Introduction

Procurement management is the process companies use to purchase economic resources and
business input from suppliers/vendors. This process helps companies negotiate prices and get the
best quality resources for production processes. In the contemporary business environment larger
companies are able to purchase resources and inputs in large volume quantities; high volume
purchases usually require a procurement management process.
A business's capital resources also are typically acquired through procurement management
departments. Individuals in this process may include accountants, business analysts or financial
managers responsible for determining the proper mix of bank debt or equity investments for
financing company operations. Procurement managers often involve members of the company's
financial team in this process, as complex financial information often must be properly presented
to banks or investors. Companies may secure discount prices on business inputs when buying
large quantities of economic resources from vendors or suppliers. Using contracts to set fixed
prices on future purchases of resources may also lower the acquisition cost of resources. Futures
contracts are a hedge against potential future cost increases on the economic resources
companies use to produce consumer goods or services.
As procurement becomes more critical and actively being involved in the mainstream affairs of enormous
companies across the globe, this attribute calls for strategic ways and means to perfect the holistic
function. Cost efficiency and better productivity has always been a major issue in procurement but in the
hype of todays ever increasing competition in the market, strategic procurement has become an
indispensable area which invariably bring forth some semblance of efficiency in various companies. It is
imperative to note that strategic procurement approaches in the contemporary business environment are
susceptible to world class business options which are embraced by the successful companies in the
market.
Changes in business environment have been happening since a long time in micro and macro steps, but
the changes have gathered speed and keeping pace with them is a challenge. The turbulent markets of the
twenty-first century has created fragmented demand of goods and services, product life-cycle have
become uncertain and mass customization has been prioritized by both public and private companies to
delight the prospective customers. This paradigm shift of doing business to a great extent has changed the
way in which companies purchase goods and services. Dealing with business complexities has made the
buyers to think strategically. The basic premise of this principle is that strategic procurement approaches
provides the right direction in understanding the amount of effort to be applied to fill the performance
gap, compared to competitors.
It is worthwhile to note that procurement is a function of myriad variables both internally and externally
and therefore procurement personnel invariably puts in place integrated, cohesive, well-harnessed and
conceptualized systems which add value to their respective businesses an attribute which is conspicuous
with strategic procurement tactics. In line with these unprecedented buying mechanism, procurement
personnel primarily focuses on decisions regarding outsourcing, supplier network, relationship with
suppliers, just-in-time procurement, information technology for instance use of electronic data
interchange (EDI) and most importantly customer service.

It is important to note that changes in procurement are forcing procurement managers to adjust their
thinking and play a role different from what they have done in the past. They must learn not to spend
much time in managing day-to-day problems and contribute towards the companys vision. Buyers must
understand that sustaining the leadership of their companies over an extended period has become a major
challenge. With no long-term success assured, in global competition, survival becomes temporary, and
only period of survival becomes very important. Companies that become complacent at any moment of
time are likely to fall behind in no time and competitors from any part of the world will replace them. As
decision makers, buyers must question whether they have the luxury of maintaining traditional habits,
behavior and practices as they attempt to guide their present procurement strategy through the unfamiliar,
uncertain turbulence going around them.
Today competitive pressure is not only to become a low-cost producer but how a company can become a
lowest cost producer; create not only simple differentiating product features but how to build complex
differentiating features difficult to emulate for competitors; how to delight both internal and external
customers and still remain lean and improve quality; reduce lead times and deal with short product life
cycles. Strategic thinking can make procurement managers aware of the following issues: Product to
advise management to make or buy; Core skills to be guarded within the company and the one to be
openly outsourced; Type of suppliers to deal with and capabilities to be nurtured; Type of procurement
tasks to be prioritized and technologies to be acquired; What to be added to fill the gap between todays
and tomorrows performance requirements not only in terms of immediate cost reductions but cumulative
cost savings which could be achieved in the long term.
Strategic supplier partnership for competitive advantage is another important area which can make a
company to intensify its market share in the business environment. World class companies have realized
that most of the future opportunities can be obtained and threats neutralized if they work in partnership
with suppliers and even with competitors. Building partnership with suppliers is becoming an explicit part
of the procurement strategy for both public and private companies. Challenges like globalization, rapid
product development, advances in production technologies, cost reduction; lean manufacturing and corecompetence based on make or buy procurement strategies have led procurement personnel to think
radically in a different way to deal with future procurement strategies.
Strategic partnership is the most valuable and difficult type of relationship. The partners have a broad
understanding of each others needs and visions and share important values. There is a high level of trust
and mutuality, with open information sharing, gains sharing and concern for mutual well-being. Because
the partnership shares so much, it is adaptable to change and transcend tactical difficulties. The strategic
buyer-supplier partnership philosophy creates a working environment promoting team work, trust and
quest for continuous improvement. It is customer-focused, vision-focused and service-providing
philosophy in which relationship based on a perception of independent needs creates competitive
advantage jointly.
Partnering is an important attribute in strategic procurement and calls for a teamwork approach with a
win-win attitude to achieve success. It is a long-term commitment between two or more organization for
achieving specific business goals. In a such new relationship buyer and supplier jointly address customer
needs and together seek the most cost-effective and competitive solution. It also allows the supplier to
gain better understanding of buyers products, process and develops own understanding how best he can
add value to buyers value chain so that both can remain in competitive race.

Definition of terms
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 Procurement
The term procurement is defined as the acquisition of merchandise or services at the optimum possible
total cost in the correct amount and quality. These goods and services are also purchased at the correct
time and location for the express gain or use of government, company, business or individuals by signing
a contract. Procurement management can be defined as the process by which companies purchase
economic resources and business input from suppliers. This process helps companies negotiate prices and
get the best quality resources for production processes. Procurement functions commonly encompass:
Purchase planning
Standards determination
Specifications development
Supplier research and selection
Value analysis/value engineering
Financing/price negotiation,
Making the purchase,
Supply contract administration,
Inventory control and stores/disposals and other related functions.
Purchasing
Purchasing can be defined as a process of acquiring goods, services, or works in return for a price. The
major type of activities under purchasing function entail: coordination with user departments to identify
purchase needs, identification of potential suppliers, conduct of market studies for important materials,
negotiation with potential suppliers, analysis of proposals, selection of suppliers, issuance of purchase
orders, administration of contracts and resolution of related problems and lastly maintenance of a variety
of purchasing records.
Purchasing activities involve buying decisions to ensure that: the right goods are in the right place, at the
right time, at the right price, at the right quality and at the right quantity. These are sometimes referred to
as the six Rs of purchasing.
The right goods: In regard to this, the buyer specifies exactly what the organization requires (based on
the needs) rather than simply buying from catalogue or what is on offer
The right place: In making the buying decisions it is important to provide detailed instructions on
how, when and where deliveries are to be made.
The right time: This is an attribute of ensuring that the ordered item reaches the company at the
stipulated time to facilitate efficient supply chain operations.
The right price: Achieving the right price is an important task since this will affect the purchasers
cost structure and ultimately the margin achieved (profitability).
The right quality: The customer either specifies quality or expects the supplier to do so. The bottom
line here is that the goods to be supplied should meet the users standards
The right quantity: This entail fully supply of the ordered items. For instance if the buyer orders ten
units then the supplier should exactly deliver the specified units that are ten.

