Procurement Management: An Introduction

• This details an introduction to procurement management
• The content is from ISD 361 at Kwame Nkrumah University of Science & Technology, Kumasi

Unit Overview

• Key terms are defined
• The concepts and processes of procurement are explained
• Supply chains and their correlation to procurement are examined
• Procurement functions, units, and their roles within an organization are explored

Definitions

• Purchasing involves all activities to get the product from supplier to final destination.
• This includes ordering and receiving goods and services
• Buying means obtaining something in exchange for something else
• Procurement is the function describing activities and processes to acquire goods and services.
• It encompasses activities to establish needs and requirements.
• Sourcing activities, like market research, vendor evaluation, and contract negotiation, are key
• Procurement follows defined rules, and procedures for acquiring goods, technical services, works, and consulting services

Procurement vs Purchasing

• Procurement involves selecting vendors, setting payment terms, strategic vetting, and negotiating contracts.
• Procurement secures all goods, services, and work vital to an organization's operations.
• Procurement is a core component of an organization's corporate strategy
• Purchasing is how goods and services are ordered.
• It is a transactional function within procurement

Scope of Concepts

• Procurement covers sourcing to supply
• Tactical/initial phase involves internal customers, specification, selecting contracting, and sourcing
• Purchasing is limited to ordering/operational tasks

Classification and Coverage

• Procurement includes goods, works, and services
• It covers one-off and repeat orders
• It also deals with direct and indirect procurement
• Considers low and high value items, and standard and nonstandard items

Purchasing in the Value Chain

• Purchasing falls into support activities, including infrastructure, HR, and tech

Procurement Cycle

• The cycle is a roadmap, establishing important actions at each stage
• It represents the series of actions required to procure something
• The activities reflect from the purchasing decision to bill payments and contract closure

Procurement Cycle: Planning

• Planning is the first procurement process stage
• Includes determining and specifying requirements
• It decides to make or buy
• Funding decisions are also part of planning
• Establishes procurement rules and methods, like tendering, quotations or single sourcing
• A timetable for procurement is prepared

Procurement Cycle: Sourcing

• The procurement method is determined.
• Pre-qualification of potential suppliers also take place at this stage
• Preparation and tender document issuance
• Requests for quotation are made including expression of interest
• Responses are evaluated based on cost, quality, margin of preference, and features
• Selecting a successful tenderer occurs
• Negotiating the offers also occur here

Procurement Cycle: Contracting

• A formal contract document is created
• Agrees on terms and conditions, with both participating parties signing
• Simpler purchases use a purchase order.
• Existing framework contracts may be used as a call-off order

Procurement Cycle: Contract Management

• Contract management ensures that both the buyer and supplier meet their obligations
• Goods contract activities can include deliveries
• Arranging inspections
• Forwarding of freight
• Establishing letters of credit
• Checking bank guarantees for financial arrangements
• Receipts and installation of goods are verified
• Services often need direct involvement from client organizations
• Payments are also made in this stage

Contract Management (Contd.)

• Works contracts often have technical supervision by an engineer
• Contracts for services often need direct participation from a buying organization.
• This includes training, advice, or responding to analysis and reports

Procurement Cycle: Storage

• Storage is needed when goods aren't immediately used
• This cycle includes considering storage conditions
• Must account for goods that require particular conditions or have limited shelf life
• Effective storage, along with proper stock handling and management are essential

Procurement Cycle: Distribution

• Involves moving goods to end users
• Distribution may involve supply chains, facilities, or end-user sites

Procurement Cycle: Disposal

• Some stocks need disposal if they are unserviceable, obsolete, or surplus stocks
• The goods' nature and state determines what can be done with them
• They may be sold by auction, transferred, or destroyed
• Accounting changes are made to reflect disposed goods and any income from them

Procurement Cycle: Evaluation

• Evaluating a purchasing function and guarantee its effectiveness is essential
• Evaluation of the procurement process is seen as an essential
• Finding weaknesses and providing plans to fix the issues are key
• Preventive actions are proposed to prevent problems
• Evaluation may include a formal audit

Procurement Objectives

• The 'Five Rights' (5R's) are the procurement function's objectives
  • Quality
  • Quantity
  • Place
  • Time
  • Price

Procurement Objectives: Right Quality

• Quality is the degree of excellence the customer see
• Quality is performing the right way the first time
• This involves meeting requirements, having fitness for purpose, and minimum variance

Procurement Objectives: Right Quantity

• Ordering the right quantity from both the buyer and seller is essential
• Strong client relationships help to improve balance
• Larger quantities can lead to discounted rates

Procurement Objectives: Right Time

• The right time to buy is affected by:
  • Availability
  • Competition in market conditions.
  • Procurement policies
  • Consumer demand
• The right time to deliver relies on:
  • Needs for organizations
  • Schedules for Production
  • inventory levels

Procurement Objectives: Right Place

• Upstream, procurement gets products from the right supply chain supplier
• Downstream's responsibility is to ensure the materials that are delivered to the end user are correct

Procurement Objectives: Right Price

• Collecting price information allows market price analysis

Procurement Process

• Three main stages are:
  • pre-tendering
  • Tendering
  • post-tendering

Procurement Process stages parts

• Pre-tendering includes needs assessment, planning, budgeting, requirements and choice
• Tendering has information solicitation, evaluation of bids, contract award
• Post ordering is contract management, payment, and review

Professional Procurement/Purchasing Function

• Conduct needs analysis to establish the basis of the purchase
• Determine the specification specially in quality and quantity of the goods and services that firms need
• Select a suitable supplier in the market.
• Must develop the right routines and systems for selecting the best suitable supplier
• Prepare negotiations with the selected supplier
• To writing up and meeting agreements for the contract
• Place the order, and develop efficient purchasing order systems and handling systems
• Ensure supply through monitoring and control
• Follow-up and evaluate the buyer-supplier relationship (settling claims, keeping files up-to-date, rating, and supplier ranking)