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Sourcing 101: What are the 5 Procurement Rights

Exporta Procurement

 

Effective procurement depends on planning, design, execution, and control over the million moving parts in the supply chain. Not to mention risk mitigation, in-depth market knowledge, and striking the perfect balance of power with suppliers.

 

This is where the 5 Rights of Procurement come into play. This term applies to a combination of deliverables that come together to make a successful procurement process. The “Rs” are a bit simplistic on the surface, but we find them quite useful for explaining procurement processes to your colleagues in other departments. 

 

What’s nice about the five rights approach is, it breaks the overall strategy into digestible pieces, enabling communication between procurement and finance, accounting, R&D, sales, and the C suite.1

 

Why the 5 Procurement Rights are Important

The 5 Rights of Procurement are inter-linked, each having an effect on the other. Therefore, the importance of the five Rights of Procurement is the impact the failure to achieve one Right has on the success of achieving all 5 Procurement Rights. 

 

Collectively, the achievement of all 5 Procurement Rights, provides a framework for effective purchasing and supply chain management that applies to all industries, sectors and countries.2

 

5 Procurement Rights

With the management and mitigation of risk at the heart of purchasing and supply chain management, how do you achieve all 5 Procurement Rights? 

The following list will go through each of the 5 Rights of Procurement in more detail.

 

  1. Right 1 - The Right Quality: The first right of procurement is defining what product you need to meet that business goal. Product is about finding that perfect material—and making sure that the quality lives up to expectations. When companies believe that procurement teams are all about low, low prices it can create a strain on internal relationships.

 

The Right Quality is a product or service that meets the standards, features and performance set out in the specification. There is often a compromise in the Right Quality to achieve the Right Price. You can get the right quality by: 

(i) Analyzing what you are buying

(ii) Evaluating if it meets your needs - If not, why not?

(iii) Measuring supplier performance 

(iv) Investigating how a reduction in costs may impact quality

 

A partnership approach to continuous improvement, may mitigate the costs associated with quality improvements. Suppliers could effectively solve your quality problems for you, if you can motivate them to innovate. 

 

For example, output-based specifications encourage a performance partnership often resulting in the:

 

(i) same quality at lower cost,

(ii) higher quality at the same cost,

(iii) higher quality at a lower cost.

 

Incentivizing suppliers to provide higher levels of quality, over and above ‘the quality’ specified in the contract, may help to harness the suppliers’ unique skills, capabilities and create efficiencies.

 

Greater profitability, longer term contracts and loyal customers are amongst the many reported benefits for suppliers who engage with buyers in this way.

 

  1. Right 2 – The Right Quantity: The Right Quantity is achieved through accurate demand forecasts for products and services on a daily, weekly and monthly basis.

 

By interrogating historical demand, it is possible to forecast future demand with a degree of certainty. This is a challenge—because procurement needs to strike a balance between maintaining stock levels that allow production to move forward. Too much stock means you’ll be stuck paying for storage space and in some cases, dealing with waste from expired products.

 

If the right quantity is not achieved, you might not be able to meet customer demand, resulting in delays and bottlenecks, as well as the associated costs from shutdowns, lost customers, and possible damage to reputation.

 

You can get the right quantity by maximizing inventory levels by segmenting spend into the following categories:

 

(i) critical,

(ii) routine and

(iii) non-critical

 

and determine for each spend segment the:

(i) Who,

(ii) What,

(iii) Why,

(iv) When and

(v) Where.

 

This supports stock rotation and ‘Just In Time’ deliveries (see ‘Right 4 - Right Time’) to avoid stock depreciation and obsolescence. 

 

  1. Right 3 – The Right Place: The right quality and quantity don’t matter so much when you can’t get the right place. Place is defined by goods and services being delivered to the right location.

 

Procurement place is no longer applied exclusively to the delivery of goods to the final location. It also includes where the materials are sourced from, other players in the supply chain, the location of the end consumer, and the location of any additional activities involved with getting this product from point A to point B, C, and so on.

 

To be successful, procurement teams need to factor in the following items during the selection process:

 

(i) Distribution planning

(ii) Transport planning

(iii) Who is responsible for insurance, freight costs?

(iv) Where will freight be delivered?

(v) How are items packaged?

(vi) Where are suppliers located–will customs be an issue?

(vii) What about communications across time zones?

(viii) How will transport affect the environment–and in turn, customer perceptions
of your brand?
(ix) What happens if goods are damaged or lost?

 

Ideally, you’ll find the perfect supplier right around the corner. But things don’t always work out that way. Procurement needs to look at all factors that place comes into play–from added transportation costs to dealing with paperwork and fees, as well as things like civil unrest or natural disasters that may impact price and arrival times.

 

  1. Right 4 – The Right Time: The Right Time is closely linked to the Right Quality, Quantity, Place and Price.

 

Economic factors such as supply and demand and the urgency of the order, can impact on all the 5 Rights of Procurement.  

 

Getting the time right allows procurement to avoid delays, bottlenecks, early delivery, and holding costs. Timing impacts everyone from front line production staff to sales and marketing, and even whether your clients continue to give you business.

 

So, how can you improve the reliability of your supply chain?

 

(i) Build Flexible Ordering into Your Contracts: Another common planning practice involves ordering materials on a pre-planned schedule based on future requirements. This isn’t always easy. Suppliers depend on regular lead times so that they can accommodate all of their customers and avoid delays on their end.

 

(ii) Shop Local, If You Can: Sourcing local is more sustainable, and you’ll get your items much quicker than sourcing items from across the world. It might be more expensive to purchase from a vendor in your neighborhood than the one in China, but you can pop over and pick up your order if needed.

 

  1. Right 5 – The Right Price: The Right Price refers not only to the initial price paid but to the: 

 

(i) cost of acquisition,

(ii) whole life costs and

(iii) the ‘opportunity cost’ (meaning other alternatives are lost at the expense of
the chosen one).

 

Of course, if the price isn’t right, there’s a problem. You can get the right pride by incentivizing suppliers to deliver solutions and activities, which can result in higher service levels at the same or lower cost.

 

​Furthermore, the use of gain share agreements and working collaboratively to share the risk and rewards (from pooling resources) is an excellent way of motivating suppliers to innovate and take cost out of their goods and services.  

 

Conclusion 

In the end, a good supplier is one that can get all five of the rights, right. The five rights sound like the procurement ABCs, but the reality is, each one is a strategy all its own. And often, you may have to give one up in favor of another.

Visit Exporta Wholesale to learn more about ways you can reduce sourcing costs and expand your supply chain operations.

 

About Exporta Technologies

Exporta Wholesale is the largest marketplace connecting suppliers in Latin America with buyers in North America. Today, we have a network of over 5,000 Latin American suppliers serving a variety of consumer goods and product categories in the United States. 

 

Exporta’s marketplace offers buyers a full service experience in the origination, sourcing and managing of products. The platform was founded on the idea that curation and service are the most important elements in the buyer’s journey. Exporta’s marketplace is building technology that addresses the pains of sourcing products internationally at attractive prices.


References

  1. https://www.procurementexpress.com/best-practices/5-rights-procurement/
  2. https://www.naomiclewsconsultancy.com/procurement-blog/what-are-the-5-procurement-rights

 

 

 

 

 

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