The success of any product can be directly related to material procurement - no matter how simple or complex the product is. Just like a tower that can’t stand without its base, most companies with poor supply chain management will struggle and fall by the wayside. We share 7 tips on what CPOs and chief supply officers should look for in materials procurement.
What happens in purchasing runs through the entire value chain in the company. Properly positioned, purchasing helps bring products to market faster, drive innovation and stay within established cost parameters. This is about much more than just the lowest purchase price - supply chain management has not been elevated to a science in for nothing.
To ensure that the full potential for value creation can be exploited at this important interface between all internal and external stakeholders, we have compiled the seven most important tips for you when procuring materials.
#1: The closer you buy to the manufacturer, the better
Every middleman and reseller that sits between the manufacturer and you will charge their own markup on the product. Generally speaking, the closer you can get to the manufacturer, the cheaper it will be.
So, if you've relied mainly on distributors for your materials, you should buy your materials directly from the manufacturer - or at least from a wholesaler or importer - if possible. Purchasing directly from the manufacturer will almost always yield the lowest cost.
#2: Compare conditions with each other
Compare, compare, compare: Just because a dealer was able to offer the most favorable prices at the beginning of the business relationship does not automatically mean that this is still true today. As dynamic as the market is, so are its players. Prices change, new players emerge, old players lose importance. If you are in the process of revising your supply chain management, you should definitely consider these external changes in the market as well.
The comparison should by no means stop at the purchase price: Incidental purchase costs (shipping charges, fees for small delivery quantities, etc.) should be compared just as much as all of the other cost parameters. For example, it may make more sense to purchase materials at a slightly higher price if the associated dealer can offer more reliability or can deliver at shorter notice. General conditions such as cash discounts or extended payment terms can also have a positive impact.
#3: Learn to negotiate properly
Negotiation skills and the psychology behind them are not only extremely important in the selling process, areas such as purchasing, can greatly benefit utilizing negotiation techniques.
If you clarify your starting position before a negotiation meeting, set goals for the negotiation, prepare arguments, make comparisons, and - last but not least - display a certain amount of self-confidence, you have already ahead of the game. You'd be surprised what savings or monetary benefits you can often still negotiate out.
#4: Use supply chain management tools
Material procurement is an ongoing process. A lot of data comes together in purchasing over years which at times can overcomplicate or add confusion to the process. If you're not using product- and quality-related supply chain management systems, you're most likely reducing your profitability. Large amounts of data provide powerful starting points for analysis and coordination.
Supply chain management (SCM) software tools, for example, simplify the flow of information and finances between suppliers and purchasing. With the right supply chain management software, you can optimize the entire supply network by keeping costs as low as possible, reducing waste and complaints, and minimizing the risk of delivery delays or failures.
#5: Don´t rely on just one supplier per product
Single sourcing, or the procurement of materials through a single supplier, is a procurement strategy that is especially popular among small and medium-sized companies. While multiple sourcing (material procurement from as many different suppliers as possible) greatly reduces the risk of delivery failures, the increased administrative effort, omitted quantity discounts and the increased risk of ordering errors can offset the benefits.
However, if you choose dual sourcing and rely on two different suppliers for purchasing, you reduce the likelihood of delivery delays and failures without having to bear the risks of multiple sourcing.
The following benefits can be derived from dual sourcing:
- Much lower risk of a supply shortage
- Better prices due to the competitive situation
- Increased pressure to innovate at the supplier/manufacturer due to the competitive situation
#6: Ask yourself the make-or-buy question
Surely, you've asked yourself the make-or-buy question at some point in your business: Which materials and products can and should we make ourselves, and which should we buy? However, this question often comes up in the early months or years of a business - and usually never revisited.
Companies should be asking this question periodically on all products. Companies grow, and with them, so do their opportunities. The market is in constant flux, raw material prices fall and rise, technologies become cheaper and cheaper, competitive situations and partnerships rise and fall. It may well be that it now makes more economic sense or is technologically feasible to simply manufacture certain materials and products themselves that they still source externally today.
#7: Communicate with your suppliers
"I already communicate with my suppliers," you may be thinking to yourself now. However, it is important to remain in engaged in the day to day business with them but also communication a longer-term strategy. Your growth should not be a surprise your suppliers. Let your suppliers know what is planned for you and what might change in the future. This gives them the ability to better prepare to meet your needs and builds trust and loyalty - two traits that should not be underestimated in purchasing.
Conclusion
In operations as complex as a manufacturing company, there are countless adjusting screws that can be turned to increase the company's success and ROI. However, purchasing forms the base of this complex tower - if something goes wrong here, it affects the entire value chain. However, if you follow our tips on material procurement, you are already laying a rock-solid foundation for your own purchasing.
Have you already been thinking about a second supplier? As the operator of a flexible machining center for small and large series products on behalf of customers, LEWA Attendorn may be just the partner you need. Feel free to contact us so that we can analyze together how we can support your company.
