I am currently busy with my research and continuously come across the phrase that procurement activities contribute positively to the bottom line, but have not really come across a method to quantify this 'positive contribution'. In a manner that a manager might be able to use in practice.
Leaders rely on the strategic capabilities in procurement to reduce costs and maintain competitiveness. Effectively re-engineering the procurement function can improve operational efficiency.
- Understanding required functionality of the component being designed,
- Enable competitive cost manufacturing process
- Identify the best suppliers
- Create Multiple Sources
- Workout logistics and lead time including Costs
- Minimum Inventory
- JIT
- Control Wastage and Obsolescence
I agree all the points mentioned by Prof. Umachandran may have a greater or lesser effect on procurement's contribution to the bottom line, but how to calculate a quantifiable contribution to the bottom line?
May be for an e.g. procurement spent 1% more on a product of hire quality, how would that action reflect on the bottom line? Under a cost driven performance indicator this means that procurement did not do a good job the bottom line should be that 1% component cost increase worst off, right? On the other hand the higher quality product reduced production time and relieved resources by eliminating rework, let's say that the freed up resources were utilised in a productive manner, other wise the higher quality parts will not really have an impact on the bottom line, but now one can say the higher quality parts reduced operational costs by say x%, this imply that the effect on the bottom line would be x% in cost reduction - 1% of component cost, that then still leaves the procurement with an in crease in price on its PI. And this cycle can be repeated for all the areas mentioned above.
Thus the question how can one quantify procurement's contribution to the bottom line?
@ Cornelius
Let us take a Foundry Operations, where the realization per one ton of Casting (eg. Cast Iron is Rs.74,000); the major contributors is Materials (Raw materials + Consumables) which is averaging 50%. The materials are from natural sources and of bulk quantity such as Sand, Steel Scrap, Benoite etc., Hence strategic procurement practices such as speculative imports, hedging, collaborative buying along with other foundries etc., Continuous monitoring of prices and markets globally yields better realization. Price Negotiations with vendors and Multiple source of supply are very vital.These affect the bottom line delivery the supply chain cost needs to effectively handled.
We make it a point during the performance goal setting process that the materials personnel have a prime goal of zero loss of production (quality ensured) due to materials with cost reduction targets and alternate materials development as part of their goals in addition to the above mentioned way of working.
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