Economic importance of Procurement

In the average company, goods, materials and services purchased from outside, form approximately 80 % of the total costs of the company. These include both

  1. direct, production-related purchases and subcontracting, which usually are shown as purchases in the income statement
  2. indirect purchases such as outsourced human resources services, information systems, training and consulting services, marketing services and in addition e.g. financial services and rents.
  3. The third group of external resources form of investments that are not shown in the income statement directly, but in the balance sheet. All these are acquired from outside manufacturers and services providers in procurement terms, although not all acquisitions traditionally perceived as procurement.

The efficiency of direct procurement, associated with selling product or service, affects directly the costs of product or service and, consequently, their competitiveness and sales. Indirect procurement targets all selling products and services, and by improving cost-efficiency has as large impact on overall competitiveness.

The procurement know-how has a great importance on the competitiveness of the company when procurement costs form the largest part of the costs of the company. If competitor knows to search, find and attract more competitive, cheaper or more knowledgeable suppliers, takes advantage of their expertise and innovation skills better, leads and encourages them to continuous improvement of efficiency, competitor’s advantage is likely to grow very significant.

More efficient supply chain or supply network reduce costs, shorten lead times and reduce tied-up capital, improve quality and provide faster product or service reforms. Thanks to these, the whole operation becomes more efficient, overall costs reduce, where sales margins improve and / or revenue increases, strategic position strengthens and the return on invested capital grows.

Often, the focus is on exclusively purchase savings, but it is important to note that it is at least as important to consider what added value in terms of money and difficult to measure benefits we are able to receive from different suppliers and how to increase them.