Procurement and Supply Chain Management (PSCM) represents a new approach to strategic and operational business management in the 21st century. It introduces a cooperative and integrated model for creating value across organizations, which presents new challenges for both theoretical and practical business management methods and tools.
In the field of materials management, significant changes have occurred due to the new PSCM perspective. This has impacted both the methods used and the focus on different process steps. This article presents a comparison of classical procurement methods and supply-chain-based procurement methods, analyzing their use in theory and practice. Traditionally, procurement received little attention from business management and economic theory. It was considered a secondary activity within an organization, primarily supporting production in classical materials management. However, in recent years, SCM has been reassessed as part of the value chain in vari...
ous industries, highlighting the strategic role of procurement in the overall supply chain.
Procurement and supply chain management (PSCM) is divided into five steps or activity fields: supporting activities, sourcing, distribution, storage, and disposal. PSCM has implemented changes in each separate step. In supporting activities, PSCM requires multi-dimensional, long-term, and dynamic instruments to guide decision-making in materials management. Cross-organizational cooperation, like advanced purchasing, is necessary for success. Sourcing also places greater emphasis on the strategic role it plays. SCM introduces new tools such as procurement E-AUCTION methods, SCR, green sourcing, TCO, Ethical sourcing, PCB, strategic alliances, and TPB. These tools are a response to the new cooperative paradigm in SCM. Distribution and storage also rely on cooperative instruments to maintain competitiveness, like VMI and integrated logistics. However, disposal brings a completely new philosophy introduced by SCM. I
shifts the focus from waste reduction to enhancing material cycles, environmental programs, and new recycling programs like reverse logistics.
There has been a shift in supply chain management (SCM) towards strategic sourcing and disposal as the primary processes of materials management. This contrasts with the classical perspective, which focused on scheduling and storage planning in procurement. SCM emphasizes the strategic role of procurement by providing an integrated and process-oriented viewpoint on value creation. Supply-chain-based procurement relies on communication, mutual interdependence, and reduced short-term competition to maintain long-term competitiveness as a unified entity represented by the supply chain. The methods employed for supply-chain-based procurement reflect its long-term, complex, and dynamic perspectives. Procurement is a cooperative and process-oriented primary activity within the supply chain that plays a crucial role in enhancing competitiveness in the long term. In recent years, there has been increased focus on procurement and SCM as a competitive advantage due to their significant impact on various aspects of an organization's financial performance such as operating costs, revenue growth, and asset management.Research on supply chain management (SCM) practices has significantly increased. Various sources such as business schools, industry consortia, SCM software providers, and consultancies have contributed to this surge. The importance of integration and collaboration has been highlighted as crucial for successful collaboration among stakeholders in the Extended Supply Chain (ESC).
The integration of Supply Chain Management (SCM) with other operational performance initiatives, such as lean manufacturing, total quality management, and new product development, is a key issue that is being explored and developed. In the early days, buyers were responsible for ensuring reasonable purchase prices and maintaining operations to avoid shutdowns caused by stockouts. The profession
gained more attention during both World Wars due to material shortages and market changes. However, until the 1960s, purchasing agents mostly served as order-placing clerical personnel in a staff-support role. In the late 1960s and early 1970s, purchasing personnel became more involved in materials systems. The significance of the purchasing department increased as materials became part of strategic planning.
Experts say that the purchasing function involves determining an organization's needs, selecting a source of supply, ensuring fair pricing, and establishing relationships with suppliers. Purchasing departments decide what to buy, where to buy it, how much to pay, and maintain availability through contracts and supplier relationships. Today, purchasing departments coordinate with user departments, identify suppliers, conduct market studies, analyze proposals, select suppliers, issue purchase orders, meet with sales representatives, negotiate, handle contracts, resolve problems, and maintain records. As the role of purchasing becomes more important, departments are taking on additional responsibilities.The role of purchasing personnel has expanded to include additional responsibilities such as participating in the development of material and service requirements and related specifications. They are also involved in conducting material and value-analysis studies, managing inbound transportation, and overseeing recovery activities such as surplus and scrap salvage. These new responsibilities also have implications for environmental management.
