Material Procurement

Planning

Written by
Eng. Hassan Al Heliel
Material Procurement

Material procurement, or raw material procurement, is the process of selecting,

purchasing, invoicing, and paying for raw materials. This project has a huge
impact on the success of a project. At this stage, you'll determine which
materials you need, the quantities of materials required to complete the
project, and the timeline under which the project will be completed.
 Procurement Types

Direct: Direct procurement is the sourcing and purchasing of raw materials that directly
impact your final product. It includes purchasing machinery, raw material, and other goods
playing a central role in creating your final product.

Indirect: Indirect procurement refers to sourcing and purchasing of ancillary goods you
need to run your business efficiently. For example, office supplies don't directly contribute
to your final product but are essential to your business running smoothly.

Services: Services procurement refers to sourcing and purchasing software, external

consultants, or any other service that helps you run your business. For example, hiring a
marketing agency to manage a short-term campaign is an instance of service procurement.
Material Procurement Important

• Material procurement ensures that your business has the raw goods
you need to develop products, drive innovation, and stay within your
budget while doing so. A strong material procurement process gives
you the following advantages.

Supportive
The ability to An end-to-
business
A high-quality address end view of
relationships
product that Sustainable changes in your sourcing
with high-
delights profit margins demand and supply chain
quality
customers supply
material
efficiently
suppliers
Is material procurement the same as purchasing?
• Material procurement and purchasing describe two different tasks. Purchasing is a step in the
procurement process, while procurement involves more functions, including:

Alignment
Business goal Vendor
Price Delivery time Invoicing and Payment with
mapping and selection and
negotiation and handling reconciliation approval manufacturing
forecasting evaluation
projections
Material Procurement Process

1. Determine 2. Design a
3. Identify and
needs and procurement 4. Negotiate prices
evaluate suppliers
business goals strategy

5. Receive 7. Receive invoices

6. Receive and and pay suppliers
purchase orders
verify delivery
and review
1. Determine needs and business goals
• Determining an organization's business goals is not solely a procurement goal. In
most organizations, the executive suite earmarks high-level forecasts, and various
departments align their targets to those goals. Procurement works the same way.
• Manufacturing will thus increase its production targets, with a knock-on effect on
procurement goals. A procurement department will fix its internal goals, calculate
lead times, and determine which goods and supplies the company needs to
achieve its broad goals
• Make sure to incorporate goal setting as part of your initial procurement project
management. Every other step in the procurement process lifecycle stems from
cementing priorities from the get-go.
2. Design a procurement strategy

• Many procurement teams dive right into selecting suppliers once they've fixed their goals.
However, take the time to create a procurement strategy that fits well with your supply
chain management systems. A procurement strategy gives you a framework to select and
screen vendors, optimize the purchase process, and evaluate vendor performance.
• Once you have a good strategy in place, you'll naturally enhance stakeholder relationships.
Thanks to the transparent metrics and processes your strategy defines, you'll have no
issues communicating expectations to your suppliers. This kind of open communication
builds strong relationships with your vendors, who will be more likely to support you
during tough times.
• At the very least, you must define vendor performance metrics (KPIs) that help you
quickly evaluate and rate the quality of services you receive.
3. Identify and evaluate suppliers

• Once you've defined your strategy, you can use it to identify and evaluate suppliers. Every
supplier brings something different to the table. However, many companies equate
supplier evaluation with price evaluation. Price is the most important factor in indirect
procurement.
• However, direct and services procurement impact your ROI significantly. Therefore, take
the time to evaluate vendor quality, market feedback, and delivery terms. For instance,
supplier A might demand short credit cycles but deliver high-quality goods on time.
Choosing a less reliable supplier solely because of better credit initiatives doesn't make
sense in this situation.
4. Negotiate prices

