Chapter_2.pdf

For use with Procurement and Supply Chain Management 8th Edition (9781473779112) by Arjan J. van Weele and Frank Rozemeijer © Cengage Learning EMEA 2022  CHAPTER 2 THE PROCUREMENT PROCESS For use with Procurement and Supply Chain Management 8th Edit...

For use with Procurement and Supply Chain Management 8th Edition (9781473779112) by Arjan J. van Weele and Frank Rozemeijer © Cengage Learning EMEA 2022  CHAPTER 2 THE PROCUREMENT PROCESS For use with Procurement and Supply Chain Management 8th Edition (9781473779112) For use with Procurement and Supply Chain Management 8th Edition (9781473779112) by Arjan J. van Weele and Frank Rozemeijer © Cengage Learning EMEA 2022 by Arjan J. van Weele and Frank Rozemeijer © Cengage Learning EMEA 2022  Learning objectives The major differences between organizational and consumer buying behaviour. The key elements of the procurement process. The various roles in a buying decision-making unit. The involvement of the procurement department in the acquisition of various goods and services. How to model organizational buying behaviour. For use with Procurement and Supply Chain Management 8th Edition (9781473779112) by Arjan J. van Weele and Frank Rozemeijer © Cengage Learning EMEA 2022  Organizational buying behavior Professional procurement: Professional buyers with education and experience who know their tasks and responsibilities. Derived demand: Developments in industrial markets are often related to changes in the end-user markets, upstream in the value chain. Inelastic, fluctuating demand: Due to the derived demand, price-elasticity in industrial markets is frequently lower than in consumer markets. Geographical concentration: Many business-to-business markets are geographically concentrated (e.g. Silicon Valley). Large order quantities and large amounts of money involved: Business- to-business transactions often involve large quantities of goods and services. Limited number of customers (Buyer power): Industrial suppliers often only supply a few companies compared to companies that deliver directly to consumers. For use with Procurement and Supply Chain Management 8th Edition (9781473779112) by Arjan J. van Weele and Frank Rozemeijer © Cengage Learning EMEA 2022 Organizational buying behavior For use with Procurement and Supply Chain Management 8th Edition (9781473779112) by Arjan J. van Weele and Frank Rozemeijer © Cengage Learning EMEA 2022  Managing supplier relationships Business-to-business marketing, and professional procurement, require active management of relationships within complex organizational networks For use with Procurement and Supply Chain Management 8th Edition (9781473779112) by Arjan J. van Weele and Frank Rozemeijer © Cengage Learning EMEA 2022  Models of industrial buying behaviour Variables that affect the buying process: Characteristics of the product Strategic importance of the purchase Sums of money involved in the purchases Characteristics of the supply market Degree of risk related to the purchase Role of the procurement department in the organization Degree to which purchased products affect existing routines in the organization. For use with Procurement and Supply Chain Management 8th Edition (9781473779112) by Arjan J. van Weele and Frank Rozemeijer © Cengage Learning EMEA 2022 According to Fisher (1970) the procurement decision- making process is primarily determined by two aspects: product complexity and commercial uncertainty. If these two aspects are combined, statements can be made about what disciplines will be involved in the decision-making process. For use with Procurement and Supply Chain Management 8th Edition (9781473779112) by Arjan J. van Weele and Frank Rozemeijer © Cengage Learning EMEA 2022  Decision-making units (DMU) DMU relates to all those individuals and groups who participate in the procurement decision-making process, who share some common goals and the risks arising from the decisions (identical to buying centre). These might include: – Users – Influencers – Buyers – Decision-makers – Gatekeepers (people who control the flow of information from the supplier towards the other members of the DMU and vice versa). For use with Procurement and Supply Chain Management 8th Edition (9781473779112) by Arjan J. van Weele and Frank Rozemeijer © Cengage Learning EMEA 2022 The procurement process For use with Procurement and Supply Chain Management 8th Edition (9781473779112) by Arjan J. van Weele and Frank Rozemeijer © Cengage Learning EMEA 2022  Aspects of the linear procurement process model Alignment with business needs: Business needs and requirements are the input for the linear procurement