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What are complex purchases and how to manage them

The vast majority of organizations focus on a single goal: to grow. Of course, it is not an easy task: as the business grows, more challenges need to be solved. In 1972, Larry Greiner, an American management professor, identified the five stages of business growth – and his model is still used to anticipate possible difficulties to be overcome.

On the way to reaching all phases towards “success”, companies deal with the increase in complexity within their organizations. It can be said that at the stage described by Greiner as “growth through alliances”, in which joint ventures, mergers and acquisitions are made, maintaining the original identity of a company, its processes and its culture is quite a task.

On the “outside”, executives are concerned with reviewing products and services, aiming to offer the customer an easy, simple and direct purchasing experience.

By combining both purposes, it is possible to understand, in summary, that as organizations grow – and their plans become more ambitious, with more people under the same management – the complexity of maintaining the organization also increases. This factor, which may seem insignificant or even “intuitive” at first glance, is gaining more and more attention from companies and executives, especially in the purchasing sector.

But, before entering the sector in depth, it is necessary to understand what complexity is and how it is defined. In the book Managing Complexity, George Rizevzki defines it as follows:

“Complexity is a characteristic of an open system that consists of a large number of diverse, partially autonomous, richly interconnected components, often called agents. There is no centralized control […] it is uncertain without being random ”.

In addition to the negative side of creating uncertainty, the author points out that complexity brings an opportunity for companies in different sectors, just like any crisis. The evolution of technology and the economy, in addition to globalization, are some positive effects presented in response to this factor over time.

In terms of sectors, the supply chain is cited as an example in the book to clearly illustrate how it is possible to bring about improvements by overcoming complexity in terms of uncertainty and amid unforeseen events.

In the same vein, you can read our article on how to make the supply chain more resilient.

Supply chain complexity

Given the importance of the sector – and its subsequent ability to deal with uncertainty and, therefore, complexity – executives have an increasingly refined look at this topic. If complexity management was ever seen as a secondary task, today it is a priority.

A survey conducted with Chief Procurement Officers (CPOs) recently has shown that “complexity management” has become one of the top five annual objectives, as part of their goal programs.

A study points out that there are three types of complexity in the supply chain (static, dynamic and decision-making) which correspond to the way they are generated: a physical situation, organizational characteristics, of internal or external origin, supply or demand.

To solve them, the common approach is to reduce or eliminate unnecessary complexity in this process, and then deal with the complexity needed to re-analyze it. The “necessary” complexity can be defined as what the consumer or the market is willing to pay, that is, something that will become a competitive advantage.

Another study offers a more pragmatic approach, summarizing the sources of complexity in the supply chain as follows:

• Customer accommodation: customers expect increasing speed and visibility of the process, and variety and customization of products;
• Globalization of operations: as supply chains expand into more varied global customer markets, substantial variations in existing supply chain processes must occur;
• Supplier complexity: globalization means developing and maintaining strategies to overcome the complex and often serious problems associated with local sourcing;
• General business and supply chain trends: the industry’s push for omnichannel supply chains is fueled by day-to-day business concerns like technology turnover or company mergers.

How professionals can prepare for it

Being prepared for changes is essential – as well as knowing how to implement them. According to Bain & Company, reducing complexity depends on the following managerial skills:

• Understand the sources of complexity and examine the trade-offs between operations and their variety or customization for customers;
• Identify opportunities to simplify products, organizational structures, business processes and information systems to save costs while strengthening basic capabilities and increasing the focus on serving target audiences;
• Take measures to contain the return of complexity, reviewing the obstacle rates for new products and other expansion activities;
• Simplify decision-making, clarifying functions and processes.

Within the supply chain, consultants highlight “flexibility” and “innovation” as key factors to perform this task, allowing companies to use them as an important part to protect themselves from fraud and to obtain more benefits.

Soluparts fits this objective, since our mission is to facilitate the work of indirect materials buyers through a wide network of manufacturers.

