Procurement

A key question in procurement is what to buy, given a limited budget. A manager in a health service may have a large choice of possible health technologies which could be purchased. Is it better to buy an MRI scanner for a hospital or an advertising campaign to encourage parents to have their children vaccinated? A military officer may wish to choose between buying more fighter aircraft or more trucks. If good data is available it is good practice to make use of Economic Analysis methods such as Cost-benefit Analysis or Cost-utility Analysis .

An important distinction is between analyses made without Risk and those with risk. Where risk is involved, either in the costs or the benefits, the concept of Expected Value should be employed.

PROCUREMENT TYPES

Direct procurement and indirect procurement
		TYPES
		Direct Procurement	Indirect Procurement
		Raw Material and Production Goods	Maintenance, Repair and Operating (MRO) Supplies	Capital Good and Services
F E A T U R E S	Quantity	Large	Low	Low
	Frequency	High	Relatively high	Low
	Value	Industry specific	Low	High
	Nature	Operational	Clerical	Strategic
	Examples	Crude oil in petroleum industry	Lubricants, spare parts	Machinery, computers

Based on the consumption purposes of the acquired goods and services, procurement activities are often split into two distinct categories. The first category being direct, production-related procurement and the second being indirect, non-production-related procurement.

Direct procurement occurs in manufacturing settings only. It encompasses all items that are part of finished products, such as raw material, components and parts. Direct procurement, which is the focus in Supply Chain Management , directly affects the production process of manufacturing firms. In contrast, indirect procurement activities concern “operating resources” that a company purchases to enable its operations. It comprises a wide variety of goods and services, from standardized low value items like office supplies and machine Lubricants to complex and costly products and services like heavy Equipment and consulting services.

PROCUREMENT SYSTEMS

Another common procurement issue is the 'timing' of purchases. Kanban or Just In Time is a system (commonly used by Japanese companies but widely adopted by many global manufacturers from the 1990s onwards) of timing the purchases of consumables so as to keep Inventory costs low.

SHARED SERVICES

In order to achieve greater Economies Of Scale an organisation's procurement functions may be joined up into Shared Services . This results in rather than a number of small procurement agents, one centralised procurement system.

PROCUREMENT PROCESS

Procurement may also involve a Bidding process. A company may want to purchase a given product or service. If the cost for that product/service is over the Threshold that has been established (eg: Company X policy: "any product/service desired that is over $1,000 requires a bidding process"), depending on policy or legal requirements, Company X is required to state the product/service desired and make the contract open to the bidding process. Company X may have ten submitters that state the cost of the product/service they are willing to provide. Then, Company X will usually select the lowest bidder. If the lowest bidder is deemed incompetent to provide the desired product/service, Company X will then select the submitter who has the next best price, and is competent to provide the product/service.

PROCUREMENT STEPS

Procurement life cycle in modern businesses usually consists of seven steps:

Information Gathering: If the potential customer does not already have an established relationship with sales/ marketing functions of suppliers of needed products and services (P/S), it is necessary to search for suppliers who can satisfy the requirements.

Supplier Contact: When one or more suitable suppliers have been identified, Requests For Quotes (RFQ), Requests For Proposals (RFP), Requests For Information (RFI) or Requests For Bid s (RFB) may be advertised, or direct contact may be made with the suppliers.

Background Review: References for product/service quality are consulted, and any requirements for follow-up services including installation, maintenance, and Warranty are investigated. Samples of the P/S being considered may be examined, or trials undertaken.

Negotiation: Negotiation s are undertaken, and price, availability, and customization possibilities are established. Delivery schedules are negotiated, and a contract to acquire the P/S is completed.

Fulfillment: Supplier preparation, shipment, delivery, and payment for the P/S are completed, based on contract terms. Installation and training may also be included.

Consumption, Maintenance and Disposal: During this phase the company evaluates the performance of the P/S and any accompanying service support, as they are consumed.

Renewal: When the P/S has been consumed and/or disposed of, the contract expires, or the product or service is to be re-ordered, company experience with the P/S is reviewed. If the P/S is to be re-ordered, the company determines whether to consider other suppliers or to continue with the same supplier.

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Procurement