The modern supply chain is made up of an incredible network of different industries across the globe that make deliveries to companies and customers in a matter of days. Yet, since early 2020, it has been evident that even the simplest and most streamlined systems are subject to major issues.
The effects of the pandemic have been felt across the board: Consumers have experienced higher costs and a lack of available products; manufacturers have experienced shortages in steel, chemicals, and other critical raw materials; and logistics teams have struggled with rising fuel costs, driver shortages, and a myriad of other challenges. According to some experts, the challenges found within the global supply chain are unlikely to change anytime soon.
So, what are manufacturers doing to combat these challenges? First, they are making major adjustments to their traditional procurement strategy, which primarily focuses on the processing and purchasing price. Why? Because procurement should be measured by the total cost of ownership, which includes costs accumulated through transactional and administrative duties, transportation and delivery, sustainability, inventory, and shelf-life - the list goes on.
In place of a traditional procurement strategy, manufacturers are implementing strategic sourcing, a procurement practice that blends science, art, and heavy data analytics into a comprehensive methodology designed to explore all purchasing avenues. This strategy is intended to reduce the total overall cost while maintaining a high-quality standard for the purchased product.
Our current times are challenging to navigate. To help you improve your cost savings and supplier relations, here are the updates that should be made to your traditional procurement strategy.
Traits of the Traditional Procurement Strategy
Outdated business practices can easily become a normal part of your business, so recognizing the defects of the accepted strategy allows you to implement a better approach. Here are some key comparisons between a traditional procurement strategy and strategic sourcing:
Poor procurement data often hinders traditional purchasing.
Outdated data can be incredibly harmful to decision-makers. In contrast, good strategic sourcing performs constant data tasks, including daily market research, to get the necessary information to achieve the best results.
A traditional procurement strategy typically chooses the lowest of three bids.
Traditional procurement strategies emphasize the processing and purchasing price rather than analyzing and considering the entirety of the cost of ownership.
Strategic sourcing assesses the supplier market and the organization’s internal needs. From there, multiple sourcing strategies are developed, qualified suppliers are identified, and a rigorous request for proposal (RFP) effort begins. During the following multi-round negotiations process, as many as 30 suppliers might be considered.
Traditional procurement strategy uses volume as the primary price lever.
Though volume is an important aspect of procurement, it isn’t the only consideration, and treating it as such often results in subpar services in the other areas of procurement.
Strategic sourcing considers more than 20 different sources of leverage. This consideration includes volume, as well as lead times, technology, transportation, and packaging costs, to create the most appropriate sourcing strategy to achieve best-in-market total costs.
Traditional procurement strategies are often intended to favor the incumbent.
When buyers go out for bid, a traditional procurement strategy often makes them lose out on a best-in-market cost, encouraging incumbents to keep prices the same and repelling competing suppliers. The competing suppliers are discouraged from investing their limited internal equity in putting their best pricing and terms into the bidding pool.
The Benefits of Partnering with a Procurement Consultant Team
Procurement consultant teams emphasize the importance of strategic sourcing by investing time into digital tools and daily interaction with the marketplace. In addition to the traits listed above, a highly skilled procurement consultant team will bring the following benefits:
1. Continuous Improvement Opportunities
Customers in today’s demanding marketplaces require significant cost savings, fast deliveries, and high-quality products - which means procurement professionals need to achieve high levels of day-to-day improved performance and attention. For example, more and more companies have environmental, social, and governance (ESG) concerns. Making ESG concerns a priority in procurement professionals’ purchasing decisions can provide significant improvements for companies involved.
2. Skills in Current Procurement Methodologies
Companies are turning to procurement consulting for industry best practices, the latest pricing data, and strategic tools because of their up-to-date procurement methodologies and years of deep industry experience. By partnering with a skilled procurement team, companies can quickly position themselves ahead of the competition.
3. Collaboration with Existing Procurement Teams
Utilizing a procurement consultant means collaboration rather than replacement. Working in conjunction with experienced stakeholders rather than undermining their processes, procurement consultants build a team between internal personnel and the consultants to face the procurement issues to reduce material costs, improve operations, and establish recurring annual savings.
4. Experience with the Subtleties of Procurement
In-house procurement teams often excel in one or two categories. Still, they may require assistance with the subtleties and approaches to current methodologies, such as contract negotiations, benchmarking, pricing models, and invoice auditing. Procurement consultants can bring a wide range of knowledge, data, and skills to the table.
Fill In the Gaps with Procurement Consultants
A strategic growth partnership with SRM is a working collaboration between your internal team and SRM consultants. Together, we will implement a sourcing strategy that moves beyond a traditional procurement strategy to find the cost savings that you might be leaving on the table.
Need more information about procurement consulting? Download our guide, Why Procurement Consulting Brings Immediate Results to Your Business.