The Importance of Purchasing and Supply Chain Management

Kavita YadavKavita Yadav3/21/2022

What is purchasing and supply chain management ?

Purchasing and supply chain management is a complex process that involves the coordination of purchasing, procurement, production, and logistics. In order to maximize the efficiency of these processes, it is crucial that all parties involved have access to accurate information on the status of their activities. This in turn allows for proactive actions to be taken before any delays or issues arise. Purchasing and supply chain management involves an exchange of information between the various participants in a supply chain.

Introduction to purchasing and supply chain management

Purchasing is both a functional group and a functional activity. To ensure that the purchasing group adds the most value to the organization, it performs a variety of tasks. Only a few examples include supplier identification and selection, purchasing, negotiation, and contracting supply market research, supplier measurement and improvement, and the development of purchasing systems. Obtaining the correct quality, in the correct quantity, at the correct time, for the correct price, and from the correct source has been referred to as "the five rights" of purchasing.

Supply management is a larger concept than just a new term for purchasing. Supplier management is a strategic approach to anticipating and acquiring an organization's current and future demands by effectively managing the supply base and implementing a process orientation in collaboration with cross-functional teams (CFTs) to meet the organization's goal. Supply Management is defined by the Institute for Supply Management as the identification, acquisition, access, positioning, and management of resources and related capabilities that a company needs or may need to meet its strategic goals.

The importance of purchasing and supply chain management

Many businesses are shifting their focus to purchasing and supply management to increase customer value by improving performance. Without a supplier base, the Supply Chain is incomplete. Supplier characteristics can distinguish a producer's final product or service.

In the manufacturing industry, the average purchase-to-sale ratio is 55%. This means that suppliers receive more than half of the revenue generated by the sales of goods and services. It's easy to see why purchasing is such a great way to save money. Savings, on the other hand, can take a variety of forms; the most common is to bargain hard for price reductions. A recent method is to form relationships with suppliers to reduce product costs jointly.

Purchasing and supply management have an impact on the quality of products and services. Many businesses are attempting to increase the proportion of parts, components, and services that they outsource to concentrate on their core competencies and specializations. As a result, the importance of collaboration between purchasing, external suppliers, and quality is increased. Purchasing can also help to improve product and process designs by serving as a liaison between suppliers and engineers.

Companies that involve suppliers early, on average, obtain a 20% decrease in materials cost, a 20% improvement in material quality, and a 20% reduction in product development time when compared to companies that do not involve suppliers early according to MIM's 4th edition of Purchasing and Supply Chain management. Supplier-involved development teams report receiving more improvement proposals from suppliers than non-supplier-involved development teams. As a result, incorporating suppliers early in the design phase allows purchasing to start adding new value and contribute to their competitiveness.


What does a supply chain management encompass?

In addition to purchasing, supply chain management encompasses a wide range of tasks. Each of these seemingly unrelated tasks has one thing in common- they are all connected to a network that determines how efficiently and effectively goods and information flow throughout a Supply Chain. Although supply chain-related operations have long been required, an organization's willingness to align, coordinate, integrate, and synchronize these activities and flows is relatively new.

These actions comprise the supply chain management concept. Purchasing, inbound transportation, quality control, demand, and supply planning, receiving, material handling, and storage are all management activities. Material or inventory control, order processing, production planning, scheduling, and control are also included. Warehousing and distribution, on the other hand, include shipping, outbound transportation, and customer service.

The evolution of purchasing and supply chain management

More changes in purchasing have occurred in the last 15 years than in the previous 125 years. Although some may argue that the last 15 years have resembled a revolution, understanding how we got to where we are today necessitates a brief overview of the evolution of purchasing and Supply Chain management. This evolution stretches over seven centuries and the previous 150 years.


Purchasing operations and structure

Purchasing became more important during World War I as a result of its role in obtaining critical war resources. At the time, the primary focus of purchasing was obtaining raw materials rather than purchasing finished or semi-finished commodities. Surprisingly, no important purchasing books were published during World War I. During the 1930s and 1950s, Harold T. Lewis, a respected purchasing professional, observed that there was widespread skepticism about the importance of purchasing to a business. Lewis observed that from World War I to 1945, there was a consistent but unequal appreciation of the importance of effective procurement to firm operations.


Strategic sourcing

The increased purchasing knowledge that existed during WWII did not carry over into the postwar years. During this time, articles began to appear outlining how various companies used employees to collect, analyze, and display data for purchase decisions.

Despite significant improvements in internal purchasing during this period, other disciplines such as marketing and finance overshadowed purchasing. The emphasis during the postwar years and the 1960s was on meeting consumer demand as well as the needs of a developing industrial market. Furthermore, businesses faced stable competition and had access to abundant materials, both of which historically reduced the importance of purchasing. During these peaceful years, the factors that would normally increase the importance of purchasing were absent.

