that capably provide a wide range of logistics services.
Example 1: Kuehne + Nagel (acts as a freight forwarder, offering a wide range of logistics services).
Example 2: Expeditors International (provides freight forwarding and other logistics services without owning major assets).
Financial-Based: These Service providers offer freight payment and auditing, cost accounting and control, and tools for monitoring, booking, tracking, tracing, and managing inventory.
Example 1: Cass Information Systems (specializes in freight payment and auditing).
Example 2: Trax Technologies (offers freight audit and payment solutions).
Information-Based: Noteworthy growth and development in this alternative category of Internet-based, business-to-business, electronic markets for transportation and logistics services.
Example 1: Freightos (an online marketplace for logistics services).
Example 2: Transplace (provides transportation management and logistics through technology solutions).
Fourth Party Logistics Provider (4PL)
The Fourth Party Logistics Provider (4PL) is a new-fangled concept in outsourcing. A 4PL forms an alliance between multiple 3PL service providers, technology providers and management consultants. A 4PL provider is a Supply Chain integrator who assembles and manages the resources, capabilities, and technology of its own organization with those of complementary service providers.
LSCM Alliances 3PL + 4PL = 7PL
The progress of 4PL solutions leverages the capabilities of 3PL providers, technology service providers and business process managers to deliver a comprehensive supply chain solution all the way through a centralized point of contact. The 4PL will integrate the client’s supply chain activities and supporting technologies across these “best of breed” service providers with the potential of its own organization.
3PL + 4PL = 7PL
LSCM stands for Logistics and Supply Chain Management. It refers to the comprehensive management and coordination of logistics and supply chain activities, encompassing the flow of goods, services, and information across different stages of production and distribution.
In the context of the 4PL and the mentioned alliance between 3PL and 4PL providers (referred to as 7PL), LSCM would involve managing the full integration of logistics services, technology, and resources to optimize supply chain performance through collaboration with various providers.
Thus, LSCM Alliances combine the strengths of both 3PL (which focuses on handling specific logistics functions) and 4PL (which integrates multiple services and technologies) to create a more advanced and comprehensive supply chain solution, potentially referred to as 7PL.
The expression 7PL was coined by the Value Logistics Group and is a concept describing the developing trend of 3PL and 4PL combined. Through this service, the client has one service provider that oversees the whole logistics chain.
The 7PL Concept
7PL is the combination of 3PL and 4PL into one (3PL + 4PL = 7PL). One service provider can now provide a client with both 3PL and 4PL services with a complete 7PL solution to clients and can undertake turnkey projects for its clients where all services and activities are provided for, under one roof.
E-Procurement
E-procurement, also known as electronic procurement or supplier exchange, involves buying and selling supplies and services online across various sectors (business-to-consumer, business-to-government, and business-to-business). E-procurement websites allow registered users to find buyers or sellers and initiate transactions, often facilitating bidding processes.
Using e-procurement software can automate purchasing tasks, leading to better inventory control, reduced overhead, and improved manufacturing efficiency. Companies that integrate e-procurement benefit from cost savings, quicker turnaround times, and streamlined operations. The transition to e-commerce and e-procurement reduces inefficiencies associated with paper processing and inconsistent procedures, enhancing overall efficiency.
(1) Pasaje de. Supply Chain. Paul Davis
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