In this sense, the use of sensors, big data and attention to technologies, such as machine learning, are fundamental points for professionals. In this way, it is possible to organize information from different sources and have a clear sense of priorities x complexity within the organizational environment.

Examples of this are already real: one of them, supplied by McKinsey recently, shows that a leading forklift supplier is investigating how the equipment can act as a big data hub that collects all types of data in real time, which can then be combined with ERP and Warehouse Management System (WMS) data to identify additional waste in the warehouse.

See how Business Intelligence can help you with this complex data analysis.

From a personal point of view, factors such as access to leadership, combined with a full understanding of customers and collaboration with suppliers are considered essential for professionals to keep in mind when dealing with complexity.

This is just one aspect of this theme. Organizations can begin to look at this more consistently in order to ultimately achieve significant gains from the “ocean of ​​data” to which they have access.

 

On our blog, we cover various trends in the supply chain for the new era, so that you can be up-to-date with the big changes we are experiencing.

How to apply Circular Economy concept in supply chain

6 tips to develop agile supply chain in your company

Robotics: role of robots in the modern supply chain

Procurement Department 4.0: challenges and trends

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Everything about Purchase-to-Pay (P2P)

Technology plays an increasingly essential role in the supply chain, as we have shown earlier on this blog: we have already addressed the role of technology in changing global trade, supply chain 4.0, and trends that are revolutionizing supply chains around the world.

The aim of today’s article is to clarify what Purchase-to-Pay (P2P) is, in addition to showing its benefits, by taking a more self-centered approach regarding the role of technology in the daily lives of purchasing professionals.

What is Purchase-to-Pay?

It is the whole process involved in the relationship between customers and suppliers. All stages of this relationship – buying, paying and receiving goods and services – are included in this concept.

In a more practical way, electronic payments, issuing invoices and even exchanging documents electronically represent Purchase-to-Pay elements.

P2P also includes purchase-to-pay (basically, how an organization acquires goods and services necessary for its production) and sourcing-to-pay (which controls the accounts payable and perceives the entire operation more strategically from the point of view of expenses).

To understand a little better what this means, see below what are each of the stages of P2P and how they bring more effectiveness to the daily lives of supply chain professionals.

P2P steps

1. Supplies

The process begins with the purchasing department being requested by other teams within the company – maintenance, for example – to find parts or services from a particular supplier. From there, you can start sending an RFQ or the activation of suppliers already known by the company.

2. Contracts

After the end of the first stage, negotiations to sign the contract start, in which the parts agree on points such as delivery time, price, terms and payment terms, Incoterms and others.

3. Purchase Orders

After the contracted is closed, purchase orders begin to be issued, often electronically.

4. Receipt of items

The requested products are checked by the supplier and sent to the customer, preventing defective items (or in wrong quantities) from being received.

5. Billing

From the moment the items are received and checked, the billing (again, electronic) can begin, but it depends on the payment terms agreed in contract.

6. Spending analysis

As part of the process, companies must have strict control over spending on suppliers. Rational spending is the best way to guarantee the sustainability of the area within any company.

As this is an action that involves multiple agents at different points of contact, it is necessary to coordinate the entire relationship very well so that the final objective is achieved without presenting major losses of increased complexity within the supply chain.

Having a partner capable of understanding all the needs of your purchasing department and achieving the best prices in the global market is essential. For this reason, Soluparts is actively dedicated to building the best possible environment so that its customers can find the parts they need, with all the guarantees and the best prices.

This way, purchasing professionals can save time and have, in addition to technological support, a true partner to carry out their purchases as quickly and efficiently as possible.

The role of technology

All the steps above can count on the support of digital solutions to be conducted quickly and with the less amount of errors as possible. The so-called “electronic purchasing systems” are of great value in this context – if employed correctly, they can bring savings of up to 80% for the purchasing sector.

Experts point out that the payback for this type of solution should happen very quickly within different companies. The most delicate part of this operation is precisely the beginning: ensuring that the area’s culture adapts to these new stages and that it fully and effectively understands the functioning of the new softwares that will be part of your daily life.

