LOG 211: PROCUREMENT

PRINCIPLES
Seminar/Tutorial session by Madam Rebecca
TOPIC ONE: PROCUREMENT OVERVIEW
• Definition of procurement,
• Procurement objectives
• Procurement cycle
• Role of procurement in the supply chain
• Organizing procurement
• Procurement relationship with other departments
Seminar questions
• 1: What are the major differences between purchasing, procurement,
sourcing and supply chain management?
• 2: What would you consider to be procurement’s added value to a
company? What are the purchasing’s core and non core activities?
• 3: Discus the argument that the procurement function should create
strong links with other organization departments and indicate the
benefits that might arise from this approach
• 4. Explain how and in what areas purchasing can contribute to the
achievement of strategic objectives of the organization
Seminar questions cont….
• 5: A hybrid structure represents a combination of the Centralized
and Decentralized Purchasing structure. In what circumstances
would you consider appropriate to use a hybrid structure? What are
the advantages and disadvantages of using a hybrid purchasing
structure?
• 6.Identify and clearly describe a typical purchasing cycle of an
organization of your own choice. In each stage /step identify and
explain the roles played by various personnel/people.
• 7 : If the purchasing function is NOT effectively and efficiently
managed, what consequences will the organization face?
• 8. Select any organization of choice, thereafter demonstrate its supply
chain and link with the role of procurement.
Question one
What are the major differences between purchasing, procurement , sourcing
and supply chain management?
Answer
Purchasing is typically more focused on the short-term and is more
transactional. It involves tasks such as ordering, raising purchase orders,
receiving, and arranging payment. Purchasers are often looking to get items
for the best price rather than the best overall value.
Procurement is a more long-term, an all-inclusive approach to acquiring
goods and services for the business. It involves tasks such as sourcing
vendors, negotiating and closing contracts, and record keeping. Unlike
purchasing, procurement considers the overall value of the transaction, not
just the price. It’s focused on building mutually beneficial relationships with
suppliers.
Question one cont.….
• Supply chain management is the handling of the entire production
flow of a good or service; starting from the raw components all the
way to delivering the final product to the consumer. A company
creates a network of suppliers (“links” in the chain) that move the
product along from the suppliers of raw materials to those
organizations that deal directly with users.
• Sourcing in procurement is a process of assessing, selecting, and
managing suppliers to acquire the desired goods and services from
them. As the name suggests, sourcing focuses on creating sources
through which an organization can obtain its supplies. Thus, it enables
procurement and helps ensure the availability of necessary goods and
services for a company.
Question two:
What would you consider to be procurement’s added value to a
company? What are the purchasing’s core and non core activities?
Answer:
Procurement adds value by reducing costs, without the compromise of
quality, product failures, assuring the operational efficiency to enable
better quality without any additional cost with an aim to achieve the
best objectives, output at a reduced cost in the supply chain.
Value adding activities of Procurement function are as follows;
1. Efficient management of procurement activities to reduce transaction cost
that will enable cost reduction
2. Effective inventory management, to minimize acquiring and holding costs
this also will help in cost reduction
3. Effective contracts negotiation and management in order to reduce the
cost of inputs
4.Effective communication with user departments to enhance specifications,
so that business needs are fulfilled more efficiently and at lower cost
5. Selecting and managing suppliers, in order to improve the quality of
inputs, with consequent improvement in the quality of outputs
6. Working with key supply chain partners to eliminate wastes (non-value
adding activities) wherever they are found in the supply process: an
approach sometimes referred to as 'lean' supply.
What are the purchasing’s core and non core activities?
• Procurement’s core activities are all those activities that are involved
in the procurement cycle. These are strategic tasks that improve
customer value and drive profits. Example; need identification,
sourcing of suppliers, supplier selection, evaluation, award of
contracts etc.
• Non core Procurement activities are day to day tasks that have little
value and are not profit center. Example human resource activities,
record keeping, data processing, logistics etc.
Question three
Discus the argument that the procurement function should create strong
links with other organization departments and indicate the benefits that
might arise from this approach.
Part One:
Why should the procurement function create links with other organization
departments?
Answer
Procurement must coordinate activities with other internal business
functions so as to understand what other departments need, when they
need it and how and when the company can pay for it. Successful internal
purchasing relationships depend on clear communication between
purchasing staff and coworkers, who rely on the items they purchase. (See
the relationship between Procurement and Production, Finance and
Transport departments in your notes!)
Question three cont…
Part two:
Benefits that arise from Procurement forming relationships with other
departments.
• Provides a more integrated approach to delivering procurement solutions
• It encourages the sharing of risks and rewards.
• It promotes the adoption of the most efficient procedures and processes
• Working with the same people helps to further develop relationships, and
as each party becomes more comfortable with each other, they produce
better overall results. If the departments stay together on a long term
basis, the process becomes more familiar, all parties know what to expect,
and both the process and the end results can be continuously improved.
Question four:
Explain how and in what areas purchasing can contribute to the
achievement of strategic objectives of the organization.
Answer
1. Reduced cost: Effective procurement management will enable an
organization to lower costs by procuring supplies, services, and
contracts at the best price. Additionally, an effective purchasing process
will provide an organization better visibility into the organization’s
budget and how company funds are spent. This allows a business to
have the option of leveraging additional cash flow by extending
payment terms and helping business owners forecast for the future.
Question four cont…
2. Greater efficiency: When a company has a fully functional
procurement process, will result in quality goods and services being
delivered on time. This also helps businesses find solutions to
unforeseen circumstances such as labor shortage or surplus, natural
disasters, and economic instability.
3. Better suppliers/services providers/contractors: An effective
procurement process also enables an organization to distinguish
between effective vendors and underperforming vendors. As a result,
the company’s overall supply chain will be improved and there is a
possibility of being compensated by underachieving vendors who fail to
deliver goods and/or services within agreed upon parameters.
Question four cont…
4. Efficient procurement practices that can help make your organization
get ahead in the competition: Due to stiff competition that businesses
face, business owners seek any competitive edge they can achieve to
make their products or services better. It is not a question of simply
improving your operation; if you want your company to be ahead in the
competition, or at the very least, at par with competitors, you need to
transform your operation. An effective procurement process allows a
company to look for innovative products or services that they can offer
consumers. When this happens, the business may also be able to
secure exclusive deals with suppliers.
Question five
A hybrid structure represents a combination of the Centralized and
Decentralized Purchasing structure. In what circumstances would you
consider appropriate to use a hybrid structure? What are the
advantages and disadvantages of using a hybrid purchasing structure?
Answer:
What is a hybrid procurement structure?
Hybrid procurement combines nimble, decentralized purchasing with
centralized compliance in a way that optimizes for value and efficiency
in transaction.
What does nimble, decentralized purchasing mean? It simply means
that the quickness or agility of the decentralized procurement structure
to respond to needs without seeking the approval from the main office.
Question five cont…