process model. Process approach: The various steps in the linear model are closely connected, and the quality of the output of the preceding steps determines to a large extent the quality of the subsequent steps. Defining the interfaces: The output of each phase has to be clearly defined, preferably with a document. Determining responsibilities: Procurement is considered to be a cross- functional responsibility. Therefore, the tasks, responsibilities and authority of the parties involved should be clearly indicated in each phase. Combining different skills, different types of knowledge and expertise: The key question is how to combine the different types of knowledge, skills and expertise in such way that all parties involved arrive at an optimal solution for the company. For use with Procurement and Supply Chain Management 8th Edition (9781473779112) by Arjan J. van Weele and Frank Rozemeijer © Cengage Learning EMEA 2022  Procurement situations Three types of procurement situations: New task situation Completely new product from unknown suppliers High uncertainty regarding outcome (e.g. acquisition of capital goods) Modified rebuy New product from known supplier Existing product, new supplier Moderate uncertainty regarding outcome Straight rebuy Known product from known supplier Low uncertainty regarding outcome (e.g. consumable items like MRO) For use with Procurement and Supply Chain Management 8th Edition (9781473779112) by Arjan J. van Weele and Frank Rozemeijer © Cengage Learning EMEA 2022 Examples of procurement situations For use with Procurement and Supply Chain Management 8th Edition (9781473779112) by Arjan J. van Weele and Frank Rozemeijer © Cengage Learning EMEA 2022  The specification phase Purchase order specification contains Functional specifications Technical specifications – Quality specifications – Logistics specification – Maintenance specification – Legal and environmental requirements – Target budget. For use with Procurement and Supply Chain Management 8th Edition (9781473779112) by Arjan J. van Weele and Frank Rozemeijer © Cengage Learning EMEA 2022  Supplier selection and assessment The selection step contains several separate steps: 1) Preliminary qualification of suppliers and drawing up bidders list 2) Request preparation for quotation and analysis of the bids 3) Supplier selection. For use with Procurement and Supply Chain Management 8th Edition (9781473779112) by Arjan J. van Weele and Frank Rozemeijer © Cengage Learning EMEA 2022  Supplier selection and assessment Summarizing the prequalification requirements, based on the order specification. Assembling the initial bidders (long) list that indicates which suppliers may probably do the job. Sending out the request for information (RFI), collecting further references and information, visiting the supplier leading to the approved vendor list. Deciding on the supplier shortlist (three to five prospective suppliers). Sending out the request for proposal (RFP) or request for quotation (RFQ). After receiving the quotations, the procurement department will make a preliminary technical and commercial evaluation. Risk analysis for critical suppliers and purchase parts. The process ends with a supplier selection proposal: – Decision to select certain supplier – Underlying ranking schemes – Underlying quotations. For use with Procurement and Supply Chain Management 8th Edition (9781473779112) by Arjan J. van Weele and Frank Rozemeijer © Cengage Learning EMEA 2022  Negotiation and contracting After the supplier has been selected – a contract needs to be drawn up. The contract may refer to specific terms and conditions: – Industry differences – Specific commercial and legal terms and condition will vary per contract (e.g. Procurement policy, market situation) – This limits the use of standard purchase contracts. For use with Procurement and Supply Chain Management 8th Edition (9781473779112) by Arjan J. van Weele and Frank Rozemeijer © Cengage Learning EMEA 2022  Prices and terms of delivery Competitive bidding/negotiation used to arrive at a fixed price which is acceptable to both the buyer and supplier. Financial obligations are defined unequivocally. Supplier should accept all risks. Fixed price is best for cost control and budget management. For use with Procurement and Supply Chain Management 8th Edition (9781473779112) by Arjan J. van Weele and Frank Rozemeijer © Cengage Learning EMEA 2022  Terms of payment Preferred method of payment = performance bond. Advance payments should be covered by bank guarantee where supplier agrees to fulfil their obligations. Milestone payments are sometimes used when installations