It is certainly common practice for procurement to go through several rounds of optimization scenarios during the sourcing process. They usually take place either in advance of negotiation discussions with suppliers or before final award decisions become contracts. Optimization is crucial as it helps decision makers understand how their assumptions and constraints change the relative advantages of each qualified option. Context is important when it comes to optimized rankings in procurement.
It is vital to understand that procurement is not the same as purchasing. Lately, most of the actual buying is handled in a distributed manner by colleagues working in other departments of the company. For the total value of each contract to be achieved, purchasing and inventory management have to be optimized as well, allowing changing circumstances and context to have the proper influence in each buying decision.
There is no one way to optimize individual buying decisions, at least not one isolated way. Multiple interconnected steps have to be taken to make sure that orders are filled without attaching capital to unnecessary safety stock that has high chances of becoming obsolete. Beyond being inefficient, non optimal buying carries the risk of consuming all of the savings procurement managed to negotiate in the sourcing process.
The three steps to take in an optimized buying program are the following:
Step 1: Intelligent Forecasting
Forecasts need to be continually revised and brought up to date if they are to remain relevant and used. They need to be adjusted as well when orders are moved up, back, increased or cancelled. However, to deem a demand forecast intelligent, inventory demand forecasting needs to predict demand levels associated with orders that have not yet been placed. Managing the effects of seasonality, trends, and outliers across every item in the warehouse with enough precision to achieve efficiency requires daily calculations for buyers to incorporate as they make purchases.
Step 2: Dynamic Safety Stock
Forecasting is important and helps companies predict and make decisions in advance. However, there still is a need to know how much safety stock should be on hand. The trick to setting appropriate levels of safety stock is to give them the same optimized treatment that the demand forecast received in step 1. Although all items will be affected by the historical accuracy of the demand forecast, there are some item and supplier specific variables that must be taken into account. Some suppliers are more reliable than others, and some items require a longer replenishment time. In the case of safety stock, the level of each product on hand has to be dynamic in terms of how it responds to forecasts.
Step 3: Cost Optimization
Each specific purchase benefits from a cost optimization all on its own. Every purchase meets the immediate needs of the buyer as well as the cost priorities of the organization through the ensuring of packaging units, minimum order quantities, ordering costs and purchase prices. Safety stock calculations and optimization reveal how well they have been implemented at the time cost optimization takes place in the ordering process. This is seen through taking a unique set of items and requirements and making certain that the order is placed as efficiently as possible.
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