The functional or operational level objectives of purchasing:

To support the company operations with uninterrupted flow of materials and services
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 To buy competitively-keeping abreast of the forces of supply and demand

To buy wisely-Continual search for better values of quality, service, price relative to the
buyers needs
To keep stock investment and losses at a practical minimum
To develop effective and reliable sources of supply
To develop good relationships with the supplier community and good continued relationship
with active suppliers
To achieve maximum integration with other departments of the firm
To handle the purchasing function proactively in a professional and cost effective manner.
Supply management
This is a process responsible for the development and management of a firms total internal and external
supply system. The specific activities include:
Early purchase involvement (EPI) and early supplier involvement (ESI) in product design and
subsequent specifications development for important items through the use of cross-functional teams
Conduct of all purchasing function and procurement process activities
Heavy use of cross-functional teams in supplier qualification and selection
Heavy use of purchasing partnering arrangement and strategic alliances with suppliers-to develop
close and mutually beneficial linkages with key suppliers in the value chain and control quality and
costs
Continuous identification of threats and opportunities in a firms supply environment
Development of strategic , long term acquisition plans for all major materials
The monitoring of continuous improvement in the supply chain
Active participation in the corporate strategic planning process
Its prudent to note that supply management concept represents the most advanced stage in the
evolutionary development of purchasing/procurement.
Supply chain management
Is a set of synchronized decisions and activities utilized to efficiently integrate suppliers, manufacturers,
warehouses, transporters, retailers and customers so that the right product or service is distributed at the
right quantities, to the right locations and at the right time in order to minimize system-wide costs while
satisfying customer service level requirements. The objective of supply chain management (SCM) is to
achieve sustainable competitive advantage. The key supply chain processes stated by Lambert (2004)
encompass:
Customer relationship management
It is important to identify who are companys internal customers and external customers. SCM being a
service function should create unifying approaches in order to ensure quick service delivery.Managing
supplier partnerships is a major concern to the buyers as source consolidation continues to be effected.
The objective is to increase business with those key suppliers that are the most capable partners.
Achieving this objective requires that these partnerships be developed, structured, administered and
evaluated to determine whether they are successful in meeting the buyers needs.
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Customer service management

Customer service is an organization's ability to identify and supply their customers' wants and
needs. The Institute of Customer Service (ICS) has a more complex, but complete, definition of
customer service:
Customer service is the sum total of what an organization does to meet customer expectations
and produce customer satisfaction. Customer service generally involves service teamwork and
service partnerships. Although somebody may take a leading part in delivering customer service,
it normally involves actions by a number of people in a team or in several different
organizations.

Demand management

Demand management is the supply chain management process that balances the customers
requirements with the capabilities of the supply chain. With the right process in place,
management can match supply with demand proactively execute the plan with minimal
disruptions. The process of demand management includes forecasting demand and synchronizing
it with production, procurement and distribution capabilities. A good demand management
process can enable a company to be more proactive to anticipated demand and more reactive to
unanticipated demand. An important component of demand management is finding ways to
reduce demand variability and improve operational flexibility. Reducing demand variability aids
in consistent planning and reduces costs. Increasing flexibility helps the firm respond quickly to
internal and external events.

Order fulfillment

This is an important approach in supply chain management based on satisfying the customers
requirements. To embrace this important approach SCM function should adopt a proactive move
based on establishing those suppliers within the market who have the right capacity and most
importantly the production function should also be up to the task to accomplish customers order
based on the expected time.

Manufacturing flow management

This entails the provision of inputs to production line for conversion and then the ultimate end product i.e.
the output. In order to perfect the manufacturing flow management the production function should work
closely with service function like procurement and stores in order to avoid uninterrupted operations.
Supplier relationship management
Building relationship with suppliers is becoming an explicit part of the procurement strategy for both
small and big companies. Challenges like globalization, rapid product development, advances in
production technologies, cost reduction, bubbling issues like trimming supply base, just-in-time, mass
customization, lean manufacturing, core competence-based on make or buy procurement strategies have
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led procurement managers to think radically in a different way to deal with future procurement strategies.
The result has been to improve the role of buyer-supplier relationship in competitive equation.

Establishing long-term relationships with capable suppliers and working closely with them over
time to achieve high levels of quality and productivity involves communicating intentions and
expectations clearly, defining measures of success, obtaining regular feedback, and
implementing corrective action plans to improve performance.
The distinct success factors for buyer-supplier relationship encompass: attitude, commitments, trust,
communication, coordination, motivation, conflict management, participation, culture change and
most importantly continuous improvement.

New Product development and commercialization

New product development (NPD) is the term used to describe the complete process of bringing a
new product or service to market. There are two parallel paths involved in the NPD process: one
involves the idea generation product design and detail engineering; the other involves market
research and market analysis. Companies typically see new product development as the first
stage in generating and commercializing new products within the overall strategic process of
product life cycle management used to maintain or grow their market share.

Returns management
Not every material that the company purchases are received by the organization. Sometimes because of
poor specifications or lack of proper communications between the suppliers and the buying entities some
materials delivered are deemed to be not in tandem with organizations requirements. It is therefore
important for an organization to come up with ways and means on how such materials reaches the
suppliers for corrective actions to be taken in order to recapture the missing value.
Stores management
Entail planning, organizing and controlling the available stocks or supplies awaiting issue or transport to
the customers. Stores operations compromise the following:
Receiving of goods from the suppliers or internal departments
Inspection to verify whether the goods supplied meet the specifications
Recording receipts and issue of supplies either manually or through computerized system
Provision of security to protect stocks against loss through theft, pilferage or misplacement
Maintenance: Protecting stocks against loss through deterioration from fire, water, bad weather etc.
Stock control: determining the range and quantities of stock or supplies to be held and their receipt
and issue.
Stocktaking: checking of stocks and verification of stock records against actual physical quantities
held in stock and also those at the work in progress stage and finished goods on hand.
Disposal of surplus: i.e. scrap, components or equipment identified as no longer in use or usable, by
donating, reuse or sale.
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 Implementation of health and safety regulations relating to stores and stores staff.
Proactive procurement
Proactive procurement can be defined as a strategic way based on advocating for control of all overall
acquisition of goods/services for a company rather than reactive way of approaching buying activities. It
puts emphasis on long range relationship negotiation activities, expanding the suppliers and materials
total cost, instead of doing it in repeated demands and stock reposition, early purchase involvement,
purchase specifications etc.
Proactive procurement procedure entails:
Making sure of purchasing continuity to keep effective relationships with existent sources,
developing other supply alternatives, or attending the emergent or planned necessities,
selecting the best suppliers.
Keeping solid and cooperative relationships with the other organizational functions, supplying
necessary information, and advising to make sure of the effective operation of the entire
organization.
Developing the training of employees, and the adoption of procedures organization to make
sure to reach the previous goals.
Keeping a balance between quality and value, obtaining products and services in the
necessary quantity and quality for the lower cost.
Surveying market tendencies.
Developing methods to negotiate purchasing conditions to deal with suppliers that look for
mutual benefit by means of superior economic performance.
Developing and keeping good relationships with the suppliers, besides developing potential
suppliers.
Emitting and controlling purchasing solicitation.
Purchasing records
Purchasing records are concerned with the storage of information. This information can be filled
manually or through computer system. Computerization enables vast amounts of information to be stored,
obviates duplication and ensures efficient retrieval of data. A part from files of requisitions, purchase
orders and other original documents, purchase records may include:
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 Supplier index providing details of address, telephone, suppliers items etc.

