Procurement PDF

Learning Outcomes  Having completed this module, you should be able to:  Define procurement.  Summarise the importance of procurement in an organisation.  Discuss the process of selecting a supplier and awarding a contract.  State the criteria and factors involved...

Learning Outcomes  Having completed this module, you should be able to:  Define procurement.  Summarise the importance of procurement in an organisation.  Discuss the process of selecting a supplier and awarding a contract.  State the criteria and factors involved in supplier selection and evaluation.  Explain the essential elements of a procurement contract and its role in ensuring legal compliance.  Recall the importance of preparing for negotiations.  Recognise the principles of purchasing strategies. Procurement is the act of obtaining goods or services, typically for business purposes. Due to the requirement for businesses to request services or make purchases of items, typically on a somewhat large scale, procurement is most frequently linked with enterprises. In general, procurement refers to the ultimate act of purchase, but it can also refer to the entire procurement process, which can be extremely crucial for businesses prior to their final purchasing choice. Companies can participate in the procurement process on both the buyer's and seller's sides, but in this case, the company doing the soliciting is the main emphasis. Certified Procurement Manager (CPP)  The role of the procurement and supply management professional is rapidly changing. While in the past the procurement professional’s area of responsibility was clearly relegated to efficient “processing” of purchase orders, the pace of today’s business environment has expanded that role to control of the entire sourcing and acquisition process. To be successful in this rapidly changing, dynamic marketplace requires not only the traditionally disciplined approach to managing critical business relationships but also the ability to quickly understand and employ strategic new methods and technology. Procurement professionals today must have the ability to assess and respond effectively to current market conditions and the foresight to envision the future needs of the organization, setting into motion plans that will respond to the changing dynamics of the continually reinvented organisation. Effective procurement requires the utilisation of sound business practices that maximise value to the organization through the acquisition of goods and services. This follows the old adage that the Procurement Department’s role is to deliver the right material (or service) in the right amount to the right place at the right time and at the right price. You can do this by employing well- conceived strategies—a plan to enhance competitive bidding, for example— that leverage clearly defined processes to manage the supply base. As a procurement professional, you will be expected to conceive and implement strategies that employ best practices. Certified Procurement Manager (CPP)  Using best practices in procurement ensures that decisions are made correctly by the procurement professional and ultimately the organisation. This implies that a company must create plans that are consistent with its objectives and best interests. These strategies are frequently built from well-defined sourcing plans created to aid the firm in achieving its overall goals. Conversely, sourcing strategies depend on a precise set of tactical guidelines to guarantee their use. The ways the organisation uses on a daily basis to communicate its requirements to the supplier are at the heart of these tactical procedures. These procedures are referred to as standard operating procedures in many businesses. You must comprehend the specifications of your purchase and be able to articulate them to a potential supplier in order to conduct business ethically. The procurement process won't be successful unless you can clearly communicate your needs to suppliers. This description frequently takes the form of a statement of work (SOW) for services or a specification for materials. This information, which is frequently referred to as a requirement, is typically generated by an internal user, and it is the procurement professional's duty to make sure that it is appropriately communicated to the supplier in the procurement document (such as the purchase order or contract). At the minimum, you should include the following elements in your procurement documents when stating requirements. Certified Procurement Manager (CPP) Describe exactly what it is you expect to receive from the supplier. This description can be provided in the form of a specification, an SOW, a drawing, a part number, or the nomenclature of an off-the-shelf or brand name part. Generally, we use a specification to describe a material requirement and an SOW to describe a service. Along with the stated quantity and the quality of the purchase, this can be the basis for approving payment and must be easy for third parties such as receiving personnel, finance, and auditors to understand after the transaction is completed. A specification contains a technical description of the material being purchased. In its simplest terms, it can be a reference to a supplier’s stock number or a brand name. It can also refer to an engineering drawing (or a set of drawings) provided by the internal user that shows the part or assembly with call-outs for the type of materials required and all necessary dimensions to produce the part. Or, in the case of chemicals and other formulated and processed materials, the specification can be tendered as a recipe or in a compositional format. Unlike a specification, the SOW describes the requirements for a service. It may be stated in a detailed and prescriptive format, describing not only what needs to be done but the method to be used (called a design specification) and how often the service must be done as well. Or it may simply be stated in terms of expected outcomes. Frequently, the SOW also contains a set of metrics describing the level of performance required (called a performance specification). The measurements used to determine the level of performance needed for a specific element are called key performance indicators (KPIs) and are often used to assess any performance requiring corrective action or, conversely, when an incentive bonus may be due. Certified Procurement Manager (CPP) This indicates the date when you expect to receive the product or service you’re procuring in the procurement document. The document must clearly state delivery or work completion dates so that the supplier understands precisely when performance is required. In order to avoid misunderstandings and clearly identify your organization's financial obligation, you must specify in the need exactly how much your organisation has agreed to pay for the specified good or service. Additionally, the payment deadline should be stated in the procurement agreement. Typically, this is stated as a net number of days, such as Net 30 or Net 45. There may be a discount period when the supplier defines the discount amount and the number of days the buyer can make payments and still be eligible for the discount. The discount period is often expressed as a formula: 2/10 Net 45 This means that if payment is made within 10 days, a 2 percent discount can be taken, but the total balance is nevertheless due in 45 days. The annualized discount savings for a 2 percent discount for 10 days (in this example) actually equals 73 percent (2 × 365 ÷10)! Certified Procurement Manager (CPP)  Most business operations would not be able to run without procurement. For projects and procedures to move forward successfully, procurement management makes sure that all goods and services are correctly procured. When optimised to save money, time, and resources, procurement can be used as a competitive advantage rather than just a company need. But cutting costs by avoiding mistakes and delays and making the most of available resources is only one of the ways procurement management contributes to a company's bottom line. Negotiating profitable manufacturing and supplier contracts, leading the development of novel new procedures, and taking a