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The order team

While COVID-19 offered a sobering reminder of the limits of our public healthcare systems, it also shed light on the previously “invisible” supply chain system we all rely on. Within weeks of the pandemic, shortages and delays revealed the impact and relative delicacy of the massive network enabling our daily life and work. 

 

Despite our collective crash course on supply chain management, there remains much confusion about where the procurement function ends and supply chain management begins. But understanding the difference is the first step in improving your company’s operating efficiency, so the distinctions are important. 

 

With that important goal in mind, today we’re taking the time to disentangle the roles of purchasing, procurement, and supply chain management within organizations.

 

By the end of this article you’ll know:

 

  •    The major functions of the Procurement and Supply Chain Management departments within an organization.
  •    How procurement and supply chain management differ, and where they overlap. 
  •    How supply chain management and procurement can work together to produce better outcomes.   

 

What is procurement?

 

In simple terms, the procurement process focuses on evaluating new suppliers and working with existing ones to supply raw materials, goods, and services for your business. The procurement function is largely one of relationship management. Great procurement teams foster strong partnerships with both their internal clients and their external suppliers in order to meet operational objectives.

 

Procurement serves as a necessary bridge between the finance team and departmental stakeholders in larger organizations, making it easier for departments to get what they need to produce goods while providing accountability and data for financial approval. 

 

Procurement is sometimes confused with purchasing. While the two terms are used interchangeably within many organizations, there is a distinction. Where purchasing describes the act of getting and paying for materials, procurement covers a much wider range of activities, such as:

 

  •    Needs identification: Understanding company needs and initiatives, developing forecasts, and planning for resource procurement to meet deadlines.
  •    Supplier management: Handling the supplier lifecycle from evaluation and onboarding to renewal or termination. 
  •    Negotiation: Using benchmarking and leveraging relationships to secure the best terms and pricing.
  •    Contract management: Ensuring suppliers meet contract terms and deliver goods on expected timelines.
  •    Receipt of goods: Receiving and reconciling invoices against the purchase requisition, purchase order, and invoices to ensure accuracy and correct delivery of goods.
  •    Payment: Approving, coding, and processing supplier payments in a timely manner. 

 

What is Supply Chain Management (SCM)?

A supply chain is the network of suppliers, service providers, logistical partners, and other organizations who work together to supply companies with raw materials, manufacture those materials into products, and deliver them to the end-user. Where procurement is the bridge between upstream suppliers and the organization, supply chain management is the bridge between the downstream network, and the promotional and logistics partners connecting the company and its customers.

 

It’s important to note that supply chain management is more than just shipping goods. While delivery is certainly part of supply chain management, it represents only a small portion of the overall function. Managing the manufacturing and the flow of goods to your buyers encompasses a much more complex set of processes. 

 

Supply chain management teams are responsible for:

 

  •    Inventory management: Managing and tracking the intake of both raw materials and finished goods. Maintaining inventory levels of necessary components to meet production timelines.
  •    Manufacturing: The process and timeline of turning raw materials into products, and the methods of improving efficiency in their production.
  •    Supply chain risk management: Evaluating the stability of the supply chain network, and the ability of your suppliers to help you get goods to market on time and at expected cost. 
  •    Quality control: improving the overall condition of products and reducing manufacturing issues and product defects. 
  •    Delivery and return management: Getting finished products from the manufacturing site or wholesale warehouses to distribution points (retailers, etc.) through logistics providers. Handling returns of defective or unwanted products. 

 

How do procurement and supply chain management differ?

Procurement and supply chain share the core objective of driving organizational success, though they achieve these in different ways. Procurement is a subset of the overall supply chain process.

 

Some key differences between the two are: 

 

  •    Procurement is “what goes in” in terms of production. This means that procurement professionals’ main goal is to acquire materials and services for use. Supply chain management is “what comes out” of those materials. Supply chain professionals are concerned with taking those procured raw goods and services and transforming them into products.
  •    Procurement is a support system for production. Supply chain management serves as the agent of production and distribution of goods. 
  •    Procurement’s objectives center on capital efficiency (finding ways to save money and improve value), whereas supply change focuses on operational efficiency (finding ways to reduce friction and distribution costs). 

 

What does procurement and supply chain management have in common?

 

Procurement and supply chain management have several objectives and critical activities in common. For example, both departments:

 

Identify cost-saving opportunities

Procurement’s main concern is with spend optimization and identifying ways to save money and improve the company’s bottom-line performance. On the supply chain side, the focus is on increasing the quality and value of goods to improve the topline. 

 

Procurement and supply chain both save money by maximizing spend efficiency on new projects, analyzing current projects and contracts to realize cost reduction, negotiating prices and terms to maintain the efficiency of current suppliers and vendors at renewal time. This may be achieved by practicing an effective supply chain strategy or employing procurement software for process automation.

 

Improve operational efficiency 

On the procurement side, efficient administration of the purchasing process shortens the time to performance for purchases and reduces the research hours necessary to execute deals. 

 

On the supply chain side, building efficient production and distribution channels allows you to get goods to market faster, with more cost-effectiveness. Improving these processes on either side saves hundreds of hours in employee wages and increases the productivity of your manufacturing function. 

 

Build Strong Supplier relationships

Strong supplier relationships play a critical role in both procurement and supply chain. By improving your strategic sourcing practice with suppliers and distributors, you can leverage better pricing, reduce the time spent evaluating suppliers, and streamline functions like goods requisitions, order processing, and invoice payment. 

 

Ways supply chain and procurement can work together better

 

Though procurement and supply chain operate independently, their coordination is essential to progress. They are, in essence, the two legs responsible for your organization’s forward motion. 

 

Three ways procurement and supply chain can improve overall performance include:

 

  •    Improved cross-departmental planning: Planning and resource allocation for the manufacturing and distribution functions should be a team lift. Improving interdepartmental alignment can produce more accurate forecasts, offer a holistic view of contracts terms and their potential impacts, reduce capacity and warehousing friction, and improve the time from raw materials acquisition to delivery of goods. 
  •    Increased data transparency: De-siloing data can greatly improve the ability of both departments to reduce lead times, identify trends, and realize opportunities for cost savings and efficiency. Integrated software can bring the supply chain management process into full view, allowing procurement to better support supply chain functions and improve performance times from beginning to end in the production cycle. 
  •    Supplier streamlining: Though procurement many have a well-honed preferred vendor list, extending that concept to embrace an interdepartmental approach can more fully leverage optimal pricing and terms. Doing so can further reduce the time and cost of order and payment processing. 

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If you’re looking to bring procurement and supply chain into better alignment for your organization, schedule a demo to see how Order can help coordinate their efforts.