Supplier rating; details of supplier performance relating to price, quality, delivery etc.
Supplier visits records
Supplier database list
Supplier conference records
price trends of crucial items
Records of materials issued to sub-contractors etc.
The period for which records providing evidence should be kept depends on the type of the contract i.e.
Simple contracts may warrant the records be barred after six years from the date when the action accrued.
Complex contracts may take up to twelve years from the date when the action accrued.
Procurement and environmental changes
Environmental changes have greatly affected functional strategies. How they have affected procurement
strategy can be summarized as follows:
a) Procurement has become global in scope: Products and services are sourced globally. Components,
sub-assemblies etc can come from any part of the world. The reason may be low cost manufacturing
or core competence of the particular company or Nation.
b) Business activities are growing at a rapid pace: Information technology has compressed time and
distance, allowing business decisions to be made at a faster rate. Internet, teleconferencing, Electronic
data interchange (EDI), E-mail and availability of excellent software allow decisions and actions to
take place in real time, influencing in much greater way business transactions.
c) Increasing customer demands: Increasing customer demands have led to proliferation of products to
target more diverse tastes by mass-customized production. Moreover, increased product and market
complexity, greater service content, wide choice, demand for quality products at low cost have
influenced much of strategy formulation.
d) Increased awareness among customers: Customers are becoming much more sophisticated about
the products they buy and this information again gets exponentially translated into higher quality
standards for the future. Today the meaning of quality is no longer limited to just meeting customers
requirement. It is a competitive search for customers delight and value addition that is yet to be
expressed.
e) The proliferation of standards: Mandatory compliance under a variety of environmental, health,
safety, and customer right protection laws, the emergency of regional trade blocs, international
standards like ISO-9000 and company standards like QS-9000 systems and procedure s have posed a
tough challenge to procurement managers to reshape procurement strategy.
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Strategic procurement and competitive advantage

A competitive advantage is an advantage gained over competitors by offering customers greater value,
either through lower prices or by providing additional benefits and service that justify similar, or possibly
higher, prices. For growers and producers involved in niche marketing, finding and nurturing a
competitive advantage can mean increased profit and a venture that is sustainable and successful over the
long term.
Gaining competitive advantage through procurement strategy goes beyond meeting the tactical needs of
the company and involves all concerned within and outside the company. It is an intellectual process
involving creativity, innovation, and radical thinking allowing the next customer to maximize his benefits
through value addition. It involves questions like: How does the competitor manage his procurement
process? Who are his suppliers? What are their strength and weaknesses? How does the competitor
develop suppliers? How big is their supply base? What type of product and services are procured from
them? What are their suppliers capabilities? What is the strength of relationship between the competitor
and his suppliers? How do the procurement staff and suppliers get involved to produce innovative and
profitable products? How can procurement decisions contribute to sustaining the companys competitive
advantage in a turbulent market? What are our procurement resources? What are the supply market
constraints and opportunities? How can we defend our company strategically against competition? Can
our procurement strategies act as a strategic weapon in competition? How is our present procurement
performance? How many suppliers will form the ideal supply base? On what criteria do we develop our
suppliers? How to enter strategic partnership with them? What new supplier alliances should be formed or
should the present one be strengthened? To what extent should our suppliers be developed and nurtured?
What type of suppliers do we need to meet emerging business opportunities? Do our procurement
strategies reflect important strategic advances and trends?
The Essence of Competitive Advantage
To begin, it may be helpful to take a more in-depth look at what it means to have a competitive
advantage: an edge over the competition. Essentially a competitive advantage answers the question, Why
should the customer purchase from this operation rather than the competition? For some ventures,
particularly those in markets where the products or services are less differentiated, answering this
question can be difficult. A key point to understand is that a venture that has customers has customers for
a reason. Successfully growing a business is often dependent upon a strong competitive edge that
gradually builds a core of loyal customers, which can be expanded over time. Producers and suppliers
familiar with farming and ranching may know that successful ventures in the agriculture industry have
typically operated in a commoditized, price-driven market, where all parties produce essentially the same
product. Such conditions imply that the ultimate winners are the most cost-efficient producers, meaning
that agricultural producers have historically relied on strategies that focused on lower costs and higher
volumes (i.e. a bushel of hard red winter wheat is assumed to be of similar quality across the entire high
plains region, meaning each bushel is assumed to be of the same value; so there is an incentive for
producers to keep prices low and volume high).
With the advent of product differentiation and niche and direct marketing, that reality has changed, and
now there are niche markets in which both individual and wholesale buyers are looking for products with
very specific characteristics or special services. These characteristics often use strategies that dont focus
on costs and volumes exclusively; rather the product or service may be of premium quality, be
differentiated from other products and services available in the market (such as organic, natural, or
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humane production), or have a value-added component (i.e. flavored meats, pre-washed salad mixes,
etc.). Successful ventures perform a combination of business activities well, including marketing,
production, distribution, finance, customer service, and/or other activities important to the enterprise.
However, a competitive advantage is often a single key element that gives an edge to a business beyond
what the competition has or does. Competitive advantage by the virtue of being companys ability

to outperform its competitors, need to be realized by availing the following building blocks that
entail:

Efficiency: Efficiency basically means doing things right. This is based on the cost of the inputs
required to produce a given output. The more efficient a firm, the lower the cost of its outputs
required to produce a given output. Efficiency helps a firm attain a low cost competitive advantage.
Employee productivity can be the key to efficiency.
Quality: The impact of high quality on competitive advantage is the creation of brand name
reputation, greater efficiency and thus lowers costs. This enhanced reputation allows the firm to
charge a high price. At the same time the costs are down so profits are much higher, thus a higher
competitive advantage.
Innovation: This is defined as anything new or about a firms operation or product. Innovation gives
a firm something unique. When a firm is the pioneer in its industry it can charge a high price because
of lack of competition.
Customer responsiveness: To achieve customer responsiveness a firm must deliver exactly what the
customer wants it. A firm must do everything it can to identify and satisfy customer needs. Steps
taken to improve efficiency are consistent with the goal of high customer responsiveness. There may
be a need to customize goods and services to meet the demands of individual customers. Customer
response time has become a big factor in increasing customer responsiveness. Other areas that aid in
achieving higher customer responsiveness are superior design, superior service and after-sales service
and support.

Emerging issues in procurement and supplies function

Lean supply

This is the state of business in which there is dynamic competition and collaboration of equals in the
supply chain, aimed at adding value at minimum total cost, while maximizing end customer service and
product quality. In this policy the purchaser seeks to minimize the number of suppliers. This is done
because of the following reasons: promote high standards and quality, enable development of good buyersupplier development, promote accountability, aid the implementation of quality management systems
etc. Lean supply chain management is considered by businesses who want to streamline their processes
by eliminating waste and non-value added activities.

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Total quality management

Todays world of business imposes an intimidating array of pressures on the organizations and their
performance. The demands of the stakeholders and more so the customers are for ever increasing as they
require improved quality of products and services. The customer has come of age and no longer accepts
inferior quality, limited choice and monopolistic margins. Todays customer is strongly demanding quality
in products and services. Hence, continuous improvement in business activities with a focus on the
customer throughout the entire organization and an emphasis on quality is one of the main means by
which organizations face up to the global competitive threats. This is why quality is looked upon by
many organizations as the means by which they can survive in increasingly aggressive market and
maintain a competitive edge over their competitors.

Total Quality Methods, requires the suppliers to provide an ever increasing quality service with
zero errors. The supplier ensures purchasing best practices using a number of tools such as six
sigma, business scorecard, checklist etc. Total quality management is a comprehensive and structured
approach to organizational management that seeks to improve the quality of products and services
through ongoing refinements in response to continuous feedback. TQM is can also be defined as a way of
managing an organization so that every job, every process is carried out right, first time and every time.
This mean each stage of process is carried out right, first time and every time. This also means that each
stage of manufacture or service is 100% correct before it proceeds. TQM is also defined as an integrative
management concept of continually improving the quality of delivered goods and services through the
participation of all levels and functions of the organization.

