Purchasing and supply management plays an important role in operations of companies because other functions of the companies depend on the procurement function. In this paper a number of issues will be considered including the role of supply management in the operational process, the strategies of negotiating prices, budgeting supplies, materials, and service, outsourcing procurement function, and the best supply management practices with examples. Supply management is one of the core functions of the company. The information presented below will attempt to justify the importance of supply management function.
Purchasing and supply management is an important part of the operational process because it involves procurement of all supplies necessary for accomplishing business activity. Purchasing consists of procurement, monitoring of goods movement, and storage of supplies. Supply management allows for monitoring the behavior of buyers and ensuring the selling items are well-stocked. Also, supply management is connected with price negotiations with wholesalers or manufacturers, cost analysis, and decisions related buying certain products. Supply management ensures that the best sellers are in stock and the products sitting on store are sold with discount or removed from the shelves. Inventory management is a part of purchasing process and supply management as well.
Purchasing involves both satisfying everyday needs of businesses and large-scale equipment. Purchasing function and supply management require excellent purchasing skills. Well-organized purchasing process can help save costs on purchasing and add value to the business. Purchasing requires considering each business process including waste management. Supply management considers both internal and external business processes thus helping improve sustainability and develop competitive advantage through saving costs on purchasing.
Selecting and evaluation of a qualified supplier takes a lot of time. However, the correct selection of a supplier can be cost-effective. The selection of the suppliers consists of the following steps: discussion of potential purchases with the members of procurement team, searching for potential suppliers, consulting journals and publications related the supplies needed, and discussion the potential purchases with those who have purchased similar products before.
After selecting several suppliers that meet the requirements, their capabilities should be evaluated. The list of references should be examined before making a decision. Also, it is a good business practice to visit a manufacturing area, warehouses, and sales offices to evaluate the capabilities of the potential suppliers. The overall prosperity of a potential supplier, use of technology, employees’ attitude should be evaluated as well. Besides, it would be nice if a potential supplier can provide samples of a product supposed to be supplied to the buyer. In addition, the financial stability of the potential supplier can be investigated.
Negotiation is an important part of a business agreement. Usually, the parties negotiate the price and risks before reaching an agreement. One of the popular negotiation strategies is breaking the negotiation process into parts. By disintegrating the negotiation process, the process is simplified. Thus, reaching an agreement becomes easier. It is easier to reach an agreement on a number of points by splitting the agreement into parts rather than making one significant decision. Another approach to price negotiating is to ask for the fair price based on the current market price and industry standards. Using this strategy, the buyer is released from the obligations to justify the terms or negotiate them. This strategy allows the buyer to ask for the standard price shifting the burden of justifying the price to the seller. In this case, the seller needs to convince the buyer to buy at the price that was proposed by the seller.
Knowing the priorities of the company that participates in the negotiation is important because negotiations often focus on mitigating the risks and increasing revenues. However, some risks and revenues are more important than others. Therefore, the company needs to establish the priorities to start price negotiation. One more strategy of price negotiation is called “offer-concession” strategy. The sense of this strategy is that when starting the price negotiations, the buyer should not reveal the bottom line because the other party may propose even better price first. Therefore, keeping silence and expectancy is sometimes the better strategy than setting the bottom line first.
One more price negotiation strategy is to make a research of the current prices because more information offers more leverage. For example, if a company sold its old assets and is willing to buy new equipment will be forced to obtain this equipment fast to continue manufacturing process. This situation gives a seller extra bargaining power when negotiating the price for the equipment.
In general, it is not recommended to be definitive or to demand accepting the conditions of one party. Sometimes one has to deal with the only buyer for the product. This buyer insists on the price set, but this price is higher that was expected. In this case it is better to postpone the negotiations, reevaluate the tactics, or seek for alternative decision. The best way to reveal the position of another party of negotiations is to ask for the arguments towards the price set. The issues related the price can be discussed constructively if both parties are interested to make a deal.
It is also important to find mutual interests and opportunities when having price negotiations. Finding a collaborative tone will help remove tension and start mutually beneficial cooperation. The meetings should be ended positively. Also, it is essential to be focused on facts rather than emotions. The facts will help make negotiations more constructive and productive. For example, a list of prices for similar products offered by competitors will help reach an agreement faster than naked assertions. It would be nice to explain the position of one party related the price this party wants to obtain based on the risks of both parties. For example, if one party pays the extra price offered by another party, both parties will be at risk.
