The value of procurement vs purchasing

September 4, 2018

 

There is a lot of misunderstanding on the value a strategic focused procurement organisation can deliver for a business, especially within manufacturing.  The lack of existence of a clearly defined procurement function within manufacturing SMEs demonstrate this

 

So, what is procurement? And how does it differ from purchasing?

 

In short, procurement is a function that manages the interface between a business and its suppliers, transmitting the business objectives and challenges to those suppliers whilst maintaining commercial control of the relationship.

 

It should be able to understand suppliers, the products and services they provide, and how they best fit with the needs of the business.  It should also be able to understand and assess the impact to the business of the differing spend categories, therefore defining high risk spend categories.  And then have the capability to act as the business consultant to advise of those risks and mitigate.

 

Done well, and it becomes a valued “business partner”, helping to shape business budgets, seeking alternative technologies/methods to improve productivity and reduce risks and helping the business become a customer of choice for suppliers.

 

Within the function, it should be lean, optimising buy processes and therefore enabling purchasing professionals to add more value to the business and become procurement professionals.

 

 

The clear objective is to ensure profits & productivity are maximised and the risk of supply chain failure minimised.

 

At the Midlands Aerospace Alliance conference back in March ’18, a well-respected speaker took place on the stage and made an attempt to define the role of procurement.  After talking at length about various issues, including productivity and innovation, he delivered his comment with almost a level of sarcasm, but at least acknowledgement a procurement function exists.

 

“…….and then it’s given to procurement and they negotiate the best price and contract!”

 

This is NOT procurement.  It is purchasing, which is often an afterthought in the buying process and traditionally used to “beat the supplier” once a supplier selection has already been made and then left to administer the process, (PO placement, invoice processing and payment).  The comment is proof enough of that fact.

 

Any leverage to negotiate price and contract is more than likely to be nonexistent due to the leverage that has already been given away.

 

The Perception

 

 

The problem the function faces is simple, and especially in manufacturing; everyone thinks they can buy something better than anyone else and anyone in procurement doesn’t understand the complexity of what is required.  They don’t need someone to do it for them.  That is no bodies fault, nor is it a criticism, its just how it is.

 

But what is clear, is that the skill required to manage and pull together different stakeholders internally and externally is key, and the strategies and plans to deliver are fully interlinked.

 

In the coming weeks and months, we will go into detail on the various aspects of procurement through our regular blogs and articles.

 

So why is procurement so important?  Why manage spend strategically?

 

Think about what you need to enable your business to operate, and think down to the smallest detail.  From the laptop/PC/phone you are using to read this article/blog, to the pen you use to write.  Take a look around you and think about what the business has brought which enables you to do your job?

Let’s go into the manufacturing operation.  The..

  • Lights

  • Machine

  • Workholding

  • Tooling

  • consumable products (including oils and fluids)

  • PPE;

they are all items the business has brought to enable you to produce products.  Even you, an employee, might have been hired through a recruitment agency, the agency fee’s come at a cost to the business.

 

In essence, your business can not function or operate without spending money. 

Your people are a critical asset in any business, and a lot of focus and investment is rightly put into keeping those assets engaged and productive.

 

However, do you put as much focus into managing your costs through every detail within your business?

 

  • How well engaged are your suppliers? 

  • Do you have a clear plan of how you are going to improve your costs? 

  • What happens when a supplier ceases to exist and can not deliver a critical product or service to your business?

  • How we do you control your supplier selection when considering commercial soltuons?

You may have people with a level of expertise in cutting tools, but are they able to manage that spend in a strategic manner and be fully aware of the commercial implications of every single communication with suppliers?  That includes IP and how that is managed!  Are they trained in contract negotiation?  Do they understand IP?  Do they manage relationships strategically?

 

The impact?

 

Consider what a 5% improvement in spend would deliver for your business.  A business with a turnover of £8m, spending approx. £6.8m could increase profits by £340k per year.

Knowing where your bottlenecks are and focusing on strategies to remove/reduce those bottlenecks can free up huge amounts of capacity and improve productivity. 

  • When did you last benchmark your cutting tools to understand if you can improve cycle times?  

  • Are your machine tools fully optimised? 

  • What’s causing your downtime?

You do not need to invest huge amounts of money to improve productivity, there are lots of hidden opportunities readily available.  But do you know where and how to unlock it?

 

Do you have contracts in place with your suppliers that enable you to push your business objectives and find mutually beneficial solutions?  Or do you just have T&C’s in place?

 

If your critical suppliers cease to exist, you are at high risk of failing your own customers?  The damage to your brand reputation can be immeasurable.

 

The Solution?

 

Those businesses that wish to take their performance onto the next level need to transform their current purchasing teams into a procurement team.  If a procurement team already exists, how much of the above are they already doing and where else could they do it and do they have the skill set to achieve the transformation?

 

 

Procurement is about pulling stakeholders together and creating a clear plan that the business buys into and sponsors.  Creating sourcing projects and agreeing contracts with suppliers that means you establish a clear baseline and expectation from which to manage those supplier relationships.

 

This means going beyond, “What savings did you make this year?”, as a key measure but into the realms of measuring business impact.

 

Need resource to deliver your transformation?

 

APS is a procurement services business, providing strategic support to manufacturing SMEs to Create Value in their Supply Chains. 

 

This helps our clients to increase profits, productivity and reduce risk.  We do this through either consultancy, managed service or training/workshops.

 

We are experts in manufacturing operations cost management and supplier performance improvement. 

 

We provide the resource, knowledge, contacts and expertise, and are confident we can support clients to unlock the full potential of their cost savings and their suppliers. 

 

Contact us today for a free, no obligation conversation.

 

Email: info@apsuk-ltd.com

Tel: 07515 003472

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