Procurement

& Logistics
Functions of A Procurement Department

LESSON 4
Content

• Procurement Departments
• Key Procurement Department Roles
• Setting Up A Procurement Department
• Procurement Department Objectives
• Effective Procurement Departments
Procurement Departments

• One of the crucial activities in any business organization is the procurement

department function which must be conducted effectively and efficiently. Today
more than ever business organizations are beginning to understand the potential that their
supply chains and procurement divisions contribute to their profitability.

• All aspects of a business organization's purchasing process are referred to as

procurement.
Procurement Departments

• The procurement department serves its customers internally by negotiating costs with the
vendors, preparing the contracts, and issuing vendor's purchase orders. The procurement
department functions play an important role in maintaining the financial health of the
company.

• Depending on the product or service, its common to carry over the procurement
department functions within the business organization. Thus, if a product is being
manufactured with raw materials, then the functions are managed by a person in the
procurement department.

• The main procurement department function is to centralize the efficiency and

compliance of the purchases done for the company for all three types of the
procurement: Direct Procurement, Indirect Procurement, and Service Procurement.
Procurement Departments

• The objectives of a world-class Procurement Department move far beyond the

traditional belief that procurement’s primary role is to obtain goods and services in
response to internal needs.

• To understand how this role is changing, we must understand what purchasing is all
about, starting with the primary objectives of a world-class purchasing organization.
Key Procurement Department Roles

Chief of Procurement:

• Leading a strong procurement team

• Manage annual organizational budgets
• Manage supplier relationships
• Develop an organization’s purchasing policies
• Source, Negotiate, and Review Supplier Contracts
• Manage supplier relationships
Key Procurement Department Roles

Director of Procurement

Maintaining knowledge of the market, citing current prices and fair rates for supplies.
Monitoring, reviewing, and analyzing bids and quotes with potential suppliers.
Monitoring, reviewing, and analyzing service agreements and contracts
Overseeing sources for purchasing supplies
Maintaining company budget and streamlining costs
Key Procurement Department Roles

Procurement manager

Identifying potential supplier sources

Conducting interviews with potential vendors
Negotiating good supplier agreements
Managing supplier and vendor contracts
Key Procurement Department Roles

Procurement analyst

Meeting with vendors

Testing products
Negotiating supply contracts
Creating cost reports
Key Procurement Department Roles

Procurement specialist

Supervise budget estimation and sourcing operations

Maintain excellent communication with all business stakeholders
Analyze offer and purchase bids and negotiate accordingly
Assist in asset management procedures when required
Key Procurement Department Roles

Contract specialist

Manage contract development through all lifecycle stages

Provide ongoing assistance to staff on contract development and compliance issues.
Evaluate records for retention in compliance with Board-approved policies
Key Procurement Department Roles

Legal counselor

Provide Legal Guidance

Conduct Legal Research
Draft Legal Correspondence
Ensure compliance with the law
Key Procurement Department Roles

Business controller

Analyzing and controlling the development of purchase prices

Analyzing and controlling the impact from cost down projects and R&D projects
Monthly reports and KPIs regarding procurement
Forecasting the impact with procurement activities and development in purchase prices
Prepare presentations for meetings
Setting Up A Procurement Department

Here are critical steps to Setting Up a Procurement Department:

• Start with procurement policies.

• Create the procurement workflow.
• Don't forget suppliers.
• Implement a Procurement platform
Procurement Department Objectives

OBJECTIVE 1 – Support Operational Requirements

OBJECTIVE 2 – Manage the Procurement Process and the Supply Base Efficiently and
Effectively

OBJECTIVE 3 – Develop Strong Relationships with Other Functional Groups

OBJECTIVE 4 – Develop Integrated Purchasing Strategies That Support Organizational

Strategies, Goals and objectives
Procurement Department Objectives

OBJECTIVE 1 – Support Operational Requirements

Supporting Operation Requirements requires procurement to:

• Understand business requirements

• Buy products and services

 At the right price

 From the right source
 At the right specification that meets users needs
 In the right quantity
 For delivery at the right time
Procurement Department Objectives

Internal Customers of procurement department include:

• Manufacturing
• Physical distribution centers
• Engineering and technical groups
• Research and development
• Information technology
• Transportation and other services
Procurement Department Objectives

OBJECTIVE 2: Manage the Procurement Process and the Supply Base

Efficiently and Effectively

To manage the procurement process and supply base efficiently and effectively the
procurement department must follow the following key steps:

