PROCUREMENT

The process of obtaining goods and services from preparation and processing of a requisition through to receipt and approval of the invoice for payment. It commonly involves (1) Purchase planning, (2) Standards determination, (3) Specifications development, (4) Supplier research and selection, (5) Value analysis, (6) Financing, (7) Price negotiation, (8) Making the purchase, (9) supply contract administration, (10) Inventory control and stores, and (11) Disposals and other related functions.

Procurement means acquiring goods and/or services from an

outside source. Procurement is the term generally used by government, while business uses the term purchasing and outsourcing is commonly used by the information technology industry. It is estimated that in the year 2003 the worldwide information technology outsourcing market has grown to over US$110 billion. Outsourcing is a growing practice within the IT industry, and it is important to appreciate the reasons it is adopted: l l l l l To reduce both fixed and recurrent costs. To allow the client organization to focus on its core business. To access skills and technologies. To provide flexibility. To increase accountability.

Procurement Planning:
Procurement planning involves identifying which project needs can be best met by using products or services outside the organization. It includes deciding: l l l l l Whether to procure. How to procure. What to procure. How much to procure. When to procure.

It is essential to be thorough and creative when planning procurement. Even though a company may be viewed as a competitor, it will often be advantageous to collaborate on some projects.

Inputs to Procurement Planning

The inputs needed for procurement planning include: l l l l The project scope statement. Product description. Market conditions. Constraints and assumptions.

It is important to define the scope of the project, the products, market conditions, and constraints and assumptions. However, it is also essential to know exactly why you want to procure goods or services.

Procurement Management Process

What is a Procurement Management Process? A Procurement Management Process, or Procurement Process, is a method by which items are purchased from external suppliers. The procurement management process involves managing the ordering, receipt, review and approval of items from suppliers. A procurement process also specifies how the supplier relationships will be managed, to ensure a high level of service is received. This is a critical task in Procurement Management. In essence, the procurement process helps you "get what you have paid for". This Procurement Management Process will enable you to:

Identify supplier contract milestones Review supplier performance against contract Identify and resolve supplier performance issues Communicate the status to management

When do I use a Procurement Management Process?

You need to implement a Procurement Process any time you want to buy items from external suppliers. By using this Procurement Management Process, you can ensure that the items provided meet your need. It also helps you manage the supplier relationship, ensuring that any issues are resolved quickly. By implementing a Procurement Process, you can ensure you get the maximum value from your supplier relationship.

PROCUREMENT MANAGEMENT
With all the discussion of procurement and how it works in businesses, the biggest question is does it actually save money? After all, that's the real bottom line. One large company that had an annual purchasing expenditure of about $10 billion was able to shave over 15% off that amount annually just by leveraging the buying power of all their worldwide divisions. Those numbers clearly illustrate that, when done correctly, a procurement system can definitely save a company money, as well as provide a number of other benefits, particularly to large companies that spend a sizable chunk of their revenue on puchasing goods and services for their business.

Procurement Management (Contd)

