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    Table of Contents

    Raw materials play a significant part in businesses, and more so in the manufacturing sector. A slight disruption in the supply chain of raw materials can impact operations. While procurement of raw materials from reputable and reliable suppliers help to maintain a steady production, there are many factors to consider when procuring materials. There are different ways of procuring materials, and which method you choose will depend on the type of product or service required.

    In this article, we will discuss the raw material procurement process, raw material procurement strategies and procurement of raw materials.

    Also read: What is procurement?

    What is procurement of raw materials?

    Procurement in manufacturing sector refers to the method of purchasing raw materials from an external source. Raw material procurement process involves researching, selecting, ordering, and paying for raw materials required for a business. Identifying and selecting vendors, negotiating prices and terms, and awarding contracts are some steps in the procurement process. Raw material selection involves several factors that include cost, quality, availability, and delivery time.

    The procedure for procurement of materials is crucial for smooth supply chain management, as procurement of materials plays a significant role in an organisation’s bottom line. You need to consider the factors involved to while procuring raw materials for your business.

    Note: Though purchasing and procurement may be used interchangeably, there is a distinction. Purchasing means the obtaining of raw materials for daily operations. The meaning of procurement refers to the overall framework set up to optimise purchase and save costs. Many companies have established a raw material sourcing strategy for a smoother procurement process.

    The 3 Ps of Procurement:

    • People
    • Process
    • Paperwork

    What is material procurement?

    Material procurement is the process by which businesses secure or procure goods necessary for production. It enables businesses to maintain operational efficiency and product quality, by ensuring that they are procuring quality products at the right time, from the right supplier, and at the right prices.

    Example of material procurement in manufacturing:

    The procurement of different types of steel in the Indian automobile manufacturing sector. For instance, high-strength steel is used for making vehicle frames (durability and safety), stainless steel is used for exhaust systems (corrosion resistance), advanced high-strength steel is used in body panels to reduce weight, etc.

    Manufacturers negotiate prices, delivery schedules, and quality requirements with different steel suppliers, to procure materials from the one that facilitate continuous production and cost control. (Also read: Role of steel in the automotive industry)

    Example of material procurement in Services:

    The procurement of software licences in the Indian IT Services sector. IT service providers have to evaluate various software to find the ones that support their services. They will have to negotiate licence agreements keeping costs, compliance, and confidentiality in mind, to deliver uninterrupted and competitive services.

    Procurement of raw material

    What are the 7 steps of the procurement process?

    In the next section, we will take a look at the 7 steps in the procurement process. This is crucial when sourcing and procuring materials in India’s competitive market. We take the example of procurement of cotton in the textile industry to understand each of the steps better.

    Step 1: Need analysis

    The process begins with the business identifying the need – i.e., the procurement of high quality cotton for producing fabric. Based on the production demand, the quantity and quality of cotton is determined. Requirements from all relevant departments are collated, priorities are listed, and the procurement department strategies the best means to procure goods based on cost economies, logistics, etc.

    Also read: Demand aggregated and procurement efficiency – How it impacts procurement

    Step 2: Supplier identification

    Finding and contacting local or global cotton suppliers is the next step. Care should be taken to ensure that the supplier meets required quality standards and can supply the raw materials in time. Quotes are requested from the identified suppliers and vendors and in specific cases, tenders might also be floated.

    Step 3: Supplier evaluation

    The evaluation stage involves comparing quotes from different suppliers to identify the right one (s). Here, the procurement department might have their specific evaluation criteria – such as price, quality, certifications, reputation of the business, availability, production practices (e.g., sustainability initiatives) etc.

    In most cases, samples might be requested to evaluate the quality of cotton.

    Step 4: Supplier contract negotiation

    The goal of this step in the raw material procurement process is to find a supplier that offers value-for-money, i.e., best prices, payment terms, delivery schedules, quality.

    This step is crucial and if the right supplier terms cannot be finalised, often other suppliers are also considered and evaluated. A contract is drawn and signed by both parties outlining the terms of the contract (SLAs) including any penalties for non-compliance and returns management terms.