local business operation international are all responsibilities that fall under the purview of procurement management. Establishing and adhering to process stages over the course of the whole procurement lifecycle is necessary for managing the purchase of commodities, materials, services, and products successfully. According to organisational needs and objectives, these process steps can vary. The fundamental "procure-to-pay" process or the basic purchasing procedure a business follows while completing a purchase, often entails four crucial steps: Certified Procurement Manager (CPP) Establish the requirement for the product or service, establish the product's specifications, and then plan—or forecast—when and how the product will be ordered or reordered based on current facts and predictions. Choose a supplier to satisfy your product needs, either from a list of approved vendors or recommended suppliers you already work with, or by looking up new vendors and putting out an RFx, or request for information, proposal, or quote. Establish expectations and clearly express requirements to suppliers before engaging in direct negotiations to get an agreement on the best price and terms for the goods. Once all conditions have been agreed upon, complete and sign the supplier agreement. The price, product specifications, and any other terms and conditions of the good or service being delivered are expressly stated in the purchase order (PO). Additionally, it acts as the "source of truth" for the product being purchased by the different impacted business units. Certified Procurement Manager (CPP) There are situations when expediting the product order is required (i.e. earlier than expected product obsolescence, a schedule change, etc.). Examining the punctuality of deliveries during this step can highlight underlying problems that need to be resolved, such as a lack of clarity on payment due dates, delivery dates, and task completion. A "three-way match" is performed between the PO, the invoice, and the packing slip/receiving document for each order in order to ensure that it complies with the defined specifications and quality requirements. Filling out a receiving discrepancy report may be required if the delivery did not satisfy the requirements. Align purchasing and accounts payable to complete the process of buying the product after inspection and confirmed document alignment (PO, invoice, packing slip/receiving document). Certified Procurement Manager (CPP) Keep all necessary records for tax purposes, audit protection, to verify product warranties, and facilitate future product orders. Give the supplier statistics and comments based on key performance indicators to pinpoint areas that need improvement and/or necessary modifications to the product or supplier contract. In most organisations, especially those in the manufacturing sector, new requirements are developed by the using department (the department that will actually receive the goods or services) in conjunction with other interested parties. Similarly, existing specifications are periodically reviewed by the using group, and any changes generated are conveyed to the Procurement Department prior to any subsequent purchases. Specifications and subsequent changes for standard products and services are usually documented and filed by the document control section responsible for physically maintaining the organisation’s specifications. However, when there are no formal processes within the organisation for developing specifications, it is the responsibility of the requisitioner—the individual initiating the request—to supply sufficient information to the Procurement Department so that the correct product or service is purchased. Certified Procurement Manager (CPP)  The responsibility for creating and maintaining specifications generally resides with the user or the using department. For direct materials used in a manufacturing organisation, that usually means an engineering group or research and development group closely associated with making the product being shipped to the organisation’s final customer. In other cases, the department responsible for the budget is also responsible for the specifications. When a statement of work (SOW) for a service used by the entire organisation is being purchased (for example, travel, consulting services, or telecommunications), most commonly an administrative department, such as Finance, Human Resources, or Information Technology, will take responsibility. The development of complex requirements often takes on a project-oriented nature, and a cross- functional team is chartered with the responsibility to define and document the organisation’s specific need in that particular situation. This team is composed of technical experts, users, and, of course, the Procurement Department. On occasion, outside information sources may be required, and consultants may be engaged to assist the project team. Frequently, it is this team that actually makes the final supplier selection. Certified Procurement Manager (CPP)  In situations where the components or service being performed is critical to the operations of the organisation, customers may play an important role in the development of specifications. It is not uncommon in high-tech industries, for example, where speed of product development and time-to- market introduction can be critical for success, to have representatives of the organization’s final customer participating in the development of specifications. Occasionally, customers will actually determine the specifications themselves if they are critical. The internal user or engineer and any current or potential suppliers of the item to be acquired are the most typical sources of extra information describing the specification or SOW. Suppliers frequently take an active role in developing standards, depending on the level of collaboration. Although this may seem like a conflict of interest, the supplier is typically in the greatest position to assist with requirement formulation, particularly when there is no internal core knowledge in a specific commodity area. This cooperation frequently results in a more thorough understanding of the customer's needs on the part of the supplier and significantly reduces the chance of acquiring subpar goods or services. Certified Procurement Manager (CPP)  In a written specification or statement of work, precise needs are often listed. These detail the exact requirements or standards that a supplier must fulfil in order for the customer to approve the purchase. A "tight" specification, or one that totally and precisely outlines the organization's intended purchase, aids in avoiding issues in the future. First of all, it forces internal development and definition of the buy needs so that the procurement department can clearly document them on orders or contracts. The provider will then be able to fully comprehend what your company anticipates to obtain and will be better equipped to match your expectations. Depending on the goals of the company, one of the following three methods is generally used to produce specifications: Technical Specifications Technical specifications describe the physical characteristics of the material or product being purchased, such as dimensions, grade of materials, physical properties, colour, finish, and any other data that define an acceptable product. Written technical specifications may be supplemented by drawings or samples. The function of a product can be defined in terms of its actual role and what it is intended to do. Functional specifications define the job to be done rather than the method by which it is to be accomplished. Typically, functional specifications do not limit the supplier to providing a specific solution, as in the case of a technical specification, thus enabling the supplier to create the best possible solution. Functional specifications are typically used to solicit suppliers’ proposals for further evaluation by the procurement organization when a specific solution is Certified Procurement Manager (CPP) not known. They are often combined with performance specifications, outlined next, to create a more detailed requirement. While technical specifications define the product’s physical characteristics and functional specifications describe what role the product plays, neither describes just how well the product must perform. This is the purpose of a performance specification, which describes the parameters of actual performance the item or service must meet. With a performance specification, you are primarily interested in results rather than in method. In the example just given of passenger movement at an airport, a performance specification might call out just how many passengers must be moved in any particular time period, or it may state the number of hours the device must be operational in any specific period. Performance specifications can be described by a virtually unlimited choice of criteria. However, they must be capable of some clearly stated measurement. Some of the more common parameters include:  Speed- The product must travel at 20 miles per hour.  