According to Fernando Motta, leader of the Process Intelligence area at gA, a global technology company that uses digital platforms to empower large companies, some of the points that can be improved by using software such as this are:

• Significant reduction in rework in purchasing;
• Elimination of order approval delay, since the software directs documents straight to those responsible and does the subsequent follow up automatically;
• Reduction of divergences between orders and invoices;
• Elimination of payment delays.

Finally, as these procedures involve a significant amount of data, it is possible to carry out a complete analytics analysis to understand where it is possible to generate more efficiency and understand more about the products purchased and their demand, therefore becoming a true aid as well as collaborating in all sectors of the company.

Benefits

In addition to the efficiency gains already described, other benefits can be linked to procurement-to-pay. The main one would be the visibility that the supply chain area has within the company, with easier communication among itself and the other business areas, making it possible to more effectively manage points such as prices and inventory.

Another feature that deserves attention is the more assertive decision-making based on data analysis that the process is capable of building. In this way, supply chain professionals can be agents who actively contribute to the financial health of not only their areas, but the entire company.

Finally, the optimization of operational performance is a result of this entire process. From the agility achieved with new methodologies and the insertion of softwares capable of assisting them, professionals now have more time to dedicate themselves to strategic tasks and can contribute more significantly to the advancement of the companies in which they operate.

Continue reading our blog to be updated on the latest market trends for the supply chain:

7 strategies for a more resilient Supply Chain

The impact of shared economy on supply chain

How to make Supply Chain more ethical?

How to apply Circular Economy concept in supply chain

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Analyzing Total Cost of Ownership in the Purchasing Sector

The concept that analyzes all costs related to the acquisition, transportation and storage of products in the supply chain is known as the Total Cost of Ownership (or TCO).

This calculation allows buyers to differentiate the purchase price from the long-term cost of purchasing a product, which relates to maintenance and repair costs in the future.

In the 1980s, an IT company carried out this cost study to calculate the expenses related to the support given to customers by the company after selling hardware and software, discovering that it could cost between 5 and 8 times the purchase price. In this article, we will present the main contributions of this concept to the purchasing department.

Concepts and Trends

The concept of cost was created in the 1940s by the Gartner Group, a North American Information Technology consulting company. At the time, the objective of the methodology was to quantify the qualitative performance of the organization as a whole, however over the years it has evolved to include other sectors, acquiring new angles.

In the purchasing department in particular, the TCO calculation includes the direct and indirect costs of purchasing a product and goes beyond the procurement process to include those incurred throughout the supply chain – ensuring a smooth integration in the final assembly. Transport, taxes, customs costs, insurance and packaging are included, among other costs such as inventory expenses, determined based on three main factors: occupied space, handling and depreciation.

When thinking about values ​​applied in the purchasing sector, that is, the budget, it is important to remember that although the final price of each purchase is important, not taking into account the TCO of an acquisition can significantly impact annual expenses – since methodologies such as the Purchase Price Variance analysis tend to disregard between 20% and 40% of the actual costs of an acquisition, as they do not normally include factors such as transportation expenses and many others related to shipping the product to its final destination.

There are some additional costs that allow us to calculate the total cost of ownership (TCO):

Acquisition costs

The analysis begins with the negotiated price of the item excluding any discounted amount related to high volume purchases and payment on time, for example.

Transaction Cost

Transaction costs are not easily perceived. They represent services provided by suppliers, including the optimal inventory calculation processes, material requisitions, preparation and transmission of the purchase order request to the manufacturer, as well as shipping, handling and receiving documentation.

Opportunity cost

This is the most overlooked item in the total cost of ownership. Where do you generate the most value? What opportunities are missed if you distance yourself from your core competencies?

The concept of opportunity cost refers to a possible loss of income in case the supplier chosen to purchase a certain product does not have quality materials, for which maintenance will be required in the short term. Because of that, it is important analyzing the benefits between a more expensive supplier – but with better quality service or product or a lower purchase cost.