Besides the impressive locations.By centralizing all of a company's procurement needs into a single cost savings, procurement management can also save valuable time and can streamline the workforce. With procurement systems, many of the steps involved in purchasing are either not necessary or are automated so that the entire process runs smoother and faster. Also, because most corporations divide up the purchasing responsibilities among their multiple divisions, they typically have several staff members who are technically doing the exact same job in different department or firm, these redundant job positions can be eliminated. Additionally, the excess office space and equipment can either be liquidated or used for more productive business endeavours. In order to achieve these and the other benefits procurement management offers, companies must be willing to go through many steps. Implementation does require some changes both in technology, in personnel, and in attitude. Without these changes, the procurement system simply won't be effective. One of the first of these changes is to adopt a positive sourcing methodology. Many corporations simply place orders; they don't form relationships with suppliers. While the distinction may not seem great, the reality is that these sellers are critical components of a business's success, and they need to be treated that way. The overall goal of a strong sourcing methodology is to achieve a mutually satisfying agreement that will provide the buyer with the goods he needs at a reasonable price and that will secure the seller a steady customer in the future. Another change with procurement is the workforce. Employees who will be dealing directly with vendors need to be highly trained and experienced in the industry in which the business is involved. For example, a pharmaceutical company would need to hire individuals who are familiar with the types of chemicals used in the creation of prescription drugs. By hiring individuals who are experts in their field and who are then trained in the procurement process of the company, suppliers feel more comfortable doing business with the buying firm. With a more centralized approach to procurement, large corporations are also in the position to have their purchasing team specialize in certain areas of procurement. An automobile manufacturer may have one team responsible for purchasing machinery, another for raw materials, and a third for temporary employees. This type of specialization would be too costly if all of the purchasing was spread out across the globe but when dealing with billions of dollars in goods and services being handled in one area, specialization is almost a necessity. Tracking suppliers, using reverse auctions, and evaluating costs are all other important parts of the procurement system. By tracking suppliers, the buyer is able to determine whether or not they continuously live up to expectations. Through reverse auctions, buyers are able to keep prices lower while selecting from a wide array of potential sellers. Plus, continually evaluating costs prevents companies from losing sight of the biggest benefit of procurement management: its cost-effectiveness.

PROCUREMENT PROCESS

PURCHASING PROCESS:

Steps in Procurement Process:

Procurement process is the term used by businesses to describe the buying process, and can refer to the purchase of supplies or services. Many businesses use automated tools such as an Enterprise Resource Planning (ERP) system and Electronic Data Interchange (EDI) to assist procurement specialists or buyer with the buying activities. Regardless of whether an automated system is used, the goal of the procurement process is to buy the exact product or service when needed for the most favourable price. Identifying a need is the first step in the procurement process. If the business has an automated system, typically a purchase requisition (PR) will be sent to the buyer indicating what product or service is needed. For businesses without automated systems, a handwritten PR is often used, which requires the person or department that needs the product or service to submit a purchase requisition form to the buyer for action. If the product or service has previously been purchased, the buyer will enter a purchase order in the ERP system or submit payment to the supplier based on the previously agreed to terms and conditions. If the product or service has not been procured before, the buyer must proceed with a request for quote (RFQ). An RFQ involves selecting a supplier, determining the price to be paid, and agreeing to the lead time and quantity for delivery. Selecting a supplier typically involves sending RFQs to multiple suppliers and comparing the bids to determine which supplier can best meet the needs of the business. The buyer will request a specific quantity and delivery date based on the requirements outlined on the purchase requisition. Depending upon the type of product or service required, there may also be the need for technical qualifications or special licensing. For example, if the product requested is a medical device, the supplier must be licensed by the FDA to manufacture the product and prototypes must be sent and approved by the business before purchase orders can be issued. Determining the price paid usually includes comparing bids then negotiating the best price. The buyer should ensure all bids are an accurate reflection of the work to be performed or service provided and include all applicable taxes and shipping charges. This way, the total landed cost is known before the purchase order is placed. It is also necessary to understand the lead time and expected quantity to be delivered. Based on the actual need date, any accepted quote should meet the required date. If the supplier cannot meet the date needed by the business, expedite premiums may be incurred. The expected quantity should also be supported by the quote received. The buyer must make sure the quantity to be shipped is not less than requested because the shortage may result in loss revenue. The buyer must also make sure the quantity to be shipped is not more than needed because the excess may result in liability for the business if the product is never used. Ultimately, the buyer is responsible for ensuring the procurement process is executed to meet the needs of the business while maintaining the profits.