Output- The product must produce 400 acceptable parts per hour  Quality - The Product must be capable of 2,000 operational hours before failure  Efficacy- The product must reduce rejected parts by 20 percent Certified Procurement Manager (CPP) Using pre-established standards is another way of describing specifications or supplementing the description when that is appropriate. In its simplest form, a benchmark provides a measurement as a guide for establishing a specific requirement. However, benchmarking can also be a detailed process for determining how one organization is performing in relation to other organisations. Most people readily agree that quality is less costly when controlled within the initial process itself rather than through some form of inspection at a stage following manufacture or shipping. Prevention is less expensive than finding a full-blown cure. Methods of quality control typically include automated controls to measure compliance to specification and site inspection at the point of manufacture where corrections can be made. It also includes control of the process through a continuous sampling and measurement discipline known as statistical process control (SPC). The kind of competition, whether it is created by the buyer directly as a result of organisational policy or as a result of market conditions, also plays a significant role in determining supplier choice. We will outline the many competitive situations you might run into in the section that follows. Certified Procurement Manager (CPP) Open competition is said to exist when there are multiple suppliers available to fill your specific requirements, and they are willing to vie for your business. When strong competitive factors exist in the marketplace, the buyer’s negotiating position is stronger, and there are greater opportunities for gaining concessions in price as well as in payment terms, service, and support. What if only one source is capable of meeting the buyer’s needs? Then you have a solesource situation—the exact opposite of open competition. Sole- source situations are often the result of a government-created monopoly, such as a local utility, and there is little the buyer can do to gain concessions. A single-source situation is similar to the sole source but is a condition created by the buying organisation, either through product customisation where only one supplier is capable of producing the product or through some predefined collaborative relationship that by its nature excludes competition. Technical competition, often referred to as limited competition, arises when there are only a few providers available for a certain product because of patents or restricted production capacity. Due to the existence of franchises or the significant upfront costs associated with starting a business, competition in Certified Procurement Manager (CPP) a given industry can also be restricted to a small number of suppliers within a given geographic area, making it financially unfeasible for the buyer to expand procurement outside of the restricted area. On occasion, businesses will form a joint venture to produce a source of supply where none exists or to jointly share the expenses of creating new technology. Even though this partnership does not officially restrict competition, the investing organisations have little to no motivation to make purchases outside its boundaries because the costs of development have already been incurred and there are no other options to recoup the investment. The same organisation will occasionally use multiple sources, either to encourage competition or because no single supplier is able to completely meet all of the needs. There are times when a portion of the business may be reserved for small or minority firms, and it is common practise to keep numerous sources to lower the risk of supply interruption. Small groups of buyers come together in various industries to make purchases collectively and enter into contracts with suppliers as a single company. This enables every firm in the consortium to purchase at a price that they would not typically get. Before joining or organising a buying consortium, there are a Certified Procurement Manager (CPP) number of legal factors to be taken into account, and these factors differ by state. Sometimes businesses will decide to source all of the needs for a certain class of goods or services—like maintenance, repair, and operations (MRO)—from a single provider. By doing this, spending in multiple commodity sectors that would typically result in a small discount and negligible service may be consolidated and leveraged. Buyers can frequently offer service benefits by integrating the supplier, like desktop delivery for office supplies or online purchasing. There are so many ways to locate potential suppliers; it is hardly possible to list them all. There may also be sources of information available to you through the technical staff within your own organisation, and that is often the best place to begin your supplier- sourcing activity. The most common way to find potential suppliers is by using buyers' guides and directories that are industry-specific. These often come with supplier listings organised by a speciality or area and are released in collaboration with a trade publication or an industry association. Along with contact names and phone numbers, these directories frequently provide details about the supplier's goods and services, capabilities, size, and market niche. Certified Procurement Manager (CPP) Nowadays, it's usual practice to look for providers online. You can find several vendors for any good or service by typing the relevant search terms into easily accessible search engines like Google. The issue is that there is so much information available on the Internet that it can be impossible to sift through it all, as you may have already experienced. Trade organisations typically sponsor magazines and online directories that help the buyer find sources. More importantly, perhaps, these organizations sponsor local or national trade shows that bring together all of the significant suppliers within a specific industry for several days of workshops and exhibits where buyers can effortlessly contact a significant number of suppliers in one location. Procurement professionals frequently look outside the organisation for proven expertise when a big or essential demand develops and there are no internal resources to perform adequate sourcing operations. Since they already have in-depth knowledge of suppliers and can use their experience to accelerate the development of the best supplier match, hiring consultants who are industry specialists can reduce the time needed to locate, prepare, and conduct in-depth research and source comparisons. Even while it might initially seem pricey, this strategy can ultimately save both money and time. Certified Procurement Manager (CPP)  You need to pick the right method in order to get a particular outcome. The supplier is the key resource your company uses to meet its needs, therefore making the wrong choice will guarantee that you never get the outcomes you are looking for. Despite requiring a significant amount of clear human intuition, choosing the right suppliers must be done methodically and according to the most objective standards you are possible to create. As you go