Logistic costs

It is necessary to consider the cost of transportation and storage of the product, both international and domestic, in addition to paying attention to the time required for its arrival at the final destination.

Seasonal fluctuations in demand and supply as well as adverse seasonal weather conditions that can affect the availability of space and its cost and availability of transportation should also be analyzed.

Currency fluctuation costs

When purchasing products from a foreign country with payment in that country’s currency, the history of currency fluctuation must be taken into account. In order to safeguard against this variation, you can choose to buy in foreign currency at the current price at the time the purchase order is issued.

Commercial regulation costs

It is essential to list the commercial incentives and restrictions offered by the countries in which the supplier is located, including those established through commercial agreements between countries or groups of countries.

Other values ​​that must be considered are import and export expenses, which include customs charges, import duties and customs brokerage services (both at origin and destination).

How to apply this calculation in the department

The purchasing professional needs to list all the costs mentioned above – whether they are favorable or not – regarding the supplier and the indirect material, in order to map and analyze the TCO.

This data analysis will generate more assertiveness to the activities and decisions of the purchasing department, such as the choice of manufacturing origin, distribution of materials, as well as the best supplier and acquisition advantages.

With this evaluation, it is possible to determine suppliers of lower cost and higher quality, that is, those that give more return to the company.

Once you get the right information, it will be possible to produce a complete report with the Total Cost of Ownership in order to improve decisions and maximize the results of the sector. Below are the 3 main steps to define your Total Cost of Ownership:

1) Organize the goals you want to achieve with TCO

2) Define what are the relevant costs

3) Choose a period for the calculation

Now that you understand the importance of these indicators, you can count on a company like Soluparts, specialized in negotiating with the main suppliers in the world, obtaining better commercial conditions in the acquisition of indirect materials.

We offer a manufacturer’s warranty and work to avoid any type of inconvenience in the event of a replacement part. Talk to one of our experts for more information.

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Should you repair a spare part or purchase a new one?

Acting as a buyer of replacement parts in large industries requires extra attention and great effort so that production is not impacted. When the purchasing department receives a demand from the maintenance department, there is the option of replacing the material or sending the defective part directly to the supplier or manufacturer for repair, but some points should be considered when making this decision.

 

When the maintenance area requests a part, you should first assess whether it is consumable or not. Consumables parts are not replaced or are finalized during the process. Spare parts are replaced and do not disappear from the machine during the process, having a material master record. In the case of consumable components, it is necessary to make the purchase request, whereas for replacement parts you can choose to request repair from the supplier.

In recent years, more companies have chosen to repair parts instead of replacing them. However, to decide whether it will be repaired or not, a series of variables must be evaluated and some calculations should be made in order to find out which option is most advantageous for the company at that time in terms of delivery time, costs, amongst others. In this text, we raise a few points that should be part of this analysis.

Check part warranty period

The first point you should check is whether the material is under warranty and, if so, you may be able to get a free replacement depending on the agreement made at the time of purchase.

If exchanging the part is an option, it is necessary to analyze its feasibility, which includes aspects such as time and logistics costs for shipping and delivery, for example. In some cases, the manufacturer picks up the defective material and delivers a new one free of charge, in other cases, it may be necessary to bear some freight cost. You should also identify what is not covered in the warranty, since some parts or components may not be included.

Repairing the part or buying a new one

When a part needs to be replaced and is out of warranty, you should evaluate whether it is really worth repairing or whether buying another one is the best option. To put that into practice, it is important to carry out a viability analysis that must contain variables such as the service life of the new part.

Make a quotation of the repair and multiply by the number of years that a new one would last. If the value of the repair is greater than the price of the new product, it is worth replacing rather than repairing it. Some companies consider that if the value of the maintenance is 60% of the value of a new one, the purchase must be made.

The Life Cycle Cost (LCC) covers several costs associated with the life cycle of an equipment, which also include acquisition costs as well as the support costs. When purchasing the material, inevitably, there will be costs due to your purchase, operation and maintenance activities.

