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Unit 5: Procurement and Manufacturing Strategies

works or service which is required either as a raw material or for operational purposes for a Notes
company or individual. Vendor development is a key function in procurement. Sourcing and
vendor development are some of the skill sets required to be developed by Procurement team.
Procurement function works closely with procurement logistics or inbound supply chain.

5.1 Procurement Strategies

Effective procurement strategy to support supply chain operations requires a much closer
working relationship between buyers and sellers than was traditionally practiced. Specifically,
three strategies have emerged: volume consolidation, supplier operational integration, and
value management. Each of these strategies requires substantial collaboration between supply
chain partners and should be considered as stages of continuous improvement.

5.1.1 Volume Consolidation

An important step in developing an effective procurement strategy is volume consolidation
through reduction in the number of suppliers. Beginning in the 1980s many firms faced the
reality that they dealt with a large number of suppliers for almost every material or input used.
In fact, purchasing literature prior to that time emphasized that multiple sources of supply
constituted best procurement practice. First, potential suppliers were continually bidding for a
buyer’s business, ensuring constant pressure to quote low prices. Second, maintaining multiple
sources reduced the buyer’s dependence on any one supplier. This in turn served to reduce the
buyer’s risk should a specific supplier encounter supply disruptions such as a strike, a fire, or
internal quality problems.
By consolidating volumes with a limited number of suppliers, procurement is also positioned
to leverage its share of a supplier’s business. At the very least, it increases the buyer’s negotiating
strength in relationship to the supplier. More important, volume consolidation with a reduced
number of suppliers provides a number of advantages for those suppliers. The most obvious
advantage of concentrating a larger volume of purchases with a supplier is that it allows the
supplier to improve economies of scale by spreading fixed cost over a larger volume of output.
Additionally, assured of a volume of purchases, a supplier is more likely to make investments
in capacity or processes to improve customer service.

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Caution When a buyer is constantly switching suppliers, no one firm has an incentive to
make such investment.
Clearly, when a single source of supply is used, risk increases. For this reason, supply base
reduction programs are almost always accompanied by rigorous supplier screening, selection,
and certification programs. In many instances, procurement executives work closely with others
in their organization to develop preferred or certified suppliers. It should be noted that volume
consolidation does not necessarily mean that a single source of supply is utilized for every, or
any, purchased input. It does mean that a substantially smaller number of suppliers are used
than was traditionally the case in most organizations. Even when a single source is chosen, it is
essential to have a contingency plan.
The savings potential from volume consolidation is not trivial. One consulting firm has estimated
that savings in purchase price and other elements of cost can range from 5 to 15 percent of
purchases. If the typical manufacturing firm spends 55 percent of its revenue on purchased items
and can save 10 percent through volume consolidation, the potential exists to deliver a $5.5
million improvement on revenue of $100 million to the bottom line.

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