How does procurement contribute to the achievement of competitive advantage?

Do you remember Porter’s Five Forces Model? This theory connects competitive advantage with the five forces- barriers to entry, the threat of substitutes, rivalry, supplier power, and buyer power. Harvard Business School’s Michael E. Porter had developed this framework to assess and evaluate the organization’s competitive strength and position.

Porter’s Five Forces give us an idea of where the power lies in a business situation. The two forces – bargaining power of suppliers and the bargaining power of buyers are directly related to an organization’s Procurement function.

Supplier Power

This is an evaluation of how easy it is for a supplier to increase prices. The factors affecting the bargaining power of suppliers are:

Number of suppliers available for each product or service that the organization needs
The uniqueness of their product or service
Relative size and strength of supplier
The cost of switching from one supplier to another

Buyer Power

This is an evaluation of how easy it is for buyers to lower prices. The factors affecting buyer power are:

Number of buyers in the market
Importance of each buyer to the organization
The cost of buyer switching from one supplier to another

The Procurement function acts as a channel between internal customers and suppliers, which provides a competitive advantage to the organization. But, with automation and intelligence getting employed in different aspects of Procurement, there are some signs to be aware of:

Metrics focusing on cost reduction:

There is a problem, when the boundaries of cost savings and cost avoidance are not clear. Besides cost leadership, other metrics such as innovation, agility, and risk mitigation are equally important.

Lack of customization:

Legacy systems might migrate to the cloud, but they remain so because they are built to meet standard requirements. Each company has different needs that they cannot configure into behemoth legacy software.

Change management:

It is time to shift the role of Procurement in the minds of stakeholders from transactional to value-add activities.

Strategic Sourcing

Strategic sourcing refers to the process of identifying the spend profile of an organization and its supplier base to ensure their business requirements are aligned with the suppliers. The increase in the adoption of strategic sourcing shows that almost everyone has heard of it.

Outlining 4 Key Benefits of Strategic Sourcing

Since, the concept of strategic sourcing is more clear, it is crucial to understand its benefits. Also, it is important to understand why more organizations should adopt strategic sourcing. A whitepaper authored by Zycus talks about the various advantages an organization can leverage by implementing strategic sourcing:

Increased Level of Cost Savings

The biggest benefit, businesses experience from strategic sourcing would be more cost savings. Identifying and selecting suppliers that will provide the most value at the right price will enable an organization to achieve higher cost savings continuously and ensure better buyer supplier relationship. It is even more important as, according to Zycus’ Pulse of Procurement 2019,

The top priority of 67% of procurement organizations is streamlining and automating such processes as strategic sourcing.

Better Alignment of Sourcing and Business Objectives

The crux of strategic sourcing is to align the sourcing activities of a business to its organizational goals and objectives. Better alignment allows the business to achieve higher business performance with higher efficiency and minimal supply chain risks.

Optimization of Ideal Suppliers

To effectively implement strategic sourcing in your organization, it is necessary to analyze the suppliers, their profiles, and their core capabilities. Once the analysis is complete, an organization has information that will allow them to match their business objectives to their ideal suppliers. Also, it implies the highest value-creation at the lowest possible cost.

Long-term Relationship Building with Suppliers

Strategic sourcing helps an organization build long-term relationships with its suppliers. By reinforcing the focus on the suppliers’ core capabilities and assuring the right suppliers for the right sourcing objective, strategic sourcing helps create a synergy between organizations and their suppliers.

By maintaining relationships with suppliers, it means that the suppliers are valued and considered in various sourcing decisions. Therefore, they feel motivated to optimize their performance to meet the organization’s objectives.

Supply Side Optimization

When the supply-side is optimized, the enterprise business objectives are linked with the procurement strategies. Besides, it means making sure that the supply base is contributing and aligned with the strategy. However, at a microscopic level, it means having the right suppliers in the right contracts.

So, what is the purpose of procurement?

For this, an understanding of the opportunities to enable and support business strategies and the right operating model is necessary. The operating model summarizes the Source-to-Pay process, which has three specific functions:

Portfolio Optimization:

By selecting the best portfolio of suppliers to achieve the purpose and by choosing the right contractual terms that reduces risk

Performance Management:

By actively ensuring that the KPIs are monitored, to measure and benchmark performance and non-performing suppliers undergo development programs.

Digitalization:

By making the most of technology to automate processes and include A.I. where applicable

Since, Japanese procurement firms are known for their excellent management skills, they rarely change suppliers. Hence, they have long-term relationships. While they focus on getting a competitive price, there is transparency and guarantee that the supplier will be getting a sufficient margin. Also, they invest the margins in productivity. Hence, procurement needs to focus on this competitive advantage.

Conclusion

It would be odd for companies to assume that a supply of materials will be there as and when they need them, in the quantity and price that they want. Therefore, compliance with strict regulatory requirements, supply disruptions resulting from political unrest and increasing competition are just some of the other forces that a company has to face and overcome continually. In this way, one can maintain the buyer supplier relationship for the long term.

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How does procurement contribute to the success of an organization?

Effective management of procurement will enable an organization to lower costs by procuring supplies, services, and contracts at the best price. Proper procurement management also enables a company to make the most of warranties or discounts that are often forgotten.

How purchasing function can lead to competitive strategy in procurement?

Purchasing function does lead the company to pursue a competitive strategy and achieve it through their procurement management. This is conducted by the company by reducing the total cost across their value chain.

How does competition benefit procurement?

Both public and private organizations often rely upon a competitive bidding process to achieve better value for money in their procurement activities. Low prices and/or better products are desirable because they result in resources either being saved or freed up for use on other goods and services.

What is the contribution of procurement?

Procurement is seen as helping to streamline processes, reduce raw material prices and costs, and identifying better sources of supply. In essence, helping to reduce the 'bottom line'.

Contribution of procurement