Nobody can deny that Procurement has been one of the business functions that has changed more over the last decades. Those days when buyers worked with limited choices in terms of supplier selection, when they selected suppliers based on geography proximity or long-standing relationships, when the procurement strategy was just based on cost…are far away. The situation nowadays is quite different. Buyers in manufacturing organizations have moved from playing just a tactical role to support business operations to playing a more strategic role, one that takes care of keeping under control and mitigating procurement challenges that can affect the efficiency, cost-effectiveness and overall competitiveness of a business. 

Procurement challenges can arise at multiple stages of the procurement process, from sourcing raw materials, to procurement operations and managing supplier relationships. Definitely, not an easy task. Let’s delve deeper on some of the procurement challenges that manufacturers commonly face today at different parts of the procurement process and understand how buyers can cope with those.

Sourcing Raw Materials: Keeping Cost Control and Protecting Business Margins

Not really a surprise, one of the main goals of strategic buyers is to keep costs under control, and that is not an easy task in a global context. 

On one hand, buyers are confronted with fluctuating prices for certain raw materials such as metals, plastics and chemicals, which can fluctuate due to factors like market demand, geopolitical instability and inflation. One of the solutions to this challenge would be to negotiate fixed price agreements with a selected supplier, in order to secure supply continuity during the duration of the contract at a prevailing market price. During the negotiation of these types of contracts it is important to understand not only the agreement price that each supplier can offer, but also the long-term “collar price” range that every supplier proposes, which defines maximum and minimum prices in order to avoid significant fluctuations for both parties.

On the other hand, strategic buyers need to be very cautious about hidden costs before making their sourcing decisions. Unforeseen costs such as shipping, handling, insurance, customs duties, or taxes can add up, making it difficult to control the total cost of procurement. It is important to capture all hidden costs as accurately as possible, in some cases this information can be provided directly by potential suppliers, while in other cases information can be provided by other departments in the organization such as the logistics or legal department. 

Procurement intelligence and using the right technology to capture all the required information during the sourcing process is key to overcome the challenges described above.

Procurement in Manufacturing: Ensuring Supply Continuity

Something that has not changed over the years is that it is critical for manufacturers to get the right materials, at the right time and with the right quality…and this is something that has become more difficult in a global context. Manufacturers need to make sure that they keep an eye on the “uncontrollable” in order to react quickly and minimize impact. Some examples of the “uncontrollable” events that can affect supply continuity are: 

• Global Disruptions: Events like natural disasters, geopolitical tensions, pandemics, or trade wars can disrupt supply chains. Manufacturers often struggle to secure reliable sources for raw materials and components.
• Logistical Bottlenecks: Shipping delays, port congestion, and shortages of transportation capacity can lead to increased lead times and higher costs.
• Inventory Shortages: Lack of stock or raw material shortages can lead to production delays, especially if there’s a reliance on just-in-time (JIT) inventory practices.

Being able to quickly react to these situations is possible through the adoption of digital tools that can enhance visibility into supply chains.

Another more “controllable” aspect that can affect supply continuity is supplier reliability. Manufacturers may struggle to rely on suppliers who cannot meet demand, which can lead to production stoppages and inconsistent product quality. In this case, implementing multi-sourcing strategies to source materials and also having access to real-time data on supplier performance to order the goods from the most reliable suppliers are strategies that can minimize the risk of supply issues. 

Supplier Management: Continuous Monitoring

As mentioned earlier, procurement teams in manufacturing organizations are switching from reactive operational procurement to proactive strategic procurement. This implies that their responsibility has changed significantly and they need to make sure that they continuously monitor their supplier base to make sure that suppliers align with corporate values and meet compliance requirements.

Increasing pressure from consumers, governments, and investors for sustainable practices forces manufacturers to consider the environmental impact of their procurement choices and carefully evaluate suppliers in terms of environmental ratings. Additionally, manufacturers need to ensure that their suppliers adhere to ethical labor practices, avoid child labor, and respect workers’ rights. Laws and regulations surrounding sustainability and supply chain transparency are becoming stricter, adding another layer of complexity for manufacturers to navigate. 

In specific industries, manufacturers have to adhere to specific industry regulations or certifications that can add complexity to procurement processes (e.g., ISO certifications, FDA approvals, etc.). 

Additionally, manufacturers need to assess the financial health of their suppliers to ensure they remain solvent and capable of delivering goods as promised.

Monitoring all these variables for manufacturers that have a significant amount of suppliers can be a cumbersome task, especially because data can be fragmented across different systems or it can be very labor intensive to compile information from suppliers (i.e. certificates gathering). In order to overcome these challenges, mature procurement organizations seek the support of combining supplier risk management solutions and supplier management solutions in order to:

• Create a single data repository that can combine all the data in order to get a 360º view of the supplier base
• Automate data collection with suppliers (i.e. automatically request suppliers to update expiring certificates, …) 
• Have visibility into the real-time supplier information when making sourcing decisions 
• Trigger automatic actions when red flags arise for a supplier (i.e. corrective action, start an audit, send an evaluation questionnaire …)

Best Practices for Addressing Procurement Challenges

Manufacturers face multiple challenges nowadays and procurement organizations have a critical role to make sure that procurement challenges do not disrupt the business at both financial and reputational levels. To overcome these procurement challenges, procurement organizations can adopt a number of strategies:

• Build Procurement Intelligence: Investing in building the right knowledge within the procurement organization so strategic buyers properly understand which sourcing strategies can be applied to different material categories and what the hidden costs they need to pay attention to in every scenario. 
• Diversify Suppliers: Reducing reliance on single suppliers can help mitigate risk, especially in critical or scarce resources.
• Invest in Technology: Leveraging digital tools like procurement software, AI-based forecasting, and supply chain management systems can improve visibility and streamline procurement processes.
• Strengthen Supplier Relationships: Fostering long-term, transparent relationships with suppliers helps to build trust and improve collaboration.
• Focus on Sustainability: Incorporating sustainable sourcing practices, such as working with eco-conscious suppliers, can help manufacturers meet regulatory and consumer expectations.

These solutions and best practices can help to mitigate risks and enhance efficiency, ultimately leading to more resilient procurement practices going forward.