SRM:
What is SRM? Supplier relationship management, according to Oracle, refers to any supplier-facing business practices which are enabled by collaborative software and which allow companies to work with their supplier base for mutual success. Primarily, SRM tools have been developed to reduce the total cost of ownership (TCO) for procured goods, while creating competitive advantage for an organisation through deeper relationships with its suppliers. A straightforward example of where supplier relationships are critical to the buying organisation is in the product development process. If materials, parts or services cannot be supplied to meet the design requirements, production deadlines or at an acceptable cost, then the product development team must go back to the drawing board. Another trend that highlights the need for effective supplier relationship management is the move by enterprises to outsource key functions, from design to product assembly to after-sales service, in order to improve competitiveness and financial performance. Gartner describes this use of contract manufacturing and other unconventional supplier relationships as 'virtualisation'. The same Gartner report estimates that an enterprise's expenditure on goods and services can often exceed 45 percent of revenue, stating that as spend with suppliers increases, so does the ability of supplier's performance to affect a company's bottom line. These important supplier partnerships must therefore be closely managed and co-ordinated, often across time zones, languages and currencies.

Supplier relationship management is a comprehensive approach to managing an enterprise's interactions with the organizations that supply the goods and services it uses. The goal of supplier relationship management (SRM) is to streamline and make more effective the processes between an enterprise and its suppliers just as customer relationship management (CRM) is intended to streamline and make more effective the processes between an enterprise and its customers. SRM includes both business practices and software and is part of the information flow component of supply chain management (SCM). SRM practices create a common frame of reference to enable effective communication between an enterprise and suppliers who may use quite different business practices and terminology. As a result, SRM increases the efficiency of processes associated with acquiring goods and services, managing inventory, and processing materials.

According to proponents, the use of SRM software can lead to lower production costs and a higher quality, but lower priced end product. SRM products are available from a number of vendors, including 12 Technologies, Manugistics, PeopleSoft, and SAP.

Steps In Supplier Relation Management:

Four steps to SRM success
Oracle believes that there are four critical factors to consider for a successful implementation of an SRM solution. The first step is integration. An enterprise cannot offer SRM to its suppliers until it has automated and integrated its own internal processes. As SRM draws on information generated throughout the enterprise, including, but not limited to, product life cycle management, supply chain planning, enterprise resource planning and customer relationship management, this information should flow from a single data source. Pella Corporation, a US manufacturer of windows and doors, wanted to lower its overall costs by adopting a central web-based approach to procurement and improving the management of vendor terms and agreements. By integrating Oracle Financials and Oracle Procurement, Pella streamlined its procure-to-pay processes and achieved significant time and cost savings, while gaining valuable insight and business intelligence. Oracle Procurement enabled Pella's corporate purchasing division to cut transaction times for purchase orders from thirty minutes to five, a reduction of eighty-six percent. Pella's manufacturing division has cut clerical costs and time per purchase order by fifty percent. Tracey Buck, co-ordinator of facilities management for Pella said: "Oracle Procurement has helped reduce the number of calls from Pella's corporate purchasing department and from vendors by as much as ninety-five percent." Secondly, suppliers need to be connected to the enterprise. They should be able to inquire, view and transact directly with the buyer's system. The method of connecting suppliers to the business must be affordable, scalable and relatively straightforward to implement and use. The range of interface options available to suppliers - XML, EDI, web services, portals or email - means that their investment in linking to the buyer's system can be kept to a minimum. Thirdly, once a single view of the supply chain has been enabled, analytical tools can

Steps In Supplier Relation Management: (CONTD)

be added to help identify the areas of greatest opportunity for both the buying organisation and the supplier base, and to monitor performance. Business intelligence tools assist decision-making and can help increase profitability for both parties. For example, if over fifty percent of a month's projected inventory of a particular item is sold within the first week of the month, the supplier is automatically notified to deliver additional stock, ensuring that the buying organisation has sufficient supply to meet customer demands, while simultaneously boosting its own revenue. Business intelligence tools can also be used to track supplier performance against business objectives, other than just price. Monitoring performance is an important step in improving supplier relationships, however according to a study by Aberdeen Group, only about half of enterprises have formal procedures in place to measure performance. Aberdeen analyst, Mark Vigoro so, says that without measurement procedures in place, companies have no way of knowing if money and effort spent on supply chain planning is doing any good. Finally, a culture of collaboration must be fostered across the supply chain, and suppliers viewed as a source of competitive advantage, rather than cost. Gartner notes that properly managed supplier relationships "can contribute to enterprise innovation and growth", while a poorly managed supply base "will drive up costs and slow new product initiatives". An integrated, connected supply chain can help lower costs, as manufacturers and suppliers are able set joint production, inventory and fulfilment schedules against real-time market data. A modular approach can be taken to an SRM project, starting, for example, with a critical supplier-facing function such as procurement or sourcing. UK retailer Littlewoods plc achieved 24 percent savings on its procurement of indirect goods in a successful pilot of Oracle Sourcing. Oracle Sourcing, a complete and integrated global sourcing application, allows a company to optimise its supplier base, reduce sourcing costs, improve supplier relationships, and source for best value. Littlewoods has now moved its purchasing function online permanently with Oracle Sourcing and expects to massively save on its annual procurement spend.

