INTRODUCTION TO

PROCUREMENT
KDR DR HANI KALSOM BINTI HASHIM TLDM
Is Procurement = Purchasing ?
DEFINITION: Procurement

 Overarching function that describes the activities and processes to acquire goods and services.
 It involves the activities involved in establishing fundamental requirements, sourcing activities
such as market research and vendor evaluation and negotiation of contracts.
 Procurement refers to the process of identifying, shortlisting, selecting, and acquiring suitable
goods or services or works from a third-party vendor through a direct purchase, competitive
bidding, or tendering process while ensuring timely delivery of the right quality and quantity.
DEFINITION: Purchasing

 Purchasing is the set of functions associated with acquiring the goods

and services that an organization requires.
 Purchasing is a small subset of the broader procurement function.
 This process includes activities like ordering, expediting, receiving,
and fulfilling payment.
 PROCUREMENT VS PURCHASING

PROCUREMENT PURCHASING
Activities related to acquiring goods and services Functions associated with buying goods and services

Steps that happen before, during, and after purchase Straightforward process of purchasing commodities

Used in a production environment (internal process) Used in a wholesale environment (external process)

Puts more importance on an item’s value than its cost Tends to focus more on the item’s price than its value

Refers to a set of tasks that spot and fulfill needs Refers to the specific task of committing expenditure

Includes need recognition, sourcing, and contract closure Includes ordering, expediting, and payment fulfilment

Follows a proactive approach to spot and fulfill needs Follows a reactive approach to satisfy internal needs

Relational–focuses on creating long-term vendor relationships Transactional–focuses on transactions than vendor relationships
INTRODUCTION

 Procurement is the full range of activities related to purchasing goods, services

and works
 Procurement can range from contracting for an entire service to purchasing
small assets such as office equipment
 The procurement process does not end at the commissioning or PROCUREMENT
contract award stage, but spans the entire life cycle of the product or service
from inception and design through to contract management and disposal of any
redundant assets or the end of the useful life of an asset.
 It involves options, appraisal and the critical 'make or buy' decision.‘
 Procurement differs from purchasing in that purchasing merely reflects the act
of acquisition, while procurement encompasses more elements of the supply
chain ( logistics, transportation etc.).
 Proactive purchasing

Aslevel of attention paid to purchasing and supply increases, work tends to

become :
more strategic in emphasis
more activities of negotiating longer-term relationships,
more activities of supplier development and total cost reduction,
small proportion of their time on administrative and clerical activities
rather than ordering and replenishing routines.
E.g. BMW, IBM, Nissan, Ford, Baxi, Hewlett-Packard

7
SCOPE
1. Purchase Planning
2. Standards Determination
3. Specifications Development
4. Supplier Research, Selection and Development
5. Value Analysis
6. Financing
7. Price negotiation
8. Making the Purchase
9. Supply Contract Administration
10. Inventory Control And Stores
11. Cooperation with Other Departments

8
 Three steps for a successful procurement transformation:

 Establish a compelling case for change;

 A realistic and value-creating solution that supports the wider business vision and brings clarity of mind on the end
goal; and

 To execute the transformation based on changing behaviour, culture and mind-sets.

 Critical success factors – points to consider

 How well does my current strategy and organisations support the delivery of the organisation’s strategy and objectives?
 Is this delivering the value it could?

 Is purchasing a service activity?