• Despite the focus on quality in direct and services procurement, raw material prices are important. Make sure
you evaluate prices from an investment perspective and not an expense minimization one. An expense is
spending you can reduce without significantly impacting your product.
• Investment refers to spending that boosts profits and your business. Your objective when evaluating vendor
prices is to focus on generating the most ROI with appropriate prices in direct and services procurement. In
indirect procurement, you must focus on cost minimization.
• When negotiating prices, review your existing cash flow to avoid offering credit terms that might put you in a
hole. For example, if you notice that your cash flow might suffer over the next quarter, try negotiating for net
60 or greater payment terms with your suppliers.
• Note that these terms might not always suit your suppliers, depending on your industry. However, cash flow
data will help you balance inflows and outflows, leaving your cash position at an ideal level.
5. Receive purchase orders and review

• Once you've negotiated prices, your procurement department will send a purchase order (PO) to your
suppliers. The PO will list details such as:
• Order number
• Items ordered
• Quantities
• Prices
• Expected invoice amount
• Any additional payment details such as credit terms
• Delivery due dates
• Once vendors receive your PO, they will begin processing your order.
6. Receive and verify delivery

• Once your vendors have finished processing your order, they will dispatch the goods. Make sure you
verify vendor deliveries. Follow the tips below, at a minimum:
• Verify delivery slips with POs. Note that your suppliers might partially fill POs by splitting goods across
multiple deliveries.
• Document delivery evidence such as Bills of Material, pictures of goods, and their condition.
• Sign off on delivery after inspecting goods.
• Communicate issues with suppliers immediately.
• Store goods securely in your warehouse or facilities.
7. Receive invoices and pay suppliers

• Most suppliers will include an invoice with their deliveries. In such cases, you can match the invoice to
the PO and verify delivery proofs. Assuming everything checks out, you can pay your supplier according
to the credit terms they offered you.
• Note that many suppliers offer early payment discounts. Make sure you capture them as much as
possible. These discounts could help you save as much as 20% annually on purchasing costs.
The Best practices for raw material procurement

2. Work with suppliers to

1. Create and share material
determine material delivery
demand profiles with vendors
schedules
Raw material
procurement

3. Mitigate risk by choosing

4. Embrace automation
multiple suppliers
1. Create and share material demand profiles with vendors

• Your company will face changes in customer demand every year. For example, retailers face fluctuating
demand depending on the season. Share these expected demand profiles with your suppliers. They can
plan their output better, resulting in timely deliveries to you. You’ll also build strong supplier
relationships driven by transparent benchmarks.
2. Work with suppliers to determine material delivery
schedules

• Ask your suppliers about their delivery schedules and check on shipment statuses regularly. Many
companies request a GPS feed of their shipments.‍
• If you're expecting a surge in demand, let your suppliers know as quickly as possible. Aside from raw
material supply, your vendors can figure out logistics and deliveries ahead of time.
3. Mitigate risk by choosing multiple suppliers

• If your company sources goods from several vendors, spread your orders among them. Sourcing most of
your supplies from a few vendors could impact your supply chain if one vendors can’t meet their
obligations. For instance, a vendor's bankruptcy might cause you to miss production schedules and lose
market share.
• Follow this principle unless your raw materials are extremely scarce. In those situations, consider buying
the vendor or owning a significant share of their company to minimize risk.
4. Embrace automation

• Procurement is a complex process that involves much record keeping and verification. Automate these
processes and you can focus on discovering inefficiencies in your supply chain.
Purchase Planning

• Purchase Planning is a necessary process in inventory management, where the purchase manager is
responsible for all the requisition related to stock in the warehouse. Simple term purchase planning
facilitates a structural approach to the management of purchasing activities which define the lucrative
material purchase plans, like what should be purchased, in which quantity and from where it should be
purchased. Planning typically takes place as a component of the budgeting process, in which inventory
needs to operate the business properly and to control the cost of the goods with suppliers.

Why is Purchase Planning Necessary for a Manufacturing or Trading unit?