"Littlewoods Retail spends around 320 million (US $462 million) a year on purchasing goods - a significant amount - that we believe can be reduced through the use of online auctions carried out through Oracle Sourcing," said David Hallet, chief information officer for Littlewoods Retail Ltd. In a highly competitive marketplace, companies are searching for further opportunities to reduce costs and improve operational efficiencies. According to Gartner , supplier relationship management (SRM) represents an evolutionary extension of supply chain management, driven by the need for enterprises to better understand their suppliers' long-term financial and operational contribution to the top and bottom lines. It is the next step in managing the supply chain more effectively. Supplier relationship management then represents an opportunity to improve the accuracy and speed of buyer-supplier transactions, while improving collaborative working practices to the benefit of both parties, driving continuous improvement and lowering total cost of ownership.

Successful supplier relationship management:

Supplier relationships are critical to any Organisation.Suppliers can directly impact the financial performance and profitability of a buying enterprise, as they influence product development costs, inventory levels, manufacturing schedules and the timeliness of delivery of goods and services.

Many leading companies have realised that it is worthwhile investing to make sure these relationships are managed effectively and efficiently. In recent years, companies have invested in supply chain management (SCM) software to automate procurement processes, improve delivery times and reduce the cost of doing business. Now, market trends, such as increased global competition, shorter product lifecycles and a move to outsource business processes, require organisations to improve collaboration with their supplier base and to examine methods of further reducing the costs associated with supplier relationships.

Procurement Strategies
The three effective procurement strategies are 1.Volume Consolidation 2.Supplier Operational Integration 3.Value Management

Volume Consolidation:
Volume consolidation is a strategy that aims to reduce the number of suppliers. It allows the buyer to negotiate strongly with the supplier for business and it allows the supplier to obtain larger economies of scale in its internal processes. Consolidating volume with limited number of suppliers increases the share of buyer in suppliers business This way it can leverage its purchasing power with a few suppliers and get better prices in return for purchasing higher volumes of product. Supplier benefits due to economies of scale. Assured of a volume of purchases, supplier is more willing to invest in process or capacity improvements.

Supplier Operational Integration:

Supplier Operational Integration aims to integrate buyers and sellers processes and activities in an attempt to achieve substantial operational performance improvement in the supply chain. It aims to achieve cost reduction, better logistics, cut waste.

Primary objective is to cut cost, reduce waste and develop a relationship that allows both buyers and sellers to achieve mutual improvements. Sharing sales and ordering information Redesigning processes to improve efficiency Achieving zero defects at suppliers Vendor managed inventory Reducing TCO

Value Management:
Value management takes the buyer-seller relationship to a more comprehensive level that involves reducing complexity, early supplier involvement in product design. More intense aspect of supplier integration where buyer supplier operations develop into a comprehensive relationship. Early supplier involvement in NPD allows supplies to reduce TCO Teams representing procurement, engineering, manufacturing, marketing, logistics as well as key supplier personnel jointly seek solutions to lower cost and improved customer service.

Total Cost Of Ownership.

