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How Supply Chain Management Differs from Logistics & Procurement
While the terms ‘logistics’, ‘procurement’, and ‘supply chain management’ are often used interchangeably, they are essentially different business processes. Understanding the differences will help you better leverage the efficiencies and benefits that logistics, procurement, and supply chain management can bring to your company.
To help you understand the core differences, here’s a quick look at the roles of logistics, procurement, and supply chain management within an organisation.
Supply Chain Management
Supply chain management refers to the act of overseeing a supply chain to improve the flow of goods and services – from transforming raw materials into products to the delivery to end users. It is a key part of a company’s overall success, as any improvements made to an organisation’s supply chain management strategy can increase revenue, optimise supply rate, as well as reduce cost, waste, and time.
There are 5 major phases in the supply chain management process which include:
The initial stage where plans are developed to address how the products or services will satisfy market demand.
In this stage, the focus will be on producing vendors or suppliers for materials required for production.
The third stage involves the manufacturing or making of products. In this stage, the products are designed, produced, tested, packaged, and scheduled for delivery.
Logistics & Fulfilment –
The fourth stage is the delivery stage. This is when the products are stored in warehouses or delivered to end users at an optimised cost.
The final stage of supply chain management is referred to the return. In this stage, any defective or damaged products are returned to the supplier for scraping or reproduction.
Procurement is one of the critical aspects in supply chain management. It is the process of finding and acquiring the goods and services your company needs to run its operations effectively. This includes planning purchase, sourcing for supplies, establishing win-win relationships with suppliers, and more.
To illustrate, the procurement process that an organisation goes through typically includes these key steps:
Specifying & Planning –
A step where the product or service needs are established. Once the specifications are set, planning will be conducted for when and how the product or service will be ordered or reordered.
Identifying & Selecting Suppliers –
During this step, suitable suppliers will be identified and selected based on product or service needs – either from established relationships or by sourcing new suppliers.
Negotiating & Contracting –
Once suppliers have been selected, negotiation for the best price and terms for the product or service will commence. When all terms are agreed upon and finalised between your organisation and the supplier, a contract will need to be signed and established.
Placing the Purchase Order (PO) –
A purchase order will be issued to the selected suppliers. It includes the price, product or service specifications, and all terms and conditions of the product or services being supplied. This document also serves as a point of reference of the product being procured for involved business units.
Receipt & Inspection of Purchase –
The products or services delivered are reviewed against the established specifications and quality standards.
Invoice Payment & Maintaining Invoice Records –
Once the products or services passed the inspection stage, payment will be made to complete the buying process. In case of an audit and for ease of product or service reordering, all proper records will need to be retained.
Logistics is a small part of supply chain management; albeit an important part that involves the movement, storage, and distribution of goods from initial production to final delivery. The objective behind logistics is to make sure the end users receive the desired product at an optimum time with the right quality and price.
This process can be divided into two subcategories:
Inbound logistics –
The process that involves the movement of goods and materials from a manufacturer or distributor to a fulfillment centre, warehouse, or retail store. This can include raw materials for production, finished products from manufacturers, or goods like packaging materials.
Outbound logistics –
The process of storing, moving, and distributing goods to deliver them to their destination – the end users.
Some companies will control their own logistics operations where they may have warehouses around the country or world., as well as in-house shipping functions to transfer goods from one place to another. However, many other companies may find this effort too expensive, or that their supply chain isn’t complex enough for such an investment. Hence, they would outsource to third parties known as logistics service providers (LSPs) or third-party logistics (3PL) providers.
In a nutshell, logistics, procurement, and supply chain management are three distinct business processes that are fundamental to an organisation’s success.
If you have any questions about the differences between logistics, procurement, and supply chain management – either in your own hiring, or as you seek to develop your career, reach out to me at Jason.Kukreja@ambition.com.sg!
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