Talk To us
Português

Procurement: how a purchasing strategy makes a business more profitable and protected against unforeseen events

06 May 2021
Article by Joana Moreira, consultant in the area of ​​Industrial Engineering and Management. 


The term procurement identifies an activity that, in Portuguese, we usually translate more closely as "acquisition" or "provisioning". However, anyone who thinks that procurement is limited to the purchase and payment of goods or services is mistaken.

From quotation, evaluation and selection of suppliers, to negotiation, management of minutes and other contracts, transportation, logistics and order receipt, and evaluation of the performance of deliveries and suppliers - there are several activities covered by procurement, which is why it has an important role in the profitability of the company's investments.

«Buying well», namely raw materials, is critical for most industries. However, "buying well”, today, is not limited to price negotiation, but also to the establishment of agile supply conditions. Whenever possible, the procurement cycle should be out of step with the operational cycle of supplies resulting from stock planning and management, particularly the longer or more bureaucratic the acquisition process.

Supply chains, however, are not immune to unexpected situations. In 2020 and 2021 we saw many companies shut down, and airports and other distribution channels close, resulting in a domino effect of disruptions in the supply chain. Data from Banco de Portugal and INE, for February 2021, reveal that 37% of companies still experience disturbances1.

This proves the importance of procurement, and the need to rethink the role of this activity in companies: what it does, how it operates and what new skills it should have. It is imperative to have a quick response to changes in objectives and circumstances, and this phase of the economic recovery should be an opportunity to explore purchasing strategies, re-evaluate prices, offers and opportunities to fine-tune specifications, explore partnerships with suppliers and adopt agile methods.

INEGI's Industrial Engineering and Management consultancy team understands Procurement as a fundamental part of an organization's strategy, and has worked with companies to define acquisition processes, establishing the integration of the purchasing area with other areas of the organization, and to outline purchase objectives and performance indicators.

In addition, we work on the respective operational procurement processes, in order to ensure that there are no disruptions or disturbances in the supply of materials directly used in production. We support our customers, not only to manage the challenges of the conjuncture, but also to create intelligent, resilient and adaptable purchasing processes to unexpected situations.

Balance between business impact and supply uncertainty guides decisions

In this process, the Kraljic Matrix2 is an indispensable tool, and the foundation of any purchasing strategy. It is a decision support tool, which crosses the impact on the business, with the uncertainty of the offer.

The impact on profit or business comprises different factors, such as the volume of purchases and their percentage of total cost, quality and growth of the business. The greater the volume or business value, the greater the financial impact.

On the other hand, supply risk is associated with the complexity of the offer and the problems that it can cause. Here, availability, number of suppliers, competition, acquisition or production opportunities, storage risks and substitution possibilities are also considered. The risk is strongly associated with dependence on suppliers, so it is necessary to avoid exclusive dependence.

Taking into account these two axes, we divide purchases into 4 quadrants - Leverage, Strategic, Non-Critical and Critical - and it becomes possible to assess the risk potential of each one, and to identify priorities. Now let's see:
  • Strategic Purchases: risky and with greater financial impact, where high-cost components and scarce high-value materials are inserted. Sets the strategy for partnerships or collaborations.
  • Leverage Purchases: low risk, but with high financial impact. Here the strategy must be based on offers or proposals.
  • Critical / Bottleneck Purchases: low impact on profit, but high risk of supply failures (scarcity of production or technological modernization). In these cases, supply alternatives must be taken into consideration.
  • Non-Critical Purchases: represent low supply risk and low financial impact. The strategy will be to reduce the company's internal costs.
This reading thus helps us to draw up a purchasing strategy, through the development of different strategies for each supplier and product / service, aiming to reduce the total associated costs and obtaining more effective advantages.

Once the purchasing strategy is applied, one must evaluate its success with several KPIs associated with the procurement. We highlight, for example, the total value of acquisitions compared to the total sales volume, the average payment term, the Total Cost of Ownership and the Life Cycle Cost of Ownership.

At the financial level, it is important to pay attention to indicators related to price and savings, namely the difference between budgeted values ​​and final values. This indicator reveals how much has been earned or saved, and allows you to assess the team's bargaining power. Likewise, it is important to compare price developments in order to measure fluctuations during the purchase process and to detect possible seasonality.


References

Inquérito Rápido e Excecional às Empresas (COVID-IREE), Instituto Nacional de Estatística e Banco de Portugal

2 P. Kraljic, Purchasing must become supply management, Harvard Business Review, 61 (5) (1983)


Cookie Policy

This site uses cookies. When browsing the site, you are consenting its use.   Learn more

I understood