Part delivery logistics

If you choose to repair the part, it will need to be sent to the factory and all costs involved in the cost-benefit analysis must be considered and calculated. Compare the delivery logistics of the new part to the repair of the current one. Check with the supplier if it will need to be imported, the lead time and the freight cost.

As already discussed in the blog, there are countless reasons to import indirect material compared to purchasing locally, including better product quality, since you can purchase indirect material produced from more advanced technologies and processes. There are more advantageous conditions that must be considered in the import process and in most cases, the cost of the piece is much lower compared to the local market.

Good relationship with suppliers

When making the decision of acquiring a new part or repairing the current one, it is essential to have a good relationship with your suppliers, who will help you to replace materials more quickly and without any hassle.

Before signing a contract, it is important to discuss and even include clauses on warranty, exchanges and repairs, so that, in case the material is defective or if repair is necessary, the situation is resolved in the best possible way.

Understand the needs of the maintenance team

It is necessary to understand all the needs of this sector and for that it is important to know  the three different types of maintenance: preventive, corrective and predictive. For the three types, the purchasing team will be activated to ensure that maintenance is effective and occurs in a timely matter. Because of that, acknowledging the priorities of each demand is fundamental.

It is up to the buyer to monitor the estimated service life of the equipment and components, as well as to maintain constant contact with the operators to verify if the supplier’s usage recommendations are being followed. This is critical in a preventive approach, as it allows you to predict with more assertiveness the ideal time for an intervention.

Conclusion

In this article, we discuss some points that should be checked when deciding whether it is more beneficial for the company to repair a particular part or buy a new one. In each case, it is necessary to carefully analyze several factors (costs and lead time, for example) including the risks involved in each alternative. Maintaining efficient inventory management is essential for this assessment. The number of materials in stock can be an essential factor in your decision-making process.

A good relationship with quality suppliers is a key in the replacement or repair of parts. Late delivery can disrupt production days, generating unnecessary losses.

A good option is to rely on a company like Soluparts, specialized in negotiating with the main suppliers in the world, obtaining better commercial conditions in the acquisition of indirect materials.

We offer manufacturer’s warranty and put effort into avoiding any type of inconvenience in the event of part replacement. Talk to one of our experts for more information.

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The best way to measure the purchasing department’s performance

The purchasing department is one of the most important within any business, being extremely strategic. The area is expected to generate value for the organization. Precisely for this reason, you always need to look for new ways to improve purchasing processes and improve your KPIs.

KPIs (Key Performance Indicators) are part of a type of process management that emerged in the 1990s and is one of the best ways to monitor the performance and evolution of any sector.

In the procurement area, the most important and most used metric to measure the success of the department is the savings on purchased supplies. This cost reduction is usually measured by directly comparing the prices charged in a previous period with the new prices for the same material.

Various practices can be adopted to reduce costs: simplifying supplier lifecycle management, increasing efficiency by leveraging the analysis of supply chain metrics, negotiating medium to long-term contracts or guiding staff on how to save costs effectively.

However, there are a number of metrics that can be used to find out how the team is contributing to the evolution of the business. Monitoring these indicators helps answer questions such as:

• What needs to be optimized?
• How do we compare to other organizations?
• Are we achieving results?
• Are we evolving?

Salim Khalife, founder, president and CEO of Paramount WorkPlace, recommends some monitoring approaches, such as: Lead time, supplier performance, cycle time, expenses under management, cost savings and percentage of POs, as already discussed in our blog.

In this article, we list some other indicators that will take the measurement of your purchasing area to a more advanced and strategic level. Check it out!

Profitability

One of the most important purchasing KPIs is the acquisition ROI. It determines the profitability of the department’s investments and in order to calculate it you need to divide the annual cost savings by the annual internal acquisition cost and express it as a proportion.

The ROI of the purchasing area should have a significant return, and setting it 10 times higher than the internal investments for the department is a good goal.

