PROCUREMENT MANAGEMENT

PSU 07101

Prepare frame work and objectives of procurement

management within the organization
1) Discuss key variables of procurement management
2) Enumerate primary task and responsibilities
3) Explain procurement as a profit Centre
 Key variables of Procurement Management
 Procurement is a function responsible for obtaining by purchase, lease, or any other legal
means; materials, equipment, components and services required by an undertaking for use
in production or resale. is the strategic process of sourcing a product or service.
concentrates on the strategic process of product or service sourcing e.g. identifying a specific
product or service requirement and the steps on how a business finds new or existing
suppliers, builds supplier relationships, measures cost savings, minimizes risk and is
predominately focused on value and return on investment.
 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
focuses on the transactional phase associated with buying products and services. This
process includes activities like ordering, expediting, receiving, and fulfilling payment.

The terms Procurement and Purchasing are often used interchangeably to mean the same
thing, but strictly purchasing is confined to the acquisition of tangible things, and procurement
is wider than purchasing as it covers the intangibles and is not confined to manufacturing, it
goes beyond to functions undertaken by private and public entity.
 Procurement vs. purchasing
This table represents the difference between procurement and purchasing:
Procurement
Activities related to acquiring goods, works and services
Steps that happen before, during, and after purchase
Used in a production environment (internal process)
Puts more importance on an item’s value than its cost
Refers to a set of tasks that spot and fulfill needs
Includes need recognition,sourcing, and contract closure
Follows a proactive approach to spot and fulfill needs
Relational–focuses on creating long-term vendor relationships
procurement management focuses on strategic, long-term
goals like gaining a competitive advantage or aligning itself
with corporate strategy or goals.
Purchasing
Functions associated with buying goods and services
The straightforward process of purchasing commodities
Used in a wholesale environment (external process)
Tends to focus more on the item’s price than its value
Refers to the specific task of committing expenditure
Includes ordering, expediting, and payment fulfillment
Follows a reactive approach to satisfy internal needs
Transactional–focuses on transactions than vendor relationships
Purchasing focuses on short-term goals such as fulfilling the
five rights in a transaction (right quality, right quantity, right
cost, right time, and right place),
Procurement process
Purchasing Process
 Procurement objectives
The main/overall objectives of procurement are to acquire materials of the right quality, in
the right quantity, at the right time, from the right source and at the right price also called the
5Rights of procurement.

Specific (traditional) objectives of procurement

 to supply an organization with a steady flow of materials and services to meet its needs

 to ensure continuity of supply by maintaining effective relationship with existing sources

and by developing other sources of supply either as alternatives to meet emerging or
planned needs.
 To buy efficiently and wisely, obtaining by ethical means the best value for every shilling
spent (value for money).
 To manage inventory so as to give the best possible service to users at low cost.

 To maintain sound cooperative relationships with other departments, providing

information and advice as necessary to ensure the effective operation of the organisation
as a whole.
 To develop staff, policies, procedures and organisation to ensure the achievement of the
objectives.
 Procurement as a Profit Centre
Previously, procurement was thought to be as a service function/unit/department
often subordinated to production or engineering departments in the manufacturing
sector, or to finance in the service or public sector. This was because it was
regarded as a cost centre, responsible for acquiring organization supplies only. It
was regarded as merely supportive function.

In recent years, due to various changes happening in the world, it has been realized
that procurement might contribute more effectively at a strategic as well as at an
operational level.
 Procurement as a Profit Centre
It has been transformed from the service function (whose aims were expressed in
the price, quality and delivery to strategic function (one which makes
contributions to sustainable competitive advantage of organizations.

by reducing the cost of ownership, cycle-time and improving time to market.

through cost reduction, quality management, product design and
development, relationship building etc all these are of strategic importance to
organization.
 Procurement Role in Corporate Planning
There are three distinct roles of procurement in corporate planning:
1) Procurement function implements competitive strategy;
2) Procurement function supports strategy of other functions and those of the
firm as a whole;
3) Procurement function drives strategy of the firm..

1. Implementing Competitive Strategy

Procurement function can be used to implement various organization strategies:
 If the organization has decided to pursue cost leadership strategy; purchasing
function can implement that strategy through pursuing cost minimization strategies
like bulk purchasing, EOQ, hand to mouth buying, JIT; etc.
 ensuring the right quality supplies are purchased for productions of various
organization products can implement product differentiation strategy.
Cont..
2. Supporting Strategy
Procurement can play a role in supporting the strategic goals and objectives of
other departments and the organization as a whole by:
• Sharing of information i.e. market trends, price, quality, delivery, forecast and
demand.
Example accounts department can not furnish effectively the suppliers’ claims
without information from purchasing function.
• Continued liaison with internal customers to achieve greater understanding of
requirements and integration timely, pro-active communication with internal
customers.

• Example: productions department needs the supply of different raw materials,

equipment and machines to be able to produce goods and services; so its goals
can be influenced negatively or positively by purchasing function..
3. Driving strategy
The third and most challenging role of purchasing and supply management
is the drive strategy by providing the firm with a long-term competitive
advantage. In this situation supply is the key driver of the firm’s strategy.
Examples of the strategies include early buyer/supplier involvement
in product design, supplier development, maintaining long term
relationships with organization suppliers and customers.