Definition of 'Total Cost Of Ownership - TCO'

The purchase price of an asset plus the costs of operation. When choosing among alternatives in a purchasing decision, buyers should look not just at an item's shortterm price, which is its purchase price, but also at its long-term price, which is its total cost of ownership. The item with the lower total cost of ownership will be the better value in the long run.

Investopedia explains 'Total Cost Of Ownership - TCO'

For example, the total cost of ownership of a car is not just the purchase price, but also the expenses incurred through its use, such as repairs, insurance and fuel. A used car that appears to be a great bargain might actually have a total cost of ownership that is higher than that of a new car, if the used car requires numerous repairs while the new car has a three-year warranty.

Benefits of Effective Sourcing Decisions

Better economies of scale can be achieved if orders are aggregated More efficient procurement transactions can significantly reduce the overall cost of purchasing Design collaboration can result in products that are easier to manufacture and distribute, resulting in lower overall costs Good procurement processes can facilitate coordination with suppliers Appropriate supplier contracts can allow for the sharing of risk Firms can achieve a lower purchase price

THE OUTSOURCING DECISION MATRIX

E-PROCUREMENT
Definition of E-Procurement
E-Procurement is more than just a system for making purchases online. A properly implemented system can connect companies and their business processes directly with suppliers while managing all interactions between them. This includes management of correspondence, bids, questions and answers, previous pricing, and multiple emails sent to multiple participants. A good e-procurement system helps a firm organize its interactions with its most crucial suppliers. It provides those who use it with a set of built-in monitoring tools to help control costs and assure maximum supplier performance. It provides an organized way to keep an open line of communication with potential suppliers during a business process. The system allows managers to confirm pricing, and leverage previous agreements to assure each new price quote is more competitive than the last.

Benefits of Adopting an E-Procurement System

E-Procurement helps with the decision-making process by keeping relevant information neatly organized and time-stamped. Most are template-driven which makes all transactions standardized and trackable. Keeping track of all bids means leveraging your knowledge to obtain better pricing. Companies can focus on their most lucrative trading partners and contracts. Well-managed e-procurement helps reduce inventory levels. Knowing product numbers, bid prices and contact points can help businesses close a deal while other suppliers are struggling to gather their relevant data. E-Procurement systems that allow multiple access levels and permissions help managers organize administrative users by roles, groups, or tasks. Procurement managers do not need to be as highly trained or paid because such systems are standardized and easy to learn.

Typical Adoption Strategies

Some firms have discovered that many of their transactions still take place on paper, and they have run into problems ranging from content management to supplier participation in their systems. Most companies who desire to make the switch fall into two camps. The first are the slow step-by-step adopters. They implement one piece of their system at a time and slowly bring trading partners on board. The others follow the total replacement model. They build a totally parallel system, test it, then switch over to it when it works. There is usually some pain involved and some mistakes are discovered, but by and large these are absorbed and the business continues.

Pitfalls to Avoid
Dont bite off more than you can chew. The parallel system approach should only be used if you have the time and resources to do this. If not, stick to the incremental approach. Dont expect an immediate return on investment. A short-tem gain may be noticeable, but it may be eaten up by the cost of staff training and equipment purchases. A year or two down the road, a larger ROI should be evident.

In short it is how the procurement will be managed throughout the project. The plan includes the following: How the make-or-buy decisions will be made and handled Contracts

o What types of contracts will be used for this project o The form and format for the statement of work related to a procurement or a contract o Metrics to be used to evaluate potential sellers and to manage contracts o Requirements for performance bonds or insurance contracts that might be put in place to mitigate some project risks Management and coordination o How to manage multiple sellers. o How to coordinate procurement with other aspects of the project, such as the project schedule, scope, budget, and status progress reporting. o Evaluation criteria for selecting sellers and measuring their performance. It is also called source selection criteria and will be covered in depth in future when we learn about conducting the actual procurements. A list of assumptions and constraints that could affect the procurement Any needed standardized procurement documents In a nutshell, the major tasks of procurement planning are making make-or-buy decisions, preparing the procurement management plan, preparing the statement of work, determining a suitable type of contract, and preparing or acquiring the procurement documents

The End