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CONTEXT OF PROCUREMENT
Procurement
Presented by:
Mohammad Mostofa Kamal

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Procurement and Purchasing CONCEPT

Procurement involves the acquisition of supplies or
 Procurement is a wider term than purchasing inputs for organization use as conversion,
 Procurement embraces a broader process than consumption or resale.
‘purchasing’
 Procurement reflects the more proactive, relational, Basic objective is to ensure right quality, quantity,
strategic and integrated role of the function in modern place, time and price (5Rs In Procurement).
organisations
 Procurement deals with the sourcing activities,
Basic steps are receiving requisition, collecting
negotiation and strategic selection of goods and services
offer, negotiation, placing order, receiving goods
that are usually of importance to an organization.
and making payment
Purchasing is the process of how goods and services are
ordered.

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Supply Chain Process

Impact of Procurement SPECIFYING REQUIREMENT AND SUPPLY PLANNING

SUPPLY MARKET ANALYSIS

DEVELOPING SUPPLY STRATEGIES

APPRAISING & SHORT-LISTING SUPPLIERS

OBTAINING & EVALUATING OFFERS

NEGOTIATION

CONTRACT PREPARATION

CONTRACT MANAGEMENT

LOGISTICS MANAGEMENT

Source:
Jean-Louis Moreau Procurement Consultant INVENTORY MANAGEMENT 6

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Value Can Be Categorised as:

Key Principles in Procurement
• Use Value Value can be increased by
 Transparency: Subscribe to an open and transparent procurement regime • Esteem Value ♦ Providing the same function at a lower
across all stages of the procurement lifecycle. The procurement procedures • Exchange Value cost
♦ Increasing the scope/quality for the same
and evaluation criteria for each procurement are made known to suppliers. • Reuse Value
cost
• Loss Value
 Open and Fair Competition : An open and competitive environment • Cost Value ♦ Increasing the function more than the
increase in cost
encourages suppliers to give their best offers. Suppliers are given equitable
access opportunities and compete on a level playing field.
 Value for Money: Organizations should procure from sources that can best Definition of Value----------
Function/Cost
meet its requirements and which offer the best value. Value for money is
derived from the optimal balance of benefits and costs on the basis of total
cost of ownership. As such, value for money does not necessarily mean that
a tender must be awarded to the lowest bidder. ◙ The function must be defined correctly and clearly

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Life-cycle cost =
Costs of Acquisition
Design Specify Request
Costs of Ownership
Install Commis Operate
-sion
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Characteristics of Goods & Services
Goods
Tangible (real, concrete)
Goods are manufactured
Tend to be capital (equipment)-
intensive
Can be stored (inventoried)
Low customer contact
Minimal participation by the
customer
Delay between production and
consumption
Productivity easily determined
Often similar and mass produced
Often patented
Quality generally easy to measure
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What does the procurement function do?
Cost of Acquisition
+ Cost of Ownership  Supply market monitoring
 Supplier evaluation and selection
 Processing procurement or stock replenishment requests
Purchase Receive Store Pay for  Providing input to the preparation of specifications
 Negotiating, buying and developing contracts
 Expediting or contract management
Maintain Service Upgrade Dispose
 Clerical and administrative tasks
Types of requirements
Services
Intangible (non-material, abstract)
Services are provided or delivered
Tend to be labour-intensive
 Operational requirements (needed to run
Cannot be stored day-to-day business)
High customer contact
Customer often participates
 Capital requirements
Production and consumption often
simultaneous  Production requirements (directly related
Productivity can be difficult to to producing the goods or services)
determine
 Non-production requirements
Can be unique
Rarely patented
Quality more difficult to measure 12
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Independent & Dependent Demand

Typical Proportion of Costs
Independent demand is the marketplace
demand for a product that is beyond the
control of the organization and is not related
to the demand for another product.

Dependent demand is the demand for a

product that is reliant upon the demand for
another product and that is under the control
of the organization.

