Procurement Operations

Lecture # 2
Date: 24th January 2016
 Types of Procurement Organizations
• Centralized Procurement

• Decentralized Procurement

• Hybrid Procurement
 Centralized Procurement
• Centralized purchasing means that all purchased items
for every division are centralized through one
department, or operating site.

• Centralized procurement staff are not concerned with

order placement, but instead with establishing
enterprise-wide contracts, managing relationships with
suppliers and providing processes for decentralized
transactions.

• End users place orders for low-dollar items using

contracts and priced catalogs set up by the centralized
procurement staff.
Advantages of Centralized Procurement
• Purchasing in larger quantities usually means it is
possible to obtain more attractive prices from
suppliers.

• Suppliers are often more attentive to larger orders,

which may give the purchaser more leverage.

• Permits a standardization of purchased products thus

ensuring a consistent quality throughout the
organization.

• As larger purchasing departments order for many

operational sites, this can allow companies more scope
for staff specialization.
Advantages of Centralized Procurement
• For example, consider a group concentrating on Pipe,
Valves and Fittings. If the group has the ability to have
individual members with specialist knowledge in a variety
of areas – one in valves, one in pipe, one in fittings, etc. - all
of which require up to date knowledge of changing market
conditions, this can lead to greater purchasing competence,
and lower material cost.

• Combining small orders reduces administrative costs, the

time taken to negotiate orders, billing time, customs
procedures where appropriate, and thus overall cost (TCO).

• Relationships with suppliers are simplified as there are

fewer diverse interfaces.

• Potential reduction of transportation costs if orders are

able to be shipped in larger quantities or full truckloads.
Disadvantages of Centralized Procurement

• Delays due to time taken to aggregate orders

• Delays due to having multiple authorization

stages in place

• Focus on corporate requirements and not on

local business units strategic needs

• Communication problems, misunderstandings

of the requirements and distance from users
 Decentralized Procurement
• With decentralized procurement it suggests
that every division within the organization
makes their own procurement decisions.
Advantages of Decentralized Procurement

• There is generally a much quicker response time than

using a centralized operation.

• Sometimes local purchasing is more responsive to the

needs of a particular operation.

• For example, the requirement for a certain ingredient

in a division of a food company located in France may
not be the same as the requirement for the same
ingredient in the equivalent company division, located
in Britain, because of differences in consumer tastes.
Advantages of Decentralized Procurement
• Reduces inventory costs since divisions only purchase the quantity
needed. In centralized purchasing larger quantities may be
purchased, which can involve additional storage capacity and capital
costs. Products may also be perishable and potentially incur
obsolescence costs.

• Risk is reduced when buying in smaller quantities.

• For example, a company, with six operating units, purchases a large

quantity of a consumable from the US for all the units. If the
exchange rate suddenly changes, or there is a problem with quality
or delivery dates, the risk to the purchasing company can be high.

• However, if all the operating companies have a decentralized

purchasing policy and individually purchase their required
quantities of the consumable from the UK, Australia, South Africa,
Brazil, Singapore, and the US, the risk arising from currency
exchange, quality, or delivery can be minimized.
 Disadvantages of Decentralized Procurement

• Unnecessary asset/resource duplication

• Lack of leverage in the market

• Local purchasing priorities only, little corporate

consideration and visibility of the group
purchasing picture, results in missing of improved
supply opportunities

• Lack of standardization of processes, forms and

procedures resulting in higher overhead cost to
the business
 Hybrid Procurement
• It is possible to establish a mixed purchasing
organization (hybrid of centralized and
decentralized) depending on the items to be
purchased.

• Small or rush orders, or those specific to an

individual site’s needs, are purchased locally
(decentralized).
 Hybrid Procurement
• High-cost capital equipment, high-volume
material, standardized products used for
several operating companies, goods with a
high technical content, or those purchased
overseas, are purchased by the head office
(centralized).
Procurement Operations
Procurement Process (Procure-to-Pay)

Purchase
Purchase
Requisition
Order

Notify
3-Way Vendor
Match
Payment
to Vendor
Vendor
Shipment
Invoice
Receipt
Goods
Receipt
 Steps in Procurement Process
• Needs identification / requirements planning

• Preparation and approval of Materials Requisition

• Supplier selection including determination of

sourcing options

• Creation of Purchase Orders

• Expediting and/or order tracking

 Defining Requirements
• In a company’s purchasing process model, the
first stage is usually defining the requirements
of the requisitioner.

