There is a strong connection between procurement in logistics and the quality of service a company provides, as every business relies on a steady supply of the resources needed for its operations. Procurement ensures a continuous flow of supplies, materials, and services, making effective stock management vital for its success.
When planning the procurement of stock in a warehouse, key questions to consider include: when should orders be placed, and how many units of each product are necessary, basically – what is the role of logistics in procurement?
In this blog, we explore these questions, delve into the procurement cycle (or process), and break down the operations involved.
Role of Logistics in Procurement:
Procurement is a critical logistics operation that ensures the consistent supply of raw materials or goods to a warehouse, logistics centre, production plant, or store. This function is essential for maintaining the smooth operation of business activities such as production, distribution, or sales.
In the logistics context, procurement is closely tied to concepts like supply and purchasing. From the perspective of a warehouse, procurement is intrinsically linked to the reorder point. When the stock of a particular SKU falls below a predetermined level (often determined by formulas like the EOQ), a purchase or replenishment order is triggered.
This action is crucial in preventing stockouts, which could result in lost sales or even production halts. Therefore, effective procurement management is vital for the sustainable growth of a business.
The Procurement Cycle:
The procurement cycle encompasses all activities from the moment a purchase or stock request is initiated until the product is received at its destination—whether that’s a warehouse, production centre, or store. The cycle concludes when the goods are received, completing the process.
This cycle can vary depending on the type of organization:
Manufacturing or Industrial Companies:
Here, the procurement process connects the warehouse with the production center. Raw materials are stored until needed on the production lines. Once these materials are transformed into final products, they are stored, awaiting dispatch.
Business Enterprises:
In these cases, the procurement cycle is simpler, as the stored products are already finished and do not require further transformation. The company stores these goods until they are shipped to the end customer, a physical store, or another facility.
Key Operations in Procurement:
To implement procurement effectively, several key operations must be taken into account:
Needs Analysis:
Determine what resources the company requires to maintain its activities over a specific period. This includes assessing the quantity of materials, supplies, and services needed for manufacturing or selling a product.
Purchasing:
This step involves acquiring the necessary resources and services at the lowest possible cost while ensuring quality and timely delivery. Choosing the right supplier is crucial, as lead time is a significant factor.
Goods Receipt and Storage:
Once the resources arrive at the docking area, they are stored until needed on the production lines. Finished goods are also stored post-production, awaiting dispatch.
Supply and Dispatch:
Efficiently supplying the production plant with necessary resources ensures uninterrupted activity. Similarly, goods destined for another warehouse or store must be dispatched efficiently to avoid overstock, which can lead to bottlenecks and increased storage costs.
Inventory and Logistics Management:
Effective stock management is critical to the success of all procurement operations.
Procurement operations involve multiple departments within a company, from administration and purchasing to logistics management. Organization and coordination among these operations are essential for optimal procurement management.
Challenges of Inefficient Procurement:
Poor procurement management can lead to several significant issues, including:
- Shortages or Stockouts: Running out of stock can result in lost sales, reduced productivity, or, in the worst case, production downtime. Maintaining safety stock can help mitigate unforeseen changes in demand and avoid stockouts.
- Dead Stock: Over-purchasing can result in obsolete stock and unnecessary storage expenses.
- Supplier Dependence: Companies using the just-in-time procurement method may be overly dependent on suppliers. Any supply disruptions can negatively impact the entire procurement cycle.
All these issues lead to one common consequence: increased operating costs. Efficient procurement management enables companies to offer more competitive prices and services, ultimately enhancing their market competitiveness.
Enhancing Procurement with a Warehouse Management System (WMS)
A Warehouse Management System (WMS) can significantly improve procurement management by organizing and coordinating operations to ensure efficiency and profitability.
A WMS, such as Easy WMS from Interlake Mecalux, allows for the management of stock levels based on just-in-time supply strategies, ensuring alignment with production needs or safety stock requirements.
For instance, the WMS for Manufacturing module ensures a continuous supply of raw materials to production lines by syncing supply and production buffers. This module provides detailed monitoring of raw materials and tracks the exact quantities used at each stage.
Additionally, it manages the bill of materials (BOM), listing all raw materials, parts, and tools needed for manufacturing a product.
Furthermore, when integrated with a Manufacturing Execution System (MES), the WMS not only synchronizes warehouse operations with production processes to guarantee supply but also provides traceability and real-time visibility of items throughout the entire process.
Risks of Inefficient Procurement Logistics:
Stock Shortages
Efficient procurement logistics must align seamlessly with other logistics functions. If it doesn’t, you may face challenges with ordering the correct amount of goods or placing orders quickly enough to meet demand. This misalignment increases the risk of backorders, stockouts, lost sales, wasted resources, and higher costs.
Limited Supply Chain Visibility
Modern logistics management relies on interconnectivity and collaboration across departments. Building a resilient supply chain operations starts with an effective procurement process. Limited visibility at the procurement stage can lead to missed opportunities.
For instance, a lack of insight into lead times can disrupt reordering schedules, while poor communication about delays can hinder the entire supply chain’s ability to adapt and stay on track. Information silos at the procurement level can cause disruptions.
Addressing these silos ensures that all departments are aware of the procurement process and can prepare for any challenges in advance.
Tips to Improve Procurement Logistics:
Use Demand Forecasting:
Accurately determining how many materials or goods to source from suppliers is crucial for procurement logistics. Demand forecasting helps optimize inventory levels and meet customer needs by analyzing past data and predicting future demand. This reduces the risk of overstocking or running out of inventory.
Calculate Procurement Lead Times:
Lead time involves factors such as the type of product, its origin, how it is transported, and the time required for production. To avoid errors, use an inventory management system that automates reorder point calculations. Simply input estimated lead times and forecasting data to streamline the process.
Track Raw Materials in Your Inventory Management System:
While tracking finished goods is essential, raw materials also require close monitoring. Proper tracking of raw materials ensures you have a complete overview of inventory levels and can take action if supplies are low. This prevents production delays and ensures smooth order fulfillment.
Optimize Procurement Logistics:
Optimizing your supply chain means refining each function within it. Here are some ways to optimize procurement logistics:
Find cost-effective suppliers:
- Choose suppliers closer to your delivery destinations
- Select shorter delivery routes
- Diversify your supplier network.
FAQ: Role of Logistics in Procurement: Strategies for Efficient Supply Chain Sourcing
Why is procurement in logistics important?
Procurement ensures a steady supply of materials and goods, critical for uninterrupted production and distribution, maintaining efficiency and minimizing disruptions in the supply chain.
Why is procurement so expensive in logistics?
Procurement can be costly due to factors like fluctuating material prices, supplier negotiations, storage costs, and complex logistics operations that require precision and timely execution.
How does a logistics officer function?
A logistics officer manages supply chain operations, coordinates the flow of goods, ensures timely deliveries, oversees inventory, and optimizes processes to enhance efficiency and reduce costs.
Conclusion:
The role of logistics in procurement is crucial for maintaining a smooth and efficient supply chain. By leveraging strategies such as demand forecasting, calculating lead times, and optimizing procurement processes, businesses can enhance their operations. For further assistance in refining your logistics strategy, consider partnering with Qodenext for expert solutions.