As we all know about the complex functioning of Inventory Management, where we require an effective
structural purchase planning approach to purchase raw materials on an interval basis. With the inventory
software, purchase planning allows manufacturers to fulfill continuous work orders timely. Effective
purchase planning can reduce the overall purchase plan cost and warehouse stock keeping cost and plays
an important role to run & manage a Modern Warehouse.
Key Considerations in Purchase Planning

Customer-Centric Focus

Warehouse and Storage Optimization

Business Viability

Budget
1-Customer-Centric Focus

• The primary consideration in any business’s purchase strategy is the customer. Customers are
paramount and the lifeblood of any enterprise, and by excluding them, revenue streams cease to exist.
In the domain of wholesale distribution, where customers frequently form part of an elevated supply
chain, reliability tends to become paramount. Procurement planning must assure consistent stock
availability, delivering customer satisfaction at the forefront of purchasing objectives.
2-Warehouse and Storage Optimization

• Warehousing necessitates inherent expenses, distinct from main workflow operations like staffing and
creating services. Effective utilization of such tools is most pivotal to elevate revenue potential. Such
purchasing techniques should also have a key influence in the maximum storage capacity, highlighting
the fact that overstocking may minimize the available space. As a result, orders should go along with the
demand, and the business should be put together to relocate well-stocked items to warehouses coming
across the shortages to preserve storage efficiency.
3-Business Viability

• While the maintenance of efficient customer relations for a steady revenue flow is the most pivotal, the
workflow of the business itself should be on solid ground to efficiently cater its customers. Overstocking
has its own risks to working capital, potentially putting an obstacle to growth and diversification.
Furthermore, it can result in stock inactivity, minimizing overall profitability. The purchasing plan must,
therefore, introduce a balance among the requirements of the business and the demands of the
customers.
4-Budget

• As well as the purchase costs of stock, the business needs to consider how supply chain support
functions fit the budget of the company. The purchasing strategy should reduce costs like warehouse
staffing and HR management while core operations must be streamlined for maximum efficiency to
reduce the cost of functions that deplete profits.
Inventory Planning

• Inventory represents often the biggest part of a retail business’s assets – up to 80% of cash is
usually tied up in inventory. Holding inventory is unavoidable as it allows organizations to operate
continuously. However, having too much inventory is damaging to a healthy cash flow and holds
business growth as the money tied up in excessive inventory can’t be invested in other areas of the
business.
• Inventory management planning is an integral part of a company’s supply chain management
strategy, alongside order management, accounting, warehouse operations, and customer
management.
• Inventory planning involves forecasting demand and deciding exactly how much inventory and
when to order. When done successfully, this helps companies meet demand whilst reducing
expenditure.
• In other words, by having just the right amount of inventory at the right time, in the right location,
businesses reduce the overall cost of storing merchandise, optimize inventory allocation routes,
and ensures that there is always the right amount of stock to meet customer demand
Differences Between Inventory Planning and Assortment Planning

• Inventory planning is all about optimizing your inventory levels so that you minimize costs but always have
enough stock to meet demand. It involves making strategic decisions on when to reorder and in what
quantity.
• Effective planning requires you to make accurate forecasts by analyzing sales history and emerging trends. You
also must ensure adequate storage for the goods and understand how factors like supplier lead times and
availability of raw materials affect the supply chain.
• There is some crossover between inventory planning and assortment planning. Both are reliant on data
regarding customer behavior, trends, and product performance. And the aim in both cases is to maximize
profit and deliver a great customer experience.
• However, assortment planning is more specific. It’s about choosing the range (or “assortment”) of products
you want to sell at times, and deciding which ones will be sold via which sales channels. This is based on
seasonality and demand for each channel or location.
• Assortment planning helps you rationalize your SKUs and focus your investments on items likely to bring in the
most revenue while avoiding those for which demand is low. You can also plan your inventory around
warehouse capacity.
Challenges of Inventory Planning

