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Introduction :-

Procurement is the acquisition of goods and/or services. It is favorable that the


goods/services are appropriate and that they are procured at the best possible cost
to meet the needs of the purchaser in terms of quality and quantity, time, and
location. Corporations and public bodies often define processes intended to
promote fair and open competition for their business while minimizing exposure to
fraud and collusion.

Overview :-

Almost all purchasing decisions include factors such as delivery and handling,
marginal benefit, and price fluctuations. Procurement generally involves making
buying decisions under conditions of scarcity. If good data is available, it is good
practice to make use of economic analysis methods such as cost-benefit analysis or
cost-utility analysis.

An important distinction is made between analyses without risk and those with
risk. Where risk is involved, either in the costs or the benefits, the concept of
expected value may be employed.

Direct procurement and indirect procurement


TYPES
Direct Indirect
procurement procurement
Raw material Maintenance, Capital
and production repair, and goods and
goods operating supplies services

F Quantity Large Low Low


E Frequency High Relatively high Low
A
Value Industry specific Low High
T
U Nature Operational Tactical Strategic
R Crude oil in Crude oil
E Lubricants, spare
Examples petroleum storage
S parts
industry facilities
Based on the consumption purposes of the acquired goods and services,
procurement activities are often split into two distinct categories. The first category
being direct, production-related procurement and the second being indirect, non-
production-related procurement.

Direct procurement occurs in manufacturing settings only. It encompasses all items


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

Procurement systems :-

Another common procurement issue is the timing of purchases. Just-in-time is a


system of timing the purchases of consumables so as to keep inventory costs low.
Just-in-time is commonly used by Japanese companies but widely adopted by
many global manufacturers from the 1990s onwards. Typically a framework
agreement setting terms and price is created between a supplier and purchaser, and
specific orders are then called-off as required.

Procurement process :-

Procurement may also involve a bidding process i.e.,Tendering. A company may


want to purchase a given product or service. If the cost for that product/service is
over the threshold that has been established (e.g.: Company X policy: "any
product/service desired that is over $1,000 requires a bidding process"), depending
on policy or legal requirements, Company X is required to state the product/service
desired and make the contract open to the bidding process. Company X may have
ten submitters that state the cost of the product/service they are willing to provide.
Then, Company X will usually select the lowest bidder. If the lowest bidder is
deemed incompetent to provide the desired product/service, Company X will then
select the submitter who has the next best price, and is competent to provide the
product/service. In the European Union there are strict rules on procurement
processes that must be followed by public bodies, with contract value thresholds
dictating what processes should be observed (relating to advertising the contract,
the actual process etc.).

Procurement steps :-

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

• Information gathering: If the potential customer does not already have an


established relationship with sales/ marketing functions of suppliers of
needed products and services (P/S), it is necessary to search for suppliers
who can satisfy the requirements.
• Supplier contact: When one or more suitable suppliers have been identified,
requests for quotation, requests for proposals, requests for information or
requests for tender may be advertised, or direct contact may be made with
the suppliers.
• Background review: References for product/service quality are consulted,
and any requirements for follow-up services including installation,
maintenance, and warranty are investigated. Samples of the P/S being
considered may be examined, or trials undertaken.
• Negotiation: Negotiations are undertaken, and price, availability, and
customization possibilities are established. Delivery schedules are
negotiated, and a contract to acquire the P/S is completed.
• Fulfillment: Supplier preparation, expediting, shipment, delivery, and
payment for the P/S are completed, based on contract terms. Installation and
training may also be included.
• Consumption, maintenance, and disposal: During this phase, the company
evaluates the performance of the P/S and any accompanying service support,
as they are consumed.
• Renewal: When the P/S has been consumed and/or disposed of, the contract
expires, or the product or service is to be re-ordered, company experience
with the P/S is reviewed. If the P/S is to be re-ordered, the company
determines whether to consider other suppliers or to continue with the same
supplier.
• Additional Step - Tender Notification: Some institutions choose to use a
notification service in order to raise the competition for the chosen
opportunity. These systems can either be direct from their e-tendering
software, or as a re-packaged notification from an external notification
company.
Public procurement :-