In the 1970s and 1980s, purchasing was categorized as "materials management." Companies and individual facilities employed executives with the title "materials manager," who were responsible for various tasks such as purchasing, supply management, inventory management, receiving, stores, warehousing, materials handling, production planning, scheduling and control, and traffic/transportation. Over time, the scope of materials management expanded to cover all activities from raw material procurement to delivering the final product to customers
and managing returns. This led to the adoption of the newer title “procurement and supply chain management.” As purchasing personnel became more integral to a company's operations, they started being referred to as "supply managers." In this role, they actively participate in strategic planning by securing partnership arrangements and strategic alliances with suppliers, identifying threats and opportunities in the supply environment, creating long-term acquisition plans, and monitoring continuous improvement in the supply chain. Research has shown that strategic purchasing allows firms to build strong relationships with a limited number of suppliers, promote open communication among supply chain partners, and develop a long-term strategic relationship orientation to achieve mutual goals.
Strategic purchasing plays a synergistic role in fostering value-enhancing relationships and knowledge exchange between the firm and its suppliers, thereby creating value. Supply managers also play a crucial role in determining supplier qualification and selection, as well as ensuring early supplier involvement in product design and specification development. Objectives for purchasing and supply management personnel include supporting the firm's operations with an uninterrupted flow of materials and services, buying competitively and wisely, minimizing inventory investment and loss, developing reliable supply sources, maintaining healthy relations with active suppliers, achieving maximum integration with other departments, taking advantage of standardization and simplification, keeping up with market trends, training and developing competent personnel, avoiding duplication, waste, and obsolescence. They also involve analyzing and reporting on long-range availability and costs of major purchased items, as well as continually searching for new ideas, products, and materials to improve efficiency and profitability.The successful administration of purchasing and supply management in supply chains necessitates a different perspective on the connections between an organization and its
suppliers. The extended enterprise model envisions suppliers and distribution customers as integral parts of the product or service provider.
In order to meet or exceed end-customer expectations, we must maintain the same level of planning and communication with our key suppliers as we do within our organization. This means moving away from a distant, adversarial relationship and towards a more collaborative and mutually beneficial one. Adopting a more sophisticated and targeted approach to suppliers will be necessary for companies expanding beyond their own operations. However, there may still be some suppliers where a conventional buyer-seller dynamic is sufficient.
However, higher-level relationships will be necessary for more critical commodities and services. These relationships can range from conventional preferred supplier agreements to sophisticated, multi-year partnering arrangements that include value-added activities like inventory management systems, technical support, and even technology co-development programs. These special supplier relationships must be established on the foundation of shared business goals and mutual trust and respect. They are more intricate to establish and require proactive management, but if properly managed, they can offer significant competitive advantage. Operational Integration is equally important in the extended enterprise model. It requires better operational integration of the value chain compared to what traditional business models usually offer.
In order to meet demand flexibility requirements while keeping inventory costs down, the flow of information is crucial to the success of the supply chain. Therefore, a well-planned and integrated information system strategy is a critical element. The SCM software industry has aggressively pursued this market need and there are two main types of software products striving for SCM integration. Large enterprise resource management providers have viewed this market as an opportunity to
include supply chain solutions in their overall enterprise package.
The other group of software providers offers specialized Supply Chain Management (SCM) packages that include functions like demand forecasting & balancing, inventory management, logistics planning, supply chain optimization, and other features. It is evident that SCM and lean manufacturing concepts are closely interconnected. In fact, SCM can be seen as an extension of lean manufacturing beyond our own factory. * Suppliers with complete integration capabilities can facilitate various lean manufacturing activities, such as kanban and automatic replenishment systems, vendor-managed inventory systems, and outsourced subassembly operations. An additional development of these ideas is the recent emergence of third-party logistics (3PL) or lead logistics providers (LLPs), which provide a comprehensive outsourced approach to logistics encompassing inventory management, warehousing, freight & transportation, cross-docking, kitting & kanban, and outbound distribution services on an optimized basis.
Supply chain partners often collaborate in technology co-development and new product development. It is essential to integrate supplier reliability, maintainability, and supportability into the initial stages of the product development process. Key suppliers should be involved in the cross-functional product development team to maximize their capabilities and decrease costs and cycle times. These suppliers can provide valuable input for reducing materials, design fabrication, logistics costs, and manufacturing cycle times. Collaborative efforts, such as incorporating upstream and downstream value chain partners in Sales and Operations Planning (S&OP) processes, have been recently witnessed.
