PROCUREMENT

PROCUREMENT
 Procurement is defined as the logistics operation
responsible for supplying raw materials or goods in
general to a warehouse, logistics center, production
plant, or store to ensure that the business activity
(production, distribution, or sale) is properly carried
out
PROCUREMENT OBJECTIVES

Continuous Supply
 One of the core objectives of procurement is to ensure that a continuous supply of
materials, parts, and components is available to certain manufacturing operations.
 Downtime due to production stoppage increases operating costs and may result in an
inability to provide finished goods as promised to customers.

Minimize Inventory Investment

 One goal of procurement is to maintain supply continuity with the minimum inventory
investment possible. This requires balancing the costs of carrying material against the possibility of
a production stoppage. The ideal, of course, is to have needed materials arrive just at the moment
they are scheduled to be used in the production process, in other words, just-in-time (JIT).
 Quality Improvement
 Procurement is critical to the quality requirements of every organization. The quality
of finished goods and services is dependent upon the quality of the materials and
components used. If poor-quality components and materials are used, then the final
product likely will not meet customer quality standards.

Supplier Development
 It is important to develop close relationships with those suppliers in order to share
information and resources to achieve better results.

Access Technology and Innovation

 Firms look to suppliers as sources of innovation and new technology to aid in the design of
new products and the improvement of existing ones.
 Lowest Total Cost of Ownership
The difference in perspective between a traditional adversarial and more
contemporary collaborative procurement strategy can be summarized as a
focus on Total Cost of Ownership (TCO) as contrasted to a focus on purchase
price.
Procurement professionals recognize that although the purchase price of
a material or item remains important, it is only one part of the total cost for
their organization. Service costs and life costs must also be considered.
 Supplier terms of sale and cash discount structures also impact the total cost
of ownership.
PROCUREMENT STRATEGY
Developing effective procurement strategy is a complex process, requiring
considerable analysis of the most appropriate means to accomplish its many different
objectives.
 decisions must be made regarding which products and services to produce or perform
internally and which should be purchased from outside suppliers.
 alternative strategic approaches to dealing with external suppliers must be developed.
 the appropriate strategic approach must be determined for the different types of
products and services the organization buys, resulting in a procurement strategy
portfolio.


Insourcing versus Outsourcing

 A fundamental decision that must be made in every organization relates to which products and services
should be made or performed internally by the organization itself and which should be purchased from a supplier.
 It should be noted that “outsourcing” a product or service does not mean that a company decides to
purchase from a foreign supplier, it simply means that the firm has decided not to produce an item or service
internally. This process underlying the decision is commonly called the “make-buy” decision.


Make-buy decision – is an extraordinarily complex strategic decision for a firm and involves consideration of
numerous variables.
- It typically involves executives from across the organization working in cross-functional teams to ensure
comprehensive analysis of both the quantitative and the qualitative issues involved
- Analysis should begin with an evaluation of a product or service relationship to the firm’s core competencies.


Supply risk – refers to the possibility of an unplanned event in acquisition, delivery, or use that negatively affects a
firm’s ability to serve its customers.
 Alternative Procurement Strategies
Four strategic approaches to procurement have been identified:

 User buy
 Volume consolidation
 Supplier operational integration
 Value management

 User Buy
The simplest approach to procurement is to allow users in the organization to
determine their own purchase needs, evaluate sources of supply, and execute the
purchasing process.
 Volume Consolidation
 An important step in developing an effective procurement strategy is volume consolidation,
a procurement strategy accomplished through a reduction in the number of suppliers.

 By consolidating volumes with a limited number of suppliers, procurement is also

positioned to leverage its share of a supplier’s business. At the very least, it increases the buyer’s
negotiating strength in relationship to the supplier. More important, volume consolidation with a
reduced number of suppliers provides a number of advantages for those suppliers

Advantage

 It allows the supplier to improve economies of scale by spreading fixed cost over a larger volume of
output.
 Make investments in capacity or processes to improve customer services.
 Supplier Operational Integration
Operational integration occurs when buyers and sellers begin to integrate their
processes and activities in an attempt to achieve substantial performance improvement.

