Unlock the True Potential of Synergy and Collaboration
I have always been intrigued by the relationship between corporate procurement departments and corporate logistics departments. The question that always comes to mind is, which department is best suited to negotiate the “best” deal for the company? There is a reason why this intrigues me.
Several years ago, we were asked by the corporate logistics department of a major apparel retailer to analyze their parcel carrier contracts to advise them what potential savings they could achieve as a result of our comprehensive benchmark analysis services. Unbeknownst to us at the time, the corporate procurement department of the retailer had been given the ultimate authority to finalize the negotiations with the parcel carriers.
Negotiations had been going on between the retailer and the parcel carriers for months, which is certainly typical with large parcel spend contract negotiations. In the end, the procurement department made the decision to end the back and forth negotiations and sign the “latest and greatest” offer from the Parcel carriers. This decision was apparently made because of the considerable amount of time the negotiations had been ongoing. However, one key element the procurement department failed to consider, was the fact that the data and analytics we had provided to the logistics department projected that if they did sign the “latest and greatest final” parcel carrier contracts the carriers had presented, they would be leaving over $12 Million in potential savings on the table.
So of course after hearing this decision by the corporate procurement department, my immediate response was, “how will you explain to your CEO and CFO that you left $12 Million on the table?” Secondly, “how many garments would you have to sell to generate $12 Million in net profits for the company?”
We assume those discussions with top management did not go well.
It is clear that the relationship between corporate procurement departments and corporate logistics departments is critical for the overall successful functioning of any organization. While they are separate and distinct functions within a company, their activities are closely intertwined and complementary.
Collaboration is King
Procurement and logistics departments should collaborate closely to ensure the smooth flow of goods and services within the organization. While procurement is responsible for sourcing and acquiring the necessary materials, products, services, and comprehensive contract provisions, logistics provides insight into the company’s actual needs for transportation services, storage, and distribution of these items. Effective collaboration and data sharing, between these two departments is essential to meet the company’s overall operational needs and even more importantly, customer requirements.
Procurement departments must rely on logistics teams to provide insights and data related to demand forecasting and inventory management. Logistics departments offer valuable information about transportation capacity, lead times, storage capabilities, freight rate structures, contract pricing requirements and anomalies, as well as overall supply chain constraints. This information helps procurement departments make informed decisions about when and how much to procure.
Both procurement and logistics departments should interact with suppliers and service providers. Procurement typically negotiates contracts, establishes relationships, and manages supplier performance. They should always work collaboratively to optimize the supply chain, ensure efficient operations, and maximize cost reductions and customer satisfaction.
Working together
Procurement and logistics departments that collaborate effectively tend to understand each other’s needs and objectives, thereby creating the best solution for all parties involved.
Shared Goals and Objectives: Procurement and logistics should align their goals and objectives to ensure a unified approach. This includes understanding the company’s overall logistics requirements, cost targets, service level expectations, and strategic priorities. By jointly defining the desired outcomes, they can work together to achieve the best value for logistics services.
Early Involvement: Procurement should involve logistics early in the procurement process. By engaging logistics experts from the beginning, procurement can gain insights into specific logistics requirements, challenges, and opportunities. This enables them to consider logistics-related factors when evaluating potential suppliers, negotiating contracts, and making sourcing decisions.
Collaborative Supplier Selection: Procurement and logistics should collaborate in selecting logistics service providers. Logistics should provide input on supplier capabilities, service levels, geographic coverage, and any specific requirements related to transportation modes, warehousing, or distribution. Procurement can then leverage this information to evaluate potential suppliers, negotiate contracts, and select the most suitable logistics partners.
Performance Metrics and KPIs: Procurement and logistics should define key performance indicators (KPIs) and service level agreements (SLAs) together. Logistics should contribute their expertise in identifying relevant metrics, such as on-time delivery, transit times, order accuracy, and responsiveness. Procurement can then incorporate these metrics into contracts, ensuring that they reflect the company’s expectations for value and service quality.
Continuous Performance Evaluation: By regularly reviewing supplier performance against established KPIs, they can identify areas for improvement, address any concerns, and drive accountability. This evaluation process should be collaborative, with logistics providing input on operational aspects, and procurement focusing on contractual compliance and cost effectiveness.
Data Sharing and Visibility: Procurement and logistics should establish effective data sharing and visibility mechanisms. They should leverage technology solutions that enable real-time information exchange, such as transportation management systems (TMS) or supply chain visibility platforms. This shared visibility allows both departments to monitor logistics operations, track shipments, identify bottlenecks, and proactively address any issues that may impact value or performance.
Continuous Improvement Initiatives: Procurement and logistics should jointly drive continuous improvement initiatives. By sharing insights, best practices, and lessons learned, they can identify opportunities for process optimization, cost reduction, and service enhancement. Regular communication and collaboration foster a culture of continuous improvement throughout the procurement and logistics functions.
Supplier Relationship Management: Procurement and logistics should work together to manage relationships with logistics service providers. They should collaborate in supplier performance reviews, contract renewals, and contract negotiations. By maintaining strong relationships with logistics partners, they can leverage these partnerships to drive value, innovation, and continuous improvement.
So while we’re sure most companies would think twice about leaving $12 Million in potential savings on the table, (especially when the savings projections were clearly documented as they were in this case), when dealing with logistics and supply chain operations the three most important elements are Communication, More Communication and Even More Communication!
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