This training provides your staff with knowledge of supply management and procurement. In the training, we will give an overview of the supply management and procurement terms. Key guidelines, processes, and prerequisites for successful and effective implementation will be provided. An important part of the supply chain process is the efficient execution of procurement activities.
Areas covered in this training include identification of needs and selection of suppliers. We will cover the negotiation of suppliers, approval of purchases, and monitoring of suppliers’ performance.
Procurement and Purchasing
Organizations use the phrases procurement and purchasing to mean the same thing. These phrases have significant similarities and differences. The definitions are:
Procurement
Procurement is the management of all procedures that involve acquiring supplies and services. You can require these procedures while producing goods and rendering services to clients. Procurement focuses on sourcing activities through supplier negotiations. It also ensures the strategic selection of goods and services. This maximizes value from a small number of important supplier partners.
Purchasing
Purchasing is a transactional part dealing with placing orders for products and services. Receiving, processing, and turning buy requisitions (requirements)
The Five Functions of Procurement
The primary goal of procurement is to buy goods and services for the lowest total cost. This is done while maintaining standards of quality and meeting the demands of consumers. Procurement must consider other factors that add to the total cost of procurement. These costs include transportation costs, payment terms, return policies, and warranties. It is prudent to negotiate with suppliers to lower the costs of purchased goods and services.
The five key objectives of a procurement department are:
1) Supporting Operational Requirements
Acquistion supports a company’s daily operational needs. It buys raw materials, subassemblies, finished products, maintenance and repair supplies, and services. Distribution centers, transportation, and other supply chain components benefit from procurement. This is by guaranteeing that the final consumers receive finished goods or replacements. In addition, it supports departments involved in developing new products, installing and commissioning new machinery. This is through ensuring that replacement parts and machinery are available as needed.
2) Collaboration with suppliers
Partnerships and effective supplier management are crucial in procurement. This is because they increase a company’s supply chain management (SCM) competitiveness. Establishing strategic agreements with suppliers enables them to deliver high-quality goods and services. This results from collaboration with suppliers who create enduring relationships built on trust. Furthermore, intimate buyer-supplier relationships provide a variety of technical, financial, and strategic benefits. It gives you a chance to collaborate on product re-engineering to reduce costs. Instead of working with many suppliers, many businesses choose to use a select few who supply. Utilizing fewer, better resources enables businesses to concentrate their efforts on enhancing performance.
3) Collaborating with other functional groups
Procurement assists in preserving the quality of the goods and services provided. It also ensures supply continuity, cuts prices, and sources from competent suppliers. But to do these objectives, procurement needs to cooperate with other corporate departments. For instance, top management, operations, engineering, marketing, quality assurance, and finance. This ensures that the procurement strategy is in line with the organizational strategy. The list of departments within a company that procurement collaborates with is below. Engineering, sales, marketing, quality control, and finance are among the departments.
4) Formulating sourcing plans
In the face of fierce global competition, many businesses struggle to stay competitive. The ability of a company to carry out strategic plans is a key aspect in creating future earnings. It may even be essential to the company’s existence. If businesses wish to expand and be profitable, they must generate more revenue. They should also reduce operational expenses within the business. This important aim can be achieved by raising sales and cutting down on expenses. A crucial factor in achieving both goals is procurement.
Organizations can maintain competitive pricing and product quality through efficient procurement practices. Procurement plays a role in lowering the cost of materials thus increasing profit margin. Procured items offer an opportunity for cost reduction and enhancing return on assets. This supports the broader organizational plan and assures the survival of the entire business. A sourcing strategy is the statement of the objectives for choosing the best suppliers. It maximizes the organization’s procurement budget, which is connected to the broader business strategy.
5) Supporting organizational objectives and goals
Procurement helps an organization stay profitable by boosting revenues and lowering expenses. Smart procurement methods enable organizations to be competitive in terms of quality. Procurement enhances profit margins and returns on assets through the reduction of material prices. Additionally, procurement is crucial for guaranteeing the caliber of the products and services. The four basic areas of organizational aims are survival, growth, finances, and environment.
The creation of strategic goals is a crucial stage in the development of organizations’ plans. The next stage is to convert these objectives into detailed procurement goals. The goal of procurement operations is to support the objectives of the entire business. It includes maintaining profitability and enough return on shareholders’ investments.
Procurement Roles and Activities
The goal of this is to get the best products and services at the most affordable price. Various tasks and activities are carried out to achieve this goal. Procurement provides the analysis of pricing and cost trends. Its roles and activities consist of the following functions:
Procurement assists internal departments in defining and documenting specifications to communicate to suppliers.
- It estimates the future supply needs of organizations, which you can communicate to suppliers.
- Acquisition usually ensures that goods and services meet quality standards to meet buyers’ expectations.
- Procurement reports on material lead times and supplier performance.
- It ensures a continual supply of goods and services needed to run businesses. This avoids stock-outs or delayed deliveries of goods and services causing decreased revenue.
- The procurement process seeks and nurtures top-tier suppliers. It locates suppliers, examines those suppliers’ skills, and chooses the best possibilities. Collaborating with suppliers to achieve continuous improvement is crucial.
Procurement departments draft contracts and these should be agreeable to both parties. To find new suppliers who can match consumer needs, procurement performs market research. To ensure that production requirements are satisfied procurement expedites shipments.
The Importance of Procurement
- It ensures a steady supply of the goods, services, and materials needed for operations. This is achieved through cutting costs, lowering supply risk, and maintaining quality standards.
- Helps with cost cutting.
Organizations can spend less on buying of raw materials, work-in-progress, and finished goods. This makes procurement a perfect opportunity to cut costs.