Main article: Government procurement

Public procurement generally is an important sector of the economy. In Europe,


public procurement accounts for 16.3% of the Community GDP.[4]

Green public procurement :-

In Green public procurement (GPP), contracting authorities and entities take


environmental issues into account when tendering for goods or services. The goal
is to reduce the impact of the procurement on human health and the environment.[5]

In the European Union, the Commission has adopted its Communication on public
procurement for a better environment, where proposes a political target of 50 %
Green public procurement to be reached by the Member States by the year 2010.[6]

Alternative procurement procedures :-

There are several alternatives to tendering which are available in formal


procurement. One system which has gained increasing momentum in the
construction industry and among developing economies in the Selection in
planning process which enables project developers and equipment purchasers to
make significant changes to their requirements with relative ease. The SIP process
also enables vendors and contractors to respond with greater accuracy and
competitiveness as a result of the generally longer lead times they are afforded.

ROSMA is a procurement acronym created by ATkearney.{Procurement Solutions


Division} It stands for Return on Supply Management Assets and endeavors to
quantify not only procurement but every piece of the procurement process
including strategic resource management. { }

Procurement frauds :-

Procurement fraud can be defined as dishonestly obtaining an advantage, avoiding


an obligation or causing a loss to public property or various means during
procurement process by public servants, contractors or any other person involved
in the procurement.[7]
Centralized V/s Decentralized Purchasing :-

Centralized purchasing involves having a central location within the organization


to buy goods and services for the organization. An organization has a central
procurement department with specialized buyers, project managers would then
request certain purchases to be done for their project needs and the procurement
department carries out those purchase requests. The centralized purchasing
department has individuals who handle bids, quotes and ensure that the corporate
purchasing standards are met during a purchasing process. For example, the
organization where I used to work the procurement department purchased
everything from computers, pens, mineral water to fruits and company cars. They
selected the suppliers and providers of services to the company.

Centralized purchasing provides for less duplication because of fewer orders thus
less processing, receiving, inspection and accounts payable. (Project management
Institute 1997) Centralized purchasing also provides for efficiency and
effectiveness in contracting or purchasing because the organization’s procurement
department has more management control and are more specialized and they tend
to have proper understanding of market conditions. Centralized purchasing also
brings about major bulk discounts because of volume purchases for the
organization and other benefits that they might get from economies of scale.

The disadvantage of centralized purchasing is that the central office lacks the
technical skills or expertise to purchase service or goods that require a person with
technical skills e.g. purchasing electronic parts, computer equipment etc.

Decentralized purchasing involves having the project managers, subsidiary, office


or departments purchasing their own products or services. Decentralized
purchasing normally has individuals attached to the project manager or office
responsible for the purchasing needs of the project or office.

The advantage of decentralized purchasing is that it provides for less bureaucracy


since the project manager has an individual dedicated to his purchasing needs and
thus quick buy decisions can be made. If a manager needs to have software or
stationery for his department, he can easily go online and purchase what he needs
within no time or he can buy from any office mart just as quickly as he needs it
unlike centralized purchasing that needs paperwork to be filled and passed up to
the necessary office. Decentralized purchasing also provides for a closer
knowledge of requirements since the dedicated buyer has the knowledge of the
project needs.

One of the major disadvantages of decentralized purchasing is that there is a lot of


duplication of effort in buying, receiving, inspection and accounts payable (Project
management Institute 1997). Also decentralized purchasing causes less buyer
specialization thus the organization cannot take advantage of discounts from
volume buys, negotiations etc.

Some organizations adopt a hybrid system that combines both centralized and
decentralized purchasing. They use centralized purchasing for larger organization-
wide contracts, but give individual business units autonomy to make small
purchases for their departments or subsidiaries.