    Also read: Tips for raw material suppliers – Know how you can become a preferred supplier of raw materials

    Step 5: PO release and fulfilment

    Once the supplier(s) has been finalised, releasing the purchase order is the next step. Usually, the procurement department vets with the relevant departments on their final requirements to ensure there’s no change in strategy and requirements. Funds are allocated and authorised and the PO is released.

    As a part of the fulfilment process, the supplier starts delivering the cotton as per terms and schedules established.

    Step 6: Quality inspection

    The raw material, i.e., cotton, once received is inspected for quality and quantity. This is essential as any deviation will impact product quality and timelines.

    If the received material is not as per requirements, it is usually returns and to be replaced by the supplier within the specified timelines.

    If the material is accepted, it is sent to the warehouse and mapped to inventory and production. The procurement department also initiates payments for the order delivered.

    Step 7: Invoicing and release of payment

    Payment is processed as per the contract terms. Once the goods delivered has been accepted, the supplier generates the invoice. If there are disputes or adjustments, it is usually adjusted in this stage. In case of a single order procurement, this marks the end of the raw material procurement process. However, if this is a continuous order, then the part of receiving of goods, inspection, and payments continue.

    At Tata nexarc, we aim to simplify steel raw material procurement for businesses. We have partnered with trusted sellers and offer steel at the best prices with attractive credit options. Contact us today to get a quote and buy steel across multiple brands on one platform.

    Procurement process

    Procurement vs eProcurement
    In the digital era, most businesses have moved to electronic procurement, to keep the process transparent, efficient, and trackable. While the process of raw material procurement doesn’t change, it involves the use of software and digital tools to streamline and automate overall operations. Note: Here eProcurement should not be mistaken for government eProcurement and tendering process.

    What is the procurement process for raw materials?

    Raw material procurement refers to the sequence of activities such as identifying requirements, sourcing suppliers, negotiating prices and drawing contracts for purchase and securing specific raw materials that are required for the production process or services rendered.

    The procurement process for raw materials therefore is pivotal for maintaining efficiency in production lines and service delivery.

    Let’s take an example of the raw material procurement process for services and manufacturing sector businesses.

    Raw material procurement process in Manufacturing: E.g. Steel

    Consider a manufacturing business making steel utensils, especially stainless steel utensils. The procurement process could look like:

    • Identifying quantity and quality of stainless steel required based on design, application, and cost
    • Seek raw material suppliers who can meet the requirements (i.e., time, availability, prices etc.)
    • Negotiate prices, draw agreements and finalise the delivery and payment schedule
    • Perform period assessment of supplier to ensure SLAs are being followed and take required steps to improve the procurement process

    Raw material procurement in Services: E.g., Paper for Printing Services

    The Services sector follows a similar process of raw material procurement – specifically in the preparation stage for rendering the services.

    Let’s consider the example of a printing service provider – journals, magazines, brochures, advertisements, book covers or any other printing material. Paper here is an essential raw material. Let’s what a procurement process for paper would look like:

    • Determine the type of paper required (i.e., thickness, GSM, size, texture, colour, etc.) for the various printing jobs
    • Contact multiple suppliers for best quotes (Note – you may have to negotiate with multiple suppliers for different paper types as a single supplier might not be able to supply all types of paper)
    • Negotiate prices and delivery schedule for promptness and efficiency (Note – This is critical. Newspaper printing for instance is a daily activity and procurement happens on a regular basis; printing of flyers and brochures however is specific requirement and may happen on a period basis)

    Also read: Printed material logistics – How logistics works for printed materials

    Procure steel

    What are the five strategies for raw material procurement?