What does centralized compliance mean? When procurement is carried

out in a centralized it follows strict organizational guidelines.
Advantages of hybrid procurement structure
• Better knowledge for local buyers; better knowledge of the whole
procurement system.
• Good relationship in the whole procurement function
• Economies obtained by procuring items which are specific in a certain
unit within the unit; by achieving economies of scale by delegating
some procurement activities to be done in various zones or centers.
Question five cont…

Disadvantages of hybrid procurement structure

• Delay in decision making
• Difficult to dictate error in the procurement process
• Conflict of authority between local and centralized buyers
Question six

Identify and clearly describe a typical purchasing cycle of an

organization of your own choice. In each stage /step identify and
explain the roles played by various personnel/people.
The class will refer to their notes for this question!
Question seven
If the purchasing function is NOT effectively and efficiently managed, what
consequences will the organization face?
Answer:
• Increased costs of purchases
• Consumption of funds that would have otherwise been used in other
activities
• Corruption and malpractices in the organization
• Stockout situations
• Loss of customers
• Poor coordination within departments in the organization
• Delays in delivery of goods, services and works
• Poor competition among suppliers, services providers and contractors
Question eight
Select any organization of choice, thereafter demonstrate its supply
chain and link with the role of procurement.
Answer:
In simple terms procurement can be defined as the sum total of effort
that goes into discovering and acquiring the supplies an organization
requires to function effectively. This includes need identification,
supplier sourcing, evaluation, contract award, contract management
and etc. Procurement is concerned with what happens from one end to
another .i.e. from the moment an organization determines a supply is
needed until the required infrastructure to deliver and keep delivering
it is made available.
Question eight cont….

Supply chain is the network of manufacturers, suppliers, logistics

providers, and others who work together to get a product into the
hands of a client. Not only do raw material providers, transportation
businesses, and wholesale warehouses make up the supply chain, but
so do jobs and services that help move the product to the end
consumer. These jobs are Procurement, Marketing, Packaging etc.
Question eight cont….

In the supply chain, the procurement process is important, because

includes business partners as: suppliers, manufacturers, distributors
and customers that use transactions to purchase, manufacture,
assemble, or distribute products and services to the customers.
End of today’s seminar!!
Thank you for listening