S&OP processes support the maintenance of a coordinated and valid operating plan to meet customer demand, business plan, and strategy. This improved plan provides partners with a comprehensive view of forecasted demand, supply capacity, financial information, and implications, facilitating informed decision-making. Expanding the use of Sales and
Operations Planning enhances visibility across the enterprise and value chain, enables improved Product Lifecycle Management (PLM), promotional planning, inventory management, revenue predictability, and customer service execution. S&OP facilitates the connection of value chain participants through information systems for demand and supply data. An example of recent collaboration is the focus on RFID (Radio Frequency Identification).
Value chain leaders are seeking ways to improve the integration of their partners' supply chains with their own functional areas. RFID technology provides a fast and efficient method for transmitting essential product information as it moves through the value chain and reaches the consumer. Recent studies indicate that prominent retailers may suffer a 3-4 percent loss in annual revenue due to products being out of stock on the shelves, despite inventory being present somewhere within the value chain. If there was improved coordination of product availability at the store level, it would have a significant impact on the entire value chain of these retailers.
Moreover, improving the visibility of retailer product availability can reduce logistics costs as products progress through the value chain to meet safe stock levels and ultimately consumer demand. With the increasing complexity of supply chain networks, there is a growing need for enhanced supply chain technology solutions. Enterprise Resource Planning (ERP) and leading Supply Chain Management (SCM) solution providers have made significant investments in developing solutions to address the requirements of manufacturing and distribution companies in various areas:
- Network and Inventory Optimization
- Logistics Optimization
- Product Lifecycle Management (PLM)
- Radio Frequency Identification (RFID)
- Sales and Operations Planning (S;OP)
- Manufacturing Optimization
- Business Intelligence
The Role of Technology in Supporting these Trends. These technologies have empowered the supply chain "information worker" to innovate, reduce costs, enhance service, and meet
customer expectations better than ever.
In order to achieve sustainable improvement in supply chain performance, a business must invest in the right balance of organization, processes, and technology. Failure to invest or focus on any one area will hinder the ability to achieve lasting improvement. The development, manufacturing, and sale of a product can challenge even the best organizations. As business drivers change, the approach to supply chain management, including business processes and investment in SCM technology, must also adapt. A poorly functioning supply chain can have negative consequences on all aspects of an organization, putting the long-term performance and success of the business at risk.
The sourcing decision involves choosing between buying a part from a supplier or producing it internally. This decision, also known as make-or-buy, requires finding qualified suppliers willing to meet specified conditions if the buyer chooses to purchase externally. Manufacturing industries in global markets are experiencing changes in competition and operations. Success in this environment requires procurement specialists with expertise, a global perspective, and motivation, as well as strategically differentiated processes. Two trends, vertical integration and increased specialization, dominate manufacturing and the high-tech industry due to the decomposition of the corporate core.
The text discusses two trends in the industry. The first trend, vertical integration, involves bringing all manufacturing processes in-house. HP, for instance, used to produce all the necessary components for their measurement equipment, including plastic enclosures, silicon chips, metal parts, and screws. The second trend is increased specialization, which can be seen in the outsourcing of noncore functions. This shift ultimately transforms in-house overhead functions into separate industries. Examples of these specialized industries include software
development, chip design and manufacturing, final assembly, electronic circuit board assembly, commercial real estate, and logistics. The underlying idea is that it is difficult to excel in every aspect simultaneously and that smaller, focused organizations tend to outperform larger firms. Thus, each of these internal activities has evolved into its own industry.
In the high-tech industry, there is a clear division of labor which is evident in well-known brands focusing on different aspects of a single value proposition. As a result, they are able to generate revenue from the same customer sale. Manufacturing outsourcing is on the rise due to the need for asset management. By implementing an outsourcing strategy, companies are able to remove manufacturing assets from their balance sheet and reduce payroll costs.
The emergence of contract manufacturing (CM) has established a new industry that offers enhanced manufacturing capacity flexibility. By leveraging fixed costs over multiple customers, stand-alone manufacturing companies can produce goods at a lower cost. This allows for resource reuse, reducing capacity risk and achieving greater economies of scale. Additionally, specialized facilities like factories and warehouses can be moved off the company's balance sheet through this dynamic.