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DIRECT AND INDIRECT PROCUREMENT Indirect Materials

ORM
(Operating Resource Management)
Direct procurement refers to the items procured for resale or
 Goods and services for the day-to-day
incorporation in goods for resale(Relates to primary revenue items) running of the organisation
Indirect procurement refers to ancillary items including MRO supplies,  Example: office equipment, stationery,
services and other operating expenses(Relates to support activities) business travel, cleaning
 Similar requirements across all industries
IMPACT:
 Easily described and catalogued
 Direct procurement is related to production and quality of production items
 Ordered regularly
 Direct procurement items normally held in stock to ensure the smooth  Low value per item
production Not listed as inventory
 
 Direct procurement items are normally related with more collaborative  Many buyers throughout company
supplier  Little control over purchasing
MRO
(Maintenance Repair and Operations)
 Mission critical items for the upkeep
and running of business operations
 Example: spare parts for machinery;
maintenance contract for IT systems
 Vary from industry to industry and
company to company
 Complex, detailed specifications
 Infrequent purchases
Significant value
 Listed as inventory
 Specialised buying
 Carefully monitored and controlled

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Supply Positioning Model: 4 types of purchase items

COMMODITY PROCUREMENT
H
Items that occur in nature like cotton, sugar, coal, Maize, Wheat, Soybean etc.
 They are unequally produced/distributed Geographically: Require International
sourcing, complex set of cost & risk, (exchange rate, transportation, Legal, cultural)
 Subject to significant and unexpected fluctuation of price (example onion) M
Impact/ Bottleneck Critical
 Depends on seasonality/Weather and embargo import/export supply
 Perishability also demands huge attn. opportunity/
risk rating Routine Leverage
L
PARTICIPANTES IN THE COMODITY MKT
 Producers: Farmers interested to get good selling price
 Buyers: Are interested for quality price
 Traders: work as buyer and seller to make a commission N
80% of items = 20% of value 20% of items = 80% of value
 Speculators: Aim to get good profit by stock business
Expenditure

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The Kraljic matrix

VALUE-ADDED

Inputs Transformation Outputs

 Capital  Processing  Goods
 Intellect  Transporting
 Services
 Management  Storing
Staff  Exchanging
 Land  Communicating
 Raw Materials &  Inspecting
Energy
 Components Requirements
Requirements
 Facilities & & Feedback
& Feedback
Equipment
 Information
 Time
OPERATIONS

Requirements CONTROL
& Feedback

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Other General Task/Objectives of Procurement The five rights (Rs) of procurement

 Internal customer service-To other functions/depts
 Risk management- Of inbound/outbound logistics
 Cost control and reduction/avoidance- By Efficient (Doing things
right)/effective (Doing the right things) performance
 Relationship management-Between org and outside stake holders
 Quality: Obtaining goods which are of satisfactory quality and fit for their
purpose
 Quantity: Obtaining goods in sufficient quantity to meet demand and
maintain service levels while minimising excess stock holding
 Place: Having goods delivered to the appropriate delivery point, packaged
and transported in such a way as to secure their safe arrival in good
condition
 Time: Securing delivery of goods at the right time to meet demand, but not
so early as to incur unnecessary inventory costs
 Price:
Securing all of the above at a price which is reasonable, fair,
competitive and affordable

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Factors in buyers’ decisions on price

The 5 forces in the Supply Market
TOTAL COST OF OWNERSHIP
2. Likelihood of


 Pre Acquisition Cost The price-cost iceberg new suppliers

 Acquisition Cost entering the
market
 Operating Cost
 Maint Cost
4. Bargaining
 Downtime Cost
power of 1. Competition 5. Bargaining
 End Of life Cost suppliers of amongst suppliers power of Buyer’s
inputs

3. Availability of
New/substitute
product or services
in the market

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Prices & costs

Assess price
Understanding the factors influencing Price
Cost-based pricing
Cost of Production or
Demand-based pricing
PRICE

Competition & Market

Value to the Customer
Factors

When to use which, & why?

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A generic procurement cycle

THE Procurement Process

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Procurement process stages

 Pre contract award:  Post contract award:

 Identifying the requirements or  Contract administration &
needs review

 Procurement planning  Expediting

 Variations & change control
 Market survey and engagement



Developing Supply Strategies
Appraising and selecting suppliers



Payment
Administration at & beyond THANKS
contract completion
 Receipt and evaluating offers
 Ongoing asset management
 Negotiating
 Contract reviews/Post-
 Contact award contract ‘lesson’ learning

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