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"The discipline of supply management has advanced more in the past five years than in the previous twenty. As procurement and supply management organizations increase their involvement in cost reduction, risk mitigation, and value creation, we're very excited to be providing a forum where peers and colleagues can exchange ideas for innovation and continuous improvement." ~ Tim Minahan
Over the last 15 to 20 years, purchasing has received much attention from both the financial community and scholars, who have recognized and written extensively on the changing nature of purchasing. The purchasing function is currently referred to as" procurement", "sourcing", supply management", "external resources", and supply chain management. Most companies now define their purchasing organizations as managing the supply chain from defining specifications based on market needs to the delivery and use of the product or service by the ultimate consumer (Anon., n.d.). Procurement, nowadays, is more than simply buying; it's buying the right things, at the right time, at the right price and for the right internal customer in order to deliver a service or a product.
Value created by effective procurement:
Today's competitive landscape challenges every business for its survival regardless of its nature and size. Coping up with this cut-throat rivalry in a profitable way is what businesses strive for by introducing innovative, superior, functional, and competitively priced products and services. While all the departments of an organization pull it together; procurement division is where the process of this value creation starts. Having the responsibility to "procure" and in plain words secure the inputs for the business, this division lays the foundation of the quality of the products or services company will proffer to its customers. Therefore, this often neglected function has the strategic prowess to help company achieve its business goals effectively. http://t3.gstatic.com/images?q=tbn:ANd9GcTcdgAhynWXLMVRVhydEC7uLLIXr-_6Oun8bBA3QCDQTneCfbfi
Effective procurement is crucial to acquire quality input without any exception. Everything else being equal, higher quality input materialized into quality output - for which quality conscious customers are willing to pay even more. Company's brand image characterizes its promises to offer quality products consistently; therefore, one exception can put company's long built repute on stake. Pharmaceutical industry is an example where the quality of the raw material procured has a significant impact on the final output.
Recession has forced many businesses to shut down their operations and have compelled remaining ones to be more prudent and efficient in terms of operations and resource utilization. Shrinking margins have pressurized the companies to lower their costs of goods sold for which purchasing raw materials at lower rates have become inevitable to stay financially strong. When Wal-Mart touts, "everyday low prices" and yet emerges as the retailer giant; its strong hold over its supply chain supports it. "Wal-Mart's supply chain begins with strategic sourcing to find products at the best price from suppliers who are in a position to ensure they can meet demand. Wal-Mart establishes strategic partnerships with most of their vendors, offering them the potential for long-term and high volume purchases in exchange for the lowest possible prices" (University of San Francisco, n.d.).
Does nurturing supplier relationship help?
Days are not rosier anymore; where companies could back on the mantra of satisfying only the customers to grow successfully. They now have to nurture every knot in their value chain to outperform their competitors. As often, it's the right relationships that make all the difference. "The major research regarding the advantage of supplier relationships comes from a study of the Japanese automotive component industry. They found that the average length of the relationship between suppliers and buyers was 22 years" (Sharma, n.d.).
With thousands of business ventures opening up, customers have more choices than ever before. Availability of substitutes has reduced customers' willingness to pay companies for their operational inefficiencies. Smoothing out these inefficiencies require assistance of reliable suppliers that are ready to adapt to new systems by challenging their own existing systems. Toyota is considered by many to be the poster child for JIT success. The Toyota production strategy is highlighted by the fact that raw materials are not brought to the production floor until an order is received and this product is ready to be built. This philosophy has allowed Toyota to keep a minimum amount of inventory which means lower costs. This also means that Toyota can adapt quickly to changes in demand without having to worry about disposing of expensive inventory (Wilson, 2010). This change in production strategy couldn't have been possible without maintaining strong and healthy relationship with suppliers.
Stability & Reliability:
Nothing is more painful for a company than experiencing instability and unreliability of its inputs' supply. Not having sustainable supply of consistent quality raw material, McDonald's can never boost about its claim to provide uniform experience on your every visit. McDonald's works hand-in-hand with [their] French fry suppliers to ensure [their] stringent food quality, food safety and sustainable farming standards are met. In close collaboration with [their] supplier partners, McDonald's [even developed] a new o-gram TFA canola blend cooking oil that delivers the same taste French fries [their] customers expect from McDonald's (McDonald's, 2008).
Declining market prices have encourages companies to invest in supplier relationships to make every penny count. Ford formed a relationship with one of their own clutch suppliers. Ford examined the production process of their supplier and was able to reduce the cost of the clutch by 20% benefitting both Ford and the clutch supplier (Sharma, n.d.).
Savior in emergency:
In an emergency situation, only healthy and steadfast relationships come handy. This case study talks about one such example; whereby, BP needed to manage the supply chain of emergency goods following the Deepwater Horizon oil spill in the Gulf of Mexico in 2010. These relationships helps purchaser to get the possible terms as suppliers go the extra mile for the business in an urgent situation.
Competitive Advantage: http://t2.gstatic.com/images?q=tbn:ANd9GcQjN-CqjyUVVE_a_JIfACKttyh4quUjWqmzXc6hoM4dsPB2pSI_AA
According to Investopedia, competitive advantage is, "the ability of a firm or individual to produce goods and/or services at a lower opportunity cost than other firms or individuals. A comparative advantage gives a company the ability to sell goods and services at a lower price than its competitors and realize stronger sales margins (Investopedia, n.d.).
Competitive advantage is a company's key strength to create value for its customers better than its competitors. It's similar to bridging the gap that creates value for the customers. From effective, low cost internal operations to uninterrupted resources of scarce resources, competitive advantage could be anything that shapes the entire focus of the company. It's a company's key strategy to win the battle in the competitive environment.
In many cases, sustainable, reliable and strong relationships with the suppliers that lower a company's opportunity cost to serve its customers and increase the barriers for new entrants. Coke can be quoted as a perfect example whereby developing strong relationships with its suppliers (bottlers) created strong barrier to entry. This competitive advantage, as a result, helped coke to cherish profitable returns on its investment in supplier relationships.
So, although the Concentrated Producer industry is not very capital intensive, other barriers would prevent entry. Entering bottling, meanwhile, would require substantial capital investment, which would deter entry. Further complicating entry into this market, existing bottlers had exclusive territories in which to distribute their products. Regulatory approval of intra-brand exclusive territories, via the Soft Drink Inter-brand Competition Act of 1980, ratified this strategy, making it impossible for new bottlers to get started in any region where an existing bottler operated, which included every significant market in the US (Anon., n.d.).
What's the real picture?
Despite all the benefits discussed above, KPMG's global survey of procurement function indicates: that the majority of Procurement functions still doesn't have a strategic role and are generally not considered (nor optimally delivering) as a true business partner to the organization. In many cases, this is a direct outcome of ineffective governance, policies and procedures or a lack of appropriate Procurement engagement during the early stages of the procurement process. As a result, those organizations are failing to make effective purchasing decisions, not fully leveraging their spend and economies of scale, and leaving themselves open to significant business and commercial risk.
So whilst early Procurement involvement has been proven to deliver higher savings, the reality is that Procurement is usually brought into the process to either close a deal or advise on the contract terms, when it is often far too late to add significant value - or often only when the commercial process has already broken down (KPMG, 2011).
Procurement might be a hidden function in many organizations; it can help in achieving business goals like improving profitability, reducing costs, managing demand, smoothing out operational inefficiencies, improving competitiveness, and offering quality products and services to the customers.