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Procurement logistics are the processes used in the delivery, receipt, movement and storage of materials purchased for a business or organization. In most manufacturing or distribution companies, procurement logistics form the backbone of the company. The primary concepts surrounding procurement logistics are focused on minimizing costs and increasing service.
Procurement is the entire process used to select suppliers and negotiate contracts for delivery of goods or services. Procurement logistics typically form a major part of the contract with material suppliers. Items included in this section of a purchasing contract include minimum and maximum order sizes, lead time requirements, delivery expectations and drop-off locations.
The cost of transportation and storage is included in the final price of all goods. However, companies that are negotiating high-value contracts can try to minimize these hidden costs through various strategies. For example, just-in-time delivery requires the supplier to store and ship the goods on a set schedule. The contract guarantees a specific volume of materials in each order. If the customer decides to store the materials, the per-unit price can be negotiated lower, because these costs are not incurred by the supplier.
Shipping of raw or processed materials from around the world is very costly. Some companies use a specialized logistics firm as a broker to manage the flow of materials and minimize costs. For example, a steel plant in China with a contract in Canada can ship the entire order to a storage space in the United States, managed by the broker. As the customer confirms quantities, the broker releases the materials for shipment to Canada. The shipping costs for the manufacturer are less, although there is an additional cost for the broker's services.
People who work in procurement logistics typically are trained in both disciplines. A solid understanding is required to create proposals, review contracts and determine all possible options. Contract negotiation skills often are developed in a procurement position but are not necessarily utilized in logistics.
Regardless of the industry, the driving factor behind all procurement logistics initiatives is a desire to reduce costs and minimize production disruptions. The failure of parts to arrive on schedule can easily result in a complete stoppage of all work. The minor savings in storage costs are more than lost in the cost of wages and overhead during a period with no production. There is a level of risk with all decisions, and procurement logistics are a method of minimizing the known risks.
I think one of the hardest aspects of procurement logistics is sourcing. Even if a companies internal logistics are flawless, it is important that your company partners with the right businesses to have a smooth flow of goods from start to finish.
I currently work in sourcing, and a lot of people I work with constantly want to break out of contracts with long term suppliers and do business with other companies who sell the same parts for cheaper.
While I understand the need to reduce material costs, I think it is worth spending a little bit more on a company that you know will deliver products on schedule, than to work with a company whose process you know nothing about.
Is it worth potentially risking quality relationships to save money?
This article reminds me of the time I spent working at a company that manufactured household appliances. These appliances would then be sold to retailers, who then sold the products to customers. Procurement logistics plays an important role in this delicate process of supply and demand.
One time, our main copper tubing supplier was late on a shipment, just before we were to fulfill an order to one of our major retailers. Because we lacked a key part, we couldn't produce the quantity demanded by our retailer, and lost money in potential sales.
Logistics is an art that needs to be handled with extreme care.
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