Procurement
Procurement is the acquisition of appropriate goods and/or
services at the best possible total cost of ownership to meet the needs of the purchaser in terms of
quality and quantity, time, and location. Corporations and public bodies often
define processes intended to promote fair and open competition for their
business while minimizing exposure to fraud and collusion.
Overview
Almost all purchasing decisions include factors
such as delivery and handling, marginal benefit, and price fluctuations.
Procurement generally involves making buying decisions under conditions of scarcity. 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 made between
analysis without risk and those with risk. Where risk is involved,
either in the costs or the benefits, the concept of expected value may be employed. Direct
procurement and indirect procurement TYPESDirect
procurementIndirect
procurement Raw
material and production goodsMaintenance,
repair, and operating suppliesCapital
goods and servicesFEATURESQuantityLargeLowLowFrequencyHighRelatively highLowValueIndustry specificLowHighNatureOperationalTacticalStrategicExamplesCrude oil in petroleum industryLubricants, spare partsMachinery, 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
standardised low value items like office supplies and machine lubricants to complex and costly products and services like
heavy equipment and consulting services.
Procurement topics
Procurement vs acquisition
The US Defence Acquisition University (DAU) defines procurement as the act of buying
goods and services for the government.[1]
DAU defines acquisition as the conceptualization, initiation, design,
development, test, contracting, production, deployment, Logistics Support (LS),
modification, and disposal of weapons and other systems, supplies, or services
(including construction) to satisfy Department
of Defense needs, intended for use in or
in support of military missions.Acquisition
is therefore a much wider concept than procurement, covering the whole life
cycle of acquired systems. Multiple acquisition models exist, one of which is
provided in the following section.Acquisition processThe revised
acquisition process for major systems in industry and defence is defined by a
series of phases during which technology is defined and matured into viable
concepts, which are subsequently developed and readied for production, after
which the systems produced are supported in the field.The process
allows for a given system to enter the process at any of the development
phases. For example, a system using unproven technology would enter at the
beginning stages of the process and would proceed through a lengthy period of
technology maturation, while a system based on mature and proven technologies
might enter directly into engineering development or, conceivably, even
production. The process itself includes four phases of development:
- Concept and
Technology Development: is intended to explore alternative concepts based on
assessments of operational needs, technology readiness, risk, and
affordability. - Concept and
Technology Development phase begins with concept exploration. During this
stage, concept studies are undertaken to define alternative concepts and to
provide information about capability and risk that would permit an objective
comparison of competing concepts. - System
Development and Demonstration phase. This phase could be entered directly as a
result of a technological opportunity and urgent user need, as well as having
come through concept and technology development. - The last,
and longest, phase is the Sustainment and Disposal phase of the program. During
this phase all necessary activities are accomplished to maintain and sustain
the system in the field in the most cost-effective manner possible.
Procurement systemsAnother
common procurement issue is the timing of purchases. Just-in-time is a system of timing the purchases of
consumables so as to keep inventory costs low. Just-in-time is commonly used by
Japanese companies but widely adopted by many global manufacturers from the
1990s onwards. Typically a framework agreement setting terms and price is
created between a supplier and purchaser, and specific orders are then called-off as required.Shared servicesIn order to
achieve greater economies
of scale, an organization’s procurement functions may be
joined into shared
services. This combines several small procurement agents into
one centralized procurement system.Procurement processProcurement
may also involve a bidding process i.e, Tendering. 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. In the
European Union there are strict rules on procurement processes that must be
followed by public bodies, with contract value thresholds dictating what
processes should be observed (relating to advertising the contract, the actual
process etc).Procurement stepsProcurement
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 quotation, requests for proposals, requests for information or requests for tender 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: Negotiations 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, expediting,
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.
