How Can Manufacturing Companies Attain Procurement Excellence
Achieving procurement excellence often proves to be a missed opportunity for CFOs in many manufacturing companies. Executives are often concerned about linking sourcing success to financial business outcomes, such as operating profit and working capital — unsure of the proper systems and processes to create this linkage — and this brings stagnation in procurement innovation efforts. Procurement excellence is all about aligning with overall business objectives and then collaborating on those objectives. Once the potential for savings is realized, manufacturing companies must assess where their greatest investments are made and how the procurement function can be of benefit to each category. Manufacturing companies generally make a significant investment in equipment, machinery, and facilities. The next largest investment is usually in inventories that include raw materials, work-in-process, subassemblies, finished goods, MRO, and consumables. A good procurement team can have a positive impact on the level and quality of inventories. This will result in lower investment requirements, more efficient production, better utilization of factory floor space, and better service and product for the customers. Here is what you need to keep in mind if you are targeting procurement excellence for your company:
Understand the focus
Most manufacturing companies tend to concentrate their focus on minimizing inventory levels to reduce investment and lower inventory carrying costs. To achieve this, it would prove useful for companies to implement techniques such as vendor-managed inventory programs, just-in-time deliveries, and consignment programs. By working closely with material planners and production schedulers, procurement teams can gain insights into the demand schedules, enabling them to work with suppliers to build the on-time and flexible deliveries that will result in lower inventories on hand, optimizing order sizes, the flow of materials, etc. A more profound understanding of material requirements through cooperation with product design teams can help in understanding the material requirements that create opportunities for substitution of raw materials and/or commonality of parts, reducing the total number of SKUs required and the level of inventories that need to be on the manufacturing floor at a given point of time. This will take manufacturing companies a step closer towards achieving procurement excellence.
The chief procurement officer (CPO) along with the CFO in manufacturing companies should be able to monitor the progress of each business unit through a spend portfolio management process. Typical parameters that should be analyzed during the process include- the savings achieved this quarter and for the year, the spend portfolio plan of savings, and the agreement of spend portfolio by the stakeholders and sourcing team.
To attain procurement excellence, the procurement teams of manufacturing companies must look for ways of continuously improve their own operations through re-engineering their operational processes and increasingly automate operations, leading to a more efficient organization and better interaction with the rest of the company. Furthermore, developing strong relationships with internal partners within the organization enables the procurement team to get exposure to other functional and operational areas and tasks.