I had reason to question the differences between procurement and supply chain recently and decided to call up a colleague in Supply Side Focus Ltd to discuss. Here is his answer below. I found it very helpful and thought it would be good to publish it in my blog as a number of people may also be glad of a brief explanation.
Procurement is responsible for understanding where the costs and risks are in the supply chain and how they can be taken out or mitigated without affecting what is required by the buying organisation – especially important in construction and process industries e.g. chemicals and cross boundary/international work.
Purchasing transactions can take place between any two organisations at each part of the supply chain eg. A supply chain = the following companies:
The Differences Between Procurement v Supply Chain Management
F which buys from C which buys from B which buys from A.
There is profit, cost and associated risk in each part of the transaction. Good procurement finds out where these profits and costs and risk lie to take them out without jeopardising the actual service or products being bought.
Costs in the chain could be each supplier’s mark up, transport, storage, import duties etc – the aim for procurement is to minimise these and work with key stakeholders in the chain. It is ALSO their responsibility to assess and mitigate RISK to the company e.g. supplier liquidity (will the supplier exist if financially unstable? – don’t buy a key product or service from an ailing company), security and assurance of supply, transporting chemicals safely (e.g. by rail rather than road), to prevent buying goods where child labour might be involved, to avoid delays at customs, strikes etc . As the expression goes, ‘you’re as strong as the weakest point in the chain’.
F (A council house management company) buys from C (kitchen and bathroom fitters) which buys from B (bathroom and kitchen equipment distributors) which buys from A (kitchen and bathroom manufacturers).
F is the ultimate buyer in the supply chain. F buys fitted showers from company C (which supplies and invoices F for fitting showers into their tenants’ houses). A good procurement manager in F would want to know the break down between Labour and the cost of the showers which C fits and should ask for both items to be listed separately.
At the moment, F does not know if the separate prices are competitive, so F needs to benchmark them against the market to see if C is making too much profit on each element. Taking the showers, F should know what a typical shower should cost and to test this, should examine how C buys showers and from whom.
F has the choice to assist C buy showers cheaper and do the procurement for C i.e. this is a second tier buying arrangement where the buying company buys from their supplier’s supplier, a third tier arrangement is F buying from B’s supplier and so on.
In assisting C buy showers, F will notice that C is buying showers from distributors and not manufacturers, hence, there is immediately a ‘middle man’ who is adding a margin, so why shouldn’t F buy directly from the manufacturer? There may be good reasons (e.g. F isn’t buying enough to go anywhere other than through a distributor), but in the ‘shower case’, F bought more than enough to qualify for direct dealings with the manufacturer and hence get a better deal – importantly, not necessarily just on price. Good procurement would also assess RISK (working with key stakeholders and mitigate it accordingly) and also try to improve the deal e.g. extended warranty on the shower (from 1 to 3 yrs), obtain quicker delivery times, better response times to replace failed showers etc.
This answers a few questions about the difference between procurement and supply chain and hopefully prompts you to look deeper into the supply chain in your next procurement exercise.