    Procurement of raw materials can be challenging at times. There are some strategies that can be used to improve your raw material sourcing and help you manage your supply chain. Listed below are raw material procurement strategies that can help you:

    Listed below are raw material procurement strategies that can help you:

    • Source locally: Raw material purchase from local vendors ensures that you can procure the materials with fewer delays. However, you need to ascertain where your providers are getting their materials, the quality of raw materials and the timelines of delivery.
    • Build a list of sources: It is a folly for any business to depend on a single vendor because the dependability on the supplier is high. If there are shortages and challenges at their end, you would find it difficult to source goods on time. Diversity in raw material purchase enables you with options and you can bring in raw materials you need even when you face challenges with a particular vendor.
    • Increase inventory: If you face regular shortages in raw materials, it is wise to increase your own available inventory. You need to understand inventory turnover ratio, and if the need be invest in additional warehousing options. It will resolve your supply chain woes in the long run and to keep your customers happy. In this respect, consider using external warehouse logistics services to store inventory cost-effectively.
    • Connect with a distributor: Another factor that can help you to resolve raw material supply chain challenges is to identify a distributor. Distributors have additional resources and can provide you with the most cost-effective solution to your current supply chain needs.

    Seven common procurement principles:

    • Value for money
    • Fairness
    • Competition
    • Efficiency
    • Transparency
    • Integrity
    • Accountability

    How is procurement of raw materials managed in different industries?

    Procurement in manufacturing industry is crucial. Here are a few examples of how each manufacturing sector handles it.

    Procurement of raw materials examples:

    • The procurement of raw materials in iron and steel industry calls for understanding of global trends and collecting relevant data about the raw materials used and their suppliers. Change in policies and environmental regulations also have direct effects on the availability and prices of raw materials. Taking these factors into consideration, firms belonging to the iron and steel industry need to adopt a strategy that calls for a smooth supply chain management for raw material procurement without incurring large costs or losing competitive advantage.
    • Procurement of raw materials in food industry is fraught with challenges like shortage, quality, lack of continuous supply of seasonal goods, inadequately trained labour force, rising packing expenses, infrastructure deficiencies such as shortage of cold chains. At the same time the food industry needs to effectively handle freshness, sustainability, and corporate social responsibility aspects too. This calls for adopting sustainable procurement solutions to avoid disruptions.

    Which procurement refers to the raw materials?

    We understand that the procurement of raw materials refers to the process of acquiring materials for production or rendering services. However, not all types of materials procurement can be referred to as raw material procurement. For example, a retail store’s procurement of garments for direct sales does not strictly classify as raw material procurement. However, a garment manufacturer’s procurement of textile for garment manufacturing can classify as raw material procurement. We’ve listed some examples of raw materials for clarity.

    Construction sector:

    Raw material procurement involves sourcing materials such as sand, cement, and steel. These materials are fundamental for building construction and hence can be considered as the basic raw material required. (Also read: Building raw materials in the construction sector)

    Textile industry:

    Raw materials like silk, wool, and cotton are procured in the textile industry. These are basic fibres used for weaving textile.

    Electronics industry:

    Procurement of metals such as copper and aluminium, for wiring components is crucial for the electronics industry. Similarly, silicon is another key raw material required for semiconductor manufacturing.

    Automotive industry:

    Raw materials such as rubber for making tyre, glass for windows, are procured on a routine manner to ensure vehicle safety and functionality.

    Paper industry:

    Procurement of wood pulp for paper manufacturing, for making various forms of papers e.g., for writing, packaging, printing, etc.

    Also read: Raw material sourcing strategy

    Raw material procurement

    How to adopt a quality management system for raw materials?

    Procurement of materials is the backbone to any manufacturing business. It is essential to create a framework that ensures timely delivery and efficient supply chain management in the procurement process. Demand aggregation for procurement can prove to be highly beneficial for large businesses and supply chains that not just help in cost savings, improved logistics and better timelines, but also aid in improving the efficiency of organisations.

    Pradeep h

    Pradeep a SEO professional and passionate content writer who loves writing on various topics with 5 years of experience. At Tata nexarc, it has been 4 years since he is helping MSMEs to know the business challenges deeper and strategies to solve those. While not writing, he loves reading about digital marketing to hone his skills for business growth.