The Basics of Sourcing and Procurement Explainer – suppliers | supply chain | planning
The Basics of Sourcing and Procurement Explainer
First, procurement needs to know what the company is likely to buy. This is a type of business planning which could involve analyzing your purchasing history and looking ahead at your new product development. Then you need to understand where you can buy those things and how much it’s going to cost.
There are lots of factors that can come into play. For example, suppliers often charge a different amount based on how much you buy. You might hear this called a price break or a volume discount. But while a volume discount can be great, it might mean that you end up with more inventory and that will tie up your working capital. Another common scenario is having to choose from a nearby supplier or one that’s far away.
You may be able to get a lower cost from the supplier that’s far away, but then you’ll need to pay more for transportation. And shipping things a long distance can be risky so you may end up needing to carry more inventory too. So when selecting suppliers for an item, you need to think about more than just the list price.
A good approach is to combine the purchase price with the transportation and inventory costs to determine the total landed cost. That lets you do a more thorough comparison between your suppliers. Sometimes the things you’re trying to buy are pretty common, but in other cases you may need something special and it’s not always easy to find suppliers who know how to make the products you need in the quantities you need them and at a price that you’re willing to pay. In that case, you may need to invest in supplier development.
Supplier development involves working with companies to teach them what they need to know about your business and your products so that they can do a better job of meeting your needs. It can also involve training and process improvement techniques, sharing research and development, and even making financial investments by accelerating payments, making business loans, or even forming partnerships.
Procurement isn’t just about getting the lowest price. There are lots of situations where it’s worth paying more to get better quality, better reliability, or faster deliveries because that could save you money on inventory and on rework costs.
In the supply chain, we’re always focused on creating value. And by analyzing the total cost for the things you buy, procurement plays an important role in creating value for the entire supply chain.