Identify opportunities
Manage internal operations
Achieve objectives
Procurement Department Objectives

Identify opportunities where the procurement team adds true value:

• Evaluation and Selection of Suppliers:

All purchases should go through the approved procurement processes

Engineering and other functional inputs are part of this process
Sales personnel should not be allowed to enter contractual agreements without
procurement’s involvement
Increasing use of sourcing teams
Review of specifications or statement of work
Procurement Department Objectives

Review the requirements for the material or service being provided

May be able to suggest alternative standardized materials that can save the
organization money
Periodic review of requisitions can allow greater leveraging of requirements
Acting as the primary contact with supplier
Determining the method of awarding contracts
Managing the supply base
Ensuring Current suppliers are competitive
Identification of new potential suppliers and develop relationships
Procurement Department Objectives

Manage its internal operations efficiently and effectively, including:

Management of procurement staff

Developing and maintenance of policies and processes
Introducing and leveraging appropriate technology and systems
Defining procurement strategy and structure
Developing plans and measures
Providing procurement leadership to the organization
Providing professional training and growth opportunities for employees
Procurement Department Objectives

Achieve objectives through :

Leadership of procurement for the organization

Sourcing management
Ownership and accountability for sourcing processes
Communication of purpose, process and pay off
Collaboration and partnering
Teamwork
Procurement Department Objectives

OBJECTIVE 3: Develop Strong Relationships with Other Functional Groups

• Procurement Department support personnel will be increasingly required to co-

locate customers to achieve greater understanding of requirements and
integration as shown in the diagram below:
Procurement Department Objectives

OBJECTIVE 4: Support Organizational Goals and Objectives

• Develop integrated purchasing strategies that support the business organization’s

strategies.

• Effective purchasing strategies that involve:

Monitoring supply markets and trends (e.g., material price increases, shortages,
changes in suppliers) and interpreting the impact of these trends on company
strategies
Identifying the critical materials and services required to support company
strategies in key performance areas, particularly during new product development
Procurement Department Objectives

Developing supply options and contingency plans that support company plans
Supporting the organization’s need for a diverse and globally competitive supply
base
 Effective Procurement Departments

• Effective procurement department helps to streamline processes, reduce raw material

prices and costs and identify better sources of supply, thus improving organizational
efficiency.
Effective Procurement Departments

1. Sourcing
• One of the most important procurement department functions is to purchase
goods, services or works from external sources. It plays a vital part in the company’s
overall business strategy as it requires strategic planning to acquire these things at the
best possible cost. It should procure from the right source at the right time the right quality
of materials in the right quantity.

• It starts by qualifying suppliers before initiating negotiations. The collection and

monitoring of supplier data are streamlined to ensure that suppliers comply with
corporate policies. Important supplier qualification information is collected and supplier
proposals are compiled and compared. Best suppliers are selected by assessing supplier
qualifications, risk factors, and policy compliance. One of the significant factors for
controlling costs is finding the best and reliable vendor.
Effective Procurement Departments

2. Negotiation
• Procurement department professionals with their skills to negotiate should be able
to negotiate the best deal for the company. They should procure the highest quality
product from the suppliers at the best possible price. This function is very vital for the
business organization`s profitability because if purchasing costs are high, a business
organization can end up spending well over half of its revenue in this area thereby
affecting its bottom line.

• Business Organizations have realized that if the purchasing decisions are effective
then cost savings can be achieved. Even the slightest decrease in purchasing costs
can make a significant impact.
Effective Procurement Departments

3. Contracting
• Procurement department professionals after evaluating supplier bids based on price,
quality and value, offer the contract award to the best supplier by taking into consideration
the unique business requirements of the organization which is in accordance with
company standards, industry regulations and client expectations.

• Tips to Streamline Redlining and Negotiating in Contracts are shown in the diagram
below:
Effective Procurement Departments

4. Monitoring of suppliers’ performance

• Procurement department professionals must monitor contracts to ensure suppliers

perform well in terms of delivery of goods and pricing. It should generate and track
purchase orders. It should see that there is timely delivery of materials from vendors and
are of expected quality, otherwise, it would affect the complete production chain.

• The promised deliveries by the vendors should be tracked to see if the invoices are
approved and paid in a timely manner. It must also keep track of all goods and services
ordered and received and maintain inventory records accurately along with details on
performance, delivery, and pricing. Thus, this function is of the utmost importance across
all enterprises.
Effective Procurement Departments

5. Compliance with business protocols

• The procurement department must ensure that it is meeting with all company objectives
and compliance requirements.