Usually, budgeting of supplies, service, and materials consists of five steps namely: cost estimation, cost budgeting, categorizing expenses, project specification, and special considerations. Cost estimation is conducted by using cost estimation methods such as historical costs, vendor quotes or prices in the catalogues. The estimate of the supplies’ costs should include all expenses associated with purchasing the supplies and materials including delivery, shipping, and handling (UCIrvine, 2014).
The costs of supplies and materials are treated as administrative costs. Supplies and materials costs can be categorized in expenses part of the budget. Broad categories should be used to describe the expenses associated with supplies and materials. A detailed description of the category should be used when justifying a budget. UCR cost categories can be used to track the costs in UCR system. All supply, service and material expenses should relate a specific project. The performance of the project necessitates purchasing budgeted supplies and materials. Special considerations outline the requirements towards project performance and cost distribution (UCIrvine, 2014).
Also, it is a good practice to consult from similar projects. By consulting a similar project, one can have a budget model to find information and to identify the origins of the resources. Further, the core costs including equipment, software, and human resources should be identified. If the costs comply with the total budget, then this budget could be accepted. Sometimes a budget cannot be justified because the estimates exceed the expected costs aligned for the budget. In this case, the budget for supplies and materials should be revised and expanded (UCIrvine, 2014).
Budget estimates can be changed in the process of making a budget. The changes in the budget depend on the nature of business and various unpredictable events. Therefore, the project budget for supplies, service, and materials should be monitored on a continuous basis. The changes in actual data should be compared to the budget thus helping estimate the costs of the project. The costs of supplies, service, and materials should be in line with the initial budget. The resources of the budget should be regularly monitored to ensure that the project complies with high priorities. Also, successful budgeting of supplies and materials depends on proper communication and cost control. Team members should be informed of the budget forecast. In addition, the directions can be changed in the case of necessity in the process of making a budget (UCIrvine, 2014).
Additional costs should be outlined as well. It would be better to specify possible additional costs than to change the scope of the project or experience cost overruns. The projections for additional costs should be accurate.
Outsourcing is the process of performing some organizational functions by outsiders rather than using own facilities and resources. Supply function can be outsourced with the help of procurement outsourcing. Procurement outsourcing has certain advantages including cost saving, higher professionalism, opportunity to focus on core competencies, increased flexibility and accountability. Outsourcing is used when there is a necessity to exercise cost control over procurement. Usually, a company outsources the procurement function to another company that specializes in the procurement function and performs the procurement function more efficiently.
Another benefit of outsourcing is using more skilled employees. Procurement outsourcing firms are more professional in performing procurement function. Thus, the company can release its employees from performing procurement or significantly reduce their workload giving the opportunity to use own workforce more efficiently. The lack of dedication to core tasks and internal expertize can lead to poor performance. As a result, duplication of efforts or overlap is possible. Outsourcing procurement functions and effective communication process organized can help reduce these duplications.
Also, outsourcing gives an opportunity to concentrate on the core competencies of the company. Outsourcing releases the companies from time-consuming and tedious tasks and allows for concentrating on the core activities. It helps save the efforts of the workforce for more productive functions rather than performing daily routine.
Greater financial flexibility can be reached with the help of outsourcing because selling assets that were used to support the procurement function can improve cash flow of the company. Also, outsourcing agreements require excellent service that is paid. The fact that the services are paid creates expectations related performance while internal functions are not additionally paid. In addition, outsourcing can be a source of additional knowledge and expertise in the outsourced area.
However, outsourcing has certain disadvantages as well. One of the most upsetting disadvantages is poor control of quality. Also, decreased loyalty of the company and losing alignment to strategic goals make outsourcing less attractive for the companies. In addition, the items that were not covered in the contract will be subject to additional costs of outsourcing service. Legal fees for retaining a lawyer could be another disadvantage of outsourcing in case if a revision of the contract is needed. Additionally, outsourcing presents threat to internal security and confidentiality of a company. The information related payroll or medical records can be transmitted to the outsourcing company thus compromising confidentiality. Therefore, the outsourcing company should be evaluated, and the confidential information should be protected. Besides, the company hiring an outsourcing company is tied to the financial success of the latter. Therefore, the bankruptcy of the outsourcing company can make the negative impact on the hiring company. The disadvantages of outsourcing can be minimized with the help of additional items in the agreements.
