Understanding the most fundamental principles of supply will allow you to know what decisions to take when it comes to supplying your entire chain. The problems taking place daily in a supply chain are countless, and the right decisions are the only way to keep the boat afloat. So let’s get started:
Purchasing the materials that will make up your supply chain cannot (and should not) be governed by a set of fixed rules because sometimes individual cases have unique characteristics, and, for this reason, decisions must also be unique. Therefore, it is preferable to consider a series of principles that may or may not fit the special circumstances of each case.
There are three basic, correct and traditional aspects that must be taken into account when buying to supply. The first is quality, the second is quantity, and the third is the price. Among the particularities that you should always remember are other variables, such as raw material properties, volume, size, and weight. This is important when storing, for example.
When it comes to quality, there are certain situations regarding materials, articles, or services. The first aspect is convenience. This means determining the right, minimum, and acceptable quality of the raw material you need to produce what you sell. This depends on your needs and is variable at different times of the year. The important thing here is that the purchasing department finds the best option in price, quality, and service.
Likewise, availability is fundamental in terms of quality. In addition to getting the required materials, they must be purchased easily and practically, so that the acquisition can be made as often as needed, in the quantities needed.
Read also: Stock-taking: A key aspect you may be doing all wrong, by David Kiger
The cost of materials is a delicate matter. Although the idea is that prices should be as low as possible, it is necessary to be careful of where the raw material comes from, and under what conditions it has been produced. It is not simply an ethical matter. In the long run, you could face economic issues if the quality is directly proportional to the price of the material, as well as legal problems if the purchases are taken under dubious circumstances.
Quality control is vital. It is necessary to check that the articles, materials, or services are purchased according to the requested requirements. Establishing a good quality control system, not only on the material that reaches the supply chain but on the items to be produced, will save you several headaches. So, set up a plan and meet it as a priority.
Now, the amount of material you buy: How do you decide it? Knowing how much material is needed is an issue that can surely save you a lot of costs when you know how to do it. So, the purchasing department must know how much material is needed exactly to produce X amounts of items and contemplate a provisional amount in case of accidents. Here, experience, prudence, and good calculation are put to the test.
The best way to buy the right quantity of materials depends on the type of items, the delivery times, the order requirements, the material unit price, the average inventory purchase, and the transaction costs. All these factors must be studied in depth.
What about the price? Some will say that it is the most important element, and even though I do not entirely agree, I understand why they say it. Especially when a company is huge, a minimal increase in prices means big budget changes that may take the company to lose the entire financial balance. Price is a sensitive term and condition of the purchase order, but, above all, it is a means to an end: To produce and satisfy the needs of your demand.
Knowing good prices and knowing how to negotiate is an art that you should start learning. You can reach agreements with your suppliers in exchange for the exclusivity and loyalty that you offer as a customer. It is important that you study your competition and be aware of how it is provided. How much money does it spend on the supply of raw materials? What providers sell supply your competition? Do they have an exclusivity agreement?
It is more than important to deal with an appropriate and efficient provider. Normally, the seller is the one who looks for the potential customer and this usually leads to a negotiation (especially when it comes to wholesale sales.) That does not mean that you cannot find the suppliers yourself. Search, analyze the best possibilities, and think about the effects of each decision on the short, medium, and long-term. When you select your supplier, measure its performance as a seller: How is the quality of its product? How many units can it provide? In how much time? What availability does it have? What is its reputation? Do not make decisions lightly.
Well, that’s it. I hope it’s useful for you.
* Featured Image courtesy of Asian Development Bank at Flickr.com