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Achieving positive business outcomes poses a stiff business challenge and organizations are struggling for better volumes, faster growth, spearheading competition, and cost containment. Topline and Bottom-line are at risk of uncertainty. Positive Cash flow is also one of the biggest challenges. The other major challenge is the bleak possibility of the market responding favourably to price upswing. With this kind of scenario, a long-term vision of procurement which can surpass quality benchmarks and beat bottom-line challenges makes sense.

Spearheading competition is a dream of many, but its actual accomplishment largely depends on unstinted and persistent efforts for the best quality, which surpass the expectations of society. Best quality is the supreme policy, we have read and heard this statement from many entrepreneurs, consultants and dignitaries across the globe. They are right. Unmatched quality, be it related to any product or service is the demand of the day. Topline and Bottom line can be better if the organization outperforms quality benchmarks with moderate procurement cost. There is a belief that quality is a function of the production department which is partially untrue. It is the procurement that decides the level of quality, the organization will procure and delivers to society.

Many organizations have failed to understand the importance of procurement and they lag behind others. I am highlighting this to understand the importance of a good procurement strategy and its direct correlation with the success of any organization. Let us discuss this further.

1. Procurement Mix:

The first step for having a good procurement strategy is to analyze the extant Procurement Mix. Setting up of organization procurement benchmark/KPIs will make sense. In-depth analyses of Procurement Mix will give you an idea about better procurement opportunities. Category-wise, Location wise, and plant-wise bifurcation of procurement are prudent, category can be decided internally. The bifurcation of procurement into High value, Moderate Value and Low Value makes sense. Counting the number of suppliers in each category will give you an idea about the supplier strength of an organization. The lowest and highest price paid for any product will give you an idea about price range or market movements. The price range sometimes can be seasonal. Delivery time and quality matching can be evaluated.

The meaningful information that can be analyzed is positive as well as negative feedback about quality, delivery and cost. There can be instances of substandard or poor or lower grade quality, late deliveries, no deliveries, partial deliveries, the excessive number of suppliers, and overcharging by suppliers. The positives are surpassing quality requirements, consistent and timely deliveries, good delivery methods, complete deliveries, and the rational price charged by suppliers. The other factors that can be considered are the suppliers association with the organization, credit terms offered and grace period granted by the supplier at any point of time, the level of discount given, his presence across the territory in which the organization operates, his creditworthiness, after-sale support or service. The information can be validated internally through check and cross-check.

2. Products breakeven:

Products breakeven from the finance team can be revisited to understand the extant material cost per product. This can serve as one of the benchmarks for revising procurement strategy in favour.

3. Procurement Strategy:

Post information validation, a procurement strategy can be prepared. The validated information will give an in-depth insight into the strength of supplies, the strength of suppliers, price economy and delivery performance. Preparation of the list of performing and non-performing suppliers makes sense. The procurement strategy which moderates the cost of a product as also maintains or surpasses the quality benchmarks of the organization is the ultimate procurement strategy. Some of the steps that can be considered are:

a) Procurement Mix reforms:

Contracts can be renegotiated with non-performing suppliers. Discussions can even be done with performing suppliers for favourable outcomes. Organizations can highlight the tenure of the association, volumes and value of business given, timely payments, and revised business plan for the favourable alliance.

b) Backward Integration:

Organizations can have their subsidiary or independent company or manufacturing facility at the national/international level, where the high-value materials required by the organization are plentiful vis a vis cost-effectiveness and if saving is sizable, of course with superior or matching quality benchmarks, it can choose this option. Shipping and freight challenges may be there but will improve over some time once normalcy is restored. Organizations may opt for business partnerships.

c) International procurement:

Organizations can opt for procurement from other countries where high-value materials are plentiful vis a vis cost-effectiveness. When an organization compare domestic vis a vis international procurement, and if saving is sizable, of course with superior or matching quality benchmarks, it can choose this option. Shipping and freight challenges may be there but will improve over some time once normalcy is restored. Organizations may opt for business partnerships.

4. Implementation and monitoring:

Concerned teams can be called upon for deliberations and finalization of the strategy. The budget can be finalized. Necessary approvals can be taken for implementation. The implementation can be monitored regularly for revisions and corrections.

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April 2024