It is essential in securing inputs at reasonable levels of cost and quality. This maintains the continuity of inputs from suppliers. As was already mentioned, the procurement function is crucial to the supply chain. The following list outlines some of the main advantages of handling procurement well.
- Significant savings can be achieved by applying effective procurement techniques.
- Quality improvement. Procurement impacts the quality of products sold by companies, as it purchases inputs. The quality of raw materials used in producing goods affects the quality of the end products.
- Product enhancement.
Procurement improves products and process designs by introducing new technologies into companies’ products and service offerings.
Types of Buying Organizations
Organizations buy goods and services for different purposes. According to Fill and Fill (2005), here are the forms of organization that buy goods and services:
1) Commercial organizations
Commercial organizations consist of industrial distributors, original equipment manufacturers (OEMs), users, and retailers. They get goods as raw materials, components, and finished products for resale. Miscellaneous materials and services needed to support running an organization should be procured. Support items may range from office supplies and real estate to lawn services.
2) Public organizations
They include railways and nuclear power plants that make purchases for operational purposes.
3) Governments
Governments are the biggest procurement customers. They often use procurement to meet small business objectives. They end up spending many billions every year as a result. Governments’ procurement budget is spent on a wide range of activities. This ranges from public hospitals and schools to the organization of the departments.
4) Institutions
These include private universities, hospitals, and schools. Institutions buy, for example, textbooks, classroom furniture, medical equipment, audiovisual equipment, and computers
Types of Products and Services in Purchasing
Procurement personnel are responsible for purchasing many different products and services. This depends on the nature of their industry and their organization. These are examples of different goods and services procurement is responsible for procuring.
Products that have not been processed are referred to as raw materials. They serve as the foundational components of the manufacturing process. and are incorporated into finished goods. Cotton, coal, and mined minerals are a few examples.
Capital goods comprise pieces of equipment utilized in production processes. They include power-generating machinery and structures and are the most expensive purchases.
Maintenance, repair, and operating materials (MROs)
MROs, such as office and cleaning supplies are crucial for the functioning of businesses. They are crucial though they are not immediately necessary for the production process.
Finished goods: These products don’t need to be processed any further. They are purchased for resale or internal usage by businesses.
Equipment used to help production is referred to as accessory equipment. Examples include toolboxes, desktop printers, hand tools, and computers.
Services -they include transportation, advertising, banking, and labor services.
Original equipment manufacturer (OEM) component parts
OEMs are products that are purchased for resale or assembled into final products. An example of an OEM is the alternator in a motor engine.
Procurement Process Overview
The procurement process entails working to understand firms’ needs. It ensures there are ongoing evaluations of supplier performances. These steps are:
1) Finding the need
A need may come from any function, although it is created during the demand planning process. For example, administrative departments may need office equipment or raw materials for production. User functions fall short of identifying needs early enough. This can lead to urgent requests and present difficulties for procurement staff. These difficulties include supplying goods faster and the costs related to quick orders.
2) Defining the needed good or service
Requests are sent to the procurement department with the appropriate paperwork. The requisition’s details include the date, department from which it came, quantity, and delivery date. They will include a detailed description of the materials and service delivery instructions. Procurement specialists collaborate with the individual making the request. This ensures that the material and service specifications have been recorded well. To describe complicated and non-standard items, engineering drawings, and other documents
3) Identifying potential suppliers
The task of finding alternative vendors falls to the procurement staff. This happens when the pre-approved list of suitable suppliers is unavailable. You can conduct this search via catalogs, websites, trade associations, and personal contacts.
4) Evaluating and selecting suppliers
A multi-function team that visits the site to examine a variety of competencies. These include management, manufacturing planning, process control, quality, and workload assessments. Procurement professionals may conduct an efficient evaluation on their own with smaller standard-item. They get and catalog items purchased through a published price list.
5) Request for price and request for quote processes
When purchasing staff receives a buying requisition, they launch a request for a quote. Requests for quotes are created and submitted to suppliers who request prices. RFQs are created and delivered to suppliers to request specifications, pricing, and delivery.
6) Order placement
After receiving the responses to the RFQ and the request for quotes, purchasing can issue a PO. Before the customer files a PO, the buyer and supplier may finish a negotiation process. The negotiation included a final agreement on price, delivery plans, product specifications, and quality.
7) Evaluation of performance
After giving a supplier a PO, you can monitor its performance to see if its goods meet the requirements. Place future orders with suppliers who deliver satisfactory goods. Unsatisfactory supplier performance may result in removal from the approved database. It may also lead to a lack of future POs. Measure supplier performance using scorecards by some acquisition departments. This measures quality, on-time delivery, cost control, and responsiveness.
Supply chain management agency theory
This theory applies to contractual arrangements between a principal and an agent. Although they are cooperating, their attitudes toward risks and their goals are different. The principal assigns duties to an agent who completes those responsibilities on his behalf.
Supply chain management agency connects to certain activities. They include risk management, outsourcing, sourcing, and supply chain collaboration. During the training, you will learn about principal-agent relationships. You will understand that the principal guarantees to act in the agent’s best interests.
Management of the company must act in accordance with the authority granted to them. They act on behalf of the company proprietors while making supply chain decisions. According to this theory, the principal and agent’s interests are not at odds with one another. They can accommodate varying levels of risk tolerance. Principals and agents both aim to get the most out of the same organizations.
The principal is aware of what the professional agent does and how he or she does it. This creates a significant informational imbalance. Principals find it difficult to predict in advance how much help they will require. This is because of the knowledge imbalance. The owners, who are the principals, want the managers (agents) to make proper choices. Decisions that will ensure SMEs prosper, including successful supply chain coordination. The aim of agency theory is thus to design and build a contract that minimizes agency problems.