A procurement channel is a defined combination of processes and tooling with common characteristics to support Purchase-to-Pay process. Thinking in procurement channels is a strong concept to come to grips with the operational procurement process. This is a well-known and applied approach when procuring indirect products and services. The model cannot be translated unchanged to direct procurement. Indeed it is possible to define procurement channels for direct purchases, but the logic used to make the right choice for a procurement channel is completely different.
There are many variants of the standard P2P; Primary steps include specifying, approving, ordering, receiving, invoice handling and payment. A purchase requisition can be made using a catalog, a web form or a free text item. A purchase order can take the form of a normal order, a service order, a blanket order, etc. Invoices can be paper-based, electronic or payment can be done using a P-card. The precise combination of process steps is called a procurement channel.
The characteristics of the product category (commodity) determine the choice for the optimal process design: is it a standard product that can be ordered from a catalog or must it be tailored to the needs of the client. Is it being ordered on a regular basis or is it one-off. Is a goods receipt required or impossible? Is a supplier able to present an e-invoice? A thorough analysis of the commodity helps to select the optimal procurement channel.
Direct is different
Direct procurement is different from indirect procurement. Direct procurement has its own procurement channels that are unknown in indirect procurement: Material Requirements Planning (MRP) with purchase order, MRP with schedule agreement, two-bin ordering, consignment stock, supplier managed inventory (SMI), supplier managed and owned inventory (SMOI), rack jobbing, etc.
Selecting the most appropriate channel is also a completely different undertaking. The characteristics of the commodity are less important than the phase of the product lifecycle of the finished product in which the BOM-materials occur.
In the early phase of the product lifecycle, the development phase, the production volume is usually very low. The most likely way of ordering is manual with a discrete purchase order. Once the production has been introduced and the production is scaling up, it makes sense to switch to MRP-based ordering, the standard way of goods receipt and e-invoicing. When the product life cycle is gearing towards full maturity, the phase of mass production, it is time again to adapt the operational procurement process. Depending on the volatility of the demand the preferred way of ordering is with supplier managed inventory or supplier managed and owned inventory. Goods receipt can be optimized with the application of advanced shipping notifications (ASN) and invoice handling by introducing self-billing. At the end of the lifecycle these concepts are no longer effective which makes it logical to switch to plain MRP again. The figure below shows the relationship between product life cycle phase and procurement channels.
Relationship between product life cycle and procurement channels
Hence, the concept of procurement channels is also valid for direct procurement albeit based on a completely different logic. The choice for the right channel is driven by the phase of the product lifecycle, rather than by the characteristics of the commodity.