Procurement Process Overview

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Questions and Answers

What is a characteristic of a competitive market?

Few competitors dominate the market

Numerous suppliers competing for market share (correct)

Limited variety of products and services

High barriers to entry for new firms

What is the primary goal of firms engaging in collusion?

To maximize individual profits without coordinating

To jointly control prices and limit competition (correct)

To increase competition and lower prices

To diversify supply sources and enhance offerings

Which procurement strategy focuses on ensuring a reliable supply?

Leveraging competition among suppliers

Negotiating long-term contracts (correct)

Tracking market trends consistently

Diversifying product offerings

What is one common action firms might take in a market with medium barriers to entry?

Monitor market trends and competitor actions Signup and view all the answers

How can a firm reduce dependency on colluding suppliers?

Diversify supply sources Signup and view all the answers

What is a direct benefit to the buyer from a long-term agreement with a supplier?

Reduced lead times Signup and view all the answers

Which factor most significantly impacts the equilibrium point in supply and demand?

Both supply and demand curves Signup and view all the answers

What occurs during a surplus in the market?

Price decreases Signup and view all the answers

How can technological advancements impact suppliers?

Make certain suppliers more competitive Signup and view all the answers

What characterizes a monopoly in the supply market?

High barriers to entry Signup and view all the answers

Which application of understanding supply and demand in procurement focuses on avoiding stockouts?

Inventory management Signup and view all the answers

Which statement is true regarding market competition?

The strength of competitors influences price and availability. Signup and view all the answers

What is a common consequence of a shortage in the market?

Increased prices Signup and view all the answers

What is the first stage in the procurement process?

Navigation Signup and view all the answers

Which option best describes the key focus of purchasing compared to procurement?

The specific ordering process of goods or services Signup and view all the answers

What function is associated with the supportive stage in the procurement process?

Purchase Request (PR) Signup and view all the answers

How is a cooperative supplier relationship characterized?

Involvement of trust and shared information Signup and view all the answers

What is the correct order of stages in the purchasing aspect of the procurement process?

Negotiate terms, create order, receiving and inspecting goods Signup and view all the answers

Which of the following is NOT a benefit of partnership in supplier relationships?

Short-term focus on pricing Signup and view all the answers

What function is primarily involved in assessing vendor performance?

Vendor rating Signup and view all the answers

Which statement about arm's length relationships is TRUE?

They are transactional and short-term in nature. Signup and view all the answers

Study Notes

Procurement Overview

The process involves managing goods and services from external sources.
Key stages include: identifying needs, selecting suppliers, establishing payment terms, and developing strategies.
Purchasing is a specific part of procurement that focuses on ordering goods or services.

Procurement Stages

Sourcing stage:
- Identifies needs.
- Creates purchase requirements.
- Assesses vendors.
Purchase stage:
- Negotiates terms.
- Creates orders.
- Receives and inspects goods and services.
Payment stage:
- Conducts three-way matching.
- Approves invoices and arranges payments.
- Keeps records.

Procurement Functions

Strategic:
- Need identification.
- Specification of requirements.
- Market research and supplier sourcing.
- Supplier evaluation and selection.
- Contract terms negotiation.
- Supplier awarding.
Transactional:
- Purchase request.
- Purchase order.
- Dispatch of products by supplier.
- Reception and storage of goods.
- Goods physical inspection.
- Documents inspection.
- Supplier payment.
Supportive:
- Department policies definition.
- Vendor rating.
- Supplier performance monitoring.
- Training and development.
- Contracts management.
- Supplier relationship management.

Supplier Relationships

Arm’s length:
- Short-term, transactional.
- Focus on price and terms.
Cooperative:
- Moderate term.
- Collaboration to meet mutual goals.
- Some level of trust and shared information.
Collaboration:
- Strategic engagement.
- Sharing resources and knowledge for improved processes and outcomes.
Partnership:
- Long-term strategic relationship.
- Deep commitment and shared objectives.

Benefits of Partnerships

Buyer:
- Reduced lead times.
- Faster product and service development.
- Improved quality.
- Reduced costs.
Supplier:
- Long-term agreements.
- Marketing advantage.
- Financial stability.
Overall:
- Reduced total cost.
- Improved long-term planning.
- Greater innovation.
- Lower inventory costs.

Supply Market Dynamics

Key factors:
- Supply and demand fluctuations.
- Market competition.
- Global events.
- Technological advancements.

Supply and Demand

Supply curve: Quantity supplied increases as price increases.
Demand curve: Quantity demanded increases as price decreases.
Equilibrium point: Intersection of supply and demand curves, determining price and quantity.
Surplus: Quantity supplied exceeds demand, leading to lower prices.
Shortage: Quantity demanded exceeds supply, leading to higher prices.

Applications of Supply and Demand in Procurement

Price negotiation: Identify bargaining power and set realistic price targets.
Supplier selection: Assess supplier risk and identify potential cost savings.
Inventory management: Avoid stockouts and optimize inventory costs.
Risk mitigation: Diversify suppliers and monitor market trends.
Strategic sourcing: Identify alternative sources and evaluate long-term partnerships.

Supply Market Types

Monopolies:
- Single supplier dominates the market.
- Characteristics:
  - Complete control over prices.
  - Limited buyer alternatives.
  - High barriers to entry for competitors.
- Procurement strategy:
  - Manage supplier relationships focusing on non-price factors.
  - Explore alternatives like in-house production or substitutes.
Oligopolies:
- Few large suppliers dominate the market.
- Characteristics:
  - Few dominant firms.
  - Interdependence between firms.
  - Medium barriers to entry.
- Procurement strategy:
  - Negotiate long-term contracts for cost stability and reliable supply.
  - Monitor market trends for competitor actions and industry changes.
Cartels:
- Group of suppliers collude to control prices and restrict competition.
- Characteristics:
  - Collusion to control prices or production.
  - Price fixing agreements.
  - Market control to maximize joint profits.
- Procurement strategy:
  - Diversify supply sources to reduce dependency on colluding suppliers.
  - Monitor market changes in prices and production adjustments.
Competitive/Fragmented:
- Many suppliers compete, driving prices down, with buyers having strong power.
- Characteristics:
  - Numerous competitors.
  - Low barriers to entry.
  - Varied product and service offerings.
- Procurement strategy:
  - Leverage competition to obtain best terms.
  - Focus on differentiation by seeking unique suppliers or products.

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Description

This quiz covers the fundamentals of the procurement process, including key stages such as sourcing, purchasing, and payment. It also dives into the strategic and transactional functions that are vital for effective procurement management. Test your knowledge on identifying needs, evaluating suppliers, and maintaining records.