Integration takes many different forms:

 The buyer may allow the supplier to have

The primary objective of operational integration is to cut waste, reduce cost, and
develop a relationship that allows both buyer and seller to achieve mutual improvements.
Value Management
Value management is an even more intense aspect of supplier integration, going beyond a focus on buyer-seller operations
to a more comprehensive and sustainable relationship.

Value Engineering is a concept that involves closely examining material and component requirements at the early stage of
product design to ensure that a balance of lowest total cost and quality is incorporated into new product design

Procurement Strategy Portfolio

A key step in determining procurement strategies, then, is to understand exactly what the firm is currently buying (or
planning to buy) and how much is actually being spent on each purchased item or service.

Speed analysis is a tool that identifies how much is being spent on each type of product or service across all locations in the
firm. It also identifies all of the different suppliers being used.


Spend analysis is an important step in determining the appropriate procurement strategy for each of the products and
services required by the buying firm.
Routine Purchases
Routine purchase are typically items that involves a low percentage of a firm’s totally spend and involve very little supply
risk.
The routine strategy focuses on reducing buying effort to reduce cost.

Bottleneck Purchases
Bottleneck purchases represent a unique procurement problem. While such items involve a small percentage of a firm’s
spend, supply risk is high and lack of availability can cause significant operational problems for the buyer. These items are
frequently only available from a small number of alternative suppliers. The appropriate strategic focus in this situations is
to maintain multiple sources of supply and if feasible, use long-term contracts to assure continuity of supply.

Leverage Purchases
Like routine purchases, leverage purchases involve little supply risk. The items are generally commodities where many
alternative sources of supply exist. However, because the dollar spend on these products or services is relatively high,
there is potential to consolidate purchases with a limited number of suppliers to generate considerable procurement
savings. Volume consolidation and supplier operational integration are typically employed for leverage purchases
Critical Purchases
Critical Purchases are typically the strategic items and services that involve a high level of

expenditure and are vital to the organization’s success. Because of their importance and
the risk involved, there is strong emphasis in concentrating purchases with a strategic
preferred supplier. Critical purchases are the items where supplier operational integration
and value management procurement approaches take on highest priority.

SUPPLIER SELECTION AND ASSESSMENT

Effective procurement practice also requires an ongoing process for monitoring
performance and providing feedback to suppliers. Ultimately, some suppliers may be
designated as certified suppliers.
Supplier Audits
Supplier audit procedure are used to document the degree to which all of a supplier’s
processes are under tight management control

While visiting supplier locations, the audit team examines in detail the supplier’s
equipment, facilities and personnel. Supplier quality management and continuous
improvement processes are a particular area of investigation. The objective of this
assessment is not only to ensure that the supplier currently has the desired product and
delivery quality required, but also that these critical capabilities will be maintained

Another area of concern for the audit team is a assessment of the overall corporate
culture and willingness of its management to commit to the buying firm.
Supplier Development
There are situations that arise in which a firm is unable to identify a supplier capable of
meeting its requirements and must develop a supplier that will have theses capabilities. This
means that the buying organization must invest in improving the capabilities and
performance of potential suppliers. This development process becomes necessary when:
 The firm needs a new product that no supplier currently provides
 The firm wants a more convenient and less costly source of a supply
 The firm wants to avoid overreliance on a single supplier
 A current supplier lacks sufficient capacity to meet the firm’s demand
 The firm finds a supplier with compatible attitudes toward quality, timelines or flexibility
that does not currently make the desired input
 The firm becomes dissatisfied with continuing poor performance by current suppliers, but
no other potential supplier exists.
Monitoring Performance
Procurement must identify the key supplier performance characteristics and develop a process to collect and
analyze actual day-to-day performance information. Suppliers should receive regular feedback regarding their
performance. Many organizations use a supplier “scorecard” for this purpose

Key supplier performance characteristics that are captured in a typical scorecard include terms of product quality,
delivery performance, cost reduction, service and other performance attributes that are important for their firm.

