What is procurement in supply chain management?
In the world of modern business, the transportation of goods and services from suppliers to consumers is crucial for success. This complex operation is known as Supply Chain Management (SCM), a multifaceted approach that oversees each different stage of the process, from producing raw materials to final products and delivering products or services to customers. At the heart of supply chain management lies procurement, a process that plays a critical role in supply chain management as it ensures the necessary materials, resources, goods and services are sourced and acquired for the business to operate efficiently and effectively. This blog will dive into the importance of procurement in supply chain management by highlighting its significance, and differentiating it from supply chain management.
What is procurement in supply chain management?
Procurement serves as a central role in supply chain management, it refers to a strategic procedure that involves purchasing, obtaining the necessary goods and services required for carrying out a successful business project. Procurement involves various activities, which not only includes using machinery to build materials and equipment, but also designing, planning, sourcing vendors, negotiating contracts, placing orders, receiving and inspecting products, as well as contract management. In the context of supply chain management, procurement plays a crucial role in ensuring that the acquirement of goods that meet the specified quality standards is completed on time within budget while also providing support to uninterrupted production and/or service delivery.
As China’s first all-category supply chain management enterprise, MU Group continuously aims to meet these standards by making sure the goods and services we provide are completed on time and of great quality.
Types of procurement
There are various types of procurement:
- Direct procurement: Direct procurement refers to the purchase of items that directly contribute to a company’s final products. From a manufacturer’s perspective, examples of direct procurement can be raw materials, components and parts. For a retailer, procurement includes items that are purchased from a wholesaler and then resold to customers.
- Indirect procurement: This type of procurement involves the purchase of items needed to support day-to-day operations, but not directly contributing to a company’s final products. Examples of indirect procurement include furniture, office supplies, safety equipment, IT support, marketing and consulting services.
The importance of procurement in supply chain management
The procurement process is fundamental in supporting the functions of a company by ensuring a smooth and continuous flow of materials, products, and services, all while aiming to achieve the best possible cost-effectiveness and value for money, and meet quality standards.
- Cost efficiency: As procurement directly impacts a company’s cost structure, negotiating favorable terms with suppliers, and executing cost-saving approaches. Effective procurement can not only contribute to saving more money for the organization, but to the overall profitability of the organization.
- Quality control and improvement: Procurement is not only about obtaining materials and goods at the lowest cost but also about ensuring quality, as quality control is critical for ensuring that products meet customer expectations. Through evaluations, quality control practices, and adherence to specific quality standards, procurement prevents risks associated with customer dissatisfaction, which would result in decreased brand reputation and revenue.
- Risk management: Supply chains are vulnerable to different unexpected risks such as natural disasters, geopolitical instability, and inflation. Procurement methods that diversify suppliers, and monitor market changes help mitigate these risks and improve the resilience of the supply chain.
- Collaboration and partnership: Effective procurement approaches can build collaboration between suppliers and buyers, and in turn improve supplier relationships. By engaging with suppliers early on during the process, this allows procurement professionals can gain a better understanding of supplier expertise, and identify industry trends. Another benefit that comes from good collaboration is that it can help to reduce waste as there is less need for frequent revision or replacement of products.
Understanding the differences: procurement vs. supply chain management
While procurement and supply chain management are closely connected, they are not the same. Procurement is a key part of supply chain management, it focuses on the process of identification and acquisition of goods and services needed to achieve business operations. The purpose of procurement is to make sure that the required supplies are available, at a price that is cost-effective, and meet the needs of the organization. Here is a closer look at the differences between procurement and SCM.
- Scope: Supply chain management encompasses a broader range of activities, including each stage of the project’s operation, from procurement, production, inventory management, logistics, and to distribution. Procurement, on the other hand, is primarily involved in the management of obtaining the goods and services for manufacturing products and providing customer services.
- Timeframe: Supply chain management involves the entire procedure of a product or service, from identifying and sourcing raw materials to producing and delivering the final product to the end customer. Procurement, however, mainly assists with the phase of acquiring inputs that get processed into finalized goods.
- Objectives: The main objective of supply chain management is to optimize the flow of goods and services from suppliers to end customers while balancing the cost, speed, and quality. Procurement is more focused on securing the necessary inputs at the best possible terms to meet and support the company’s needs and objectives.
Conclusion
The importance of procurement in business and supply chain management cannot be understated. Procurement is a key part of successful supply chain management, it ensures that organizations have access to the goods and services they need to operate efficiently in today’s competitive market.
MU Group embraces these best practices in procurement, because we are not only about driving cost savings, enhancing product quality, managing risks, innovating, but we also aim to uphold ethical and sustainability standards.