Creating competitive advantage through local procurement
By LUAGHANO MIAMBA
THERE exists a strong correlation between competitive advantage and procurement.
This is especially true for many of the companies operating in the manufacturing industry. Notably, Michael Porter’s 1985 book, Competitive Advantage makes mention of how every value (processing) activity employs purchased inputs of some kind, ranging from raw materials used in production to professional services, office space and capital equipment. In essence, procurement practices often affect the quality and supply of purchased inputs and in the long run, production costs, inspection costs, and product quality.
By definition, procurement is the process of acquiring suitable goods, works or services from a third-party vendor through a direct purchase, competitive bidding, or tendering process while ensuring timely delivery of the right quality and quantity. Local procurement, therefore, entails obtaining raw inputs, personnel, services, supplies, and equipment from local or indigenous sources.
To begin with, procurement is a huge determinant of cost position. A well-defined procurement process can provide an organisation with competitive advantage by reducing production costs. One way to do this is to lower operational costs by purchasing supplies and services locally. For instance, a company employing the low-cost strategy can potentially reduce supply chain costs through local procurement. By sourcing products from local suppliers, companies avoid custom clearance, which can be a costly and time consuming process. Thus, local procurement has the potential to position a company for competitive advantage as it greatly supports the low-cost strategy.
Further, maintaining shorter transport distances reduces the amount of time it takes to initiate purchase of inputs and have them delivered to the manufacturer. Typically, local suppliers are in a better position to deliver inputs quicker than global suppliers, making them more responsive. Responsiveness is a great asset especially in times of supply emergencies, logistical mishaps and abrupt material shortages as it allows companies to increase production during periods of high demand. More importantly, the close physical proximity to local suppliers allows an organisation to foster real relationships and increase supplier loyalty which directly affects impacts bargaining power. Supplier bargaining power is the pressure that suppliers put on buyers by raising their prices, lowering quality or reducing the availability of their products. Supplier loyalty is easier to create with locals and it can put an organisation ahead of its competitors in a highly congested industry.
Moreover, procurement can make or break a company’s competitive advantage due to its direct impact on production. One of ensuring your procurement enhances your competitiveness is through local sourcing. Among the biggest benefits of local sourcing is that it enables an organisation mitigate supplier risk more easily. A research conducted by the Zambia Association of Manufacturers and OXFARM revealed that as a consequence of the COVID-19 pandemic, manufacturing subsectors which seemingly used more of imported inputs not readily supplied in Zambia, were among the most negatively affected by the effects of COVID-19 in 2020. A steady supply of production inputs translates into greater customer experience and also encourages consumer loyalty. In this case, diversifying sources of raw inputs as well as considering policy interventions that ease local sourcing can propel competitive advantage.
Additionally, national tastes and preferences play a key role in consumer interest in authentic local produce particularly in the agro-processing subsector. Moreover, local procurement of inputs like fresh foods means the use of fewer preservatives and therefore more organic and stronger flavours. In the coming years, more leading manufacturers will need to retain strong local food production activities to give that preferred local flavour to their product ranges. For example, one of Zambia’s leading manufacturers recently launched a tamarind drink that is fast becoming a local favourite. This is partly because the product is made from a locally sourced and available core ingredient and its indigenous appeal has naturally drawn a local customer base.
Conclusively, local procurement has the potential to significantly increase an organisation’s competitive advantage by means of reducing production costs. Particularly, low production costs, steady supply of raw materials and faster access to inputs are key features of local procurement and potential areas for creating competitive advantage.