through the procedures in this section for choosing the best supplier, consider how your company can profit from adopting a more strict methodology in this area. Evaluating Offers Every buyer should use an evaluation procedure before choosing an offer to make sure all organisational needs are being taken into account and optimised. When analysing a supplier's offer, it is important to consider both the cost and the supplier's capacity to deliver the appropriate level of quality and speed of service. You must weigh both potential risks and rewards while evaluating offers. Will the supplier continue to provide the required level of quality while offering incentives to win the contract, such as lowering the price? This is only one of many factors you will need to take into account when choosing your supplier. In performing proper due diligence, the buyer reviewing a supplier offer evaluates three key criteria before reaching a decision to award the contract to a specific supplier: Certified Procurement Manager (CPP) The supplier's capacity to complete the work in accordance with the specification or scope of work specified in your call for proposals will certainly be the primary criterion for getting the award. In high-value or high-profile contracts, it is advisable to physically inspect the supplier's facilities to qualify the supplier and ascertain its suitability for your requirements. However, site visits may often be physically or monetarily prohibitive, so it is best to employ alternative techniques to verify the supplier's responsiveness. For instance, you can think about getting in touch with a supplier's prior clients to enquire about similarly related work completed. This is frequently a reliable method of assessing supplier ability in general. In order to make sure the supplier has satisfactorily handled all of your mandatory requirements and all of the questions in your bid proposal, you may also wish to carefully examine the response document. Even if mistakes can happen occasionally, it is not encouraging to see that some of the crucial aspects of your requirement have not been addressed. Questions that are not addressed in an offer should be regarded as nonconforming and rejected. The extent of the supplier's comprehension of your requirements and its proficiency in offering practical solutions, services, or conforming parts are typically indicated by the supplier's answer and the quantity of detail the provider gives. You should also assess how much the supplier's proposal complies with your organisation's principles and practises around business, ethics, and the environment. Another key capability to be evaluated is the supplier’s technology and technical ability. Does it have the necessary equipment, tools, and talent to meet your requirements? This can be determined not only through site visits but through historical performance records and active participation in industry events. How many patents does the company hold in comparison to its competition? How often does it lead the market with the introduction of new products? To what extent is it funding its research and development efforts? You might also consider supplier certification as an adjunct to technical enablement. Does the supplier have the necessary licenses, Certified Procurement Manager (CPP) insurance, and certifications required to ensure regulatory compliance? This not only reduces the supplier’s liability, but in many cases it may reduce the liability of your own organization, too, because lawsuits directed at your supplier while they are performing your contract will potentially bring your organization into potential litigation as well. The supplier's physical ability to fulfil your needs as promised will be one of the major factors in award determination. You don't want to choose a supplier who might struggle to deliver the required volume because of capacity issues or scheduling difficulties with other jobs. A straightforward measure of this capability is the current output-to-capacity ratio. When a supplier is loaded at more than 90% of capacity for your goods or services, your risk of an on-time delivery failure rises, especially in sectors where it can be challenging to find skilled labour or production capacity. Qualifying a supplier requires the disciplined application of an objective process. A checklist typically includes a set of criteria appropriate for that particular supply segment to which some form of measurement can be added. Evaluation is most commonly performed by a cross-functional team with members chosen from the various departments or stakeholder groups affected by the choice of supplier. It is the team’s job to develop the final supplier selection through some method of achieving consensus. Commonly, consensus is generated through the application of a scoring evaluation matrix that averages the inputs from each of the team members. We’ll discuss consensus matrices and other methods for supplier selection in this section. Certified Procurement Manager (CPP) Qualifying the Supplier Clearly, the site visit is conducted to qualify or continue the qualification status of a particular supplier. It is a formal process and should be well prepared for in advance. And since it can be somewhat costly considering travel expenses, the team should develop a process that will enable it to come away with as much information as possible. Order processing and fulfilment cover the methods by which the supplier receives, processes, and schedules incoming customer orders. It includes shipping and tracking records. Some of the specifics you should cover include the efficiency and effectiveness of the following: Systems employed for entering and verifying customer orders, level of automation, and reliability Methods used to prioritise orders. Processes used to schedule orders and monitor delays. Comparative length of backlog. Cycle times. Flexibility in meeting spikes and valleys of incoming orders. Training and expertise of the staff. The areas of operations you should consider reviewing for a supplier audit include manufacturing, technical document control, engineering, facilities management, and procurement. Specifically, you should be concerned with the following: Capacity (the current level of operation as a percentage of the maximum level of operation). Degree of automation and technological enablement. Complexity of the product line. Flexibility to fulfil additional requirements. Certified Procurement Manager (CPP)  Work-in-process (WIP) tracking and lot tracking ability. Inventory management. Preventive maintenance. Record keeping including technical specification control. Production flexibility. Reliability of suppliers and methods used to improve performance. Training and expertise of the staff. Quality systems generally consist of the methods used to ensure current quality and the processes employed for longer-term improvement. A buyer performing a supplier audit should review the following in regard to quality systems: Systems used to evaluate and control quality. Processes employed for continuous improvement. Record keeping. Compliance control. Internal and external audit procedures. Measures and methods used to determine customer satisfaction. Supplier quality engineering. Communications programs. Training and expertise of the staff. Training programs for employees. The method used for controlling costs is one of the key elements that should be covered in a site visit, largely because the suppliers’ ability to manage cost will indicate its future viability as a partner. To a large extent, your organization’s ability to compete with others in your market depends on the effectiveness of your suppliers and their ability to Certified Procurement Manager (CPP) keep pace with market pricing. Some of the most important areas you should review include: Ability to properly account for cost by job. Systems used to allocate costs by task. Effectiveness of cost control initiatives. Process documentation. Engineering support. Performance of value analysis. Adherence to accepted standards of cost accounting. Establishment of aggressive company-wide goals. Ability to manage cost variances to limit margin loss. How an organization manages its finances generally