The true value of outsourcing lies in the ability to bring together several highly specialized contributions into a single, adaptable value proposition. The use of information technology and a global logistics infrastructure allows for the division of labor into specialized industries. In this competitive business environment, success is determined by maintaining visibility and assigning tasks to the most capable players. Each partner must strike a balance between cost and responsiveness to customer needs in order to thrive. However, achieving operational excellence at this level of complexity is
not an easy task. Challenges arise as companies focus on their core competencies through outsourcing, requiring increased attention to be paid to the "extended enterprise" – the network of specialized partners that contribute to a company's value proposition.
Communication among the nodes in the network not only offers visibility of the complete supply chain, but also fosters a shared comprehension of how local events should be connected to market demands. Effective outsourcing hinges on coordination as a prerequisite. In summary, the primary and crucial obstacle lies in establishing a common language and prioritizing exception processes. The second challenge entails effectively transmitting relevant information among participants. It is important to note that while technology clearly assists in information processing, it is only a facilitator.
Success is reliant on processes and people. Another challenge is to leverage existing investments in the network. In the current environment of rigid, proprietary IT systems, it is important to recognize the difficulties faced by smaller suppliers trying to work with multiple, incompatible transaction protocols. The increasing number of data formats can be overwhelming and reduce local gains.
One of the challenges is to enhance the current infrastructure to establish a versatile and efficient logistics and distribution network. This network needs to implement proven processes developed by itself, rather than being constrained by the limitations of generic platforms. Usually, system adjustment can only be achieved gradually. Additionally, the entire network faces the challenge of consistently adapting to evolving business circumstances.
The supply chains of high-tech parts like hard-disk drives are continuously reconfigured due to their short lifecycles, as well as the exceptions that occur in the extended enterprise. Successfully outsourcing such products can be challenging due
to the highly dynamic and fashion-like market preferences. For companies like HP, which have faced outsourcing challenges for years, an inevitable consequence is that an increasingly larger proportion of procurement dollars now come into play.
As companies purchase more complex items and services, procurement has become a crucial function. This not only means that businesses are procuring more, but they also have the chance to gain better advantage from the parts, products, and services they acquire. Similar to other horizontal functions, procurement is evolving into its own industry. In short, the primary benefit of procurement is to utilize the buying power, technological resources, and established relationships of an enterprise to maximize the benefits of preferential treatment.
Preferential treatment can be obtained through various forms such as discounts, improved availability, or the provision of more skilled personnel. HP has successfully faced the challenge of maintaining preferred customer status in an increasingly outsourced and fragmented enterprise by developing specialized buy-sell services. These services enable the company to outsource the physical management and assembly of products while retaining control over financial transactions. In this setup, suppliers directly deliver their parts to the contract manufacturer or partner, eliminating the need for HP to handle the material flow. At the same time, buy-sell services ensure that the agreed terms of the sale with suppliers are properly carried out.
In outsourced transactions, the procurement specialist guarantees that the corporation receives the appropriate price. The process is automated and advanced, incorporating functions like tax optimization, price-masking, and supplier split management. Although this service has a cost, the benefits in terms of improved pricing, terms, conditions, and risk reduction far exceed the expense for many aspects.
On an annual basis, a standard return on investment of over 8-to-1 (including setup costs and IT investments) was attained.
The buy-sell process is carried out using a disciplined and differentiated strategy. In order to prioritize the most important parts, around 20 percent of inbound supply chain parts are actively managed through the buy-sell procedure. The next tier, which accounts for approximately 50 percent of inbound parts, is audited by comparing the price received from the CM to the price entitlement. This audit, known as eBOM, determines whether funds are collected or a premium is withheld based on the discovery of any discrepancies. Audits for all other parts are not considered necessary as HP does not believe it can outperform its partners in these areas. Therefore, these parts are obtained from partners through turnkey processes.
Effectively, the buy-sell relationship emphasizes the most valuable parts and unique supplier relationships. Audited eBOM parts usually consist of board-loadable components, while other components are handled by qualified partners. The success of this differentiated strategy relies on high-quality market data and constant monitoring. Another way sourcing adds value to the extended enterprise is through its global nature. IT and logistics capabilities enable procurement to create geographically flexible sourcing, where material flows can adjust dynamically to business and legal needs.
This, in turn, provides corporations with significant financial flexibility through the utilization of regional tax and duty advantages. By strategically selecting the procurement location, companies can not only optimize material costs but also minimize their tax and duty obligations. Additionally, HP's sourcing activities have expanded to include engineering solutions for supply chain issues. Routine sourcing work within the extended supply chain has also presented
opportunities for revenue generation, such as licensing intellectual property, including patents for cooling systems in Itanium chips.
