Proactive Approach to Procurement Amidst Price Fluctuations
April 1, 2020
Price volatility is a complex issue in procurement. The changing tide of product and material pricing means uncertainty and risk. A proactive approach to procurement can help an Original Equipment Manufacturer (OEM) avoid getting pulled down by a pricing riptide.
After decades of being overlooked, procurement has taken its seat at the strategy table for business. Recognizing that supplier-partner relationships have important reverberations on the business bottom line, manufacturers understand that managing the dynamics of pricing is critical. The procurement department is as well situated as other business areas to make decisions “that reduce costs, retain customers and obtain first mover advantage.”
With the ever-increasing amount of data and management tools available today, it is easier for the procurement officer to gather information and points of data to understand what is affecting price. With insights into historic trends, factors impacting the market price and more, procurement can make informed decisions. The days of relying on “gut feelings” are gone.
“It’s not uncommon for a concerted effort to yield annual supply chain costs savings of between US $2 million and $10 million, depending on the size of the company. — Rob O’Byrne, CEO, Logistics Bureau”
Proactive procurement is a more strategic view of purchasing. Procurement still looks to manage supply distribution, inventory levels, and outsourcing. Yet proactive procurement takes a longer-term look at the organization’s goals and develops strategies to align with and add value to those objectives.
In proactive procurement, the person in this role plans a purchasing strategy in advance, taking many factors into consideration. These could include:
- What new products or services will we introduce next year?
- What changes to existing products or services will we be making?
- Are we discontinuing any products or services in the next year?
- Can we anticipate decreased or increased demand for any particular products in the next year?
- What products have experienced erratic pricing patterns in the past several years?
In a proactive approach, the person in the procurement role collaborates closely with supplier-partners. This can involve communicating the answers to the above questions to supplier-partners and asking for their expert insights. What trends are they noticing? Building this kind of effective supplier relationship can be a source of competitive advantage. Further, it can support a shift in procurement perspective. Instead of thinking of cost reduction as the priority, the procurement department can focus instead on value creation.
In collaboration with supplier-partners, you may be able to find alternative options for a revision-prone product. A fabricated part that typically receives a “wet” finish may be better suited for powder coating, for example. A heavy metal fabricator can work with your team to design, prototype and produce the parts that meet your specific requirements, across a variety of design stages and market demands. By apprising the supply chain partner of your concerns about market volatility, they may be able to assist with the planning efforts needed to keep your equipment production lines moving more consistently.
Being proactive in procurement means seeking out opportunities for improvement throughout the supply chain. By looking to anticipate the likelihood of disruptions, such as those experienced with COVID-19, the procurement team can work to proactively initiate, develop, anticipate and implement solutions.
Proactive procurement requires quality data. Developing a strong relationship with supplier-partners can provide better access to the kind of information needed to forecast and hedge. Anticipating and adapting to price volatility comes from informed value chain analysis.
Another essential part of proactive procurement is considering customer satisfaction. What the customer wants, “not just what you think they want” must shape your strategy. Your customers need to see value in what you are offering and it has to meet their needs. Otherwise, you’re wasting your time procuring the necessary materials in the first place. The ability to better understand your customer leads to greater sales, profits, and loyalty. All of this can help fortify your business in the face of price volatility.
Peace of Mind
Combating price volatility isn’t the only reason to actively seek opportunities to think long-term with procurement practices. Proactive procurement offers many other benefits including fewer surprises, mitigated risks, and improved transparency. This approach can also help find greater value and enhance service levels and product quality while improving supplier-partner relationships.
Market volatility is to be expected. In a late 2018 Institute for Supply Management Survey, with A.T. Kearney, price inflation was a top concern for 63% of business leaders. Commodity costs, geopolitical uncertainty, and even now with the spread of the Coronavirus, are all adding pressure to the procurement professional’s efforts.
Working proactively to manage costs through improved relationships, greater inventory management, and using data to forecast and hedge and understand customer wants and needs can all make a positive impact. With intentionality, procurement can better align its efforts with business objectives to deliver greater value throughout the supply chain.
Explore how a strategic metal fabricator can help you find opportunities for your industrial equipment manufacturing company, as well as better handle changing market demands and disruptions by reviewing the available solutions offered by Miller Fabrication Solutions today.