Supplier scorecards are used in several ways. To provide feedback, scorecards should be reviewed with suppliers at
periodic intervals. By providing this feedback, suppliers have the opportunity to respond to and improve their
performance. Frequently, the procurement organizations even show relative comparisons to competing suppliers.

ADT Security Services, a division of Tyco International, sources finished equipment from numerous suppliers to
include in the security systems it sells to its customers. Such equipment ranges from card readers that control access
to facilities to video products that record images for surveillance and security purposes.
Another aspect of the scorecard deals with how well a supplier helps the company meet its cost savings goals.
Supplier Certification
A supplier that consistently meets performance standards set by the organization may
be designated as a certified supplier.
 Certified suppliers may be given access to information that other suppliers are not
allowed.
 Certified suppliers are most likely to be those who participate in vendor-managed
inventory that has substantial advantages for both the buying organization and the
supplier.
 Certification can also be revoked if a supplier fails to maintain its performance or if
problems are discovered in a re-audit of its processes.
E-Commerce and Procurement
Applying technology to procurement has considerable potential to speed up the process while simultaneously reducing errors and lowering total
acquisition cost.

Probably the most common technology used in procurement is Electronic Data Interchange (EDI). EDI involves the electronic transmission of data
between a firm and its suppliers. This allows two or more companies to obtain and provide timely and accurate information

Using EDI there are many types of data being directly transmitted, including purchase requisition, purchase orders, purchase order acknowledgement,
order status, advanced shipment notification, and track and trace information.

The explosion in EDI usage is a direct recognition of associated benefits, including standardization of data, more accurate information, more timely
information, shortening of lead times with associated reductions in inventories and reduced TCO.

Another procurement application of electronic commerce is the development of electronic catalogs.

Electronics catalogs allow buyers to gain rapid access to product information, specifications and pricing, allowing buyers to quickly identify products
and place order.

Buying exchanges are another technology based purchasing development. Typically, buying exchanges allow users to look for sellers or buyers of
specific goods or services.
LOGISTICAL INTERFACES WITH PROCUREMENT
Procurement may provide an organization’s logistical linkage with customers as many
organizations have turned to outsourcing of logistical services.
Just-in-time, logistics outsourcing, and performance based logistics represent three
critical aspects of the interface between logistics and procurement within an organization.

Just-in-Time
Just-in-time (JIT) referred to as just-in-time purchasing, and frequently referred to as
just-in-time delivery, the goal of JIT is to time=phase activities so that purchased materials
and products arrive just at the time they are required for the transformation process
Procurement of Logistics Services
The procurement of logistics services was considered an “indirect spend” and has not typically received the same
strategic emphasis.
Tyco International is one firm that has taken a close look at its strategy for procurement mof logistics services.

Performance-Based Logistics
Performance-based logistics (PBL) is used to buy what the military has tranditionally referred to as logistics support.

The most interesting aspects of PBL is that the military buys performance outcomes instead of what has historically
been individual transactions defined by product specifications.

Historically, the DoD told contractors what products to produce, when to produce them, and what activities to
perform, and then paid them upon completion. In this traditional arrangement, the more the contractor produced, the
more money it made. With PBL, the government simple tells the contractor what the desired outcomes are and lets
the supplier determine the best wy to meet those requirements. The government has found PBL to be an effective
means for obtaining higher quality while simultaneously achieving lower cost. While PBL has been limited thus far to
government purchasing, it is expected that business organizations may begin to adopt the practice in the future.
Summary
 Procurement in an organization is charged with responsibility for obtaining the inputs
required to support operations
 The focus is multidimensional, attempting to maintain continuous supply, minimize
leadtimes from suppliers and inventory of materials and components, and develop
suppliers capable of helping the organization achieve operating goals.
 Procurement professionals are focused on the Total Cost of Ownership as contrasted solely
on purchase price.
 This requires careful consideration of trade-offs between purchase price, supplier services
and logistical capability, quality, and how an item impacts detailed analysis of both the
value of an item and the supply risk associated with the item.
 Different strategy is required for different situations.
