The Rising Role of Procurement in Supply Chain Management
November 30, 2022 |
An expert procurement team can help mitigate the worst of supply chain problems.
If you’re a procurement professional, you have probably noticed something surprising over the past year or two: More people are paying attention to your work. Your bosses might be asking for your opinion more frequently, too. There’s just more interest in the role of procurement in supply chain management.
And that’s a good thing. We’re seeing more interest in procurement because, after the past few years, businesses now have a greater appreciation for just how important this function truly is. After years of quiet but excellent service, procurement teams deserve the praise for their hard work.
In this post, we’ll dig into why procurement is enjoying a new level of appreciation and how your team can build on this moment to deliver even greater value to your organization.
What is the difference between procurement and supply chain management (SCM)?
Before we go any further, it would probably help to clarify a few things because many companies talk about procurement and supply chain management differently. For the purposes of this blog post:
Procurement is strategically acquiring the right goods and services for the right price, in an effort to create value for a business and minimize risk and disruption. It is focused on a company’s inputs.
Supply chain management is the process of moving goods and materials from raw materials to manufacturing to packaging, warehousing and eventually shipment to customers or other end users. Unlike procurement, SCM deals with inputs and outputs.
For example, let’s say you oversee procurement for a computer manufacturer. As part of your job, you would identify suppliers that can provide the right components you need at the right price, sign contracts with those suppliers and make sure everything arrived at your facilities on schedule, so the components could be used to make computers.
At most companies, procurement would probably be treated as a subset of the company’s overall supply chain management.
So, at our fictional computer manufacturer, the SCM team not only would take responsibility for those inputs but also would make sure the finished computers were shipped to the right dealers or customers on time using the right channels. It would also handle customer or dealer returns, as well as the disposal of end-of-life, faulty or unused products.
While most people would agree that procurement is one part of SCM, not everyone sees it that way. Some companies use procurement and supply chain management as interchangeable terms. Or they’ll set up procurement and SCM as two separate teams.
Why is procurement receiving increased attention now?
The ability to minimize or prevent disruptions
An effective procurement team can help prevent disruptions and delays in an organization’s supply chain by selecting suppliers that have excellent track records of delivering on time and that are less likely to be affected by lockdowns, port congestion or other barriers. Procurement can also help a company resist inflation by finding the best possible pricing available.
More effective supplier relationships
As resilience and adaptability became as important as (or more important than) efficiency in supply chain management, a company’s relationships with its suppliers become more important, according to the Harvard Business Review. For one thing, having open communication allows companies to spot problems earlier and collaborate with suppliers to find solutions. Procurement teams are uniquely positioned to manage those relationships.
Increased insight, increased effectiveness
At the same time, digital transformation is making procurement teams more effective. New tools and platforms — some of which include AI and forecasting capabilities — allow them to gather more information from suppliers quicker so they can rapidly identify needs and resolve threats. It enables procurement teams to assess supplier performance faster, too, so they can segment and reward the top performers accordingly.
Help hitting ESG targets
Procurement can be very useful when an organization needs to hit goals related to environment, social and governance (ESG) issues. More businesses are being asked (and, in some cases, required) to track their Scope 3 impact — the environmental effects of all the suppliers in their supply chain. An effective procurement team can greatly increase the odds that suppliers will help measure those impacts accurately and take steps to reduce any ill effects.
How can your business continue to build up procurement team effectiveness?
Provide more tools to the procurement team to support and incentivize suppliers
Historically, procurement has tried to create the greatest value for its organization by seeking longer repayment terms. That’s beneficial for the company’s cash flow, but it has the potential to be harmful to suppliers, which could run short of the money they need to pay bills and continue to reinvest in their business.
Today, forward-looking companies are empowering procurement to offer payment options that let suppliers get paid faster, usually in exchange for a small discount. This is how C2FO’s Early Payment program works. It’s a win-win for everyone: Suppliers can receive payment in days instead of weeks and months, while enterprises, which tend to have strong cash positions, can pay early and reduce their cost of goods sold (COGS) by accepting a discount.
At the same, early payment also gives procurement the ability to build a stronger, healthier supply chain for the long term. When suppliers have enough cash on hand, they’re less likely to shut down or make themselves unavailable to serve your enterprise in the future. Having sufficient working capital also gives suppliers the fuel they require to keep growing so they can meet your future needs.
Invest in talent development and recruiting
As it is for many fields, there is a great hunger for supply chain and procurement talent right now, so even if you’re staffed at 100%, you might not be next month. According to one survey, almost 80% of supply chain and logistics staff said they planned to change jobs in 2022.
To ensure you have the right talent to optimize procurement performance, you should:
Train current employees for promotions by offering upskilling and reskilling training, as well as career development.
Make your team feel appreciated. That might mean a raise or better snacks in the breakroom. Some workers might simply want a word of praise every now and then.
Offer more flexibility. Giving workers options about where and when they work will make them feel more appreciated and help them achieve a better work-life balance.
Rethink job requirements. A lot of companies ask for the moon when they publish a job listing when many of those “requirements” are really just “nice to have.” Keeping an open mind could help you find a great candidate who doesn’t check all the official boxes.
Invest in digital transformation
Too many procurement teams mostly manage their activities with spreadsheets, and that’s a missed opportunity when there are a wealth of source-to-pay (S2P) platforms that allow users to find, negotiate with and contract suppliers, then oversee order management, payment and compliance processes in one interface.
These tools provide more actionable data about supplier performance, which in turn helps procurement make smarter decisions. The platforms also tend to be much more efficient than management by spreadsheet. Your procurement team will spend less time on busywork, making them more efficient and effective.
The bottom line about procurement’s rising role
If there’s one silver lining from the last three years, it’s that procurement is receiving more recognition for its contributions. Business leaders know that an effective procurement team can help prevent supply chain issues or reduce their severity while helping the company deliver greater value.
But you shouldn’t stop at recognition. Companies should continue to invest in their procurement team’s capabilities, so they possess the right talent, the right technology and the right incentives to create value.
Vinay Sachdeva is the vice president of global growth at C2FO.
C2FO is the world’s on-demand working capital platform. Learn how you can use our solutions to build a stronger, more resilient supply chain.