Strategy is often interchanged with terms like policy, objectives, and procedures and indeed, the term is confused.
Purchasing and Supply with Nyasha Chizu
This situation is compounded by the fact that strategy comes in a variety of forms.
There are various levels of strategy in procurement such as e-procurement strategy that feeds into the procurement and supply strategy.
There are also strategies for particular type of spend or project which are often referred to as contract strategy, procurement strategy, commodity strategy which are rather tactical.
These tactical plans, however, have capacity to influence organisational strategy by means of some form of integration that includes acquiring your supplier or your customer in support of the overall strategy adopted by the organisation.
An organisation can adopt a strategy to maximise profits. All cylinders of the business have to focus on cutting manufacturing and distribution costs.
A decision has to be made to remove unprofitable lines. The mindset of being lean and mean must be engraved in all activities. Unprofitable customers require transformation. New markets for existing selling products need to be developed.
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Procurement plays the major role to ensure input costs are managed in order to cut manufacturing costs.
Input costs can be viewed at various angles, they can be assessed in absolute terms with respect to product cost, the value of capital that is sacrificed in order to acquire stock in the economic sense of opportunity cost.
Acquiring a product or service of the same quality at a discounted price contributes directly to profitability. Procurement also has the responsibility of evaluating outsourcing or make or buy decisions.
If savings can be derived from outsourcing rather than producing it yourself, the strategy to maximise profit can be achieved by such assessments.
Input costs management can also be in the form of delayed payment for material and services.
An organisation can reduce costs by entering into supply agreements that prolong payment periods and the saving can be measured in relation to the interest rate that would have been paid if such a purchase was paid for in cash using borrowed money or interest lost if the money had been invested in other activities.
Procurement may achieve maximisation of profits by improving cash flows through contractual delayed payments.
Procurement function in some organisations has the responsibility to manage distribution. Distribution activities include warehousing and transportation from supplier to the customer.
A lot of activities are involved that include costs in the distribution management.
The distribution function must ensure that constant supply is available to meet customer demands. Constant supply is achieved by effective management of inventories and the distribution network. If it is achieved, revenues are guaranteed from the anticipated sales in support of the organisational objectives to maximise profits.
Strategies such as order consolidation can be adopted to minimise distribution costs.
In addition to managing availability, the distribution function must ensure that goods are preserved to maintain their condition.
Profitability of an organisation can be eroded by high value of write offs of stock due to damages emanating from poor handling or loss through pilferage. Handling systems must be efficient to reduce losses during storage and transportation.
In order to achieve the strategic goal of profit maximisation, procurement activities should contribute towards that through efficient management of inputs and the distribution activities.
Nyasha Chizu is a Fellow of the Chartered Institute of Purchasing and Supply writing in his personal capacity. [email protected]