Keep in mind that this KPI is different from the ROI calculated with the formula ROI = Net Income / Cost of Investment.

Emergency purchases

The emergency purchase fee is a KPI focused on unplanned orders. These orders are usually placed when there is a shortage of products in stock and the purchase and replacement of a particular part must be immediate.

This indicator has a time factor, that is, it is measured over a certain period and is expressed as a percentage between emergency purchases and total purchases. The objective is to keep the index as low as possible, avoiding supply chain bottlenecks, shortages in the product portfolio and extra expenses such as faster freight, for example.

This indicator will show how effective the planning of the sector is and whether it is necessary to adjust future strategies. Proper planning is essential to reduce costs and improve the quality of the sector’s purchases, directly impacting the organization’s profit.

To improve the performance of your department and solve your main problems, we recommend this article.

Supplier quality

The quality of suppliers can be measured through several parameters, such as: analysis of reliability, deadlines and delivery quality, response time, quality of products supplied, price competitiveness, number of pending or overdue orders, quality of the relationship, among others. These criteria should be defined according to your department’s priorities and goals.

The control of the performance standards of its partners reflects not only in the optimization of the department’s processes, but also in the production, avoiding delays, waste and stopped machinery.

The average quality of services provided by suppliers can be improved through new criteria for choosing new suppliers or through renegotiation with existing ones.

Another tip is to do a SWOT analysis of each supplier before signing the contract in order to prevent possible risks related to the agreement, as explained in this article.

Purchase effectiveness

A popular method of assessing purchase effectiveness is to review inventory turnover rates. The index measures the number of times, on average, that the stock is used or rotated during a given period.

Measurement in this case can bring improvements related to:

• Dead stock reduction
• Savings on storage costs
• Decrease in emergency or unforeseen purchases

This indicator helps in stock management, but it is essential to pay attention to seasonal purchases that can make this measure inaccurate. One solution would be to have a separate effectiveness indicator for seasonal purchases.

Transport improvements

Transport costs are a significant part of general logistics costs, but are often negotiated and defined by the buyer. Therefore, being able to lower freight prices when negotiating the purchase helps to reduce the total costs of the purchasing department, increasing its effectiveness.

Part of this negotiation consists of choosing the Incoterm included in the purchase order. Some companies have standard Incoterms used in most orders, but a careful assessment of the possibilities can help you save money.

Always try to make more cargo consolidations, buying more materials from the same supplier or from the same location in a short time, thus, only one shipment will be made and the total transportation costs will be reduced.

In this process, never fail to compare the freight values ​​offered by the supplier to the freight price chart provided by your company’s logistics, opting for the most affordable.

Automation is necessary for better measurement

In addition to defining indicators to assess the development of activities in the area and identifying bottlenecks in processes, these data must be correct and always available for monitoring. The best way to do this is by automating the supply chain.

Automation not only improves data management, but it also reduces costs and prevents frauds, minimizing the risks of operations and subsequent frustrations. Use tools to optimize each step and collect, analyze and monitor data from the entire process.

To better interpret the information generated through data, we suggest using a Business Intelligence software to centralize all the information that needs to be analyzed and used in decision-making. In this manner, possible flaws in the department’s processes and improvements can be identified with greater precision and ease.

Conclusion

Developing an effective measurement for the purchasing team is not always an easy task. It depends on analyzes of the department’s operation and definition of the main priorities, goals and objectives.

After identifying the real needs of the business and understanding the nature of the key purchasing performance indicators, it is easy to choose those that are in line with the defined objectives.

Monitoring the indicators and KPIs with your team will enable them to better understand the company’s buying habits, the performance of suppliers and whether the procedures are working as they should. Thus, it becomes easier to make eventual personnel changes, reallocate resources, mitigate risks and avoid bottlenecks, in short: assess problems, find solutions and optimize the department.

On our blog, you can find great content that will help you to optimize and modernize your purchasing department. We also have a series on negotiations and career development. Check it out!

To better understand how Soluparts can contribute to your company’s purchasing department, contact our team!

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