For decades, businesses across industries have faced a particularly thorny problem: the disconnect between demand, procurement and supply chain management.
Many companies have trouble delivering goods and services during “rush” times, such as the winter holidays. In addition, for B2B brands, the changeover of fiscal years often involves a lot of extra orders. The resulting delivery delays expose faults in suppliers’ fulfillment processes.
The solution lies in a convergence of procurement and supply chain functions. The company’s purchasing software needs to know when to order things, under the direction of the procurement department. So how can this work in practice?
One of the ways that companies fail to meet customer expectations is when something is out of stock at a time when demand is highest. As analyst Prankaj Madhani pointed out way back in 2010, this problem has led to a lot of marketing failures.
Madhani cited Kmart as an example of the disconnect between marketers and purchasing. The discount retailer used to be ubiquitous in the suburbs; now it has just a handful of stores remaining. Its marketers would put an item on sale, then send out flyers, but when shoppers showed up to buy the product it would frequently be out of stock. Eventually, people quit paying attention to the flyers, because they knew the product wouldn’t be available.
What does a convergence between supply chain management and purchasing look like? In a word, Amazon. The giant e-tailer succeeds through rapid fulfillment and a high in-stock rate. When an item is immediately unavailable, Amazon will tell customers when they can expect delivery, and offer an alternative. In addition, it will often order extra goods that are slated to be on sale during promotional events such as Prime Day.
Startups that produce high-tech gadgets need to consider the Amazon effect. Such companies often face a lot of competition, and unlike household staples, where shoppers might be willing to wait for an item, there’s a high chance that customers will go elsewhere if they find something similar that arrives faster. Similarly, if the seller fails to deliver on time, its chances of keeping the customer long-term decrease dramatically. Considering the high cost of customer acquisition, that’s an expensive problem.
Amazon does a good job of informing customers of inventory levels. It puts notices on items that are nearly out of stock, while also noting when more are on the way, and their expected ship date. In the process, it manages customer expectations, letting them know which items need to be ordered right away to avoid disappointment. Amazon knows these things because of its ability to integrate inventory, ordering and its procurement software. Amazon’s supply chain is carefully managed from the top down.
Delighting your customers isn’t the only reason that procurement and supply chain functions need to converge. At the same time, the business will run more smoothly, and it will be easier to adapt to supply chain problems.
The events of the last few years have shown that supply chain conditions can change rapidly. A reduction in travel, government lockdowns and large-scale labor shortages have made moving goods around the globe extremely difficult at times. Yet the buyer that keeps global conditions in mind is less likely to be the one that’s left with nothing.
For example, if you have great sourcing functions within your procurement software, it becomes easier to find an alternative source of a critical component in a pinch. (Even if you have to pay a little more temporarily.) This way, your production unit can keep working so that there’s always adequate finished-product inventory.
Finally, when procurement and supply chains are balanced, it’s easy to change with, or plan for, changes in customer demand. Like Amazon, you’ll be able to produce more units ahead of a busy season or promotion. And if your sales are down, you can adjust quantities within the procurement software to avoid a large overstock.
With a balance of supply and demand, you can earn better profits. Not only will you be less likely to need big discounts to sell your stock, but you won’t need as much costly storage. And, of course, you can avoid the problem of having something out of stock for very long. In those such cases, you can make like Amazon and give your customers a realistic expectation of when the goods will arrive.
RSS
