The Connection Between Procurement, Logistics And Supply Chain Management

Procurement is an intricate network of vendors with several stages that account for many things such as acquiring logistics, building connections with manufacturers and vendors, negotiating the prices, invoicing, shipping notifications, placing orders and tracking receipts.

That being the case, it is still just a small part of a larger process that is known as ‘supply chain management’. Supply chain management is the movement or flow of goods or services throughout the organisation. This includes the procurement of the raw materials or primary services from vendors, the storage and/or refinement stage, shipping to consumers and so on. In essence, it is the active streamlining of the business’s supply and distribution side to maximize the value brought to the customer.

‘Logistics’ is the smallest link on this massive chain, but still important. It refers to the actual moving of products or services from the point of origin to the point of consumption by the customer. So, for example, if a business sells eggs, it needs to get the eggs from the farm to the customer. To do that it will need trucks, crates and drivers to get those eggs from point A-to-B. These physical assets are what is known as logistics and they come under the process of procurement, as one part of the overall procurement process.

Customer Expectations

For starters, customers want to be treated like people. Yes, a business runs on numbers and data, but it is the people that give it substance. The minute you start treating the customer like another number for your bottom-line, they will know. That said, customers expect the company to know, at the very least, some basic information about what they want and need.

Background information gives you insights on those needs and allows you to give the customer a tailor-made experience that is both enjoyable and memorable. The value of a good reputation in the eyes of the public goes a long way in business.

Porter’s Value Chain Activities Explained

The model, as stated earlier, calculates the value that the product brings the customer and the profits made from it as a result. The profits can be calculated by looking at the total cost of production subtracting that from the price of the product. This value is derived from the nine activities that a company engages in, to add value to said product. The activities that help determine all this are divided into two categories, ‘Primary Activities’ and ‘Secondary Activities’.

The primary activities are directly involved in the production and selling of the product. The secondary activities are supporting activities that coordinate the process across the different primary activities. This ensures a smooth and seamless workflow that maximises efficiency.

Logistics Is Not Distribution

Logistics is the area of the supply chain that is concerned with the physical flow of products and goods, as well as non-physical elements such as planning, implementation, organising, mapping and upscaling where needed.

It will vary from organisation to organisation but the general premise remains the same for any logistics activities. The non-physical flow is pretty self-explanatory. The physical elements however are a little more intricate. Let us take a look at the different types of logistics:

Procurement: This encompasses all the logistics needed for procuring goods and raw materials for manufacturing from the external suppliers and vendors. It falls under upstream logistics which is just a broad term that means, the process is located at the start of the production cycle. It is basically sourcing. This area did not receive much attention in the past, but nowadays it is key for sourcing cost reduction by companies. What that means is, just keep an eye on how much you order and get the most cost-effective way to transport it. It will keep the cost of production relatively low throughout the production process.

Production: In this phase, acquired materials move within the various production units of a business and stay within its boundaries. It includes how items are manufactured, packaged, distributed and moved to factories where they are refined, shipped and then stored in warehouses. This comes under the internal stage of the logistics network.

Distribution and sales: Historically, logistics at this point referred to the transportation of goods and services from warehouses or storage, but that has changed. Now it refers to all the equipment and transportation needed to deliver these goods and services to the end-user from warehouses and production units of the company. This comes under the downstream stage of the logistics chain. The logistics of distribution and sales, is not to be confused with the distribution process. Logistics encompasses many different aspects of the movement of goods and services across the business, whereas the distribution process’s primary concern is with activities related to the sales of those goods and services to customers. In this context, distribution is a sales and delivery network that focuses on giving the end-user what they want, and logistics focuses on the ways in which the business can physically make that happen.

Recovery: This process refers to the movement of products that have been returned or recalled, back to the company through logistics channels. Hence the name, ‘recovery’ as the company is recovering the items. It is also known as reverse logistics as the items are moved in the opposite direction of the normal product flow. Recovery logistics can be segregated into five main activities:

1. 1. 1. 1. This includes recycling waste by-products
         2. Handling and overseeing customer returns
         3. To refurbish and repair
         4. Providing full-scale reverse logistics for recalls of faulty products. A good example of a recall is when Samsung had to recall all of its Note 7 units because of dangerous and faulty batteries.

