Guide to procurement in manufacturing

October 7, 2019

At this stage of economic development, manufacturing processes are an inescapable part of life, and we interact with the outputs of manufacturing on a routine basis. In terms of worldwide economic influence, manufacturing contributes more than $8 trillion to the global economy. Further, manufacturing-related labor directly contributes more than 12 million jobs to the global workforce.

Considerable ongoing growth is predicted in the manufacturing realm. Roughly three-quarters of manufacturers consider growth to be a high priority for their operations over the next few years, while cost-cutting measures remain an equally vital priority for them. To that end, many manufacturers have explored expanding operations to previously unconsidered regions of Asia and Africa as a means of reducing expenditures and conserving resources.

To this end, businesses and departments involved with procurement are singularly suited to fulfill the needs of manufacturers whose eyes are on saving money while expanding their operations. Through equipping and empowering their procurement teams with the latest tools and strategies, manufacturers can reduce risks, facilitate internal innovation, and realize even greater revenues than were previously considered realistic.

How Does Procurement Relate to Manufacturing?

When it comes to manufacturing, procurement leaders have a unique assortment of factors to consider. Chief among these is understanding the intersection between the expense of material and the actual value it contributes to the finished product. In one instance, a manufacturer may pay substantially more for a material that does not make the final product better.

In another case, the same manufacturer might spend slightly less for a material that drastically diminishes the appearance, structure of performance of the final product. In both examples, these are issues that a procurement team must be cognizant of and tradeoffs that must be weighed before areas are identified in which costs can be reduced, or sacrifices can be made.

Another factor influencing procurement and manufacturing decisions is the potential for the creation of waste. If a high-cost material is replaced with a lower-cost material that requires further refinement before it can be put to use, the resources required to convert the material into a usable form must be calculated based on their true cost to the firm, even if the only resource necessary to transform the material is manpower. Furthermore, if the process of converting the material into a usable state results in the physical loss of some of that material, then what once seemed like a wise, cost-saving purchase may actually cost the firm money in unforeseen ways.

In addition, there are market considerations and executive decisions that must be accounted for. Theoretically, if the volume of existing products is being increased, more production materials must be purchased in order to meet this internal demand. Conversely, if a certain product is being phased out or eliminated altogether, the procurement department must be alerted quickly in order to prevent the continued purchase of useless materials.

If the procurement staff has been vigilant and is engaged in the manufacturing process, the presence of less material waste is a likely outcome, along with fewer unwise purchasing decisions, and the presence of an optimal level of resources. This latter benefit also manifests itself in the greater availability of production space and more efficient production processes. Ideally, it will also result in high-quality standards and faster product turnover as well.

For manufacturers, there are many risks attached to not having a mindset toward procurement, or connected to failing to have the infrastructure in place to take advantage of technological advancements in procurement. For example, most Kenyan manufacturers reported an overreliance on paper-based documentation systems, which means they lacked the digital capabilities necessary to engage with e-procurement systems.

Moreover, those employees who did have access to e-procurement options were often unfamiliar with the systems or distrustful of them. As a result, they engaged with e-procurement options only two-thirds of the time, meaning they missed out on the cost reductions available through compliance and contract terms 22 percent of the time.

In light of this, manufacturers must make sure their procurement departments are furnished with reliable e-procurement capabilities, and also thoroughly familiarized with whatever procurement technology and software they are using. This way, manufacturers can curtail actions that might prevent future cost reductions for their companies.

Procurement Considerations of Manufacturing Executives

Procurement teams should not overlook the roles of executives in the manufacturing process. As far as members of the executive team are concerned, the CFO is the member of their group most likely to affect the goals and tasks of the procurement team. Unsurprisingly, CFOs are very likely to look at business purchases in isolation, which can influence businesses on micro and macro levels.

On a macro level, CFOs look at the money spent within large categories, like facilities, machinery, services, and raw materials. This means they can order spending increases or reductions in one area or another without paying heed to the many small purchases that constitute the total. On a micro level, CFOs might not consider the interplay between different materials and their corresponding effect on the finished products.

Manufacturing facilities commonly spread their spending amongst nine different categories, including machinery, equipment, facilities, raw materials, subassemblies, work-in-process, finished goods, MRO and consumables. Machinery, equipment, and facilities are typically the most infrequent and expensive purchases made by manufacturing operations.

How Procurement Teams Can Help Manufacturers

The internal focus of manufacturers is typically on inventory turns, minimizing inventory, and reducing the carrying costs associated with warehousing unsold goods and the raw materials responsible for their production. To help reduce these costs, procurement teams can implement vendor-managed inventory programs, just-in-time manufacturing and consignment programs.

Vendor-managed inventory programs are based on a streamlined approach to inventory management and order fulfillment. It relies on cooperation between suppliers and their customers, along with the integration of software that makes suggestions pertaining to the frequency of replenishment within the product pipeline.

Just-in-time manufacturing is based on the principle that a manufacturing facility should only house materials that are in the process of being used to create products. In keeping with this, stocks of inventories are kept at the optimal level and are regularly monitored to determine when additional rounds of purchases are required.

Consignment programs are developed around the premise that the finished product is in the hands of the distributor or retailer, but is still owned by the manufacturer. This is beneficial to both the manufacturer and the seller because the manufacturer can allocate a minimal amount of space to warehousing finished goods, while the seller can continue distribution or retail operations without having to worry about maintaining product inventories.

Procurement teams that work closely with material planners and production schedulers can minimize the amount of time unused materials are taking up valuable space, as well as the amount of time completed products are sitting in warehouses prior to shipment to distributors and retailers.

There are three suggested procurement strategies for manufacturers hoping to achieve and maintain success. The first of these strategies call for manufacturers to accelerate innovation, which includes both product development and time to market. In the execution of this strategy, procurement teams are tasked with creating operational efficiency and competitive advantage, which makes it easier for firms to be first to market with new ideas and products, and also empowers businesses with the ability to shift to match changes within the marketplace.

The second strategy calls for companies to incorporate new digital technologies. Now that data-driven software has become ubiquitous, nearly all successful manufacturers have their decisions informed by software-based solutions. These solutions largely depend on artificial intelligence (AI) for the purposes of analyzing vast amounts of data and preparing purchasing strategies based upon that data.

Some of these useful software solutions are more specialized than others. For example, Fairmarkit, as a vendor and developer of purchasing software, has developed a SaaS product that specifically helps customers with tail spend purchases, which encompass the 20 percent of a company’s purchases that amount to 80 percent of the overall vendor interactions. Management of this spending often goes overlooked due to the low-dollar or one-time nature of the purchases in this category, but organizing the spending in this category is worthwhile simply for the improved employee time-value management connected with controlling tail spend, let alone the potential to optimize spending.

The third and final strategy is to enhance collaboration, which involves customers, suppliers, and partners. Simply stated, this involves adopting a corporate disposition of mutual benefit, as opposed to harboring an adversarial attitude toward those with whom materials and products are exchanged for money.

While all of these solutions involve a behavior change within the company, the general solution for manufacturers who wish to adopt a procurement solution is to integrate the best available software and technology into their operations’ purchasing methodologies. Through this definitive action, they are likely to bring about an optimal outcome that simplifies procurement processes and saves money.

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