Critical supply chain elements

The concept of materials management exploded in popularity in the mid-1960s. Although interest in materials management rose during this time, the concept's historical roots can be traced back to the 1800s, when railways in the United States organized around the materials management concept in the latter half of the nineteenth century. They merged linked functions including purchasing, inventory control, receiving, and stores under the control of a single person.

External events had a direct impact on how a typical business operated. Price and material availability concerns arose as a result of the Vietnam War, for example. During the 1970s, companies faced material shortages as a result of oil "shortages" and embargoes. Industry's reasonable answer was to become more efficient, particularly in terms of material acquisition and management.

The materials concept's basic goal and the functions that would fall under the materials umbrella were widely agreed upon. Materials management's overall goal was to tackle material problems from a comprehensive system perspective rather than from the perspective of specific functions or activities. Materials planning and control, inventory planning and control, materials and procurement research, purchasing, incoming traffic, receiving, incoming quality control, stores, materials movement, and scrap and surplus disposal are all examples of materials-related tasks.

During this time, there was a noticeable change in purchasing behavior. Multiple sourcing was stressed through competitive bid prices, and the supplier was rarely seen as a value-added partner by purchasing management. Suppliers and buyers had an arm's length relationship. Supply contracts were mostly determined by price competition. When the severe economic recession of the early 1980s happened, along with the advent of foreign global competitors, the purchasing tactics and behaviors that had formed over the previous half-century were insufficient. In many firms, the function was demoted to a secondary role.


Future directions

Today's purchasing and supply chain management reflect a greater emphasis on the importance of suppliers. With a few select vendors, supplier relationships are shifting from adversarial to cooperative. The actions required of a modern purchasing organization are vastly different from those required only a few years ago. Supplier development, participation in supplier design, full-service supplier selection, total cost supplier selection, long-term supplier relationships, strategic cost management, enterprise-wide systems (enterprise resource planning, or ERP), and integrated Internet linkages and shared databases are now recognized as ways to create new value within the supply chain. To meet the performance demands of the new era, purchasing habits are changing dramatically.

Three conclusions can be drawn about purchasing in the twenty-first century.
1. The purchasing function in the expanding global economy is being reshaped in response to problems posed by global competition, rapidly changing technology, and shifting client expectations.
2. The purchasing function is becoming increasingly important, particularly for businesses competing in areas marked by global competitiveness and rapid change.
3. Purchasing, as well as operations, logistics, human resources, finance, accounting, marketing, and information systems, must remain more connected with consumer needs. This evolution will take time to complete, but integration cannot be avoided.

The growth, progress, and rising stature of purchasing and Supply Chain management over the last 150 years may be seen in the history and evolution of the profession. Each historical epoch has made a distinctive contribution to the evolution of purchasing, including the events that have impacted today's emphasis on integrated supply chain management.


What does a purchasing and supply manager do?

The procurement, storage, and monitoring of items sold at a retail store, machinery, supplies, or other raw goods are all part of purchasing and supply management. The purchasing and supply manager is in control of this portion of the job, as well as the other employees who work there. Purchasing and supply management is one of the most significant job descriptions for most firms, particularly retailers, in terms of monitoring customer behavior and ensuring that top-selling items are well-stocked.

Acquiring and supply management may entail negotiating with manufacturers or wholesalers when purchasing goods or materials, as well as working closely with cost analysts and marketing specialists to determine which products to buy and which are not selling well enough to justify the costs. This procedure ensures that the corporation keeps better-selling items in stock while discarding things that are accumulating dust on store shelves.

Inventory management is also an important aspect of purchasing and supply management. Inventory is taken at regular intervals in each warehouse or store, and the numbers are compared to how many of each product were initially purchased. This allows managers and owners to determine which goods to purchase more of and which to reduce.

What does a purchasing and supply management team do?

Purchasing and supply management staff must continually research and learn about consumer behavior, as well as keep up with new and developing items on the market. A company's survival depends on its ability to provide the goods and services that customers desire.

Purchasing and supply management teams are frequently made up of a number of key people. Pricing analysts, market researchers, and marketing workers, as well as managers from each of these departments, store owners, and supervisors, may be part of this group. It is critical for each member of the team to exchange notes and discuss purchasing and marketing tactics. In the case of retailers, they must also compare notes with the purchasing teams of manufacturers or wholesalers to determine which things are being manufactured and sold, as well as to whom.

The purchasing and supply management teams must also reach agreements with their goods suppliers about the possibility of returning stuff if an item fails to sell. Before any merchandise is paid for, the purchasing and supply department must negotiate certain terms, as well as preserve proper records and inventory to comply with all agreement terms and conditions.


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