Many businesses need raw materials to produce its products or help provide its services. Sourcing these materials from suppliers helps maintain steady production. However, there are many factors to consider when working in material procurement.
The supply chain evolves and changes as a business grows and more materials are required. There are various ways of procuring materials, and the most suitable method would depend on the type of product or service being offered.
Businesses need to find a reputable and reliable supplier that can provide them with the necessary materials on time and at a reasonable cost.
In this article, we will discuss the material procurement process and some tips on managing suppliers and contracts.
What is Material Procurement?
Procurement is the method of acquiring or obtaining goods, services, or works from an external source. It is a strategic function that is vital to an organization’s success. Procurement involves identifying and selecting vendors or suppliers, negotiating prices and terms, and awarding contracts.
Organizations must procure raw materials or products they need to operate. The direct procurement process is critical to supply chain management and can significantly impact an organization’s bottom line. Companies must carefully consider all of these factors involved to make the best decisions for their business.
The terms purchasing and procurement may be used interchangeably, but there is a distinction between the two. Purchasing is buying goods or services, while procurement is a broader term that includes purchasing but also includes sourcing, negotiation, and contract management.
Factors to Consider in Material Procurement
There are many factors to consider when procuring materials, including cost, quality, availability, and delivery time. Organizations must balance these factors to get the best value for their money.
Cost is often the primary consideration when procuring materials. Organizations want the best price possible for the goods and services they need. It is important to compare prices from different suppliers, negotiate for the best price, and observe strategic sourcing.
Quality is another important consideration when procuring materials. Quality is crucial because it affects the performance of the materials or products being procured. For example, if a construction company procures wood that is lower quality than required for a stable structure, they won’t be able to provide a good product to their customers, even if the lower quality means a cheaper price.
Organizations want to purchase products that meet their standards and requirements. They may need to sacrifice cost to get the desired quality. This can help businesses gain a competitive advantage over their competitors.
The availability of materials is a factor that can affect what you buy and from whom. Organizations want to make sure that the products they need are readily available, often on a consistent basis.
This can be challenging if the organization is trying to procure rare or unique items. They may need to place orders well in advance to get the goods when needed. If certain items are not available, this can affect the entire supply chain.
The delivery time of materials is also an important factor to consider. Organizations want to ensure that the products they need are delivered on time. This can be challenging if the suppliers are located in different parts of the country or world. It is important to understand the supply chain well to manage expectations and include expected delivery dates in your vendor contracts.
Importance of Procurement of Materials
Material procurement is an important part of direct procurement as it helps to ensure that businesses can source and purchase the raw goods they need to keep their operations running. Effective material procurement also reduces the chances of disruptions due to shortages within the supply chain.
In many cases, procurement operations are also responsible for ensuring that materials are sourced at the most competitive prices, which can lead to significant cost savings for the company. It can also help with the competitive advantage as some suppliers may offer better terms to those who commit to larger orders.
Organizations can use several different methods for procurement, and the most appropriate will depend on the type and quantity of materials required and the company’s budget and preferences. Some common methods include direct procurement, indirect procurement, and online procurement.
Direct and Indirect Procurement
In any business, either materials must be acquired to produce products, or products that are not raw materials must be acquired to provide a service. Procurement as a whole is broken down into direct procurement and indirect procurement.
Direct material is a term used for those items that become an integral part of the finished product. In contrast, indirect materials are used in manufacturing but not incorporated into the final product. Indirect materials might include the following:
- Marketing services
- Human resources
- Software licenses
There are advantages and disadvantages to both indirect and direct procurement. Businesses have more control over the quality, timing, and cost when doing direct material sourcing. They can also be sure that the materials will meet their specific requirements.
However, direct materials can be more expensive, and there may be a greater risk of disruptions in the supply chain.
Indirect materials are usually less expensive than direct materials and can be easily sourced from various vendors. The flexibility of indirect procurement can help avoid disruptions if one supplier cannot meet the demand.
Moreover, an effective indirect procurement process can make a company more efficient. This is because indirect procurement managers can streamline the process of procuring goods and services, leading to reduced waste and improved turnaround times.
Steps for Procuring Materials
There are broadly five steps involved in the direct procurement of materials. They are as follows:
- Requisitioning: This is the first stage and involves preparing and submitting requisitions for the required material. The requisition should include quantity, quality, delivery date, and more details.
- Planning and scheduling: In this stage, the procurement department plans and schedules the direct procurement process. This includes identifying potential suppliers, fixing delivery dates, and many more.
- Negotiation and placement of order: In this stage, negotiations are held with the suppliers regarding price, quality, terms of delivery, etc. After the negotiations are complete, an order is placed with the supplier.
- Receipt and inspection of material: In this stage, the procured material is received from the supplier and inspected for quality and quantity.
- Payment to the supplier: After inspecting and accepting the material, payment is made to the supplier based on the contract terms.
The above steps are broadly followed in most organizations. However, some organizations may have more specific procedures in place to procure materials, while still loosely following these basic steps.
Managing Time and Material Contracts
With the different material contracts that a company may have, it is important to understand how to stay on top of them. Many factors are considered and included in these types of contracts and, if not paid attention to throughout the entire procurement process, could result in costly mistakes. To manage time and material contracts, there are a few key things to keep in mind:
- It is important to have a clear and concise scope of work.
A concise scope of work is important to avoid ambiguity in what is expected from the contractor. This can be accomplished by having a detailed project description that outlines all deliverables, timelines, and milestones.
- Make sure you have a clear understanding of the billing structure.
With time and material contracts, you are typically billed for the hours worked plus the cost of materials. It is important to clearly understand how the contractor plans to bill you so that there are no surprises.
- Make sure that there is a plan in place for how materials will be procured.
This is important to avoid any delays in the project due to material shortages. It is also important to ensure you get the best price for the materials used. This includes understanding lead times, minimum order quantities, and payment terms.
- Establish clear communication channels between the company and supplier.
This is important to ensure that everyone is on the same page and that there are no misunderstandings. It will also save some time if issues arise since the concerns can be communicated quickly and efficiently.
By keeping these things in mind, companies can avoid many pitfalls associated with time and material contracts. By having a clear scope of work, a direct procurement plan, and good communication, companies can set themselves up for success.
The material procurement process is important in any organization that relies on direct procurement. The goal is to ensure that the correct materials are obtained at the best possible price and on time. There are several different ways to procure materials, each with its advantages and disadvantages.
There is no one-size-fits-all solution when it comes to direct procurement. It’s important to understand the options available and choose the one that best fits the organization’s needs.
With that said, here are a few final thoughts on the procurement process:
- Ensure a thorough understanding of the organization’s needs before starting the direct procurement process.
- Be sure to compare prices and delivery times from multiple suppliers before deciding.
- Pay close attention to detail, and don’t hesitate to ask questions. The goal is to get the best possible deal on the materials needed.
Following these tips will help ensure that the purchasing process goes smoothly and that the organization gets the best possible deal on the materials needed, which can help your business succeed and, in the end, improve customer satisfaction.