Procurement is another word for purchasing, but in procurement the purchasing is well managed and controlled; the procurement department focuses on purchasing items that is actually needed and focuses on the quality of the item alongside it also aims to pay the minimum price possible. An effective procurement department ensures quality and cost saving.
There are three key processes of procurement that include: expenditure analysis, strategic sourcing and agreement management.
Through analysis of each and every expense of the company, why was this expense conducted? What was the need of it? What was the benefit generating from it? It not only focuses on bringing the cost down but it focuses on enhancing the quality from the goods and services purchased.
Strategic sourcing goes a point beyond the purchasing of goods and services; it actually looks into the future need of resources and their availability as well as how to manage them by making forward purchases, making commitments by evaluating market data and conducting multiple combinations of operations in order to reach the satisfaction level of the client.
This involves management of clients’ needs and suppliers’ demands to ensure the performance of the company is enhanced beyond the commitments. It is also ensured that the benefits arising from procurement are fully utilized.
WHAT ARE THE KEY ISSUES INVLOVED IN DECIDING WHAT TO MAKE INTERNALLY AND WHAT TO BUY FROM OUTSIDE SUPPLIERS?
When a company has to decide regarding what to outsource and what to conduct in-house; it has a huge dilemma as the right decision will allow reduction in cost and enhancement in efficiencies, which may lead to sustainable competitive position. Whereas, a wrong decision will have heavy negative impacts that may even lead the company out of business. In order to make an informed and correct decision, the outsourcing decision matrix tool is used by companies.
Under this matrix, there are two distinctive characteristics on the base of which a company decides whether to outsource or to develop in-house; these are the contribution to operation performance and strategic importance. The only time when a department or product will be outsourced is when it has high contribution to operation performance but has low strategic importance.
Another way to identify whether a product or department should be outsourced will be by evaluating the impact on the competence, quality and cost of the company under either option.
Zara evaluated the decision under the following characteristics that is expertise, relative cost and giving special consideration to time sensitivity, to keep the in-house manufacturing competent; they make the factory managers bid against the third party suppliers and the one who will make the better bid will conduct the order.
WHEN A FRIM OUTSOURCES A PERTICULAR PROCESS, HOW CAN IT ENSURE TIMELY SUPPLY OF COMPONENTS?
There are multiple ways to ensure timely supply of components, but four most key concerns that a firm must address is as follows,
Strong Relationship with supplier
A supplier requires long term contracts; on the other hand the company requires timely delivery and quality of goods. If a firm is able to reach a consensus with the supplier then the supplier will not want to do anything; which will make the firm take the contract back; therefore, he will ensure that the standards of the firm are met.
Supply Chain Integration
The firm can operate an ERP system, which will integrate suppliers and firms supply chain management system; this will ensure proper record of each order and its transaction, ensure the quality levels and total production time that will enable a more efficient delivery system by ensuring timely deliveries.
The firm can conduct a tender regarding the service that it needs to outsource or the order it wants to completed from outside. The tender will give the assurance that the best supplier is selected, which will make the delivery in time and the most economical cost.
Education and training
The supplier can be educated and trained about the processes as well as quality desired by the firm; the transfer of expertise will enable supplier to meet the firm’s standards in a better manner along with timely delivery.......................................
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