determines how long it will stay in business. Today, the government in every sets strict rules for financial accountability, and site inspections can effectively determine the efficacy of government regulations. Look for evidence of the following: Effective profitability management. A strong balance sheet. Excellent credit ratings. Contracts can, in general, be made orally or in writing. Although written contracts are considered to be the least risky from a procurement standpoint, it's crucial to realise that oral contracts may also be enforceable under certain circumstances. Real estate sales or transfer agreements Contracts to take on another person's obligation or debt Contracts that, either by their terms or because they are genuinely difficult to Certified Procurement Manager (CPP) perform, cannot be finished within a year Agreements that must be documented in writing (like the ones previously mentioned) are not required to assume a particular contractual form. However, the text must at the very least include: The other party's identification as the person in charge of the contract. Some kind of above signature. A contract's expressly stated subject. Certain conditions and terms. The consideration's identification (as an exchange of value). When it can be demonstrated that relying on the oral promise will result in significant or unconscionable harm to the promise or unjustly enrich the promisor, the principle of harmful reliance is applicable. In general, it is not thought to be a good enough justification for the promise to be able to enforce an oral contract if it relies on the promise to its detriment. However, when bespoke products are manufactured for a buying organisation under an oral agreement and cannot be sold to any others, the contract is enforceable by the seller. It is generally acknowledged that four essential factors must be proven for a contract to be legally enforceable: mutual agreement, legality, consideration, and capacity. Let's go into detail on each of these: Certified Procurement Manager (CPP) As evidence of a “meeting of the minds,” mutual agreement includes an offer and its acceptance. When a buyer places a Purchase order (PO), for example, it is considered an offer to buy, and the seller’s acknowledgement is generally considered an acceptance. Acceptance can also be demonstrated by actual performance, such as a shipment of materials or some constructive action of service that indicates such acceptance. This is called a unilateral contract, whereas a contract containing both an offer to sell and an agreement to buy is considered a bilateral contract. If a seller extends an offer in the form of a quotation but the buyer requests a modification to some of the terms, it is considered a counteroffer rather than an acceptance. By requesting modification, the buyer, in effect, rejects the original offer and proposes a new one. If a buyer issues a solicitation for a certain quantity of materials and a seller provides a quotation, does it signify a contract exists? No, because a solicitation is not necessarily an offer to buy. A contract requires a legal purpose. Contracts that violate a legal statute or are against public policy are invalid. Consideration means an exchange of anything of value. To be valid, a contract has to show evidence that an exchange of some value for a promise is part of the agreement. Consideration does not necessarily have to be exchanged in the form of money. It can also be in the form of various types of services rendered. Certified Procurement Manager (CPP) Parties to a contract need to be legally competent to enter into it and perform its obligations. Minors, for example, are not considered legally competent. A person who is legally insane cannot be a valid party to a contract. During the regular course of business, a procurement department will typically use a wide range of contractual papers. The precise document you select will be heavily influenced by the business requirements of your company and the nature of the transaction. The most popular contracts are described in this section. In almost all environments, the PO is the most common procurement document available and is, in effect, a contract. As a standard form, it is the easiest way to order purchased materials and services and provides the most commonly required audit trail. A standard PO can be used for recurring or repetitive purchases as well as one-time purchases. Requirements contracts or indefinite-delivery contracts are used when the buyer wishes to lock in pricing or lead time in exchange for a commitment to purchase all of the organization’s requirements (or at least some described minimum and/or maximum amount) but specific quantities and delivery dates are not yet known. Certified Procurement Manager (CPP)  A definite quantity contract specifies the amount being purchased during a given time frame but not the specific delivery dates. This type of contract is also known as a take or pay contract because the buying organization cannot cancel it and must pay for it at the end of the contractual period even if it is not used. Fixed-price contracts are the most commonly used contracts in typical business environments. They are commonly adapted for commercial use by procurement departments. Essentially, they are contracts in which prices are agreed to in advance of performance. The purchase of contracts for products works, and services by public sector organisations and some utility sector organisations is governed by public procurement law. The following UK public procurement laws are relevant:  Public sector procurements are governed by the Public Contracts Regulations 2015 (PCRs).  The 2016 Utilities Contracts Regulations (UCRs), which are applicable to purchases made by specific regulated utility providers.  The 2016 Concessions Contracts Regulations (CCRs), govern the acquisition of concession contracts for works and services.  The 2011 Defence and Security Public Contracts Regulations (DSPCRs), are relevant to the awarding of specific defence and security contracts. Certified Procurement Manager (CPP) This legislation only applies to England, Wales, and Northern Ireland, with the exception of the DSPCRs, which are applicable across the entire United Kingdom. Although Scotland has its own procurement laws, they are essentially the same as those that apply to the rest of the UK. Unsurprisingly, our organization wishes to maximize the return on its investment in goods and services. Naturally, your provider wants to maximize their profits from all commercial transactions; this is nothing new. When there is a lot at risk, both parties usually work together to resolve their divergent opinions. This action is known as negotiating. It is important that you first assess the current situation prior to conducting actual negotiations. Assessing the negotiating climate typically involves gaining an understanding of market conditions for the particular commodity or service being purchased and the position of the supplier in that market. Market conditions generally refer to circumstances such as the availability of supply in relation to actual demand or the number of suppliers in the marketplace available to create a competitive situation. What is the market share for each of the major players, and how aggressive is the battle for market share? How profitable are companies in the industry, and what constitutes a typical profit margin? What is the economic outlook for this particular segment of the economy? In addition, it is important for you to assess the relationship you have with the supplier. Often, this can determine the atmosphere during the negotiation and have an important impact on how you and your team develop your negotiation strategy. With this information come insights into the supplier’s Certified Procurement Manager (CPP) objectives and, as a result, many clues that tell you what supplier strategies to expect during the negotiations. When the competitive environment is limited by the lack of qualified suppliers or by intellectual property rights, competitive bidding is unlikely. In this circumstance, negotiations may be the only way to achieve organisational objectives. Competition is available in virtually all markets for goods