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 halt operations and severely impact manufacturing. 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 many ways of procuring materials, and which method you choose will depend on the type of product or services required.
In this article, we will discuss the raw material procurement process, raw material procurement strategies and the factors to consider in raw material procurement for SMEs.
What is procurement of raw materials?
Procurement of raw materials refers to the method of obtaining goods from an external source. It 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. The procedure for procurement of materials is crucial for smooth supply chain management as procurement 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.
It may be noted here that while purchasing and procurement may be used interchangeably, there is a distinction. While 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.
What are the key steps involved in the procurement of raw materials?
The procurement procedure consists of seven main process steps. The key steps in the procurement of raw materials include the following:
Assessing the need is the first crucial step in procurement where the company takes stock of the raw materials required from different teams and segregates the list depending on the priority of the needs. At this stage, the team handling procurement also determines the best way to procure raw materials in terms of cost saving and logistics.
2.Contract negotiation and approval
Once the list of procurement is decided, the procurement department identifies vendors and requests for quotes. Some factors that play a part in vendor selection are reputation, cost, quality of service, and dependability. At least three quotes are sourced as a practice, but it depends on the organisation. The vendor with the lowest quotation is selected and post approval of the quote, the raw materials are transported to the manufacturing units.
Once the list of procurement is decided, the procurement team seeks approval for the purchase. They also cross verify the list with different teams and the raw materials are approved as per their operational priority.
4.Purchase order review
Prior to the final approval of the order, the senior procurement manager does one final review before approval. Once the approval is obtained from the procurement manager, the list is sent to the accounts department.
5.Funds for raw materials are verified
Based on the list, the accounts department issues a purchase order to the vendor and releases the funds. That purchase order is an indication to the vendor that the request has been approved and that they can proceed with the request.
6. Shipping of raw materials
While in selected cases, the vendors arrange for the transportation of raw materials, it does not always happen in the case of all suppliers. In most cases, businesses need to arrange for their own transportation to transfer the raw materials from suppliers to the manufacturing units.
7.Invoice approval and payment
Once the raw materials reach the manufacturing unit, the products are cross verified against the bill and the invoice is approved and the payment is transferred to the suppliers.
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 are the five strategies for raw material procurement?
Procurement of raw materials can be challenging at times and the pandemic had proved the same with severe supply chain disruptions that impacted businesses globally. 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:
- Source locally: Sourcing 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 sourcing 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. While you may need to 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.
What are the factors to consider in material procurement?
Raw material selection involves several factors that includes cost, quality, availability, and delivery time. Businesses need to balance these factors to obtain the best value for their money. Some of the factors are discussed below:
- Cost: Finance is the primary factor in procurement and businesses need to strive for the best price possible for the goods and services they need. Make sure to compare prices from different vendors and negotiate for the best price.
- Quality: Quality is the second crucial factor because it is responsible for the performance of your final products.
- Availability: The availability of materials also plays an important part in procurement. As a business you need to make sure that the products you need are easily available on a consistent basis so that your manufacturing is not affected.
- Delivery time: For smooth operations, raw materials need to be delivered on time. You need to understand the supply chain well to plan and ascertain that expected delivery dates are included in your vendor contracts.
Seven common procurement principles:
- Value for money
How is procurement of raw materials managed in different industries?
The procurement of raw materials in iron and steel industry calls for understanding of global development and 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.
Similarly, procurement of raw materials in food industry is fraught with challenges like shortage, quality, lack of continuous supply of seasonal goods, inadequately trained labor force, rising packing expenses, infrastructure deficiencies. 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.
To sum up: How to adopt a quality management system for raw materials?
The procurement of raw 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 organizations.
There are several service providers like nexProcure in the market who helps break down the challenges involved in procurement and help you to obtain your production parts and materials at competitive prices. nexProcure 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.