One of the major challenges in procurement is inadequate needs analysis. Not having clarity on your production requirements like who needs the goods or services, when you need them and how to source them within timelines is often a major setback for businesses. This is where demand aggregation in procurement comes in.
Let us understand in this article what is demand aggregation and how does it help to ensure efficiency in procurement.
What is demand aggregation in procurement?
Demand aggregation refers to the practice of consolidating all the procurement requirements for several departments within the organisation or on a bigger scale across locations into one streamlined platform and assigning it to a pool of limited identified vendors. It helps to improve the efficiency of your procurement, reduces costs and assists to harness greater economies of scale and cost when procuring from the market.
Let us look at this demand aggregation example to understand the concept better. You are a manufacturer of medical devices and require different components of steel. Your business is divided into departments and each department has a procurement manager responsible to source your raw material.
In a normal instance, each department will reach out to their individual external vendors and source it at the best possible price and timelines. However, many a times due to supply chain disruptions, orders to one department may get delayed and it impacts your whole manufacturing process. Or if is a very small order, it may not be accepted by the vendor. How does demand aggregation help here?
Under a centralised procurement system, each department will put in a requisition of their needs and cite the delivery timelines to your central procurement manager who will collectively purchase the bulk order. Say for example, Department A requires 20 tonnes of steel, Department B requires 60 tonnes and Department C needs 20 tonnes. So, a collective order of 100 tonnes can be placed. Demand aggregation always deals with larger inventories.
Demand aggregation in procurement not just makes it easier to buy in bulk but it also improves logistics, saves on cost and time. It helps increase efficiency in the process too.
It enables organisations to purchase requirements on established rates and agreed terms and conditions.
What are the benefits of demand aggregation?
If you are in businesses like manufacturing, you will agree that it can be complicated and expensive unless you ensure that production is efficient and uninterrupted. Aggregate demand is the key to streamline your procurement needs. It helps to maximise productivity by mapping production demand with capacity. By specifying when to buy which raw materials and entering into contracts with trusted vendors, you can minimise expenses long term.
The various advantages of demand aggregation include the following:
- Helps in cost reduction for the buyer
- Decreases cost of operations due to reduced number of sourcing processes/requests
- Brings in standardisation that leads to streamlining of the buying process
- Better logistics management
- Improves efficiency
- Better mapping of raw materials and demand
- Quality control of goods owing to fixed pool of vendors
It allows collective purchase of common goods and services needed in running the organisation and results in value-for-money through economies of scale.
What is aggregation in strategic procurement?
Strategic procurement as a best practice is necessary for every manufacturer. Also known as strategic sourcing, it refers to the process of planning inventory such that the goods and services needed to run the organisation successfully are procured on time and within budgets. Demand aggregation plays a pivotal role here as it helps to procure goods in bulk and in a planned manner.
The need of demand aggregation also arises because businesses may miss the benefits of bulk purchase or centralised delivery when different departments of the same organisation buy the same products – and from the same vendor. Very often due to delay in delivery and lack of planning, the supply chain collapses and severely impacts production.
So, why do businesses fail to adopt a robust demand aggregation process? One pertinent reason is the lack of an agency that can help collaborate all requirements and facilitate procurement for organisations.
Over the years, many service providers like nexProcure have entered the market to provide customer-facing marketplaces. It is an online platform for procuring raw material from trusted sellers at the best prices with attractive credit options. Equipped with a wide supplier network of verified sellers, it not just offers you the best prices for your raw material requirements but also attractive credit assistance for purchasing raw materials.
How can a procurement be strategically effective and efficient?
An effective procurement strategy should be able to manage your material requirements and production timeline within a specific budget. So far, most procurement service providers have been focussing on building an effective strategy for procurement solely through adoption of technology and automation.
However, there was not much done to reduce procurement challenges. So, how do you ensure efficiency in procurement? Adopting an alternative buying model like demand aggregation that promotes collaborative buying will go a long way to build a new age procurement system where procurement service provides like nexProcure can play a big role. So, for procurement to be strategically effective and efficient, adoption of a demand aggregation process is imperative. It will not just help manage supply chains of raw materials effectively but also improve the efficiency in operations.
• Focus on your vendor management
• Emphasise on transparency and collaboration
• Manage your inventory more efficiently
• Go digital
To sum up
Demand aggregation can prove to be highly beneficial for large businesses and supply chains that cannot just help in cost savings, improved logistics and better timelines, but also help in improving the efficiency of organisations. There are several service providers like nexProcure in the market who helps break down the challenges involved in managing supply and help you to procure your production parts and materials at competitive prices.