and services. What you have to assess is the nature of that competition so that you can effectively formulate your procurement strategies. Higher competition generally results in lower prices and a greater willingness by suppliers to provide additional services. Competition can be evaluated from a number of perspectives: Number of qualified or qualifiable suppliers in the market. Higher numbers generally foster greater competition. Impact of the buyer. Greater procurement volume encourages vigorous competition for your business in markets where competition exists. Barriers to entry for the particular product or service. The lower the cost to establish new businesses in a particular market, the greater the competitive pressure Capacity. Often related to the number of suppliers, higher levels of unused capacity within an industry can foster greater competition. Dominant brand. Effective branding strategies that make one supplier or one product more desirable than others result in a less vigorous competition. Certified Procurement Manager (CPP)  Ability to substitute. Products or services that are easily substituted by those from other industries are more highly competitive. Role of market forces. When analysts speak of market forces, they generally refer to factors—economic, physical, and political—influencing and affecting buying and selling at a particular time. Once you have reviewed the general negotiating climate and have a relatively clear understanding of the forces operating behind the scenes, so to speak, you need to prepare for conducting the negotiation itself. This involves a great deal of planning that builds your confidence through a keen understanding of the circumstances you will likely encounter during the actual negotiation. It is also a continual process of fact-finding and analysis that leads and guides your strategy. In preparation, you will likely want to select and orient your cross-functional team to ensure that you are all working together as a team toward common objectives. With your team in place, the primary focus of your planning will be to carefully review the supplier’s proposal from the perspective of your organization’s needs. To what extent are your needs being addressed, and where are there critical gaps that fall short of your objectives? The more you know about the contents of the proposal, the less likely you will be caught off guard by any omissions or issues that have not been clearly thought out. Planning for negotiations, in a way, also involves understanding the needs and objectives of your supplier, anticipating its most likely position on any key issue in relation to yours. If you and your supplier can avoid creating surprises with unexpected issues both during and after the contract negotiations, the chances are that the actual performance will run smoothly. Certified Procurement Manager (CPP)  Your next step is to lead the development of a plan for the actual negotiation. It is always best to put this plan in writing so that you and your team members can use it as a guide in future negotiations. As a first step in developing the plan, team members should list their objectives and the anticipated objectives of the supplier. Objectives can be based on the identified gap between initial expectations in the sourcing process and those actually achieved. Under each objective, indicate the likely impact of not achieving the objective. Then rank the objectives on this list by priority, focusing on developing a strategy for those that are most critical. The strategy will outline what initial offer you can expect from the supplier and what you are willing to counteroffer. (You might call these “take-aways” and “give-aways.”) You will also need to determine a position at which you would be willing to accept the offer and one where you would be willing to walk away altogether for each of the key objectives. Your assessment of the situation, such as current market conditions, will play a critical role in this process, for without it you will likely not be able to understand the supplier’s needs and motivation. When your supplier selection team established its initial requirements and began the process of determining the most qualified supplier, it also developed a set of expectations. These expectations were based on your organisation’s needs. Whatever needs are not fully satisfied in the supplier’s response, even when that response is the best one received, will need to be further negotiated. You will likely have performed a gap analysis prior to constructing your negotiating plan, so you can compare what you have to what you actually wanted. Certified Procurement Manager (CPP) Despite the fact that you understand the nature of value and the concept of the total cost of ownership, the focal point of any negotiation is usually price. The seller wishes to reasonably maximize profit and the buyer wishes to obtain the best possible price. In most cases, the ideal position for both is a fair and reasonable price. For the most part, the best way to determine a fair and reasonable price is through the current pricing in an open market, such as a commodities exchange. On an exchange, commodity prices fluctuate openly in response to supply and demand, so the trading price at any given time reflects the current price a buyer is willing to pay and the current price at which a seller is willing to sell. As negotiations progress, you will likely find that increased quality specifications result in higher prices and that relaxing some of the noncritical specifications may result in lower prices. To the extent possible, the technical group on your team should review the specifications as part of the planning process. Knowing where specifications and tolerances can be relaxed and where they cannot need to be determined largely in advance and should be included in the negotiation plan. Whenever the potential for limitations in a supplier’s production or service levels exists as a result of forecasted changes in market conditions, you will need to address it contractually. During periods of constrained capacity and shortages when suppliers cannot keep up with demand, you will want to ensure that your organization has the protection it needs by locking in specific commitments from the supplier for Certified Procurement Manager (CPP) certain amounts of its capacity or specific volumes based on your anticipated needs. This, of course, is always a trade-off, since in exchange for guaranteed capacity the supplier usually wants a guaranteed volume of business. Naturally, our company wants to get the most out of its investment in goods and services. Naturally, your supplier also wants to benefit as much as possible from all of their commercial dealings; this is nothing new. Therefore, both parties typically work together to resolve their divergent perspectives when there is a lot at stake. Negotiations are the term for this action. The organisation's supply is under the control of purchasing. Its duty is to guarantee the availability of supply including goods, infrastructure, resources, and services. The traditional goal of purchasing—to obtain the proper goods in the proper quantities and of the proper quality at the proper times and locations, while taking economic considerations into account—remains valid today. But more strategic techniques have been created as a result of the growing significance of purchasing activity. Planning should be comprehensive and long-term for purchasing activities. Global development of the procurement markets is required, as well as the strategic partnership development of suppliers. Strategic purchasing is a broad area of activity that has grown out of these factors. This evolution frequently results in the split of individuals within Purchasing into operational and strategic skill areas. The normal processing of order procedures is handled by operational purchasing, whereas the strategic buyer creates the long-term framework conditions in accordance with the business plan. Certified Procurement Manager (CPP)  There are three basic functions of Purchasing today: Operational Purchasing: Securing supplies. Strategic Purchasing: Long-term planning. Project Purchasing: Support of the product development