Green procurement

Green procurement is environmentally responsible purchasing; it's about using purchasing power to
promote productive use of resources and materials. This involves integrating environmental
considerations into all stages of the purchasing process: from avoiding unnecessary purchases and
identifying greener products to the specifications you use for contracts and whole life costing.
Environmentally Preferable Purchasing (EPP) or Green Purchasing refers to the procurement of
products and services that have a lesser or reduced effect on human health and the environment when
compared with competing products or services that serve the same purpose. This comparison may
consider raw materials acquisition, production, manufacturing, packaging, distribution, reuse, operation,
maintenance or disposal of the product or service. In the past, many individuals thought of Purchasing
and Supply Chain Management (SCM) as a business function with only bottom-line financial
considerations. However, for the past 20 plus years purchasing and supply chain professionals have
worked to link purchasing and SCM with environmental science and management (as well as other
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academic disciplines) by researching (and applying) the impacts that purchasing and SCM have on
social, economic and environmental processes and systems.
By understanding and researching purchasing and the supply chain in this way, purchasing and supply
chain professionals hope to demonstrate and apply the benefits of integrating social, ethical and
environmental indicators and criteria upstream (where purchasing decisions are made), which have
multiple downstream impacts (including better policy and technological enhancements as well as
identifying pollution and waste prevention opportunities and discoveries).

Globalization

Globalization refers to the increasing unification of the worlds economic order through reduction of such
barriers to international trade as tariffs, export fees and import quotas. The prime goal of globalization is
to increase material wealth, goods and services through an international division of labor by efficiencies
catalyzed by international relations, specialization and competition. It describes the process by which
regional economies, societies and cultures have become integrated through communication, transportation
and trade. As a result, most companies are integrating their international strategy by formulating it across
markets taking advantage of underlying market, cost, environment and competitive factors.
Before globalization, marketers utilized a great deal of country by country multi-domestic strategy, with
each country organization operated as a profit center, each national entity marketing a range of different
customer segments, utilizing different marketing strategies with little or no coordination of operations
between countries. However, with expanding operations, inefficiencies generated by the multi-domestic
approach, coupled with external forces integrating markets worldwide, pressure is generated towards
improved coordination across country markets.
Globalization Drivers/factors
Both external and internal factors will create the favorable conditions for development of strategy and
resource allocation on a global basis. These factors can be briefly reviewed under the following headings:
i)

Market factors: Marketing factors dictates the performance of businesses across the globe.
Business operators therefore need to establish the basic marketing modalities which can bring
forth a high degree of success in their respective business venture. Distinct marketing issues to be
addressed entail: common customer needs, global customers, global market channels and also
transferable marketing attributes. One reason given for the similarities in customers demand is
a level of purchasing power that translates into higher diffusion rates for certain products.
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Similarly developed infrastructures lead to attractive markets for other products. At the same
time, channels of distribution are becoming more global; i.e. a growing number of retailers are
now showing great flexibility in their strategies for entering new geographic markets.
ii)

Cost Factors: Avoiding cost inefficiencies and duplication of effort are two of the most powerful
globalization drivers. A single country approach may not be large enough for the local business to
achieve all possible economics of scale and scope as well as synergies, especially given the
dramatic changes in the market place. The cost factors which ought to be addressed entail: global
scale of economies, sourcing efficiencies, factor of production differences, high product
development costs and rapidly changing technology.

iii)

Environmental Factors: Today government barriers have fallen dramatically in the last years to
further facilitate globalization of markets and the activities of marketers within them. For
instance, the forces pushing towards a pan European market are very powerful. The increasing
wealth and mobility of European consumers (favoured by the related immigration controls), the
accelerating flow of information across borders and the publicity surrounding the integration
itself all promote globalization. Also the resulting removal of physical, fiscal and technical
barriers is indicative of the changes that are taking place around the world on a greater scale. At
the same time, rapid technological evolution is contributing to the process. New global players
are taking advantage of todays more open trading regions and newer technologies. Newer
companies with sales between 200 million to 1 billion dollars are able to serve the world from a
handful of manufacturing bases compared to having to build a plant in every country as the
established MNEs once had to do.

iv)

Competitive Factors: Many industries are already dominated by global competitors that are trying
to take advantage of the market, cost and environmental factors. To remain competitive the
competitors may have to be the first to do something or be able to match or preempt competitors
moves. Products are now introduced, upgraded and distributed at rates unimaginable a decade
ago. Without a global network, a marketer may run the risk of seeing carefully researched ideas
picked off by other global players.

Market presence may be necessary to execute global strategies and to prevent others from having undue
advantage in unchallenged markets. Caterpillar faced mounting global competition from Komatsu but
found out that strengthening its products and operations was not good enough to meet the challenges.
Though Japan was a small part of the world market, as a secure home base (no serious competitors) it
generated 80% of Komatsus cash flow. To put a check on its major global competitors market share and
cash flow, caterpillar formed a heavy equipment joint venture with Matsushita to serve the Japanese
market.
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E- Business

E business, or e-business, is the application of information and communication technologies (ICT) in

support of all the activities of business. Commerce constitutes the exchange of products and services
between businesses, groups and individuals and can be seen as one of the essential activities of any
business. Electronic commerce focuses on the use of ICT to enable the external activities and
relationships of the business with individuals, groups and other businesses or e business refers to business
with help of internet i.e. doing business with the help of internet network. The conspicuous purchasing
activities in line with IT entail: E-procurement, E sourcing, E-auction etc.

Organization and structures in supplies function

Organizational structure can be defined as the pattern of relationships among positions in the organization
and among members of the organization. Organization design and structure is concerned with such
elements as:
The definition and allocation of specific tasks
The grouping of related tasks into manageable functions, divisions, departments, sections or other
units
The allocation of responsibility within the organisation and to constituent functional units.
The supply function focus primarily on centralized and decentralized purchasing when building up the
structures for the organization. Centralized purchasing encompass grouping of purchasing tasks and
specialist functions or services into one serving unit and under unified control. On the other hand
decentralized purchasing entail division of purchasing function into sections whereby each section is
mandated to control the functions within its scope. Here each department or branch is entirely responsible
for its own buying.
Centralized purchasing
The advantages of concentrating purchasing in a strong central department with a responsibility of
coordinating across functions include:
Economies of scale
Centralized purchasing enables an organization to use its purchasing power or leverage to the best effect,
since:
14

 Consolidation of quantities can take place resulting in quantity discounts

Suppliers dealing with a central purchasing department have an incentive to compete for the whole
proportion of an undertakings requirements
Cheaper prices by enabling suppliers to spread overheads over longer production runs
Specialist staff can be employed for each of the major categories of purchase
Lower administration costs e.g. it is cheaper to place and process one order for one million shillings
than ten each for one million.
Coordinating of activity

Uniform policies can be adopted e.g. single sourcing, partnership sourcing etc.
Uniform purchasing procedures can be followed
Competitive buying between departments within the organisation is eliminate
Standardization is facilitated by the use of companys wide specification
The determination of order quantities and delivery dates is facilitated.
Staff training and development can be undertaken on a systematic basis.
Purchasing research into sources, quantities and supplier performance is facilitated
Suppliers find it more convenient to approach one central purchasing department.