PRINCIPLES OF PURCHASING :-

The School Committee views the purpose of purchasing as a service to the


educational program by providing necessary supplies, equipment, and related
services. Purchasing will be centralized under the general supervision of the
Business Administrator.

It is the goal of the School Committee to purchase competitively, without prejudice


or favoritism, and to seek the maximum educational value for every dollar
expended. Competitive bids or quotations for procurements shall be solicited
pursuant to law. The Massachusetts General Law requires that purchase contracts
for goods and services involving annual expenditures with a particular vendor that
exceed $10,000 and public work contracts involving an expenditure of more than
$25,000 will be awarded only after responsible bids have been received in response
to a public advertisement soliciting formal bids. Similar purchases to be made in a
fiscal year will be grouped together to determine whether a particular item must be
bid.

Goods and services not required by law to be procured by the department through
competitive bidding will be procured to:

1. Ensure the prudent and economical use of public monies;


2. Ensure that the procurement is in the best interests of the taxpayers;
3. Facilitate the acquisition of goods and services of maximum quality at
the lowest possible cost under the circumstances;
4. Guard against favoritism, improvidence, extravagance, fraud and
corruption.

Alternative proposals or quotations will be secured by requests for proposals,


written or verbal quotations or any other appropriate method of procurements,
except for procurements:

1. Under a current city contract;


2. Under a current state contract;
3. Of textbooks and utilities;
4. From a sole source.

The Purchase Cycle :-

USER (FACULTY & STAFF)

1. Recognizes the need.


2. Writes the specification or purchase description. When necessary, the
user should indicate that no substitutes for the required item will be
accepted, and the reasons why no substitution is acceptable.
3. Completes the requisition in duplicate and forwards it to their
appropriate Department Head/Principal/Director for approval.

DEPARTMENT HEAD/K-12 DIRECTOR

1. Assigns a budget code and description, if needed.


2. Compares the requisition with the budget appropriations for
availability of funds.
3. If there are funds available in the account, he/she may approve the
requisition and forwards it to the Building Principal or Business
Office, whichever is the appropriate level.
4. If there are no funds available in the appropriation account, the
Department Head will either disapprove the requisition and return it to
the teacher or may forward the requisition with a recommendation for
transfer of appropriations. The appropriation account from which the
funds will be transferred should accompany the approved requisition.
BUILDING PRINCIPAL/DIRECTOR

1. Assigns a budget code and description, if needed.


2. Compares the requisition with the budget appropriations for
availability of funds.
3. If there are funds available in the appropriation account, the
Principal/Director may approve the requisition and forward it to the
Business Office for processing.
4. If there are no funds available in the appropriation account, the
Principal/Director will either disapprove the requisition and return it
to the department/teacher or may forward the requisition with a
recommendation for transfer of appropriations. The appropriation
account from which the funds will be transferred should accompany
the approved requisition.

BUSINESS OFFICE

1. The requisition is date stamped by the Accounts Payable Clerk.


2. The Business Administrator verifies that there are funds available and
that the account number and description fit the item being ordered.
3. If there are funds available in the account, the Business Administrator
may approve the requisition.
4. If there are no funds available in the account, and there is no
indication of a transfer, the Business Administrator will disapprove
the requisition and return it to the appropriate Building
Principal/Director.
5. The Business Administrator is the final authority for
approving/disapproving a requisition.
6. The Accounts Payable Clerk forwards the approved requisitions to the
City Purchasing Department for processing.

CITY PURCHASING DEPARTMENT

1. Date/Time stamps the requisition.


2. Verifies the requisition in terms of sufficient descriptions for
purchasing.
3. Determines the appropriate method for procurement.
4. Prepares a Purchase Order for the item required, or prepares bid
documents or requests for proposals as appropriate.
5. Signs a Purchase Order after all the appropriate steps are completed,.
6. Signed Purchase Order is forwarded to the vendor. Pink and blue
copies of the Purchase Order are sent to the Accounts Payable Clerk.