or capital goods are purchased. For use with Procurement and Supply Chain Management 8th Edition (9781473779112) by Arjan J. van Weele and Frank Rozemeijer © Cengage Learning EMEA 2022  Penalty, warranty and other arrangements A sound purchasing contract includes agreement on: – Penalty clauses – Warranty conditions – (if applicable) Systems responsibility. Other arrangements may include: – General terms of purchase – Insurance and safety regulations – Transfer of rights and obligations – Contracting out to third parties – Terms of delivery. For use with Procurement and Supply Chain Management 8th Edition (9781473779112) by Arjan J. van Weele and Frank Rozemeijer © Cengage Learning EMEA 2022  The ordering process After the terms and conditions of the contract have been agreed, the order can be placed. Generally, a purchase order will include an order number, a concise description of the product, unit price, number of units required, expected delivery time or date, delivery address and invoicing address. Usually, the supplier is requested to send an order confirmation for each order received. For use with Procurement and Supply Chain Management 8th Edition (9781473779112) by Arjan J. van Weele and Frank Rozemeijer © Cengage Learning EMEA 2022  The expediting process Three types of expediting: Exception expediting: Buyer only takes action when the organization sends out signals of material shortages. Routine status check: Preventing materials supply and quality problems – a few days before the promised delivery, the buyer contacts the supplier to confirm the delivery date. Advanced status check: For critical purchase parts – a detailed production plan will be handed over to the buyer, and during the process the buyer will carry out periodic checks. Field expediting: For critical purchase parts – field inspector periodically inspects on site whether supplier is on schedule (e.g. military projects). For use with Procurement and Supply Chain Management 8th Edition (9781473779112) by Arjan J. van Weele and Frank Rozemeijer © Cengage Learning EMEA 2022  Follow up and evaluation The buyer’s role continues after the new product has been taken into production or the installation has been put into operation. Compares invoice with the original order Solves delivery issues Supplier assessment:  Keeps track of supplier’s quality, delivery record, competitiveness and innovativeness. For use with Procurement and Supply Chain Management 8th Edition (9781473779112) by Arjan J. van Weele and Frank Rozemeijer © Cengage Learning EMEA 2022  Major bottlenecks and problems (I) Supplier or brand specifications: Specifications worked out in detail by the user are sometimes written for the capabilities of specific suppliers. Inadequate supplier selection: Failure to check the supplier's (bank) references, can produce unpleasant surprises like bankruptcy. Personal relationships: Purchase orders are placed with suppliers with whom the user has a friendly relationship. As a result, such suppliers may not be as competitive. Contracts are too general: Incomplete, drafted up by the supplier or not present at all. For use with Procurement and Supply Chain Management 8th Edition (9781473779112) by Arjan J. van Weele and Frank Rozemeijer © Cengage Learning EMEA 2022  Major bottlenecks and problems (II) Too much emphasis on price: Especially when buying capital equipment, buying decisions need to be based upon total- cost-of-ownership (TCO) rather than on price only. Poor administrative processes: Putting a sound administrative system in place could lead to significant savings. Problems in delivery phase: Overdue or incomplete delivery, or quality problems can put the continuity of the business process in danger. Suppliers are not systematically assessed: This results in unprofessional suppliers and repeating problems. For use with Procurement and Supply Chain Management 8th Edition (9781473779112) by Arjan J. van Weele and Frank Rozemeijer © Cengage Learning EMEA 2022  Summary Buying behaviour of organizations differs significantly from consumer buying behaviour. Procurement department involvement is highest during the operational stages of the procurement process. A linear procurement process shows that effective procurement decision-making requires a stepwise cross- functional approach. Procurement process models offer organizations a tool for structuring their procurement processes and ideally each phase of the process should result in a documentation of the decisions. For use with Procurement and Supply Chain Management 8th Edition (9781473779112) by Arjan J. van Weele and Frank Rozemeijer © Cengage Learning EMEA 2022