Control of activity
The purchasing department may become either a separate cost centre i.e. a location within the
organization in relation to which costs may be ascertained or a profit centre.
Budgetary control may be applied both to the purchasing department and to the total expenditure on
supplier.
Uniformity of purchase prices obtained by centralized purchasing assists standard costing.
Inventories can be controlled, reduced obsolescence and loss of interest on capital locked up in excessive
stocks.
Approaches such as Just-in-time and MRP ii can be implemented
Purchasing department performance can be monitored by setting objectives and comparing actual results
with pre-determined standards.
Disadvantages of centralized purchasing
Centralized can result in many activities that involve expenditure and time without adding value.
Centralization can foster emphasis on functional objectives with a minimum concern for overall
organisational goals.
User departments will resort to informal procedures if formal purchasing procedures are slow.
15

Training of managers with broad perspectives and wide understanding of business may be inhibited.
Employee identification with a specialist group or function can make it difficult to implement change. It
is a more rigid structure.
Long chain of command.
Slow-decision making.
More bureaucratic.

Decentralized Purchasing
Advantages
The local buyer will have better knowledge of the needs of his/her factory and local suppliers for
improved service. It is more responsive to clients i.e. the user departments.
The buyer will be able to respond more quickly to emergency requirements.
Local purchase will be emphasized and this attribute will save on transport costs.
Local purchase will contribute to local prosperity of the local community etc.
Small and easy to manage.
Easy to instil team spirit.
Fast in decision making
Disadvantages

May lead to buying expensively for lack of economies of scale.

Duplication of purchases may result.
Standardization of materials and procedures may be difficult to implement.
Specialized staff training may not be possible
Rivals can emerge

Purchasing procedures:
Overview of purchasing procedure
Apart from pre-purchase activities such as participation in the preparation of specification and budget
decisions, purchasing has traditionally involved three main phases, each involving specific documents
and considerable clerical activities.
(a) The identification phase
This involves the notification of the need to purchase by either:
-A requisition issued by the stores department
16

-A bill of materials (BOM) issued by the drawing office or production control department
-Requirement from user departments.
(b)The ordering phase
On the receipt of the requisition or bill of materials, the buyer will check them for accuracy, conformity to
specifications and purchase records to ensure whether the purchase is a re-buy or a new buy request. If it
is a re-buy request previously purchased from satisfactory supplier at an acceptable price, a repeat order
may be issued. If however, the item is anew purchase request, the traditional steps will be involved as
follows:
(i) Enquiries will be sent to possible suppliers accompanied by additional documents e.g. drawings,
specifications etc which will enable the suppliers to quote.
(ii) Quotations will be received in response to the enquiries and compared with respect to price, quality,
delivery, tool costs etc and terms of business.
(iii) When quantities are sub-station and quality/delivery are of great importance, further negotiation with
suppliers including an evaluation of their capacity to undertake the order may be required.
(iv) A purchase order will be issued to the vendor. The quotation should be amended thoroughly in line
with the negotiation between the buyer and the supplier.
(v) An order acknowledgement should be required from the vendor which should be examined by the
buyer to ensure that the order has been accepted on the terms and conditions agreed.
(c)The post-ordering phase
-It may be necessary to progress the order to ensure that delivery dates are met or to expedite delivery of
overdue orders.
-The supplier will issue an advice note, notifying the buyer that goods have been dispatched or are ready
for collection.
-On receipt, the goods will be checked for quantity by the stores, matters of quality or specifications will
be examined by the inspection department.
-An invoice for the value of goods will be received from the supplier. The purchasing department will pay
special attention to the legitimacy of any variations from the quoted price and if satisfactory, the invoice
will be passed to accounts department for payment.
-On completion, the order will be transferred to a completed orders file.

17

Purchasing cycle:
Requisition voucher
staf

User dept
Identification of the
need

Field
Stores

Specification

Description of the
need
Brand

Quotation inquiry
form
Grades
Samples

Request for Quotation

Analysis of Quotation

Comparative
Analysis
Drawings
Blue prints
Post tender negotiation
Bill of materials

Award of the contract

Purchasing officer
Service contract/LPO
Supplies Manager

Acknowledgment
Note

Follow up/expediting
18

By Supplier

Advice Note
By buyer
Supplier to
exchange or issue
Credit Note

Notification of
dispatch
Goods Inspection
If not ok

By Stores/User
dept/Accounts

If ok
Return to
Goodssupplier
Receipt Note
Delivery Note/Invoice

Receive in the
system
Stores officer
Approval & payment

LPO/GRN/DN/Invoice
Maintain records
POR/RFQ/QA/LPO/DN/
INVOICE

Accounts
Purchasing/Stores/Accoun
ts

Mechanisms for product specifications, quality control/assurance

a) Characteristics of specifications
The term specification refers to a description of the characteristics of a commodity or service required.
Specifically, it is defined as the explicit requirement furnished with a solicitation upon which a purchase
order or a contract is based. Specifications are one of the most important elements of purchasing process.
The preparation of good specification is probably the most difficult function in the process of purchasing.
Inadequate or poor written specifications are prime causes of many challenges in the purchasing process.
Specifications are drafted by the user departments and thereafter the internal users forward the same to
the purchasing department for sourcing. To this extent therefore, the purchasing function has the mandate
to review the specifications for suitability and competitiveness. Specifications should have the following
characteristics:

Identify minimum requirements

Allow for a competitive bid
Provide for an equitable award at the lowest possible cost
All specifications should be clear and accurate
Specifications should be flexible
Specifications should be legible and concise

b) Quality control
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Quality control is concerned with defect detection and correction. Inspection activities can be classified as
quality control processes, along with other activities which involve monitoring to ensure that defectives or
potential defectives are spotted. Quality control can also be defined as a process employed to ensure
certain level of quality or service. It may include whatever actions a business deems necessary to provide
for the control and verification of certain characteristics of a product or service. The basic goal of quality
control is to ensure that the products, service or processes provided meet specific requirements and are
dependable, satisfactory and fiscally sound.
c) Quality assurance
Quality assurance differs from quality control and is defined as all those planned and systematic activities
implemented within the quality system and demonstrated as needed to provide adequate confidence that
an entity will fulfill requirements for quality. Quality assurance can also be defined as a planned and
systematic production processes that provide confidence in a products suitability for its intended purpose.
It can also be defined as a set of activities intended to ensure that products and services satisfy customers
requirements in a systematic and reliable fashion.
Two key principles characteristics of quality assurance entail: fit for purpose (the product should be
suitable for the intended purpose) and right first time (mistakes should be eliminated). Quality
assurance include regulation of the quality of raw materials, assemblies, products, components, services
related to production, management production and inspection processes.
Quality assurance is concerned with defect prevention and has become synonymous with quality systems
such as Kenya bureau of standards (KEBS), BS5750 and international counterpart ISO 9000. Quality
assurance includes all activities connected with the attainment of quality such as:

Design, including proving and testing

Specification, which must be clear and unambiguous
Assessment of supplier to ensure that they can perform
Motivation of all concerned parties
Education and training of suppliers staff
Inspection and testing
Feedback to ensure that all measures are effective