• Inventory planning involves bringing together lots of different factors and variables. Planning inventory
accurately can be challenging even for businesses operating on one sales channel.
• When a business or organization relies on multiple channels, with multiple warehouses, and possibly even
multiple 3PL providers, things get even more complex. Especially when demand fluctuation and seasonality
are also added into the mix.
• Dealing with so many separate operations and variables at once poses some unique challenges. Even small
hiccups can spell disaster. Typical challenges include:
1- Disparate data

• Effective inventory planning requires a lot of data from a lot of places. And bringing all this data together is a
complex task. Inventory planners will need to collate historical data and retail reports that may be dispersed
across many different legacy systems.
• Planners will need to collate sales orders, accounting, fulfillment, suppliers and point-of-sale (POS) data.
• This is not only time consuming but, if done poorly, may result in biased demand forecasting leading to over-
stocking, under-stocking, or missed opportunities.
2- Guesswork

• Making predictions is never easy. If you don’t have the right KPIs in place to guide your inventory planning,
guesswork will always be there, even if you have analytics tools. Plus, unpredictable market variations can
make the forecasting even more complex.
3- Multiple locations

• Allocating inventory that is stored across multiple locations is challenging. Without a suitable inventory
tracking system, it’s difficult to know exactly where to allocate your merchandise all the time.
• Plus, storing merchandise in the wrong place could result in added shipping costs and longer wait times for
customer order fulfillment. A poor picking process will not only reduce productivity but increase travel times
across the whole supply chain.
4- The human component

• Technology is not the whole solution. Inventory management planning is ultimately controlled by an
inventory planner. When the role is taken over by somebody else, there is a lot of historical knowledge
that needs to be transmitted to the new person in charge.
• The new planner will initially lack the brand awareness of the outgoing planner and may struggle to
understand the historical reasoning behind the current inventory management system.
• And the human component doesn’t just apply to senior staff. Even with the best inventory software in
tow, if staff aren’t sufficiently trained to use it, your business won’t see the best results possible.
• Poor training impacts management and breeds miscalculation. Likewise, poor communication between
procurement, production, and quality control departments will ultimately impede efficiency.
Key Considerations When it Comes to Inventory Planning

• Given that proper inventory planning is so business-critical – now more than ever- what can we do to
ensure that our inventory plans are robust and ready to go?
• To actualize and carry out a successful inventory plan, you’ll want to follow some best practices and
procedures. To do this it’s imperative that e-commerce businesses familiarize themselves with the
important steps involved when it comes to planning inventory.
The important steps involved

• There are many important steps involved in planning and executing a successful inventory
plan. In general, these roles can be thought of in three parts: context; analytics; the planning.
• Context refers to your business’ data history. From micro details to macro level planning.
Everything from sales orders, customer knowledge to the competitor landscape and current
socio-political events should go into informing your inventory planning process.
• Analytics refers to inferring information from the data itself. Ensuring that the inventory plan is
based on the correct data, sufficient data, and (extremely important) complete data. What
does this data mean, and how will it inform a flexible, scalable inventory plan?
• Finally, the planning stage is critical in and of itself.
 Setting tentative or
strict receipt budgets
Analyzing the by product category Weekly performance
competition’s‍ recaps to assess
data (pricing, product and category
promotions, & trends) performance

Using SKU Setting markdowns

performance to set and promotions based
expectations for on weekly
upcoming seasons performance recaps

Reforecasting
Understanding how periodically based on
stock keeping units weekly updates,
(SKUs) have performed trends, and current
events

Gathering a
comprehensive
The Managing evergreen
inventory with
database of historical
sales data planning monthly sales
forecasts and receipt
projections

stage
THE END

• If you have any questions or consultations regarding supply chains and development.
• Eng.hassan.alheliel@gmail.com
• eng-hassan-al-heliel-950398276/Mobile:+966504813276