• This is achieved either through a defined

scope of work in the case of services, or a
technical specification in the case of goods
and products.
 Defining Requirements
• Should a new purchasing agreement be necessary, it is
important that the requisitioner/contract user
thoroughly provide details of their requirements:

– An outlined Scope of Work/Specification

– Volume requested
– Locations required
– Quality requirements
– Delivery/timescale requirements
– Budget costs
– Existing quotations received
– Critical requirements
– Any sole source information
 Defining Requirements
• Ideally the engagement of key suppliers and
the input of their knowledge of supply
markets would be advantageous in developing
specifications and understanding materials
availability and other service considerations.

• It is widely acknowledged that early

involvement of suppliers is a key aspect of
optimal supply chain management,
particularly in times when agreements with
suppliers facilitate total cost reduction
opportunities.
 Create and Approve Requisition
• The Procure process requires that material
requisitions shall fully describe the material
requirements and shall include all information
required for processing.
Material Requisition Data Requirements
Material description
Timing and delivery
Financial
Contacts
Special instructions
 Technical specifications: e.g.,
drawings, datasheets, piping and
instrumentation diagrams / process
flow diagrams, material specifications
 Material stock code and description
 Model/Serial/Part number if required
 Unit of measure
 Quantity
 Whether substitutions are permitted
 Quality-related requirements:
inspection, material certifications,
positive material identification (PMI),
material safety data sheet (MSDS)
 Any known HES and licensing
requirements
 Material Group Code (MGC)
 Priority
 Delivery date / required on-site date
 Ship-to address
 Ultimate destination / location where
material will be used
 Company code and cost object (WBS,
cost center)
 Estimated value
 Clearly defined return policy
 Originator, technical and/or supplier
contact information.
 On behalf of ___
 Contact person at delivery location
 Delivery instructions
 Handling or preservation
requirements)
 Inventory and Surplus Utilization
• It is very important to note that in some cases,
challenging the validity of the initial
requirement with the requisitioner may also
be considered when cost savings
opportunities exist. (e.g. under conditions of
surplus or leveraging through existing
contracting arrangements).
 Inventory and Surplus Utilization
• The availability check of inventory, surplus, and idle
equipment is important for reducing unnecessary
expenditures.

• Using available material not only saves the business

unit money but it also helps to compress cycle time.

• If needed material is available in inventory, surplus, or

idle equipment, the requisition need not be
completed; instead, a material issue request (for items
in warehouse inventory) or material movement
request should be generated.
 Utilize Agreement or Select Supplier
• The requisitioner may or may not have
knowledge of contracts currently open in the
company’s system.

• Therefore, one of the first stages in Procurement

is to determine whether an existing contract can
be used to fulfill the requisitioners’ needs.

• This is a fundamental step towards reducing time

wasting in the procurement process, as it can
eliminate unnecessary work in bid list and tender
preparation for the Procurement department.
 Utilize Agreement or Select Supplier
• Existing contracts shall be reviewed to
identify whether they can be used to satisfy
the required material.

• If not then Procurement has to decide

sourcing strategy
 Award Basis
• Selecting the award basis involves choosing
the sourcing approach that will result in the
best overall value to your firm. The options
are:
– Competitive bid
– Competitive negotiation
– Non-competitive negotiation
 Competitive Bid
• A competitively bid award is one in which company
issues a tender package defining the work and the
terms and conditions under which it will be performed
to three or more potential suppliers, receives tender
responses, analyzes the responses to determine
comparative costs, and awards the Contract to the
supplier whose tender response represents the best
value to your company.

• Competitive bidding may be conducted as sealed bids

or non-sealed bids, whether via paper or an electronic
sourcing system.

• For competitive bidding, negotiation is not always

necessary.
 Competitive Negotiation
• A competitively negotiated award is one in which
company asks two or more potential suppliers to
submit tender responses to perform certain work
based on a tender package; analyzes the suppliers’
tender responses; negotiates with two or more of the
suppliers to arrive at an acceptable scope, terms and
compensation for the work; and awards the Contract
to the supplier whose negotiated offer represents the
best value to the company.

• The intent of the negotiations is to improve the terms

of the supplier’s tender response, so in contrast to
competitive bidding, competitive negotiated awards
may have significant improvement to price or other
terms during multiple rounds of negotiation after
suppliers’ tender responses are received.
 Non-Competitive Negotiation
• In a non-competitively negotiated award, only
one supplier submits a tender response to the
company’s tender package, and the company
analyzes the supplier’s tender response and
negotiates to arrive at a mutually acceptable
scope, terms and compensation, and awards the
Contract to that supplier.