Quality control/Assurance objectives

Reduction of errors and enhancement of quality
Problem prevention rather than detection and correction
Reduction in product or service costs
Improved productivity
Improved employee involvement, motivation, job satisfaction and commitment
Improved teamwork and working relationships
Development of employee problem-solving ability.
Advantages of quality control and assurance
Both buyers and sellers gain benefits from a good quality control. The following are the principle
advantages:
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 Minimum possible rejection and wider acceptance of the supply is made possible by the suppliers
effective quality control system.
Minimum inspection time and effort help the vendor as well as the purchase in delivery and receiving
the supply at a lower cost
Prospect of zero defects increase
Scraps are minimised and wastage is reduced due to good quality control system
Goodwill of both vendor and purchaser is enhanced as there are fewer difficult and problems in
regard to quality products
Sometimes inspection at the purchasers end is eliminated if vendor quality certificate and statistical
date regarding the quality of the goods supplied is enclosed.
Quality consciousness is developed resulting in benefit to all concerned.
Accumulation of obsolete material is reduced to the minimum
It results in reduction of lock-up capital due to decrease in inventory.
Terms and conditions of purchase and sale
These are attributes that govern legally the two parties to the contract i.e. the purchasing company and the
selling company. Most companies print their terms and conditions at the back of the purchase order form.
Normally a series of terms and conditions which are put forth by the two companies are standard for all
orders. The distinct attributes in line with terms and conditions of buying and selling companies entail:
Definitions of the company, reference of the orders, quality provided, approval and acceptance,
inspection, drawings, designs and specifications, delivery, prices and payments, cancellation and delays,
set-off, insurance and indemnity, termination, assignment and applicability of the law.
Negotiation for contracts and orders
Negotiation is the process whereby two or more parties decide what each will give and take in an
exchange between them. Negotiation can also be defined as any form of verbal communication in which
the participants seek to exploit their relative competitive advantages and needs to achieve explicit or
implicit objectives within the overall purpose of seeking to resolve problems which are barriers to
agreement.
Negotiation falls into three distinct phases: pre-negotiation, the actual negotiation and post-negotiation.
Pre-negotiation: In this phase the matters to be determined are as follows:
Who is to negotiate, what is to be negotiated, determination of venue, gathering intelligence and most
importantly tactic and strategy.

The actual negotiation (meeting phase)

a) Stage one: Introductions, agreement of an agenda and rules of procedure

The major aim of this stage is to establish atmosphere conducive to agreement. This may include an
impression of wishing to work to a mutually advantageous goal, the physical arrangement of venue,
restating areas of agreement and so on.
b) Stage two: Ascertaining the negotiation range: This is the start of the debate stage where the issues
which the negotiation will attempt to resolve are ascertained. With adversarial negotiations this may
21

be a lengthy stage since the participants often overstates their opening positions. However with
partnership negotiation, there is more openness that saves time.
c) Stage three: Agreement of common goals which must be met if the negotiation is to reach a
successful outcome: This will usually require some movement of both sides from the original
negotiating range but the movement will be less or unnecessary in partnership negotiations.
d) Identification of and, when possible, removal of barriers that prevent attainment of agreed common
goals: At this stage there will be:
Problem solving
Consideration of solutions put forward by each
Discertainment of what concessions can be made
It may be useful to: review what has been agreed, allow recess for each side to reconsider
Its position and make proposals or concessions which may enable further progress to be made.
If no progress can be made it may be decided to:
Refer the issue back to higher management
Change the negotiators
Abandon the negotiations with the least possible damage to relationships
e) Agreement and closure: Drafting of a statement setting out as clearly as possible the agreement(s)
reached and circulating it to all parties for comment and signature.

Post-negotiation

Post-negotiation involves the following activities:

Drafting a statement detailing as clearly as possible the agreements reached and circulating it to all
parties for comment and signature
Selling the agreement to the constituents of both parties i.e. what has been agreed, why it is the best
possible agreement, what benefits will accrue.
Implementing the agreements, e.g. planning contracts, setting up joint implementation teams, etc
Establishing procedures for monitoring the implementation of the agreements and dealing with any
problems that may arise.
Approaches to negotiation
Approaches to negotiation may be classified as adversarial and partnership.
Adversarial negotiation
Is referred to distributive or win-lose negotiation. This is an approach in which the focus is on positions
staked out by the participants in which the assumption is that every time one party wins the other loses.
As a result the other party is regarded as an adversarial.
Partnership negotiation
Also referred to as integrative or win-win negotiation. This is an approach in which the focus is on the
merits of the issues identified by the participants in which the assumption is that through creative problem
22

solving both parties gains. Since the other party is regarded as partner rather than an adversary the
participants may be more willing to share concerns, ideas and expectations.
Content of negotiation

Amendment to the quoted or existing price

Quantity, cash and trade discounts
Terms of payment e.g. extended credit
Basis on which price increases are to be determined
Carriage charges
Time of delivery
Method of delivery
Conditions and warranties applicable to the contract
Supply of samples
Packaging requirements e.g. palletization
Amendments to the specifications

Purchasing methods
Contract
A contract is an agreement between two or more parties with an intention to create legal binding
obligations. The distinct types of contracts in purchasing methods encompass: spot, period,
quantity and open contracts.
Spot contracts: This is a contract for immediate sale of urgent commodities. For instance a spot
contract can allow a company to buy or sell foreign currency on the day it choices to perfect the
deal. This method of purchasing is used for items of small value or where there may be one
supplier in the market or where the buying company has dealt with certain supplier(s) for many
years. The idea behind this method of purchase is basically to address those emergency issues
which apply within a company. To this extent therefore the purchasing unit find it necessary to
acquire goods for the user without following the mainstream purchasing activities which can take
a lot of time.
Period contract: This is arrangement between the buyer and the seller to enter into a contract
which should be based on specified time period e.g. two weeks contract, one month, three
months etc. To this extent therefore the contract should be enforced during the agreed time
frame. The contract may be nullified if one party (supplier) fails to meet the set time.
Quantity contract: This contract is based on the agreed number of products to be delivered by
the vendor. To this extent therefore, upon the delivery of the ordered items an inspection ought to
be done by the buying companys representatives to establish whether the goods correspond with
the order.

23

Open contracts: These are contracts whose terms do not constitute the entire agreement between
the contracting parties and whose clauses or provisions can be changed or modified without
mutual consent. Open contracts examples can be purchased or sold items which are yet to be
completed. Also some construction and supply contracts can be good example of open contracts
where one party (usually the contractor or vendor) can increase price or alter some other element.
Small value purchases
Small value purchases increases costs and hamper purchasing and accounting productivity. To
this extent therefore, small transactions require little involvement of the purchasing department
to negotiate or expedite the purchase. Low cost procedures for the efficient handling of low value
purchases include:
Telephone orders: The buyer passes all the requirements via the telephone conversation to the supplier
and provides an order number.
Procurement cards: These are similar to consumer credit cards and involve a provider such as master
cards, visa etc. Such cards relieve purchasing staff from purchase order preparation.
Petty cash purchases: Items bought are paid for at once from petty cash. The main problem in this case
is controlling the number and size of purchases.
Standing orders: Entail submission of an invoice of agreed intervals.
Blanket orders: Encompass all orders for a range of items placed with one supplier for a specified
period. Users call off required items directly from the supplier through telephone, fax etc and the amount
due is summarized by the supplier as a single invoice. This attribute is convenient for making bulk order
to gain economies of scale.
Electronic Data Interchange (EDI): This can include linkages for information exchange, order payment
and can be easily combined with blanket ordering.
Blank-cheque orders: In this case the blank cheque is attached to the order form and sent to the supplier.
On forwarding the goods, the supplier fills the cheque and deposits in his accounts
Placement for own orders: The users are authorised to raise own orders and sent to suppliers in areas
where purchasing function expertise is not required.
Quotation method
This is a purchasing method whereby several printed request for quotation forms are send to different
suppliers, asking the suppliers in question to quote prices for specific goods. Analysis based on the ideal
supplier to deal with is normally done by the Purchasing personnel. Analysis is based on:

Quality
Price
Quantity (Capacity-ability to supply)
Terms of payment
Time
Place

Tendering process
24

Tender is an invitation for offers/proposals from willing and able bidders. It should be sealed and
ought to be delivered before or at the specified time for it to be valid. The essence of inviting
bids from suppliers in the market is to encourage a high degree of competitiveness for the
goods/service to be purchased. Tender Process (or "Invitation to Tender" process) is a method by
which suppliers are selected for the provision of products and services to an organization. The
process involves creating a suite of Tender Documents to manage the supplier selection process.
The Tender Documents help the organization to select the best possible supplier available, and
include documents such as the "Statement of Work", "Request for Information" and "Request for
Proposal". The tendering processes should be based on the open national tender (ONT) specified
by the government of Kenya under the public procurement and disposal act, 2005. There are
three (3) exceptions to the Tendering Process these being:

Sole Source Justification

Emergency Purchases

Sole Source Justification By Reason Of Compatibility

Buying capital goods

Capital goods include factories, machinery, tools, equipment, and various buildings which are
used to produce other products for consumption. Capital goods, then, are products which are not
produced for immediate consumption; rather, they are objects that are used to produce other
goods and services. These types of goods are important economic factors because they are key to
developing a positive return from manufacturing other products and commodities.
Buying capital goods, such as building, plant and machinery differs in several ways from the
purchase of non-capital goods. Unlike merchandise, production materials or office supplies,
capital goods are not bought for current needs to be used up in a short time but are bought for
long term requirements to be used for the production of goods or services. Production and
finance staff need to be involved in making purchasing decisions concerned with capital
equipment.
Depending upon the type of capital purchase, each may have a significant part to play in, for
example, identifying the type of equipment, examining the alternative sources which may be to
provide that equipment and in specifying the performance specification and budget factors that
are involved. Because of the special features and procedures used in capital purchases all capital
expenditure has to be authorized by the board that is capital requisitions being approved by the
board of directors. However, in large organizations authority to approve capital expenditure up to
a specified amount of money is delegated to local directors, CEOs, division managers etc.
Contribution of purchasing in acquisition of capital goods

Location of sources
Vetting of suppliers
Negotiating
Cost benefit analysis
Advice on residual prices
25

Establishment of total supply

Lease/hire/buy comparison
Contract management
Provision of support materials
Co-ordination of procurement team

Information sources and criteria for Supplier Choice

a) Supplier survey
This is a comprehensive process based on identifying the available prospective suppliers in the market.
Sources of information relating to potential suppliers encompass:

Catalogue: This is a booklet containing details of items for sale by the supplier. They contain valuable
technical information and format of presentation is simple.
Trade directories: These contain new product requirements, special/occasional requirements and
emergency items.
Yellow pages: Entail a classified telephone directory, often printed on yellow paper that lists
subscribers by the business or service provided.
Sales persons: They can provide useful service information regarding suppliers
Exhibition: This is a public display of products/services and it offers a great opportunity to talk with a
number of potential suppliers in the same place at the same time.
Trade Journals: This is a periodical containing new developments, discussions etc concerning a trade
or profession.
Business advisers: Local business-support organisations, such as chambers of commerce or Enterprise
Agencies often point out prospective suppliers to deal with.
Professional peers: This entail informal exchange of information between buyers
Information provided by prospective suppliers
Internet: This is a global network that provide variety of information and communication facilities

b) Supplier selection
This is the process of identifying suppliers who are able and willing to provide consistently
quality products/services through giving out competitive prices. It is worthwhile to underscore
the fact that, choosing the right supplier involves much more than scanning a series of price lists.
The choice of the ideal supplier will primarily depend on a wide range of factors such as value
for money, quality, reliability, technology infrastructure of the supplier, financial solvency,
experience, environmental consciousness policies, demographics, on-time cost effective delivery
of products etc. The process of supplier selection is as follows:
Survey stage: This entail exploration of possible sources
Inquiry stage: This stage involve the analysis of potential sources
Negotiation and selection: Encompass exploitation of better terms of doing the business
transaction with the suppliers and hence selecting the better ones
Experience stage: This stage involve contract administration and supplier evaluation
26

c) Supplier evaluation
This is the assessment/appraisal of current and potential supplier willingness and ability to
provide goods/services in accordance to the agreed terms and conditions. The success or failure
of a firm depends on the ability of the contracted supplier to satisfy the purchasing function
objectives. Companies under consideration as potential suppliers are invariably evaluated using
the following criteria: quality, technology, productivity, process control, cost-competitiveness,
innovations/new ideas, financial stability, delivery predictability/reliability, service, management
philosophy and training programs.
Relationship between the purchasing and supply function with other departments

Some issues on which interaction and cooperation may take place between purchasing and other
company departments include the following:
Purchasing and finance/accounts department
Finance/accounts department prepares budget allocation for goods/services to be purchased
in a given time period
The purchase department establishes and forwards to finance/accounts department value
analysis report for goods/services to be purchased
Finance/accounts department briefs the purchasing department on issues based on supplier
payment
Purchasing department gives accounts department information based on damaged items and
obsolete items
Purchasing department gives out information based on stock movement to the accounts
department
Purchasing/supplies department works together with accounts department during stock taking
exercise which is based on assessing the variance status of the companys inventory.
Stores personnel who works under purchasing/supplies department works together with the
accounts personnel when it comes to the issue of receiving goods from the supplier(s). The
accounts personnel checks whether the amount indicated in the invoice correspond with the
amount indicated in the local purchase order (LPO).
Purchasing and design department

Preparation of specifications for purchase of materials and components

Quality assurance or defect prevention
Value engineering and value analysis
Information to departments regarding availability of materials, suppliers and costs
Agreement of alternatives when specified materials are not available
Creation of library of books, catalogues, journals and specifications for joint use by the
design and purchasing departments
27

 Purchasing and production (User department)

Preparation of material schedules to meet just in time requirements

Ensuring that delivery schedules are maintained
Control of inventory to meet production requirements
Disposal of scrap and obsolete items
Quality control or defect detection and correction
Approval of first-off samples
Make or buy decisions
General involvement in such techniques and systems as optimised production technology,
computer integrated technology, materials requirement planning (MRP) and manufacturing
resource planning (MRP 2)

Purchasing and human resource development

Purchasing professionals gives out technical expertise when a prospective purchasing staff is
being interviewed for a job.
Human resource personnel liaise with purchasing managers on checking the performance of
purchasing employees through job appraisal analysis.
Human resource development relates with purchasing department when it comes to issues of
arranging training and seminars for the purchasing staffs.
Human resource development work hand in hand with purchasing department through
provision of motivational incentives for the purchasing staffs. This entail the
acknowledgment of best employees through giving out Awards, presents and so on.
Purchasing department works also with human resource development on disciplinary matters
of the employees.
Purchasing and marketing
Provision of sales forecasts on which purchasing can base its forward planning of materials,
components etc
Ensuring that through efficient buying, purchasing contributes to the maintenance of
competitive prices
Obtaining materials on time to enable marketing and production to meet promised delivery
dates to the end-customer
Exchange of information regarding customers and suppliers
Marketing implications on partnership sourcing
Purchasing and information technology department (IT)
Purchasing department and IT have an increasing number of interdependencies. In some cases IT
function is outsourced by the purchasing function. To this extent therefore its performance is
evaluated accordingly by the purchasing department. Also the manager of IT works closely with
28

purchasing manager to develop automated procedures and reports in line with purchasing. To add
on that IT department establishes computer devices to purchase and to this extent the IT manager
prepares purchase order requisition (POR) for such items and forwards the same to purchasing
department. On the other hand the purchasing department sources for such devices on behalf of
the IT department.
Legal and organization implications on professional behavior
Ethics is a branch of philosophy that addresses questions about morality that is concepts such as good and
evil, right and wrong virtue and vice, justice and so on. As part of the code, the ethical considerations in
law perform two separate but interrelated functions: (a) the provision of proper ethical behavior in
response to a certain specific factual situation (b) furnish the legal functions which ought to be followed.
Normally the virtue of embracing ethical standards gives a company/an employee a great chance of being
in good terms with the legal authorities. Conversely, the companies or perhaps employees that do not
uphold standards of ethics to a great extent are subjected to legal disputes. Some of ethical standards that
have some legal implications entail the following:

All business must be conducted in the best interests of the State, avoiding any situation which
may impinge, or might be deemed to impinge, on impartiality;
Public money must be spent efficiently and effectively and in accordance with Government
policies;
Agencies must purchase without favour or prejudice and maximize value in all transactions;
Agencies must maintain confidentiality in all dealings
Government buyers involved in procurement must decline gifts, gratuities, or any other
benefits which may influence, or might be deemed to influence, equity or impartiality
Business ethics and in particular personal relationships between buyers and suppliers is an area which is
receiving increased attention in both public and private companies. Recent high profile scandals involving
corruption in supply chains have caused many organizations to focus on the personal ethical aspects of
business transactions. Personal ethics in business is a complex and sensitive area. There are many view
points and opinions that different people have in this area and it is not always easy to say categorically
what is right and what is wrong. For instance personal ethics has a social and cultural dimension that
means that business practices such as generous gift giving, which are perfectly acceptable in some
countries, may be utterly unacceptable in other countries.
Ethics and law have similar or complementary purposes. Both consist of rules to guide conduct and foster
social cooperation. Both deals with what is right and what is wrong. Societys ethical values may become
law through legislation or court decisions and obedience to law is often viewed as being ethically correct.
It is imperative to note that legal regulations are significant source of values for business ethics. In fact,
many business and professional organizations look to the law when drawing up their codes of ethical
conduct. At least five major ethical rules/principles can be drawn from the law. These include:
29

 Liberty and rights

First, the law requires respect for the liberty and rights of others. This requirement in legislation protects
the right of privacy, guarantees freedom of expression and due process of law. The intellectual property
rights forms the basis of liberty and individual rights for any person who seeks protection for his/her
discoveries. To this extent therefore, the person in question obtains exclusive rights for his/her products
for a specified time period. During the time frame granted by the government, the inventor will be the
only person authorized to use or sell the specified products/services.
Good faith
The law requires that good faith be demonstrated in various economic and other transactions. For instance
in sale of goods the law requires the whole exercise to be carried out in good faith, which means
honesty in intent and honesty in fact. The reverse of good faith is bad faith, which can be
understood as dishonesty in intent. In cases involving a bad faith for instance withholding of amounts due
under insurance policies, some courts and juries have severely punished defendant insurance companies
with large punitive damage awards.
Due care
This is ethical value reflecting legal rules and requires the exercise of due care in individuals behavior.
Due care is derived from societys expectations about fairness and reasonableness of actions in various
undertakings. Due care promotes the common good. In negligence law, failure to exercise due (or
reasonable) care is the principal element that triggers liability against the defendant.
Confidentiality
Honoring confidentiality is an important ethical value in line with the provision of legal regulations. The
legal requirement of honoring confidentiality is conspicuous in agency law. For instance it is a
malpractice for agent to disclose some of confidential information of the principal to third parties. This
attribute gives the principal proper grounds to revoke the engagement with the agent since his continuity
in the agency relationship may subject him (principal) to undue losses in business transactions.
Conflict of interest
Conflict of interest is embodied in business codes of ethics. Avoiding conflict of interest is a ethical value
flowing from the law, especially from agency law. A conflict of interest occurs when one attempts to
serve two masters and no agent or employee of one principal can secretly work for another whose
interest competes with that of the first principal. That is why a real estate agent may not represent both the
seller and the buyer in a real estate transaction without permission from both parties. In line with public
procurement a conflict of interest may arise when a tendering committee member has some vested interest
in the tendering exercise. Ideally, if he is allowed to continue being a member of the tendering committee
he/she may influence the decision in his/her favour hence making the whole exercise fail to have the right
threshold as prescribed by Public procurement and disposal act of 2005.
Importance of ethics in business and purchasing
30

A business that lacks ethical principles is bound to fail sooner or later. According to International ethical
business registry, there has been a dramatic increase in the ethical expectation of business and
professionals over the last decade. Increasingly, customers, clients and employees are deliberately seeking
out those who define the basic ground of ethics in day to day activities.
Ethics is important in purchasing for the following reasons
Purchasing staff are the representatives of their organisation in dealing with suppliers
Sound ethical conduct in dealing with suppliers is essential to the creation of long-term relationships
and the establishment of supplier goodwill
Purchasing staff are probably more exposed to the temptation to act unethically than most of other
employees
It is impossible to claim professional status for purchasing without reference to a consideration of its
ethical aspects
Ethical standards reduces excuses for fraud

Purchasing and fraud

First and foremost fraud is an action or an instance of deceiving in order to make money or obtain goods
illegally. Fraud can also be defined as dishonestly obtaining advantage, avoiding an obligation or causing
loss to another party. The term fraud commonly includes activities such as theft, corruption, conspiracy,
embezzlement, deception, bribery and extortion.
Purchasing is a function that is particularly vulnerable to fraud. Evans states that fraud is not necessary
restricted to those with the title purchasing officer but may involve anyone in direct contact with
suppliers; including engineers, works managers, sales and computer staff.
Examples of supplies-related fraud
Buyer/supplier collusion leading to approval for payment of fictitious charges
Presentation of false invoices
Re-presentation of genuine invoices that have not been cancelled at the time the initial cheque was
signed for second payment
Abstraction of tenders or arranging for the lowest tender to come from a desired source
Omission of credit notes for goods returned to the supplier
Premature scrapping of assets in return for a kickback from a scrap dealer
Computer-based frauds which take advantages of inadequate controls or limited understanding of
information technology on the part of senior management
Pricing inflictions in order to get commission
Ghost suppliers- Goods exist on paper only
Ordering goods for personal use
Prevention of fraud
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The prevention of fraud in relation to supplies depends on sound internal control, internal and external
auditing and the detection of give away signs.
Frauds in working environment can be prevented through the following ways:
Ensuring a separation between recording and custodian duties.
Only specified employees should have the power to requisition goods and then only up to an
authorised limit which increases with the level of authority. The existence of a separate purchasing
department or function considerably strengthens internal control by ensuring that user departments
are prevented from ordering items without the order first being independently vetted.
The requisitioning department can act as a check on the purchasing since every order placed should
be traceable to a requisition
Goods inward should be received in specially designated areas. Control is best established at the gate
or entrance. The receipt of all goods should be recorded. Goods received notes (GRN), where used
should be serially numbered to reduce the danger of introducing false documents and copies should
be sent to the purchasing and finance departments
While it may be unrealistic to check all invoices presented for payment, a sample should be examined
on a random basis.
Provision of internal controls in respect of computers-classified as systems development and control,
organisational controls and procedural controls
Provision of internal and external spot auditing
Use of ethical code as companys culture of honesty and leadership
Separation of the buyer (Purchaser) from the one who receives the goods
Give-away signs
Give-away signs of fraud include the following

Unfolded invoices that have not come through the post

Too many orders to one supplier other than those where single sourcing arrangement apply
Loss of supporting documentation
New suppliers continually facing entry obstacles
Excessive supplier hospitality to selected staff
Sudden unexplained affluence
Unwillingness of employees to take holidays or accept transfer or promotion to other work

Factors that influence unethical behavior

Poor remuneration
Peer influence
Lack of awareness in regard to ethical issues
Pressure to meet unrealistic business objectives and deadlines
Poor supervision
Job stress.

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