 Previous thinking was that purchasing was a service function
 Now transformed to one that makes a contribution to sustainable competitive advantage
9
Factors of The changing role
 External organisational factors
 Leading-edge concepts
 Fewer but larger suppliers
 Increasing environmental awareness
 Competitor activity
 Advancing technology
 Professional Institution
 Innovation
 E-commerce

 Internal organisational factors

 The level and percentage of purchased goods and services
 Structural changes
 Performance management 10
Changing purchasing roles: Reactive and proactive buying
11
Differences between transactional and 12

‘the mutual relationship’

Procurement positioning/targeting
 Pareto’s principle applies => 80 percent of expenditure will be with 20 percent of suppliers

 Procurement positioning tool is used to determine suppliers with whom close relationships might best be sought.
 2 main limbs:
1. Risk
 Supply risk – risks of vulnerability of the business to unreliability of supply
 Technical risk – risks arising during and after installation
 Factors :-
 The reliability of the sources of supply;
 The availability of the commodity or service required;
 The degree of response by suppliers to the company’ requirements;
 The quality of the product in relation to the role which it is required to fulfil.
 Experience with the product
 Supply/demand balance
 Supply chain complexity
 Financial risk
 Safety and environmental risk
 Design maturity
13
 Manufacturing complexity
2. Profit potential
 The potential benefits:
 Reducing the total cost of ownership (TCO);
 Improving the quality of the procurement process;
 Improving the efficiency of the procurement process
 Earlier sales or production due to reduced cycle time

4 categories of product or services

 Critical items
 Bottleneck items
 Leverage items
 Routine items

14
 First table: Examples of factors determining risk
15
Second table: Examples of factors determining procurement potential
The ‘procurement positioning tool’
16
 Supplier preferencing
 Essential to consider the chosen supplier’s view of the purchaser,
known as ‘supplier preferencing’

 Development and key account

 If the supplier views the customer this way, it will not result in any
difficulty

 Nuisance and exploit

 If customer regards an item as leverage but supplier regards
business as unimportant because customer falls into the nuisance
or exploit category, competitive tenders or direct negotiations
are unlikely to produce the commercial advantage sought
 Where possible the customer should try to switch to a supplier to
whom its account is more attractive and move items out of the
critical and bottleneck categories
18
Supplier’s objectives

19
Total acquisition cost and total cost of ownership

 Total acquisition cost is more than simply price

 It is the total you actually pay for goods or services, including such things as tooling, duty, inventory-
carrying costs, inspection, remedy or rectification and so on

 Some organisations prefer the expression ‘total cost of ownership’ when referring to capital
goods or materials that will be retained for some time

 Things to consider for TAC and TCO:

 Specification
 Quantity and timing
 Market considerations
 Supply continuity
 Product development
 Standardisation of components 20
‘Price cost iceberg’

21
TYPES OF PURCHASING

 Types of purchasing :
 For resale – e.g retail product or merchandise
 To produce or assemble final products – e.g. raw materials ad components
 To manufacture or deliver products – e.g investment goods/machinery
 To support internal operations e.g. IT, facility products, legalfinancial,
account services
 For consumption

22
 23
Example of the scope of a procurement function: some goods and services necessary to operate a passenger aircraft
 THE DEVELOPMENT OF PROCUREMENT

1980-90
2000 2010-present
Back office function
Reduce total cost Best value decisions
Place order
More involved with Generalist to specialist
Lowest possible cost suppliers
Reactive Supply chain
management

24
The supply chain concept

 Also be called as ‘value stream’

 ‘Pipeline management’ is another expression with a similar meaning

 All of these terms reflect the fact that purchasing is no longer just
about ordering or buying, but has a strategic role, and is concerned
with the flow of materials from raw start to use and disposal

25
MEASUREMENT OF PURCHASING DEVELOPMENT
 Why?
 indication whether development is appropriate for the needs of the concern

 The evolution of purchasing development frameworks

 1983 - First attempt was undertaken by Jones
 whether or not organisations with well-developed purchasing functions were more effective
negotiators than those where purchasing was not developed
 1988 - Reck and Long produced a more involved four-stage purchasing development model
 1989 - Russel Syson saw purchasing divided into three principal areas of focus: transaction, commercial
and proactive
 1997 - Final framework by Jones known as Purchasing Profile Analysis suggested that purchasing has
five stages of measurable development which are:
 Infant
 Awakening
 Developing
 Mature 26

 Advanced