• Two forms of non-competitive negotiation are:

– Sole-sourcing
– Single-sourcing
 Sole-sourcing
• Sole-sourcing – defined as a non-competitive
contracting and procurement process for a service or
material available only from one supplier.

• A common example involves replacement parts from

an original equipment manufacturer.
 Single-sourcing
• Single-sourcing – defined as a non-competitive
contracting and procurement process where a choice
is made for business reasons to utilize one of several
available suppliers for the service or material.

• Justification of award and special approval is needed.

 Bid Summary
RFQ Number:
Supplier #1 Name Supplier #2 Name S
Item Qty UOM Description Unit Cost Extended Cost Discount Lead Time Unit Cost Extended Cost Discount Lead Time Unit Cost
1 Description of Materials…. $0.00 $0.00 $0.00 $0.00
2 Description of Materials…. $0.00 $0.00 $0.00 $0.00
3 Description of Materials…. $0.00 $0.00 $0.00 $0.00
4 Description of Materials…. $0.00 $0.00 $0.00 $0.00
5 Description of Materials…. $0.00 $0.00 $0.00 $0.00
6 Description of Materials…. $0.00 $0.00 $0.00 $0.00
7 Description of Materials…. $0.00 $0.00 $0.00 $0.00
SUBTOTAL $0.00 $0.00
Freight Costs:
Certification Costs
Inspection Costs:
TOTAL COST $0.00 $0.00

Quote #:
Quotation Date:
Bid Validity:
Estimated delivery date/Lead time:
Discount:
Quoted Currency:
Exchange Rate:
Payment Terms
Terms of Delivery / Incoterms:
Ship via (mode of transportation):
Quotations Meets Technical Specifications:
Tax Considerations:
Additional Considerations to be determined by the Business Unit:

Recommended Supplier:
Reason for Selection:
Approved by (PRINT):
Approved by (SIGNATURE):
Date:
 Create Purchase Order
• Depending on the value of the goods/services, a
contract is signed with the vendor.

• If company’s contracting thresholds allow, then a

Purchase Order (PO) can be issued to the vendor
without signing a contract.

• In most ERP tools, PO is automatically generated once

the PR is fully approved.

• However, this luxury is not available in all available

tools

• PO should include the following information:

Purchase Order Data Requirements

Material description  Technical specifications: e.g., drawings, datasheets,

piping and instrumentation diagrams / process flow
diagrams, material specifications
 Material stock code and description
 Serial number if required
 Unit of measure
 Quantity
 Quality-related requirements: inspection, material
certifications, positive material identification (PMI),
material safety data sheet (MSDS), flag for hazardous
material. (if applicable)
 Any HES and licensing requirements (e.g., permit for
transportation of hazardous materials) (if applicable)
 Material Group Code (MGC)

Timing and delivery  Priority

 Promised delivery date
 Ship-to address/work location
 Ultimate destination / location where material will be
used
 Incoterms (FOB, FCA, etc.).
 Freight payment terms
 Transportation requirements, such as packing,
preservation during transit, or temporary storage

Legal and Compliance  Ts and Cs aligned with Legal requirements

 Any other legal requirements (e.g., export control
classification number or ECCN)

Financial  Agreed price

 Payment terms, including any progress payments
 Bill-to address
 Company code and cost object (WBS, cost center,
GL)
 Work order cross-reference, as applicable
 Tax considerations
 Any cancellation charges

Contacts  e.g., buyer as applicable, supplier contact as needed

Special instructions  Contact person at delivery location

 Delivery instructions
 Handling or preservation requirements)
 Expediting / Track Material
• Purchase Order Acknowledgement

– Business Units are required to establish and apply

criteria for determining when PO
acknowledgments are required.

– Order acknowledgements are intended to

minimize delivery delays (e.g., the purchase order
was not received by the supplier) and ensure that
suppliers confirm their ability to meet requested
dates.
 Expediting / Track Material
• Expediting

– Business units should define criteria to establish

the frequency of expediting and follow-up of
purchase requests, for example:
• Priority of request
• Type of material
• Supplier
• Lead time
 Goods Receipt
• Goods receipt is a goods movement activity in which
we accept goods into our system.

• If materials are delivered against a purchase order we

will reference that order and ERP can
– Retrieve data from the PO for us to verify: material,
quantity, Pricing and so on
– Update inventory G/L account automatically
– Update purchase order history with the receipt
– Update physical inventory
 Invoice Receipt
• Engage in 3-way match to validate the invoice.
– PO
– Good Receipt
– Invoice

• Post the invoice in ERP System

• Payment to the vendor

Thank you