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Creating Competitive Advantage through Procurement and Supply Chain

By Mahesh Khetan, AVP - Supply Chain Management, Pantaloons Fashion & Retail

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Mahesh Khetan, AVP - Supply Chain Management, Pantaloons Fashion & Retail

You must never try to make all the money that’s in a deal. Let the other fellow make some money too, because if you have a reputation for always making all the money, you won’t have many deals.”  - J. Paul Getty

Historically, Procurement has been taking a back seat when considering development of the core competencies of an organization. In a supply chain domain, competitive advantage is achieved by two deliverables:

• Reducing costs

• Increasing responsiveness to customers' needs.

Both of these can be gained by Excellence in Procurement which, is now evolving into a far more strategic discipline.

In today’s retail environment, strongly influenced by malls and e-commerce, the consumers have too many choices conveniently available. Price and availability benchmarking with the competitors is far easier. So, if a product is not available or even slightly costlier in a store, consumers are much more likely to shift loyalty. Procuring continuously at a competitive price and getting each consignment delivered at the right time have become sources of competitive advantage. To achieve these, there are few megatrends mushroomed in the recent past:

Supplier Relationship Management

“Tell me and I will forget, show me and I may remember, involve me and I’ll understand.” - Chinese Proverb

Selecting and managing relationships with proven suppliers is extremely critical. It is about aligning the whole enterprise around the task of managing a specific supplier based on a clearly documented relationship strategy. Creating Join Business Plan (JBP) with strategic suppliers over a 3 year domain can help them to plan their capacity expansions based on your needs and this leads to transforming you as a preferred customer. 

Online Reverse Auction

A reverse auction is a type of auction in which the roles of buyer and seller are reversed. Reverse auction tools have been around for more than 20 years, but have only recently become increasingly popular. Advantages of reverse auctions include reduction of purchasing costs, increased efficiency in the market, enhancement of the procurement process, and access to a global supplier base as:

• Suppliers are able to see the bids of others and thus buyers benefit from vendors “fighting the price out.”

• Bidding is not limited to those physically present. It removes geographical limitations and leads to global searches for the best price.

• The reverse auction’s ability to include a larger number of suppliers and keep the bidding process transparent, makes it possible for a supplier’s excess capacity to be effectively utilized to meet the buyer’s demand.

Outsourcing the Procurement Process

Eighty-five percent of the reasons for failure are deficiencies in the systems and process rather than the employee. The role of management is to change the process rather than badgering individuals to do better.” - W. Edwards Deming.

Procurement can be very complex and cost consuming in many large companies, thus some of them are outsourcing procurement rather than building their own world-class procurement capabilities, like Amazon, Tesco and Wal-Mart. A procurement outsourcer can leverage their economies of scale and have the experience and trained staff that cut costs and enhance efficiencies. Smaller companies that have experienced growth spurts and have few internal purchasing resources are also outsourcing procurement to take advantage of external structures and expertise.

Analytics Playing an Increasingly Important Role in Procurement

Vendors and manufacturing organizations are moving from plant-level production planning to a demand-driven focus. Demand planning is a key function of large-scale production. Large vendors usually have a manufacturing plant in almost every major country, in every region, and it depends on labor, materials and customer demand when and where they will manufacture the products most efficiently. Some vendors also outsource the actual manufacturing and don’t hold stock themselves, but supply their partners on a per-order basis. Obviously, this makes it imperative to have the right amount of raw materials available at the right time and at the right plant, and to make sure there’s adequate stock of these materials to service incoming orders.

Careful demand planning therefore plays a crucial role, because how well vendors manage this function impacts directly on their partners’ business. If vendors don’t plan properly, their partners run into restrictions.

One of the first steps in becoming a sustainable business is to change the processes by which the organization purchases through its supply chain. What is interesting about these trends is that they indicate a large broad opportunity for the procurement function to increase their visibility and relevance. And it will likely change the very core of how companies look at procurement as a competitive advantage at the marketplace.  

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