Why Is Procurement Vital to Supply Chain Management

Why Is Procurement Vital to Supply Chain Management

Why Is Procurement Vital to Supply Chain Management

Procurement is important for businesses, large or small. The sheer impact of procurement as a service market is apparent by an estimate according to which it is expected to reach USD 9 billion by 2027 at a CAGR of 8.7%. From addressing the demand patterns to ensuring smooth business operations, effective procurement strategy makes sure that you acquire goods or services at the best available price and quality. 

Since procurement is a critical part of complex supply chains, it can directly affect your profit margins and customer satisfaction. In this article, we will understand more about the role of procurement in supply chain management and how these terms, although used interchangeably, are different. 

Difference Between Procurement and Supply Chain Management

In simpler terms, procurement is the process of acquiring goods for your business operations. Whereas, supply chain management involves turning these goods into finished products for your end users and delivering them efficiently to meet the needs. 

Here are some of the key differences between procurement and supply chain management.

  • Procurement manages the inputs that are needed to run the day-to-day business operations. On the other hand, supply chain management manages the outputs and delivery to the customers as effectively and efficiently as possible. 
  • Procurement can be viewed as one of the components of supply chain management. In fact, supply chain includes functions including market research, quality control, procurement, logistics, distribution, finance, operations, sourcing, as well as customer service.

The Importance of Procurement in Supply Chain Management

The primary role of procurement is to manage supplier relations to ensure timely and quality delivery and reduce risks. It is not just about saving costs and managing procure-to-pay process but to strategize the entire process of selecting vendors, defining quality controls and compliance’s, creating purchase orders, negotiating, managing inventory, and much more.  

Here is why procurement is vital to supply chain management.

  • Affects the profit margins

Businesses need a consistent yet economical supply of goods and services to deliver. Thus, purchasing is a major part of any procurement team’s budget. Businesses can create more value by purchasing the required goods or services at the best possible prices to lower the operational costs. Managing costs, therefore, has a direct impact on your business’ bottom line or profitability and financial wellness.

  • Improves efficiency  

An effective procurement strategy helps you create a reliable base of suppliers which align with your business’ interests and goals, offers scalability that can help reduce supply and production costs, as well as analyze suppliers performance to eliminate underperformers. 

  • Drives growth strategy 

Accelerated growth requires scale of economies to meet the increasing demands. This may sometimes result in a strained supply chain which often occurs due to limiting capabilities of existing suppliers. This is where procurement strategy comes in—procurement teams can identify new, competitive suppliers that can support the rapid expansion and growth of the companies at critical junctures to ensure there is no supply disruption. 

  • Reduces suppliers risk  

It may happen that a supplier may fail to deliver on the agreed-upon commitments. Such disruptions may lead to delayed production and delivery, increased production costs as well as affect the reputation. An effective procurement strategy can help manage suppliers risks associated with operations, compliance, finance, and strategy. Identifying reliable suppliers, nurturing relationships, and improving communications are all part of procurement strategy to mitigate supplier risk. 

  • Impacts reputation 

The businesses are moving towards sustainability to reduce the impact on the environment. This means identifying responsible suppliers who ensure fair pricing, conservation, and labor wellbeing. Moreover, with the advancement in technology and access to global suppliers, the supply chains have become more complex. Businesses, thus, have to be more vigilant in assessing the suppliers performance to maintain high quality controls. Procurement strategy can affect all of these factors and affect the reputation if the ethics and commitments are compromised.

Impact of Technology on Procurement

Technology is transforming the supply chain—cloud computing, artificial intelligence, analytics, and remote accessibility have enabled businesses to deliver more than expected. It has also increased the overlaps between procurement and supply chain management, making supply chains smarter. However, the source suppliers also need to adopt technology and smarter solutions over legacy systems to stay ahead of the competition. 

Businesses, thus, need to automate and streamline their procurement processes including vendor management, inventory management, reconciliation, contract management, and much more to ensure customer delight and maintain financial wellness. 

Induzbuy’s procurement management solution is a trusted choice among small and larger organizations and can seamlessly integrate with your existing ERP systems.To know more how we are helping businesses, visit Induzbuy