• Example: In an organization, if members or staff is requesting to purchase things like

supplies, stationery or computers, then it has to look into the business protocols for
purchase and budget approval and ensure whether the items purchased are in
compliance with the business organization’s purchasing policy.
Effective Procurement Departments

6. Leveraging technology to help in procurement functions

A recent case study research concerning the challenges facing procurement

department functions and responsibilities in an organization established, 48% cited
on lack of professionally qualified and experienced employees and 28% cited on
technology change. From the findings, it shows that an organization should learn to adapt
to any technology change as technology improves the efficiency of the organization.
Effective Procurement Departments

7. Collaboration with Other Departments

• All departments of a business organization are generally interconnected, wherein a task is

achieved with the help of all contributing teams. In the case of the procurement
department, the procurement manager needs to understand the finance & budget
controls, legal formalities, inventory level, and production capacity of the company
before making an informed decision about the prospective vendor.

• Proactive collaboration with other departments on the part of the procurement

department team is essential for the seamless functioning of the company.
Effective Procurement Departments

8. Forecasting the Procurement Trends

• Although forecasting does not fall within the scope of the procurement department team’s
activities, the importance of learning, and understanding the trends in purchases has
increased in recent years.

• By collaborating with the sales department and gaining insight into the sales volume, the
procurement department must be able to forecast the rise or fall in demand for products,
which will help in cutting costs or increasing the expenditure level at the right time,
thereby profiting the business organization.
Effective Procurement Departments

9. Effective Monitoring of the Procurement Department Team

• A team is as efficient as the management that monitors it. Procurement Department

is one of the crucial expenses that a business organization invests in that determines the
profit or loss for a period. Procuring goods over the budget level or under the fixed budget
can result in a loss.

• Hence, the management must monitor the functions of procurement department, where
every purchase and transaction is intensively controlled. It is also essential to ensure
there are not any malpractices within the team and there are no clerical errors that could
tamper the reputation of the business organization.
Effective Procurement Departments

10. Competitor Analysis

• The procurement department team must stay abreast of the vendor management by
constantly analyzing the competitors of your vendors. Competitor analysis enables the
team to understand the market scenario, quality, and price details.

• Procuring the best items at a competitive price is the ultimate objective of the
procurement department and it could be done with an effective analysis of the market
competitions.
Case Study 1
Toyota

Procurement Policy

Toyota Industries Corporation is involved in a wide range of business fields from textile
machinery to automotive related fields suchInsert
as engines,
text car air-compressors, and vehicles, to
materials handling equipment such as forklift trucks, and the electronics that go into these
products, and even to foundry parts.

Our company procures the necessary parts, materials, and equipment for these many
different business fields from suppliers all over the world. Along with requiring our suppliers to
provide quality items at a low price and in a timely manner, we cooperate with them to
promote environmental preservation and meet the other demands of society. In addition we
take a long term view toward our relationships with suppliers with an aim to realize an
amicable relationship of mutual prosperity based on fair business practices.
Case Study 1

Fair Business Transactions Based on an Open Door Policy

We have an open and fair entry process that allows all potential suppliers, regardless of
nationality, size, and experience, the sameInsert text
chance to offer us their products or services.

We select our business partners based on economic reasons such as the quality, price,
and volume of their products, as well as on their adherence to delivery times.

In addition, we also consider comprehensively things like safety, environmental

awareness, company stability, technological development ability, and compliance.
Case Study 1

Amicable Relationship of Mutual Benefit Based on Mutual Trust

At Toyota Industries Corporation we work hard to realize an amicable relation of mutual

benefit with our suppliers based on mutual
Inserttrust.
text

We also believe that it is important to promote friendly communication with our

suppliers by means of our procurement activities.

Reducing Environmental Impact through Environmentally Preferable Purchasing

In order to create environmentally-friendly products we aim to procure parts, materials,

and equipment that have low environmental impact from suppliers that always give
sufficient consideration to the environment.
Case Study 1

Localization of Business Based on Good Corporate Citizenship

As a company that undertakes local production overseas, we promote procurement from local
suppliers in order to contribute to the local community.
Insert text

Obeying the Law

It is Toyota Industries' policy to strictly abide by both the letter and spirit of laws and
regulations and to also carefully handle and protect our partner's secret corporate
information.
Q&A Session