ACCOUNTS PAYABLE CLERK

Files the pink copies of the purchase order and forwards the blue copy to the
appropriate party.

THE PAYMENT CYCLE

USER (FACULTY & STAFF)

1. When the item is received, the user MUST sign the packing slip and
forward it to the Accounts Payable Clerk. If there is no packing slip,
the user should sign a copy of the blue purchase order indicating the
receipt to the goods or services, and the fact that there was no packing
slip.
2. During the summer months and during long breaks the Building
Principal should open all packages and sign the packing slips for all
items received. This will insure a timely process for payment.
3. There will be times when the packing slip is also the invoice, or vice
versa. Invoices MUST be forwarded to the Accounts Payable Clerk as
soon as possible.

ACCOUNTS PAYABLE CLERK.

1. Compares the packing slip and/or the invoice against the original
purchase order.
2. Holds any invoice for payment until a signed packing slip is received.
3. Checks the invoice for accuracy against the packing slip and purchase
order.
4. Forwards the signed packing slip, and invoice to the Business
Administrator for approval for payment.
5. Prepares the warrant and a voucher for each payment.
6. Coordinates with the School Committee for the signing of the warrant.
7. Copies all of the required documentation and then forwards the signed
vouchers and warrant to the City Auditor for payment.
8. Once the City Auditor approves the vouchers and warrant, the City
Treasurer issues a payment to the vendor.

NOTES & EXCEPTIONS:

1. Generally speaking, requisitions will include the staff member’s name or


grade level for shipping purposes. The City Purchasing Department will
endeavor to include the specific shipping information when issuing the
purchase orders. Please understand that this is extremely cumbersome when
we are dealing with the general supplies bids. In order to obtain quantities
for the bids, all needs are consolidated. Once the bids have been received,
the Principals are free to add or subtract from their original request.
However, the request is still at a building level. The Principals will have to
maintain an itemized list for their buildings.
2. Under no circumstances will telephone orders be generated by the faculty
and staff. All orders must be made through a valid purchase order or
requisition.
3. Seminars and conferences require the completion of a requisition. Payment
for the conference/seminar is generated through a confirming purchase
order.
4. There are several local vendors with whom the City has "open" or "charge"
accounts. Pre-approved staff members are allowed to go to those vendors
and purchase items without a valid purchase order under the following terms
and conditions:

A. The staff member must have written approval to charge at the local
vendor. This approval is received from the Business Administrator.
B. The staff member must receive a signed receipt, and the purpose of
the purchase must be easily identifiable.
C. Once the invoice is received, the Principal/Director will be asked to
approve a "confirmation" requisition. The completed requisition and
the charge receipts will be forwarded to the Business Administrator
for approval following the normal procedures.
Faculty and staff may be reimbursed for out-of-pocket expenses and mileage.
They must complete a claim for reimbursement in duplicate. These claims must
be submitted no later than June 30th of the current fiscal year. Their supervisor
must approve the claim and forward it to the Business Administrator for
approval and processing.

