Supply Chain and Procurement May Not Always Be on the Same Page

In a paper presented today by McKinsey & Company analysts, executives are told that on the face of it, a company’s supply chain and procurement functions should have a lot in common.

They both act as primary interfaces between an organization and its suppliers, for example. And they are both incentivized to ensure that materials and components bought from elsewhere are available in the right quality, at the right time and the right price.

But According to Ashutosh Dekhne, Xin Huang and Apratim Sarkar, procurement and supply chain processes don’t always work hand-in-hand, but sequentially.

“At discrete intervals—during the development of a new product line, for example, or every few years after launch—the procurement function will launch a project to identify suppliers that are capable of delivering specific material requirements at the forecast volume and the required quality,” they contend.

“It will then engage with qualifying suppliers to negotiate favorable terms and fix those terms in a robust contract. At that point, procurement hands over much of the management of ongoing supplier relationship to the supply chain function.”

The paper observed that procurement staff will continue to monitor the situation “at arms length,” checking that suppliers are complying with contract terms, for example, but the detailed management of orders and logistics is left to their supply chain colleagues.

“Working this way not only creates significant inefficiencies, it also ignores important opportunities to reduce costs and to add value for companies and for their suppliers,” said McKinsey analysts.

They concluded that Inefficiencies arise because, even if overall demand meets forecast levels, the day-to-day detail of supply requirements can be highly dynamic:

“Seasonal demand variability, the introduction of competitive products or promotional activity in retail channels can drive big short-term fluctuations. On top of this, any number of exceptional circumstances, from floods to product quality issues, can require rapid and significant action by suppliers.”

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