Lecture 2 - Procurement 101: Definition, Process & Importance

Procurement Definition and Importance

• Procurement is interchangeably used with terms such as purchasing, sourcing, and supply management
• The five rights of procurement include: right quality, right quantity, right time, right price, and right source

Organizational Buying vs. Consumer Buying

• Organizational buying involves companies, governmental organizations, and institutions that need products to feed, support, and maintain their primary and supporting processes
• Buying process includes determining procurement needs, selecting the supplier, agreeing to proper price, terms and conditions, issuing the contract or order, and following up to ensure a proper delivery and payment
• Consumer buying involves individuals striving for immediate satisfaction of their needs, with a derived demand

Procurement Process

• The procurement process includes determining specifics, selecting supplier, contracting, ordering, expediting, and evaluation
• The added value of a professional buyer lies in their ability to act as a facilitator for the supply process
• Procurement process timeline includes internal customer, determining specifics, selecting supplier, contracting, ordering, expediting, and evaluation

Elements of the Linear Procurement Process Model

• Internal customer
• Determining specifics
• Selecting supplier
• Contracting
• Ordering
• Expediting and evaluation
• Follow-up and evaluation

Procurement Situations

• Supplier selection
• Determining the method of subcontracting
• Preliminary qualification of suppliers and drawing up the bidder's list
• Preparation of the quests for quotation and analysis of the bids received
• Selection of the supplier
• Negotiation and contracting

Purchase Agreement

• Prices and terms of delivery
• Terms of payment
• Penalty clauses and warranty conditions
• Different price arrangements available: fixed-price + incentive fee contract, cost-plus contract, cost-reimbursable contract, and agreement with price-adjustment

The Ordering Process

• Purchase order specification includes quality specifications, logistics specifications, maintenance specification, legal and environmental requirements, and target budget
• Expediting includes exception expediting, routine status check, and advanced status check

E-Procurement

• Benefits of e-procurement include virtual elimination of physical paperwork, reduced time between need recognition and order release and receipt, improved communication, reduction in errors, reduction in overhead costs, and reduction in P.O and invoice processing times
• Three types of e-procurement solutions: electronic marketplaces, electronic auctions, and electronic catalog and ordering systems

Bottlenecks and Problems in Procurement

• Supplier or brand specification
• Inadequate supplier selection
• Personal relationships
• Lack of good contractual agreements
• Too much emphasis on price
• Poor admin
• Delivery problems - risk of transport

Test your knowledge of procurement and its significance in business. Learn about the linear procurement process model, e-procurement, and the five rights of procurement. Identify the major bottlenecks in procurement and understand the differences between organizational and consumer buying behavior.