In order to make a successful decision about outsourcing, all positive and negative factors should be assessed. First, the type of outsourcing required by the company should be chosen. Also, the priorities for the hiring company should be outlined. Sometimes the decision about outsourcing is hampered by the employees of the hiring company because outsourcing presents threat to their employment. It will be better if the hiring company develops mutually beneficial partnership with its vendors. In this case the risk connected with the negative consequences of outsourcing is low.
In order to decide whether outsourcing is needed, the company should identify the sort of outsourcing relations that will meet the needs of the company. The level of outsourcing and the areas that will be under control of the company and the vendor should be outlined in the contract. Some companies share strategic information with the vendors, but others may outsource on a limited basis. The decision about the level of outsourcing depends on the needs and goals of the company. Also, it is very important to address the concerns of the employees to succeed in outsourcing.
Additionally, outsourcing has to meet the specific needs of the company and comply with the organizational culture. Otherwise, outsourcing will not add value to the company because non-compliance with the organizational culture will lead to the internal discrepancies. The vendors should be able to integrate their business functions into the organizational culture of the customer. It is also important for the vendor to exercise cost control and meet deadlines. Also, performance criteria and the responsibilities of the vendor should be clearly identified in the contract. Besides, the hiring company can consult an attorney regarding the terms of the outsourcing contract because the vendor is usually more experienced in outsourcing.
One of the best practices in purchasing area is centralized supply management. Cost saving is reached by consolidating business units. Centralized supply management helps better understand the requirements of the customers and address them. However, in this case access to the corporate expertise and upper management is required to change standards (Engel and Wesoky, 2010). This practice was used by IBM. IBM is an example of the company that successfully used the practice of centralized purchasing. The purchasing structure of IBM was poorly organized, but Gene Richter created an effective supply chain that saved approximately $5 billion for IBM. IBM had 4,900 suppliers in 1993. In 1999, their number was reduced making up 50 suppliers. Thus, 85% of IBM’s supplies were purchased from them (Barve, 2002).
The famous manufacturer of apparel and accessories, Liz Claiborne, experienced security issues and difficulties connected with shipment delays. Liz Claiborne obtained goods from more than 3,000 factories dispersed in 35 countries. The shipment delays occur because the sourcing locations are diverse. Also, there are capacity issues and equipment failures. In addition, the countries of production that are not stable cause troubles connected with strikes. The import team of Liz Claiborne decided to increase control over supply chain. For this purpose, shipment visibility had to be improved. The company introduced TradeBeam system that allowed tracking shipment online. All stages of shipment including leaving, customs, and the arrival at final destination could be tracked using this system. Thus, visibility of the shipment process was significantly increased, and the import team was able to track each stage of the shipment process proactively. It is an example of how the increased visibility can make supply chain of the company more effective (Enslow, 2013).
The sharpest question in the global supply chain management is finance. Supply chain finance is a combination of financial services and a technological platform. It involves financing of inventory, discount programs, and programs helping improve predictability of the payments. Supply chain finance helps reduce costs and create an effective supply base. Supply chain finance was adopted by AJT, a retailer of fast-fashion that allowed the company to reduce unit costs by minimum 5%. Supply chain finance helps the Asian suppliers of AJT to improve margins and increase responsiveness. A new system of payment allows the vendors of AJT to save 5-15% of the purchase value while they were losing approximately 20% of the purchase value before using the letters of credit. This innovation helped AJT develop stable partnership relations with its vendors. Also, payment visibility was improved, and a low-risk supply base was created. Besides, the time for tracking the payments was significantly reduced and cash flow projections of AJT were improved (Enslow, 2013).
Another example of improving supply chain management is Renault. Renault succeeded to centralize management information and manufactured a low-cost car the Logan. The Logan was partially built in Western Europe and then assembled and sold in the emerging markets. By partially outsourcing the manufacturing function, Renault minimized taxed and maximized free trade agreements. Thus, total manufacturing costs were reduced, and profit margins were maximized.
Supply management is an important function of operational activity of any business. Supply management can be organized in many ways including outsourcing. There were several ways of performing supply management function considered in the current paper. The current research showed that purchasing and supply management are the core functions in a highly competitive environment because this functions, if well-organized, help save costs and emphasize core competencies.
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Engel, R.J. and Wesoky, J. (2010, April). 10 Best practices for supply management
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Enslow, B. (2013). Global supply chain excellence: new best practices to master. Retrieved
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