Responsibility of Purchase Department :-

• The Director of Materials Management & CPO has responsibility for the
procurement of all goods and services, either by providing the services for
such procurement or by granting functional directions to others delegated the
authority to perform such functions.
• The Purchasing Department has the responsibility for obligating the
University through the use of purchase orders to commitments for the
procurement for materials, equipment, supplies and services.
• The Purchasing Department is responsible for the review and approval of
new vendors.
• The Purchasing Department is responsible for making the final
determination of supply sources, quantities purchased, delivery schedules,
and price negotiations, except where others are so authorized by the
president. These decisions will be made in consultation with those
originating the requisitions and in conjunction with other Administrative
departments, i.e., Finance, Office of General Counsel, as appropriate.
• The Purchasing Department is responsible for initiating and maintaining
effective and professional relationships with suppliers, actual and potential.
• The Purchasing Department serves as the lead channel through which
requests regarding prices and products are handled. The Purchasing
Department will conduct all final correspondence with suppliers involving
prices or quotations. In cases where the scientific, technical or business
expertise required to solicit and qualify a bid or quotation rests with
departments other than Purchasing, individuals designated by the Head of
Laboratory or Department may correspond with suppliers regarding
scientific, technical or business issues in the process of identifying
appropriate vendors/sources and obtaining a bid, proposal or quotation. In all
cases, the Purchasing Department must be consulted regarding the
solicitation and must be provided with copies of relevant correspondence.
Close coordination between the departments and Purchasing must occur
regarding such solicitations.
• Purchasing personnel are to seek to obtain and purchase all goods and
services at the lowest possible total end cost, considering the guidelines of
prices, service, quality, delivery and reliability.
• The Director of Materials Management & CPO has full authority to question
the quality and kind of material or service requested in order to ensure that
the policies of the University are followed and that the best interests of the
University are served.
• Purchasing personnel are to inform requisitioners whenever the quantity or
specifications of materials requisitioned are inconsistent with sound
purchasing practices or market conditions.
• Purchasing personnel will negotiate the return of rejected equipment or
supplies to suppliers. In cases where the scientific, technical or business
expertise required to negotiate the return rests with departments other than
Purchasing, individuals designated by the Head of Laboratory or Department
may correspond with suppliers regarding scientific, technical or business
issues related to the return. In all cases, the Purchasing Department must be
consulted regarding the return and be provided with copies of relevant
correspondence. Close coordination between the departments and
Purchasing must occur regarding such returns.
• The Purchasing Department is responsible for considering the
appropriateness of prepayments.
• The Purchasing Department is responsible for considering the
appropriateness of "trial period" or "demo" transactions for equipment.
• The Purchasing Department reviews and approves, with appropriate
consultation with the Finance Office, trade-in arrangements for University
equipment.
• The Purchasing Department is responsible for questioning requests that are
beyond the University's "generally accepted" terms and conditions and for
consulting with the Office of General Counsel on these issues.

Steps To Purchasing Cycle :-

So what exactly is a purchasing cycle? Well it’s the steps taken to order and pay
for products that a business requires. The purchasing cycle determines the
frequency that products are purchased.
The steps in a standard purchasing cycle are:

1. The Need
You need to identify that there is a need to update the inventory or stock.
You may also need a business service or ad hoc product.
2. Specify
Now you need to decide how much and when you want the products or
services delivered.
3. Requisition or Order
This is when you write the purchase order or requisition order.
4. Financial Authority
Before the order can be placed, it usually requires some kind of authority for
its purchase. With some purchase orders, this is reasonably automatic. With
a large order that will be put out to tender it could be multi staged.
5. Research Suppliers
Repetitive orders usually have set suppliers, although it does no harm to
review the options sometimes. Other orders will either need to go out to
tender or there will be a choice of suppliers.
6. Choose Supplier
The supplier is now chosen.
7. Establish Price and Terms
In a large company, many suppliers will be contracted with a Master
Agreement where prices and terms are set for a defined period. For other
orders, now is the time to negotiate terms and prices.
8. Place Order
At this stage in the purchasing cycle, the order is placed and this becomes a
contract between the business and the supplier.
9. Order Received and Inspected
The goods are delivered, checked in the warehouse and entered into the
inventory. Shortages and breakages are reported to the supplier for the
appropriate credits to be supplied.
10. Approval And Payment
Usually within 30 days, the invoices are received and paid.
11. Update Of Records
The purchasing ledger and stock records are updated. This is automatically
done by many purchasing computer systems.When there is a need to place a
requirement out to tender the purchasing cycle becomes slightly different:
When there is a need to place a requirement out to tender the purchasing cycle
becomes slightly different:

1. The Need
In this case, the need usually goes through a business case and is then tightly
defined and specified.
2. Financial Authority
This usually happens at a higher level and includes the management of the
department that requires the goods.
3. RFP
A Request For Proposal (RFP) is written, in which the need is highly
specified.
4. Invite Tenders
This is always done formally, usually by posting the request in trade
magazines and appropriate web sites. Government projects are posted on
government web sites.
5. PQQ
A Pre Qualification Questionnaire (PQQ) is sent out to likely suppliers in
order to select a short list of appropriate potential suppliers.
6. Tenders
The tenders are sent in from the qualified suppliers.
7. Qualifying
A number of meetings are held to clarify any questions that suppliers may
have.
8. Evaluation
This is the most exciting part of the purchasing cycle and can take many
weeks for a big tender. All the tenders are evaluated and the requirement
awarded to the winning bidder.
9. Negotiation
The fine print of the terms and conditions are negotiated with the chosen
supplier. The price is fixed at the bid price.
10. Contract Award
In a very short time, the contract is awarded to the chosen bidder.
11. Manage Contract
This is the period in the purchasing cycle when the goods are delivered.
12. Approval And Payment
If the contract is carried out completely then full payment is made. If there
are problems, there may be a damage request.
13. Sign Off
At the end of the contract work and deliveries, the contract is signed off and
all relationships with the supplier are finished.
14. Update Of Records
The purchasing ledger and stock records are updated. This is automatically
done by many purchasing computer systems.

Vendor Management :-
Strategies to Strengthen Vendor Relations
Vendor management allows you to build a relationship with your suppliers and
service providers that will strengthen both businesses. Vendor management is not
negotiating the lowest price possible. Vendor management is constantly working
with your vendors to come to agreements that will mutually benefit both
companies.

1. Share Information and Priorities :-

The most important success factor of vendor management is to share information


and priorities with your vendors. That does not mean that you throw open the
accounting books and give them user IDs and passwords to your systems.
Appropriate vendor management practices provide only the necessary information
at the right time that will allow a vendor to better service your needs. This may
include limited forecast information, new product launches, changes in design and
expansion or relocation changes, just to name a few.

2. Balance Commitment and Competition :-

One of the goals in vendor management is to gain the commitment of your vendors
to assist and support the operations of your business. On-the-other-hand, the
vendor is expecting a certain level of commitment from you. This does not mean
that you should blindly accept the prices they provide. Always get competitive
bids.

3. Allow Key Vendors to Help You Strategize :-


If a vendor supplies a key part or service to your operation, invite that vendor to
strategic meetings that involve the product they work with. Remember, you
brought in the vendor because they could make the product or service better and/or
cheaper than you could. They are the experts in that area and you can tap into that
expertise in order to give you a competitive advantage.

4. Build Partnerships For The Long Term :-

Vendor management seeks long term relationships over short term gains and
marginal cost savings. Constantly changing vendors in order to save a penny here
or there will cost more money in the long run and will impact quality. Other
benefits of a long term relationship include trust, preferential treatment and access
to insider or expert knowledge.

5. Seek to Understand Your Vendor's Business Too :-

Remember, your vendor is in business to make money too. If you are constantly
leaning on them to cut costs, either quality will suffer or they will go out of
business. Part of vendor management is to contribute knowledge or resources that
may help the vendor better serve you. Asking questions of your vendors will help
you understand their side of the business and build a better relationship between
the two of you.

6. Negotiate to a Win-Win Agreement :-

Good vendor management dictates that negotiations are completed in good faith.
Look for negotiation points that can help both sides accomplish their goals. A
strong-arm negotiation tactic will only work for so long before one party walks
away from the deal.

7. Come Together on Value :-

Vendor management is more than getting the lowest price. Most often the lowest
price also brings the lowest quality. Vendor management will focus quality for the
money that is paid. In other words: value! You should be willing to pay more in
order to receive better quality. If the vendor is serious about the quality they
deliver, they won't have a problem specifying the quality details in the contract.
8. Vendor Management Best Practices :-

Whether you're a multimillion dollar company or a small business with a few


employees, here are some Vendor Management Best Practices that any size
business can use.