Procurement Process Overview

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.