processes and other business areas It is obvious that the Buyer's area of responsibility can vary greatly depending on the variety of responsibilities involved. Additional areas of responsibility could become available depending on the business sector and its importance. But securing the organization's supply of the necessary production materials remains the fundamental goal of purchasing. Basically, Operational Buyers assume the classical purchasing functions with regard to routine operations. As a rule, they will make recourse to the conditions established by the Strategic Buyer. Within the tasks of Operational Purchasing we have, for example, the handling of routine order processes, expediting deliveries, operational planning of procurement activities in terms of demand planning, scheduling, and the processing of returns and notices of defects. The main aim of Operational Purchasing is to secure the availability of materials at any time and also to achieve optimum stock levels. As this field of activity is closely connected with the business function of Material Management, Operational Purchasing activities are often located there. Thus, in classical Purchasing departments, necessary latitude to perform strategic tasks is realised without a need for additional personnel. Certified Procurement Manager (CPP) In the context of strategic considerations, activities prior to the actual order process have become increasingly important. This function is assumed by Strategic Purchasing. Strategic Buyers make decisions that are beyond the scope of day-to- day operations. In doing so, they create the framework conditions of Operational Purchasing. The first step is to define the basic strategic direction of procurement activities in terms of supplier, commodity groups, and risk strategies that support the overall business strategy. Furthermore, Strategic Buyers research potential procurement markets, negotiate framework agreements, and manage the supplier portfolio. Last but not least, they are also responsible for process improvements within the value chain, which also means questioning their own function. Ideally, this results in the continuous optimisation of the whole procurement process including its points of interface. Project Purchasing is a multidisciplinary procurement function within the context of product development projects in which Purchasing is increasingly gaining significance. One of its main tasks is to co-ordinate all purchasing activities within the scope of the project. Project Purchasing, therefore, represents the suppliers involved, and it also represents the interests of the Purchasing department in the project team. In doing so, it makes use of the resources of Strategic Purchasing and hands over the established framework conditions once the project has been approved. The importance of Project Purchasing becomes especially clear if one considers that roughly two-thirds of the product costs are determined in the early opening stages of development projects. For this reason, the early involvement of Purchasing at the start of the project is becoming increasingly important and should be backed by the management. Certified Procurement Manager (CPP) Project Buyers are also involved in the case of complex, indirect supplies with long lead times. This may be, for example, capital investments such as new plant, machinery, or workshops. That is why Project Buyers need a sound basic knowledge of technical and commercial aspects and a distinct understanding of Project Management. The variety of purchasing responsibilities will disproportionately expand in the future. Numerous company operations, including Strategic Planning, Commercial, Risk Management, and Project Management, still fall under this category today. Therefore, it is obvious why purchasing has already attained a powerful position in many businesses. However, strengthening Purchasing's strategic position inside the organisation would be the biggest hurdle. Even if it is becoming more important, other departments' operations are still the norm in the majority of businesses. In many businesses, this so-called "maverick buying"—or uncoordinated purchases—amounts to 20–30% of total purchasing. In this situation, a lot of explaining is necessary, and one's words must be followed by deeds. When offered unrealized gains, specialised departments frequently react with surprise since they lack the same information and market understanding that purchasing should possess. Certified Procurement Manager (CPP) Buyers must have the required knowledge at their disposal in order to accomplish this. In addition to the demand for extensive business expertise, this specifically involves a fundamental technical grasp of the products to be procured and of their manufacturing processes. Buyers will only be treated seriously in interactions with technical departments and be able to purposefully implement the variety of purchase approaches that are accessible with such prior knowledge. This is necessary to effectively combine internal requirements with supplier competences and support the objectives of the business. In light of shorter product life cycles and smaller vertical manufacturing ranges, establishing technology co-operation agreements with suppliers and integrating them early in the product development process becomes increasingly crucial. Close and long-term partnerships must be established and developed for this. Buyers must take on the challenge of exploring and utilising fresh, exciting markets for their own businesses while keeping an eye on the hazards associated when it comes to possible supplier markets. Never lose sight of the fact that rising external added value also entails rising dependence on it. Supply chains that are extremely branched and global conceal significant risks and hazards. A case in point is how global purchasing operations may make the effects of natural disasters on the other side of the planet relevant to one's own production line. The entire value chain could come to a halt if just one component failed. It is the job of purchasing to proactively develop risk management plans in order to prepare for such eventualities and take appropriate action. Certified Procurement Manager (CPP) The personal requirements that Buyers must fulfil in order to properly carry out their expanded range of duties create another difficulty. Along with technical expertise, business acumen, and negotiation skills, buyers will also require soft skills and leadership qualities. A high level of leadership competency is required for managing supplier partnerships and mediating internal disagreement, even though only a small number of buyers directly hold leadership responsibilities. Suppliers must be managed, inspired, urged on, and forewarned just like employees. Because of this, among the fundamental characteristics that modern Buyers must possess are assertiveness, social intelligence, and communication abilities. Strategic Principles Essentially, "strategy" refers to an operational framework that is focused on achieving long-term objectives. The highest level of planning is the strategy, which provides a solution to the query, "What does the firm intend to achieve?" A company vision, or a formalised depiction of the organisation in the future, is frequently the source of the strategy. From this vision, the business strategy is derived, but it will still depend on many factors. In defining the strategy, the following issues must be taken into consideration: What are my core competencies? Which services do I offer? How do I distinguish myself from competitors? What are the needs of my stakeholders? What is the focus of the added value? Certified Procurement Manager (CPP)  What opportunities, potentials, and threats exist? A strategy's primary purpose is to outline the conditions for future business success and to avert scenarios that could be disastrous for the company. In most situations where a business is fighting for its life, developing a plan will be too late. In planning a strategy, fundamental principles must be kept in mind to ensure that the strategic considerations will be successfully implemented rather than being accepted in name only. For this reason, strategies always cover a