Strategic Important of Logistics in Supply Chain Management

Logistics has been defined as the Planning, execution, and control of the procurement, movement, and stationing of personnel, material, and other resources to achieve the objectives of a campaign, plan, project, or strategy. It may be defined as the 'management of inventory in motion and at rest.‘

And if we look at the definition of Supply Chain, it has been defined as:- 

The continuous planning, developing, controlling, informing and monitoring of action in order to 

have an integrated supply chain process which will meet the objectives and goal of the company.

Thus, need to emphasis here that, the logistics operation is one of the most important function in 

supply chain activities.

The logistics responsibility to managing traffic management, warehousing, order fulfillment

inventory control, order entry and planning material movement is the the key for any successful 

supply chain operation. Without effective management of these key function,  any plan toward 

supply chain efficiency will run aground.

Why we need Procurement in Business?

All businesses are set up for one single purpose, i.e to make plenty of money for the shareholders. In order to do so, two thing need to happen quickly;

a) Increase the sales order by capturing more market share
b) Reduce the overall cost of operation to stay efficient

To increase the sales and capture more shares in the market place, the company need to have a quality product which is also competitive. Without these two value, it will be extremely difficult to generate more income for the company business.

In order to generate more sales, the company will need efficient output. To achieve this, the production department need to increase productivity either through efficient labor workforce or through investment of new technology. Beside this, the quality department has to play it part to ensure all operation under control to achieve the specification.

Having done that, efficient costing will not be achieve without having a quality supply with good pricing from suppliers,

Cost of material in certain industry can be from 45% to almost 60% of total product cost, which meant, material cost percentage in the total product cost is very high. And the greatest saving of cost to ensure company stay competitive is from the procurement function.

Beside lowering down of cost to ensure business stay competitive, is the fact that, managing disruption is also part of the objective of procurement.

There are few type of disruption in business operation which need to be managed from procurement perspective.

a) Quality issue from raw material supply by supplier
b) Disruption to supply due to delivery issue or event which need to be overcome through risk profiling
c) Poor performance by business partner which supply raw material and accessories to the company.

In the end, the real need of Procurement in business is very important and the role is extremely critical and strategically, the strength of the company rely on few area of operation and one of the most major area is procurement.

Strategic Procurement Activities

Procurement management is a strategic role and the key objective is to meet the business goal of the company.

In order to achieve the demand placed on the operation, the procurement function by itself must able to play the part effectively and to do so, there are certain number of area which need to be focus
upon.

These parameter which need to be review and evaluated are as per diagram below.

Internal Analysis -  the need to review all current business needs and internal operational issue. What are the strength and weakness adherent to the current business structure need to be identified. For example, where is the company position in term of marker share? Is the company cost of operation is at the best optimum level or need to improve? What the contribution factor which causes the company business to be at the undesirable level? Is the company need to refocus onto more strategic plan for sourcing to reduce cost or to be in better position to negotiate? Are there suppliers whose performance is below average and contribute to the company weakness?

Supplier Management -  what type of strategy need to be in place to have better control over supplier performances? Is the Supplier Relationship and Performance Management need to be further strengthened? Is the company practicing a reactive supplier management system instead of to be more proactive? What are the percentage of supplier who is actually performing to the level desired? Pareto law indicated that, normally, 20% of root causes is helping to create 80% of the overall problem. Does the company procurement chief operating officer need to reevaluate this area and arrange a strategic strategy to ensure company goal are met?

Market Intelligence -  Strategically, one of the most critical influence which can contribute to a business growth or decline will be the external environment condition. The need to gather information and run a risk profile on a number of key issue is a necessity to ensure procurement strategic strategy can be achieve. Taking step to overcome future potential issue is a pre condition to overcome many business issue.

Sourcing Strategy - Depending on the analysis done, confidence level on the supplier performance and output gathered from the market intelligence, a sourcing strategy can be put into place to determine the objective to be met.

Overall cost leadership – sourcing to provide best optimum cost to the customer or company. Review supplier with high costing and look for cheaper alternative.

Differentiation strategy -  sourcing for new source which offer a different level of services and product. This to act as alternative offer  to the marketing of new niche range or provide a different more efficient process for production to be more efficiency.

Focus on business need – sourcing to ensure company interest in the market place is secured by addressing the need on the market segment. Example sourcing for material or product which will add value to a particular market segment. This could be new development or revising current product by adding new material or product offering.

