If you follow industry news and commentary, you may have noticed that there’s quite a bit of confusion around the difference between procurement and supply chain management.
Does procurement report into supply chain, or vice-versa? Is there an overlap between the tasks the two professions undertake? Do procurement professionals need to understand supply chains, and do supply chain professionals need to understand procurement? Should they collaborate, and why?
The fact that many writers use the terms interchangeably doesn’t help, but does demonstrate that the two disciplines are difficult to neatly separate and define. The Institute for Supply Management (ISM) dodges the issue by using “Supply Managers” as a catch-all term for procurement and supply chain.
According to Comprara’s Procurement Glossary, procurement involves “all those processes concerned with developing and implementing strategies to manage an organization’s spend portfolio in such a way as to contribute to the organization’s overall goals and to maximize the value released and/or minimize the total cost of ownership.”
Supply chain management, on the other hand, refers to “all those processes associated with management of the flow of goods, information and money between suppliers in a category’s supply chain.”
Our friends at Procurify give perhaps the clearest explanation of the difference between the two professions: “Procurement is the process of getting the goods you need, while supply chain is the infrastructure (extensive, in many cases) needed to get you those goods.”
Other definitions tend to highlight the fact that procurement’s focus lies with fulfilling business needs while supply chain is focused on the customer. Datex defines procurement as “the process of acquiring goods and services that your company needs to fulfill its business model," while supply chain management is “every activity involved in putting products in the hands of consumers.”
Is procurement a part of supply chain or vice-versa?
Again, there’s little agreement on this debate. Some visual representations of the procurement cycle include supply chain management as a step in the process, while supply chain cycles have procurement just one part of their multi-step process.
AZCentral suggests that in the overall supply chain process, the job of the procurement professional stops “once your company has possession of the goods”, while the supply chain manager's role encapsulates everything from the raw material stage until the final product is in the hands of a customer.
The website offers a helpful analogy: “The supply chain can be considered the entire chair, while procurement and sourcing are parts of the chair.”
Looked at in this way, procurement would appear to be a subset of supply chain management. Job titles and job descriptions only muddy the waters further, with many advertised supply chain roles reading like a procurement job descriptions, and vice-versa.
Another confusing factor is that while the CPO would appear to be a higher-profile role than Head of Supply Chain or Chief Supply Chain Officer, company boards and executive teams tend to place higher value on supply chain management skills. In the rare cases of CPOs ascending to the role of CEO (Apple’s Tim Cook being the most famous example), it’s usually the executive’s knowledge and understanding of the company’s supply chain that’s highlighted as a key reason they were chosen to lead, rather than their procurement acumen.
Cross-functional collaboration is critical
What is clear is that supply chain managers and procurement professionals rely upon each other for the success of the business, and any sort of silo mentality or lack of collaboration will lead to poor outcomes for both groups.
Generally speaking, procurement professionals are experts in the pre-contractual phase, with proficiency in identifying business needs, sourcing, contracting and negotiation. Supply chain deals more with post-contractual issues including logistics and the hands-on management of suppliers.
Ideally, the two groups should seek to understand as much of each other’s work as possible to determine how they can help each other by sharing skills and information. An article by SupplyChain24/7 talks about the benefits of improved collaboration between supply chain and procurement functions: “At its simplest, [collaboration] involves procurement professionals gaining a full picture of supply chain requirements before negotiating supplier contracts. Such an understanding helps to ensure that potential suppliers are able to offer sufficient volume flexibility and sufficiently short lead-times, for example.”
Writing for Forbes, Jonathan Webb notes that as companies have grown more advanced, the differences between these two practices have merged.
“[Procurement professionals] looking for new suppliers are thinking deeper into post-contractual realities, and logisticians [working in the supply chain team] are beginning to feedback into those engaged in sourcing.”
Datex notes that together, the functions can realize benefits in risk reduction, improved customer satisfaction, cost reduction, supply chain flexibility, better supplier relationships and important initiatives such as the eradication of child labor.
Collaboration between procurement and supply chain can be improved through:
- Shared reporting lines
- Shared KPIs
- The co-development of policies, processes and standards
- Collaboration technology and data sharing
- The creation of cross-functional teams.
A McKinsey report titled Bridging the Procurement-Supply Chain Divide gives the real-life example of a company in the high-tech sector where the supply chain group worked with the procurement function to find a way to integrate the supply of critical components into a new distribution regime that addressed the problem of “cripplingly high levels of finished goods inventory”.
The cross-functional group came up with a scheme that would mean suppliers delivered parts on a just-in-time basis to lower inventory levels. The results of this collaboration were impressive: “Systemwide inventory fell by 19 percent, the company’s freight costs fell by 22 percent, and its suppliers’ freight costs ended up 14 percent lower. Average lead-times approached zero; customer service levels improved from 68 percent to 94 percent.”
Rather than trying to rigidly define and separate the procurement and supply chain disciplines, it’s better to acknowledge that they are becoming increasingly interwoven and find ways for the two functions to work together to realize common goals. After all, as Webb comments: “The company bottom-line does not see the difference of who delivered the value, but how it was created.”
Ready to add to your bottom line? Incorporating group purchasing into your overall sourcing strategy may help. Contact Una to learn more!