Procurement, also sometimes known as purchasing, is the group responsible for acquiring components, services, and other materials to manufacture a company’s products and to keep the operation running.
But corporate procurement isn’t quite as simple as placing an order on Amazon or another web marketplace. Manufacturers must ensure that the materials they use meet the required quality specifications, that they arrive on time, and that they pay a reasonable price. That may still sound simple, but corporate purchasing, regardless of the commodities the buyer is responsible for, is anything but simple.
Procurement pros are required to purchase necessary materials of the correct quality, at a reasonable price, and to have them delivered on time. But oftentimes two items that appear identical have different specifications, and only one may meet the company’s requirements. The purchasing pro must be aware that the items are different and ensure that they only place orders for the version that meets specifications.
Purchasing is also required to buy goods at the lowest possible price, consistent with quality and delivery needs. Often, these pros’ performance is measured against a standard cost, and any deviation from the standard cost—known as purchase price variance—hits the company’s profitability. Paying less than the standard creates extra margin, while paying more increases product costs.
Purchasing pros are also responsible for negotiating purchase order terms, such as freight methods and responsibilities, payment terms, and price breaks for quantity purchases. In many companies, they must determine the economic order quantity—the quantity that will give them the lowest per unit price without requiring them to commit to buying more than might be needed.
Corporate procurement is a delicate balancing act, requiring the buyer to juggle competing priorities.
In the days before ERP software, material was ordered using paper requisitions, sometimes known as “traveling reqs.” The inventory department kept track of item usage on an inventory card, and the inventory card had an attached requisition form. When it seemed like time to replenish inventory, the planner sent the traveling req to the buyer to create a purchase order.
The buyer had the item’s purchase history on the req, so they knew the vendor and the most recent quantities and prices. They also saw the planner’s recommended replenishment quantity, but it was the buyer’s responsibility to adjust that quantity up or down to achieve better pricing. The problem was they often had little or no visibility into future requirements.
In addition to future requirements, the buyer often had no way of seeing everything the company purchased from a particular supplier. Seeing the full range of business the company did with a vendor could be extremely valuable in eliciting concessions such as lower prices or faster delivery from the supplier.
Recent Methods Using Traditional ERP
Traditional ERP vastly simplified the buyer’s job by providing more visibility into all the business the company did with a particular supplier, so the buyer could combine negotiations for several items to achieve a better price for each item.
Traditional ERP also provided more visibility into total item requirements for a year, so the buyer had more insight in determining the best economic order quantity.
Supplier performance analysis could also show whether a particular supplier had frequent late deliveries or delivered poor quality product. Either situation could cause expensive downtime or require product rework, so in some cases, the purchasing pro might decide to buy from a different supplier even if the price was slightly higher to avoid these pitfalls.
But the most valuable change traditional ERP brought to the table was the buyer/planner concept. Rather than silo the information about item usage and purchase order information, a buyer/planner could see both sides of the item’s history and decide on the best possible purchasing strategy to meet requirements.
Next Generation ERP Methodologies
More modern ERP solutions provide even more buying options by enabling procurement pros to join “buying groups” that could negotiate price and delivery as a block, with each company involved in the group enjoying the benefits of lower prices based on higher purchase quantities.
Next generation ERP also includes the ability to generate true blanket orders, with the ERP solution automatically calculating the remaining open quantity. Trade management solutions enable the automatic application of discounts, rebates, and pricing tiers without procurement having to track all the information manually offline in a spreadsheet.
Complete integrated supplier management helps reduce supply chain risks and build better supplier relationships while controlling costs and quality. As a result, next generation procurement teams are able to work to ensure the company more easily achieves its price, quality and delivery goals. The company can adapt its procurement strategies to reflect changes in supply and demand, or to adjust to product life cycles.
Is Your Company an Adaptive Manufacturing Enterprise?
The only thing certain in manufacturing is change, and companies must always be ready to adapt to changes as they occur. If your procurement team struggles with managing a global supply chain or ensuring you receive every benefit due through buying groups, contracts, and blanket orders, you may need a better, more adaptive ERP solution to help your procurement team achieve excellent performance.