Purchasing or procurement activities are a part of our daily lives and are often not given much thought by individual buyers. However, in an organisational setting, it can cause a massive change within the revenues and achievements of the Corporate Social Responsibility and value creation goals that a company sets for itself.
Mass consumption products have an inelastic demand which means that the demand is unaffected by the change in price. This implies that the customers will keep buying the products even though the price is high.
On the other hand, keeping the price of these products low is in the best interest of the companies selling them because it could give them a great competitive advantage and make the operations sustainable in the long run (Etzel, Walker & Stanton, 1997).
Terminology of Procurement versus Purchasing
The terminology of procurement vs purchasing can perhaps be best explained using the PP Organogram, as shown in the diagram below. The diagram depicts the focus of purchasing on system and process, whereas procurement is focused on the active interaction with suppliers, as well as with internal customers. This article will adopt the terminology of procurement where the activities involved require active interaction both internally, and with suppliers.
Importance of Pricing Decisions for Mass Consumption Products
The price of a product is a pressure point for the management of any company because it is determined through the progress in technology, prices by competition, change in the demand for the product, changes in the economic and political background of the country. Everything that happens in the internal or external environment of the company has the potential to affect the prices.
When an organisation is able to control the source pricing then it will also be able to give a more competitive price to its customers. Hence the source pricing or the effectiveness of the procurement practices has the potential to provide a competitive advantage to a company (Eliashberg & Jeuland, 1986).
Importance of Purchasing Mass Consumption Products
Implementation of effective procurement practices has the following benefits (Leonard, Seiders & Grewal, 2002)
Managing the inputs and outputs for the company helps in the reduction of costs such as utility, material procurement, etc., and increases the efficiency of the processes which creates a financial advantage.
The organisational goals and business values can be aligned with the procurement practices through the making of effective purchasing policies. It also helps reduce business risks and improve the management of the supply chain. The company engaging with effective procurement practices is able to provide more innovations through the use of technology and lean production methods. When the suppliers understand the company’s requirements then they are able to cater to its change in productivity levels as well.
Effective procurement practices focus on reduction in waste and better methods of its disposal. The reduced burden on the resources helps decrease the consumption of energy without a dip in the quality or increase in costs. Better management of the transportation, packaging, carbon footprint and maintenance of biodiversity can help preserve the environment. This is beneficial not only because it would enable a green way of production but also give the company a competitive advantage through a better brand image.
When the procurement practices of a company are lean, they are more focused on improving the quality of life for their employees and creating better work environments. The products become more sustainable which helps make the economic conditions of the company and the region that it operates from, better. A stronger local economy helps all the industries and hence vulnerable groups are protected. There is an increase in economic opportunities which helps with further development.
The Effective Procurement Strategies
Below listed are the strategies that can be adopted in order to optimise the source price and make procurement practices more effective (Dolan, & Youngme, 2000).
This strategy is available to large corporations where the sourcing price or quality is more relevant than the transportation cost. This is because with the increase in the size of the company, supply channels are automatically set and with the rise in the quantity supplied, the transportation costs become irrelevant in the long run. This allows to get in touch with the suppliers having the best quality and prices, no matter what their location.
An important strategy that companies with global sourcing networks supplement is of the risk management. The sourcing from certain high risk countries could be cheap but may have additional risk which needs to have a Business Continuity Plan [BCP] in place and risk management factors considered.
This strategy is adopted by many firms that want to either reduce their carbon footprint or increase their environment promotional activities. This procurement practice is not always cheap but bio-degradable products, environment friendly practices and ways to recycles makes it the most effective strategy in the long run (Young et. al, 2010).
The Company can select a variety of vendors offering different rates and services along with the product to come up with the right mix of the best product prices and the most associated services. This also allows the company to become more independent of suppliers and in case of issues with one of them, the company can just start to rely more on other vendors.
Total Quality Methods [TQM]
This strategy for optimising procurement practices focuses on reduction in errors and six sigma practices in order to deliver the items. Industries that are extremely quality sensitive opt for this method of procurement.
Developing relationships with vendors beyond the procurement of products can help companies develop various new and innovative ways to improve pricing and the supply chain process. The lightness in the procurement cycle comes from the benefits that two companies would be able to provide each other in the long run.
The intake of mass consumption goods is ever increasing and in the competitive market environments, effective procurement practices can be a tool for sustenance.
There are several benefits that organisations can reap from adopting effective procurement practices which range from financial, increased management efficiencies, environmental and socio-economic in nature.
There are also several ways in which the procurement practices can be made effective. A company can opt for a TQM provider, indulge in vendor development, opt for green buying, optimize several suppliers, go for global sourcing and pair it with effective risk management strategies (Dolan & Youngme, 2000).
Companies can also choose a mix of these strategies that work best within their industry to come up with the most effective procurement practices.
Dolan, R. J. & Youngme, M. 2000. Pricing and Market Making on the Internet; Journal of Interactive Marketing, vol. 14 No. 2, pp. 56–73.
Eliashberg, J. & Jeuland, A. P. 1986. “The Impact of Competitive Entry in A Developing Market upon Dynamic Pricing Strategies,” Marketing Science, vol. 5 no. 1, pp. 20-36.
Etzel, M. J., Walker, B. J. & Stanton, W. J. 1997. Marketing; 11th edition, Irwin McGraw Hills, USA.
Leonard L., B., Seiders, K. & Grewal, D. 2002, “Understanding Service Convenience,” Journal of Marketing, vol. 66, pp. 1-17.
Poh, Philip (1988), “Defining and Clarifying the use of Terminologies”, International Federation of Purchasing and Materials Management conference, Brisbane.
Young, W., Hwang, K., McDonald, S., & Oates, C. J. 2010. Sustainable consumption: green consumer behaviour when purchasing products. Sustainable Development, vol. 18, no. 1, pp. 20–31.