R;D, or research and development, is another internal function that has also undergone an increase in specialization. The procurement of product design from external sources, despite the demanding procurement processes involved, is becoming more common. This shift can be seen in the transition from working with contract manufacturers (CMs) to a growing reliance on original design manufacturers (ODMs). While ODMs serve as a middle ground between specialization and fully-integrated solutions, the separation of design, manufacturing, and logistics increases both the involvement and value brought by procurement. The management of the sourcing process is another aspect that expands the overall value proposition of procurement.
Companies believe that increased specialization and unbundling will give strategic advantages to all partners involved. The sourcing process has been sped up through Smarter sourcing, accelerated GEP RFx, and GEP Auction, which are designed to streamline and speed up cycles for RFx awards. The optimization of these tools actually helps identify the best sourcing deals based on a company's internal parameters. With these tools, a company can collaborate across teams on eRFxs, assess suppliers, and create proposals from scratch. GEP RFx standardizes supplier responses and compiles them for seamless tracking, communication, and documentation of best practices.
The executive reports can be generated automatically or manually. They can also be accessed by multiple teams. These reports help determine the best-fit negotiations strategy and can be sent to the GEP Auction tool to set up a live event quickly. The savings from these events can be accessed in real-time. Additionally, award decisions can easily be sent
to the GEP Contract tool with just a few clicks.
E-Purchasing AND E-Procurement
The use of the Internet and e-commerce is significantly changing the way purchasing is conducted. This has resulted in the emergence of terms such as "e-purchasing" or "e-procurement." The utilization of the Internet in purchasing has greatly improved communication in areas such as competitive bidding, purchase order placement, order tracking, and follow-up. Online systems have provided a faster and easier way to perform these tasks. Furthermore, negotiation processes can be enhanced, and reverse auctions can be facilitated. Reverse auctions allow buying firms to outline their requirements and receive bids from suppliers, with the lowest bid winning.
E-procurement is seen as a key characteristic of a top-notch purchasing organization. The implementation of e-procurement technologies in certain companies has led to lower prices for goods and services, shorter order-processing and fulfillment cycles, reduced administrative burdens and costs, enhanced control over off-contract spending, and improved inventory control. It also enables companies to expand into trading networks and virtual corporations. Key factors for successful e-purchasing include: having a single, internet-based, self-service system that can handle all purchasing requirements (both direct and indirect), implementing a flexible catalog strategy, and providing tools for extensive reporting and analysis.
Supporting strategic sourcing. Enhancing supply-chain collaboration and coordination with partners.
Increased Competition and Price Pressures
Cost improvements around inventory management, logistics operations, material management, and manufacturing costs, including raw material and component acquisition can be found with:
- Sales and operations planning
- Transportation/distribution management
- Improved product lifecycle management
- Improved strategic sourcing and procurement
Suppliers can differentiate themselves in a number of ways as well as provide value, additional services, and
capabilities to their customers. The differentiating factors include:
- Vendor Managed Inventory (VMI)
- Labeling and packaging
- Drop shipping
Companies should not only look to their supply chain to drive cost improvement but should increase capabilities as a means for staying competitive. Streamlining processes with better design, better collaboration across networks, and new services will help a company stay competitive and strengthen relationships with its customers. As many companies step back and examine their core competencies, some realize that outsourcing parts or all of a supply chain can be advantageous.
Due to advancements in (1) information media and systems, (2) the cost and quality of global manufacturing and distribution, and (3) product design capabilities, companies are increasingly finding benefits in outsourcing either all or certain parts of their supply chain. Outsourcing can lead to significant economic advantages, but it also poses risks in the absence of appropriate systems, processes, and organizational management structures. In an environment with heavy reliance on outsourcing, companies must implement more controls and systems to compensate for the lack of on-site supply chain capabilities. Consequently, in an outsourced supply chain setting, ensuring information, controls, and excellence from the "information worker" becomes paramount.
The emergence of green supply chains
The green supply chain management (GSCM) involves incorporating environmental considerations into every aspect of supply chain management, such as design, material sourcing, manufacturing processes, delivery to consumers, and end-of-life product management. This marks a departure from traditional supply chain practices.
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