The procurement function is critical in strategic sourcing, ensuring the right inventory is always on hand while keeping raw material costs low.
The procurement team is critical in ensuring minimal business disruption, with direct and indirect materials accounting for at least 50% of typical production costs. This includes establishing strategic supply agreements while minimizing excess inventory. However, ongoing supply chain disruptions have made procurement increasingly difficult.
According to the 2022 SYSPRO Global Research Survey entitled “Realigning the links of the global supply chain,” 70% of companies have experienced material handling and supply chain disruptions in recent years.
Despite this, only 33% of companies invested in procurement and sourcing technologies to reduce supply chain disruptions.
Without the right technology, procurement cannot manage these disruptions. While persistent supply chain disruptions will persist for the foreseeable future, there are several best practices or strategies to improve processes and efficiency throughout the supply chain.
1. Consider a dual-sourcing strategy
Most manufacturers and distributors have faced extremely low supplies of raw materials or lack of access to mainstream suppliers due to various disruptions, from weather events to military conflict and even the pandemic. As a result, some companies have completely stopped production due to material shortages, resulting in cascading effects throughout the supply chain.
Some have blamed just-in-time (JIT) manufacturing, but nothing in this method advocates maintaining an absolute minimum inventory anywhere in the supply chain. Instead, JIT manufacturing recommends keeping a stock of critical components and materials strategically placed along the supply chain so that manufacturers can weather these disruptions and continue manufacturing operations.
The problem can be partly attributed to legacy systems not allowing full visibility into the supply chain. According to the SYSPRO study, 50% of companies chose not to invest in new technologies and to continue with their current systems.
With the newer data-driven technologies, the procurement team would have had the required visibility and adjusted accordingly to minimize business disruption.
Greater connectivity and visibility across the supply chain would allow companies to identify alternative sources more easily. A self-service Supply Chain Portal helps by extending online procurement management so that suppliers can be engaged quickly by streamlining document processing and management.
2. Build standardized processes centered on ERP
Another challenge purchasing departments face is dark purchasing – or the shadowy area where items are purchased outside of standardized processes. As a result, a company cannot manage the process and track expenses. In addition to the absence of standardized methods, reliance on manual systems is another important factor behind dark procurement.
The challenge of dark procurement can be addressed with a few standardized systems across the company:
An application system for purchasing goods without contractual obligations, yet providing the necessary control and visibility to power expenditure. Naturally, this requires pre-approved suppliers who can deliver at short notice. An Accounts Payable System (AP) linked to a workflow process that can automatically route purchase requisitions to relevant approvers. Another feature to consider is artificial intelligence (AI) to detect anomalies and potential fraud in the AP process. Purchase order functionality, where a purchase request can be routed through different managers with corresponding authorization levels until the final stage when the request is converted into a purchase order. By integrating the procurement and requisition process with material requirement planning, the procurement team can enforce the use of approved suppliers in the procurement process and implement a predefined procurement policy. Purchasing budget management and wasting money on dark procurement is increasingly becoming a governance issue for the stakeholders. These systems must be part of an Enterprise Resource Planning (ERP) platform, which provides the necessary controls and traceability to set limits and prevent overspending or fraudulent transactions. The ERP system can produce standard reports and signal deviations to decision-makers.
3. Leverage actionable insights for better query accuracy
Creating an environment with enhanced visibility across the entire supply chain requires data and actionable insights. According to the SYSPRO survey, nearly half of the companies have invested in the Internet of Things (IoT) to improve data collection in the supply chain.
The problem with this approach was that only 20% of companies invested in data analytics tools and only 5% in Machine Learning (ML) and AI for real-time interpretation of the additional data collected. This can lead to a serious “lack of insight” if not addressed.
ERP systems already contain a vast amount of real-time data, which can be fed into ML and AI tools to predict potential disruptions and give time to mitigate risks. Data from third-party tracking tools can also be integrated into the ERP system.
Today’s procurement leaders must create a procurement process that allows for contingencies for logistics and commodity disruptions, manage multiple suppliers, and consider tariffs that affect raw material costs while finding alternatives to embargoes and trade wars. This will help them manage the global procurement plan and associated supply chain. By using a suitable ERP solution, it is possible to streamline this process further, making the supply chain a strategic advantage for a company and distinguishing it from its competitors.
