Procurement is the process of acquisition of goods and services from an external source either through tendering or a competitive bidding process. The procurement products include raw materials, machinery, goods, or even services provided by the specific tender. The procurement process is usually undertaken for acquiring goods on a large scale by conducting a bidding procedure with various vendors. The tenders are allowed to present their bid and the final decision lies with the buyer, depending on the decided budget. The bidding process ensures equal opportunity and fair competition for all tenders. It is also advantageous for the buyer who is provided with multiple options to choose from.
Procurement is one of the most dominating aspects of the market. As the domain continues to expand, competition among companies continues to grow as well. To assess the strength of the company within this growing competition, one can consider a framework designed by Michael E. Porter called Porter’s Five Forces of Competitive Position Analysis. The theory emphasizes the five forces existing in procurement –
- Barriers to entry
- Threat of replacements or substitutes
- Rivalry
- Power of supplier
- Power of buyer
All these forces work towards deciding a company’s strength in the competitive environment.
Power of a supplier
Power residing with the supplier is a key element directly related to a company’s procurement efficiency. The power of a supplier is assessed based on his ability to increase product prices. This power depends on the following factors-
- Number of suppliers present for each product or service required by the organization
- Uniqueness or distinctive characteristic of the product
- The size and strength of the supplier in comparison to its contemporaries
- Cost of switching from one supplier to another
Power of a buyer
The power of a buyer is another one of Porter’s principle. In simple terms, a buyer’s power lies in the ability of negotiation i.e. lowering the prices of products. This ability depends upon –
- Total number of buyers present in the market
- The necessity of each buyer to the company
- The cost of switching from one supplier to another
Steps to enhance a company’s competitive advantage
A company’s competitive advantage can increase by inculcating and adopting various methods such as lowering the price-point of products, introducing different products with unique attributes, utilising a defensive strategy and many more. However, the key lies in purchasing everything that the company requires more than its contemporaries. The various methods to adopt for enhancing the competitive strength is as follows- Embracing innovation in product development, communication and negotiation,
- Installing efficient and sturdy systems to make the company’s procurement process more agile
- Increasing suppliers’ participation by establishing a relationship of loyalty and trust with them as well as including suppliers’ optimization practices
- Establishing procurement visibility and transparency to improve relationships with stakeholders
- Including procurement leaders in the organization’s overall decision-making process
Conclusion
Procurement is a complicated phenomenon comprising of multiple elements and processes. However, in simple terms, it is the process of acquiring products on a large scale from external sources. This b2b transaction is a growing domain with immense competition. To have a competitive advantage in the market, companies must consider multiple forces that would affect their negotiation. Special Attention needs to be given to forces that contribute to the organization’s visibility and strength in the market.