Why Companies Need to Shift from Passive to Strategic Purchasing Right Now
Purchasing is a strategic process for any company, as it involves intense planning and execution of strategies. Intense competitive pressures have forced companies to re-examine their approach to managing their purchasing strategies. Initially, most companies followed traditional purchasing methods also known as passive sourcing. However, passive sourcing had its own set of problems such as […]
Purchasing is a strategic process for any company, as it involves intense planning and execution of strategies. Intense competitive pressures have forced companies to re-examine their approach to managing their purchasing strategies. Initially, most companies followed traditional purchasing methods also known as passive sourcing. However, passive sourcing had its own set of problems such as no targeted resources, low cost-benefit and cost-effectiveness indicators, and poor justice in access to services. This is one of the prime reasons for strategic purchasing to gain the limelight. Strategic purchasing improves the value to price relationship by simultaneously reducing cost and improving service quality. It studies the supplier relations across the entire organization and creates partnerships with suppliers. But that’s not all, here are some of the main reasons why companies who are still sticking on to the age-old passive sourcing strategies must consider strategic purchasing:
Cost of ownership
Passive sourcing is known to be price driven. Strategic purchasing, on the other hand, focuses mainly on the total cost of ownership. This involves determining which costs are most relevant in the acquisition and use of a particular good or service. The elements involved include order placement, transportation, inspection, and the costs of use and disposal.
Build supplier relationship
Today, building good supplier relationships is integral to an efficient sourcing process for a company. Unlike passive sourcing, strategic purchasing begins by identifying spending areas that need improvement, followed by collecting information on the supplier capabilities in the marketplace and then to select suppliers based on the total cost of ownership philosophy. Companies can use supplier relationship management to maintain the improvements and build high levels of trust. By maintaining a good rapport, suppliers and customers can work together to measure defect rates and identify the root causes of these defect. This also helps in maintaining good supplier stability.
Both buyers and suppliers are benefited from strategic purchasing. Buyers are benefited as they gain the ability to negotiate lower unit prices for high-volume purchases, which reduces the price of the cost of goods sold and maintaining the ability to set competitive prices for their products. Suppliers are benefited as they will be able to sell a significant portion of their output. This makes planning easier and provides management with long-term cash flow visibility.
Strategic purchasing can help in risk management. Close supplier relationships can help companies identify and resolve potential problems easily and rapidly. Also, managing supply risk is an integral part of sourcing. An in-depth understanding of supply chain risks allows companies to draw contingency plans to mitigate them. Supply chain risk assessment helps protect profitability and the company’s image against supply disruption.
To know more about the challenges of passive sourcing and strategic purchasing