All recovery logistics come as a cost to the company, especially if it is large-scale recalls like that of Samsung. Therefore, you need to budget for recovery logistics before setting up the network.

How Does It Work And Why Is It Important?

Inventory management’s role in all this is to make sure that the company never runs out of these things. To make sure that does not happen, you need to track the market’s level of demand for your particular product or service. This gives you an idea of how often customers purchase your product/services and shows you how the pace at which inventory is should be ordered. 

All this tracking and managing can be taken care of in two broad ways – manually or through software. With software the tracking is automated with minimal involvement of people. The manual method on the other hand, is almost entirely done by people.

Whatever path you choose for your company, it is apparent that inventory is key for any business to operate. Without it, even the supply chain, becomes just an empty system without anything to transfer, move or co-ordinate. Maintaining the right balance is crucial for any business, big or small. This is especially true for the likes of inventory-heavy industries such as the food business.

For instance, restaurants, need to make sure that they maintain a perfect balance at all times, while still maintaining quality (good food needs good ingredients). They have to have enough food that they do not run out on a busy night, but not so much that if business suddenly stops, (say, a sudden lockdown due to the pandemic) they are left sitting there with tons of food rotting in a storage unit.

Business foresight and ability to read the pulse on the market become vital. You do not want to suddenly find that there is a shortage – have the right amount of inventory, in the right place, at the right time. This is why inventory management is important, it lets you know when there is no more food in the kitchen.

So, What Is Distribution?

Now that you have procured raw materials and developed the goods/services, it is time to go to market and sell them – either directly via the Web, your sales force or retail outlets or indirectly through wholesalers, distributors and the likes. Think of it as business networks through which your products or services will reach all end users. In business jargon, these networks are called distribution channels. 

A typical business will use both direct and indirect channels for quicker market access and rise in sales. Take, for instance, any famous cosmetics brand. One can buy its products online, at the company’s retail centres or at the local shop/supermarket. Understandably, the latter gets the stock through indirect distribution, mostly through wholesalers, distributors, dealers and other middle agencies.

Now, let us take a look at the distributors. They are the middle agencies which buy products from manufacturers and sell them to the wholesalers that buy and sell the products to retail stores in bulk. Sometimes the distributor will bypass the whole seller and opt for multiple dealers instead, who specialise in a niche market and deal with very specific products. For a distributor to do their job effectively they need to build and maintain relationships with the manufacturers and stay up-to-date on all the goings-on in the market.

Distributors also manage orders, oversee returns and even sell products on behalf of the brand at times. A good distributor has a thorough understanding of the market and uses that to prompt bigger sales.

How Supply Chain Evolved

Supply chain management (SCM) had started in the colonial era, long before the term was coined in 1982. The New World was being discovered and shipping routes were being established. The need for a supply chain was ever-growing and so, a primitive form of such a chain was developed. The massive shipping routes and delivery systems were broken up into segments where more and more traders and suppliers came into play.

With the advent of the Industrial Revolution, the need for more efficiently mass-produced goods became necessary. This led to the development of the supply chain management to keep up with the sudden spike in demand. By the time Henry Ford had introduced his revolutionary car assembly line for maximum efficiency in 1913, the supply chain had nearly been perfected. 

Later in the century, businesses were struggling to keep up with demand. As a solution to reduce cost while still meeting demand, businesses started to vertically integrate the chain of supply into their operations. They absorbed the supply chain from the top-down, so that they owned and controlled the sources, suppliers, manufacturing and so on. For example, newspaper publications that absorbed all aspects of the business from the supply of raw materials to the distribution of the final edition in order to have a better control of the chain of supply and the final price of the product.

The arrival of globalisation in the 1980s made integration and cross-communication that much easier with the aid of the internet. This grew into what we know today as ‘SCM 2.0’, where even the most complex of supply chains can be managed by companies both big and small, thanks to things like social media, digital democratisation and other collaborative platforms.