Inventory Management - one of the key procurement focus is inventory. This area are often ignored by procurement or purchasing professional due to misconception that inventory management is the responsibility of the logistics and warehousing team. While, this is true, but the impact of poor inventory control lead to internal bleeding of resources and lead very often to fire fighting to resolve issue. Poor inventory management lead to many other related issue which will impact procurement role. Example, poor inventory control resulting in high level of unproductive stock kept and this will lead to additional cost of operation and leading to high cost for the businesses.

Contract Management -  having a well written contract does not solve all problem if the contract is not managed effectively, Contract management include step to preempting potential issue from occurring instead of relying on the contract to challenge non performances. Best practices in contract management are broken down into 4 different area of best practices.  Control , Interact, Adapt and Planning.

Procurement main task is to manage the supply of material to the

businesses efficiently. With this in mind, the key strategic 

objective must be inline with the overall business goal.

  

What is Procurement compare to Purchasing?

The word Procurement and Purchasing has been used interchangeably by many, including those who are engaged in the profession.

What is the real difference between Purchasing and Procurement?

I will explain in this blog the differences and also the objectives of the two job description. First of all, Purchasing is the origin term use to meant "material man". It was coined by Charles Babbage in 1832 to describe the responsibility of someone in the industry who will select, purchase and arrange delivery of article required for the construction of railway track.

These term were use since then to described the arrangement of the selection, buying and delivery of material to the business need. These were described as an administrative function.

During the expansion of the industrial revolution in the early 20th century, there begin a need to run purchasing into a managerial function. The scope of the task begin to expand and it take up a strategic role in businesses.

Thus, we need to break up the responsibility of each of the respective role as following:-

Purchasing - is the tactical role in business organization where it function as the executioner of the task of sourcing, selecting, issue purchase order and resolve immediate operational issue to ensure the material are supply on schedule to the business.

Example of tactical role in purchasing will be to resolve supply problem which impact production or business needs and organize the sourcing of new supply.

These are tactical role to ensure the business operate smoothly. The objective of the purchasing function is such that, the ultimate aim is to meet the procurement goal which are strategic to the business.

Procurement -  is the managing of the full spectrum of material supply to the business and it function by setting long term strategies to support business goal.

Example of strategic objective of procurement is to plan strategies in order to meet business goal and these objective ranging from developing supplier management strategies, planning long term cost reduction in order to stay efficient, set up strategic objective to achieve in sourcing, planning, inventory management and other task relevant to ensure business goal are achieve,

In summary, we can conclude, purchasing ultimate agenda is to meet the objective set by the procurement management while procurement set the objective to achieve business goal.

It is a Tactical strategy (short term and immediate needs) versus Strategic strategy (long term plan)

Procurement Contract not the single solution to all ill of supply chain

One remark put to me recently as following, "I am getting fed up with the project engineers handling the package as there were too many issues and I need a proper contract to enforce it!"

First of all, the purpose of a contract, especially in managing supply chain operation or project is to put into writing the following parameter:-

a) Quantity of supply in purchase or to build for a project b) Value of the contract
c) Quality specification
d) Duration of the contract
e) Term of payment
f) Claim clause, including penalty for non performance
g) Lead time to supply or date to complete the job
h) Delivery method for supply of material
i) Safety and Health matter in project
j) Under which legislation or law this contract is covered under, especially if this is an international procurement contract
k) Copyright issue
l) Variation job which was not included in the job scope for project
m) Various processes which need to be adhere to for any abnormalities or decision to be made

So back to the comment put to me, my next question to him was, " Actually what the problem?"

The reply given to me was that, there is always claim made by the supplier or contractor which was not specify in the contract and this create too many following up, questions to be answered and decision to be made if those claim can be pay or otherwise.

My reply to him was as following:-

a) As long as everyone follow to the content in the contract, there will be very minimum issue to be managed on ad hoc basis

b) Supplier, contractor and the managers managing the contract must follow all information stated in the contract and issue like the above complaint occurred because there are too many issue not followed to the script, for example;

• operation processes were not follow the the procedure and allow thing to bypass the system 
• self decision made without looking into the contract proper
• variation order for project or excess material supply was accepted before referring to the method of deciding as stated in the contract
• specification was waived but not communicated to the necessary level
• deadline expire and no action taken on penalty
• conflict of management as in some cases, decision was made by someone which are not supposedly make such decision and these decision not recognized

Such issue need to be resolve by having regular update or meeting and having ad hoc discussion as and when issue are created for immediate disposal of such matter.

The life cycle of the contract management is important to make sure all issue are recorded, performance updated and communication with all parties are file in system to reduce any conflict. Non recording of the issue will create unwanted conflict during the course of the contract or at the end of the job scope.