Why is Procurement so Important in a Supply Chain?

Warehouse supervisor scanning goods in a warehouse

As an active business – large or small – securing the right materials, resources, or services is a core element of an effective, fully-functioning supply chain. This process is known as procurement and, as many organisations have shown, it can have a significant impact – positive or negative – on both your day-to-day operations and your balance sheet.

While larger corporations may have a greater degree of self-sufficiency, this is often not the case for small businesses. Without a steady and economical source of essential goods or services, your business will not be able to survive, let alone thrive. 

Therefore, a proper procurement strategy is critical in this context. Along with your wider supply chain management strategy, it ensures the smooth functioning of all other aspects of your business, and ensures you have relationships in place that can withstand external difficulties or risks.

Indeed, to illustrate the importance of procurement in the supply chain, we've compiled a comprehensive breakdown of just how far-ranging its effects can be.

Procurement vs Supply Chain Management

First, though, it is necessary to understand what differentiates procurement from the broader concept of supply chain management. 

There is a lot of complementarity between these two areas; after all, both are related to the process of acquiring supplies, raw materials, and other goods and services for business.

Despite the apparent similarities, however, they are not interchangeable. Rather, there is a direct relationship between the two, which runs thus: through procurement, your business is able to find goods and services at the best possible price and quality. Through supply chain management, you will ensure the flow of those goods to your company.

While procurement can involve many different steps – such as the creation of quality standards, finance sourcing, vendor negotiations, purchase orders, and inventory control and management – its role ultimately ends once your business gains ownership of the goods in question. This is where supply chain management enters the fray; those goods purchased through procurement will become a part of your company's supply chain.

So, given that procurement is only one seemingly small part of this broader, overarching process, why is it so vital?

It Directly Affects Your Bottom Line

Purchasing often takes up a significant portion of a firm's total annual budget. The cost of goods and services bought has a direct impact on the profit margin and the bottom line of the company.

These costs are unavoidable, of course, but through the implementation of an effective procurement strategy, it is possible to make significant savings in your expenditure. Such savings – even minor ones – can have a huge impact on your company's finances, with a reduction in input cost meaning an increase in your profit margin as well. 

It Reduces the Risk in Your Supply Chain

A smooth and constant flow of goods is the hallmark of a healthy supply chain. Disruptions in supply can have serious consequences for the entire organisation, both in the short term and the long term. It could lead to a slowdown in production, delay in the delivery of goods, a loss of reputation, or other severe consequences and increased costs.

One of the cornerstones of effective procurement is supplier management. It involves identifying reliable and credible suppliers and nurturing long-term relationships with them. This has multiple benefits, such as rebates and other cost reductions, along with improved communications, resulting in less chance of critical disruption in the delivery of goods. 

It Helps Drive the Long-Term Strategy of Your Business

Businesses, particularly small and medium enterprises, are always seeking growth. But as technology enables fast-paced expansion, supply chains are also strained. A lack of insight into existing supplier capabilities can result in a critical shortage of materials at times when you can least afford it.

This is where the inputs from a procurement team become vital. It can help your business avoid problems of scaling that are commonly associated with rapid expansion. For a successful growth strategy, procurement teams can contribute by identifying new or alternative suppliers who can step in to ensure constant access to essential goods in future. 

It Can Impact Your Reputation

The scale and complexity of supply chains have only grown in recent decades, particularly as the shift to a globalised world has quickened. In the last few years, even smaller firms have gained access to international suppliers and, aided by technology and advances in communications, supply chains have grown even more complex.

As such, procurement has also assumed increased significance, particularly in regard to identifying and dealing with far-off suppliers. Enforcing and maintaining quality standards can be a major headache when the source of your goods is located thousands of miles away.

This can't be ignored, either. Modern consumers – particularly among younger generations – are often extremely concerned about issues such as ecological conservation, sustainable pricing, and labour standards – all factors which can affect procurement.

Therefore, you need to consider how procurement affects your corporate social responsibility strategy and, in turn, your wider brand image. For instance, if you run a coffee roasting business, then sourcing your product through a renowned international network such as FairTrade will reflect well on your company. Alternatively, if you are procuring from providers that enforce questionable labour practices or source via ethically compromised means, your business could experience a loss of reputation – and sales – as consumers seek more compliant alternatives. 

Procurement in a Digital Tomorrow

The evolution of digital technology has only resulted in an increased interconnection between procurement and supply chain management. Modern supply chains are becoming smarter, with artificial intelligence, the Internet of Things, and improved data analysis all serving to disrupt the way things have traditionally been done.

However, as supply chains and logistics providers become smarter, source suppliers also need to step up. Otherwise, there will be an inevitable major disconnect between legacy systems and modern digital systems.

Procurement has a dual role to play in this scenario. It could actively encourage suppliers to embrace the digital future themselves, which is more plausible in the case of businesses where long-term relationships exist. Procurement teams also have the additional responsibility of identifying compatible suppliers who possess the technological capabilities to link with your existing supply chain seamlessly. 

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Procurement and supply chain management are inextricably linked together in business. One cannot exist in isolation without the other. Organisations cannot afford to ignore procurement and expect supply chains to function smoothly, or vice versa.

Therefore, the importance of procurement is even more defined, especially as global business operations fall into uncertainty as a result of US-China trade disputes, Brexit, and the ongoing COVID-19 pandemic. Players at every point in the chain will need to adapt to the acceleration of innovative technologies, leading to the further evolution of procurement and supply chain management. The question is – how will you position your procurement strategy to take advantage of it?

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