long-term period (of 3–5 years) although their validity during this period is not necessarily permanent. Strategies often have a high degree of uncertainty due to their predictive nature. Markets and framework conditions may sooner develop in another direction than that anticipated during the strategy development process. Therefore, purchasing strategies must be flexible and checked against changing market conditions at regular intervals and adapted accordingly. Strategies and any changes to them must always be recorded. The only way the fundamental strategic direction may acquire the requisite authority to prevent unpredictable shifts in the course is by being documented. Thus, the strategic direction can be effectively implemented in everyday corporate activities. Therefore, it is crucial to conduct regular evaluations of the proper metrics in order to determine the extent of strategy advice execution. Certified Procurement Manager (CPP) A further strategic concern is how to adjust the strategy's level of detail to the complexity and importance of the good that needs to be purchased. The strategic framework should be more wide the more significant the commodity group is to the organisation. However, the method can also involve sizable one-time purchases of equipment or new office space. And it may also be part of the strategy to have no strategy at all for commodity groups of lesser relevance. As a general rule, purchasing strategies shouldn't be created using intuition and context. Always clarify your goals in terms of quantifiable data. Because of this, it's critical to gather comprehensive data from both internal and external sources early on so that strategies may take these results into account. Internal data, resources, and organisational structures are just as significant in this regard as external market trends and competitive environments. To best balance internal needs with environmental factors, the latter should be routinely assessed. The next parts go into detail regarding the methodical creation of a purchasing plan. Certified Procurement Manager (CPP) The method of strategy development follows a logical thought process and can be divided into different stages as shown. An analysis of the purchasing environment can serve to ascertain the relevance of Purchasing towards achieving the company’s targets. What is the position of Purchasing in the business strategy and which demands does Purchasing have to meet? It can also be ascertained which internal purchasing requirements must be satisfied; for example quantities, technologies, or processes, to which the purchasing strategy must be aligned. Monitoring external factors shows the influence the corporate environment has on the achievement of the company’s goals and how far this environment is linked with internal requirements. Apart from the competitive situation and market trends, this also encompasses, amongst others, the maturity level of one’s own supplier portfolio, the industry structure, and the potential of new procurement markets. In the next stage, Purchasing targets are defined with the aid of the collected information and the resulting overview. Essentially, purchasing targets can be divided according to two criteria: efficiency and effectiveness. Effectivity targets include strategic targets as opposed to operational targets of costs, quality, and time. Strategic targets aim for safety, growth, and optimisation. For the costs, this may, for example, mean the aggregation of demand; for quality, the development of suppliers; and for time, the shortening of supply chains. Certified Procurement Manager (CPP) If the focus is broadened to include security, risk management will become relevant; by including growth, exploiting new sources of supply will be necessary; and for optimisation the design of internal processes and the training of purchasing colleagues. In the next stage, the purchasing strategy is worked out against the defined targets. From this, general codes of conduct may be formulated. These codes reflect the basic design of the purchasing activities. These rules of conduct often follow so-called guiding principles by which companies commit themselves to compliance with internationally agreed guidelines and social standards. Such guidelines may demand, amongst other things: Fair and partner-like conduct in dealing with suppliers. Compliance with ecological, social, and ethical standards. Combating corruption. The strategic features will be used to inform the tactical decisions and actions that will be taken to guarantee the successful implementation of the purchasing strategy within the business environment. These choices and actions specify how the approach will be implemented. To guarantee the effectiveness of the planned action plans, cross-departmental coordination, the allocation of resources, and the backing of the board are essential prerequisites. The development of the action plan is one of the tactical steps. The various steps in this plan are included, together with the suitable resources and techniques for achieving the objective. Some potential solutions include conducting in-depth market research on the procurement sector in a particular area, creating tangible procedures, and combining various requests. Reviewing the existing supplier relationships is also necessary. The key question, in this case, is whether and how much the current supplier portfolio Certified Procurement Manager (CPP)  will help achieve the strategic goals. This assessment leads to specific supplier management actions, such as the identification of new suppliers and their growth, the improvement of current suppliers, or the modification of the supplier portfolio through the phase-out of current suppliers. Determining short-term success criteria can benefit from the establishment of interim or stage goals. This will allow for quick corrective action to be done in the event of a bad trend, allowing for the tracking of the realisation of long- term goals. The emphasis of Commercial Purchasing is to quantify and assess the degree to which goals have been realised. To do so, Commercial conceives and deploys control mechanisms and aligns the parameters to the strategic targets. In this way, appropriate metrics can be defined that can ascertain whether and to what degree the implemented measures have contributed to the realisation of the goal. In practice, business indicators will often be used that show the degree of realisation in a quantified way. In this context, the development of appropriate indicators is one of the main tasks of Commercial Purchasing. With the help of business indicators, the contribution that the implemented measures have made can be shown numerically. Usually, company metrics can be transferred to appropriate procurement indicators, which can help to enable progress. The key contents covered in this course are:  Procuring products or services, usually for commercial objectives, is known as procurement.  Without procurement, most business processes could not function. Procurement management ensures that all commodities and services are properly acquired in order for projects and procedures to proceed smoothly.  The department that will actually use the goods or services, along with other interested parties, creates new needs in most businesses, particularly those in the industrial sector. Certified Procurement Manager (CPP)  Technical specifications detail the material's or product's physical features, including its dimensions, material quality, physical attributes, colour, finish, and other information that helps define an acceptable product.  When evaluating a supplier's offer on the company's capacity to meet its goals, both the price and the supplier's ability to provide the requisite degree of quality and timeliness of service should be considered.  A cross-functional committee that includes representatives from several departments or stakeholder groups impacted by supplier selection often conducts the evaluation.  Agreements that must be in writing (such as the ones just mentioned) need not take on a specific contractual form.  Prior to engaging in genuine discussions, it's crucial to first evaluate the current circumstances. Certified Procurement Manager (CPP)