Procurement Management

Procurement
• Concerned with purchasing and arranging in-bound
movement of materials, parts, and/or finished
inventory from suppliers to manufacturing or
assembly plants , warehouses, or retail stores thereby
ensuring availability of materials/ assortments where
and when needed. -Inbound logistics.
• In a given marketing situation, manufacturers’
physical distribution is same as retailers’ procurement
operations.
Seven Rights of Purchasing
• obtaining the right material
• in the right quantity
• for delivery to the right place
• at the right time
• from the right supplier
• with the right service
• at the right price.

Dig a little deeper. - noticed that three of the rights focus on what you are buying—that is,
making sure you have the right stuff. Two rights focus on assuring availability, or on getting
that stuff where you need it when you need it. The final two rights—supplier and price—stand
on their own.
 Procurement Process Cycle
Planning for
Requisitions material(MRP/MPS)

Collation Finalise requirement Send Inquiries to Receive quotations

suppliers
Contracts
Prepare Purchase Finalise supplier Compare quotations
Order

Approve Purchase Print and despatch Receive Acknowledgement

Order/Delivery schedule Purchase Order

Print claims if any Check vs. challan Receive goods at desp.

locn

Print GRNS Inspect Goods Print Rejection Notes if any

Send GRN to Finance for payment

Finalise GRN and Print

Close Purchase Order

Procurement Performance Cycles

Sourcing Order placement and S

Expediting U
P
P
L
I
E
R
Receiving Transportation
S

Purchase Price Variance = (Actual Price – Budgeted Price) × Quantity Purchased

Purchase Requisitions

Purchase
Requisition
Approval
Process

Determine Process Requisition

Source

ASL
?
Supplier
RFQ P.O
release
 Request for Quotation
RFQ 123
Sup. A

RFQ 123

Planned Orders RFQ 123

Sup. B
Requisitions Item 124
Item 897
Mai
Contracts Item 345 l
Manual Fax
RFQ 123
Sup. C
Bidders
List
Sup. A
ASL
Sup. B
Sup. C
manual
 Request for Quotation contd.
Rank
Quotation Comparison based on: RFQ
Suppl.A
- predefined criteria Sup. C 1
(price, del.time, qty,
Vendor rating)
- user definable criteria
Quotation Order
RFQ
Suppl.B
Sup. A 2
Contract

Quotation
RFQ
Suppl.C
Sup. B 3
Purchase Contracts

Prices and discounts, terms and conditions

Call off against a Contract

Central Contract / local call off

 Central Purchase Contracts
Central Contract
Local copy of Supplier ABC Central Contracting
central contract Pur.Off.X
Item 1234 Updates

Off. A 1000 Contract

Contract Off. B 2000 Item 1234
Item Off. C 1250 2000 ea
Item 1234
1234
1000
1000 ea
ea
Ship-fr. Y
Ship-fr. Y
Ship-fr. X

Purchase Off. A Purchase Off. B

P.O Replic. of called / invoiced

Update of release
Schedule qty’s and amounts
called/inv.
qty and am.

Contract Purchase Off. C

Item 1234
1250 ea
Supplier ABC Ship-fr. Z
Ship-from X
 Leadtimes

pattern of
informing supplier shipping pattern

Buy-from transp. time inbound time

Internal L.T.

inspection / storage

Purchase Off. Supplier Mfg warehouse

shipping receiving
date date

leadtime component

calendar
Supplier Selection
Purchase Categories
 Strategic Sourcing Matrix
Purchasing & Supply Management
Issues to be addressed
• Every organisation engaged in procuring goods & services faces certain important
questions:
• Did the organisation fetch a good price for the procurement?
• Are the suppliers reliable?
• Will they deliver good quality at the right time?
• How efficient is the procurement process?
• How can an organisation benefit from its suppliers?
• Should the organisation develop new sources?
• Purchasing & Supply Management is a structured set of planning methodologies that
enables organisations to answer the above questions

Professional Purchasing is a Derived Demand. Your Colleagues Are Your Customers.

Structure Operations to Create Outstanding Value
Purchasing & Supply Management
Current Requirements

• Shift in Quality Management Methods

• Transition from Detection & Correction to Prevention & Elimination
• Changing Cost Structure
• Quick Response requirements
• Need to create Lean organisations
• Importance of New Product Development
Components of Expenditure

C o m p o n e n t a s a % o f T o ta l
(1989-94)
89-90 90-91 91-92 92-93 93-94

60

50

40

30

20

10

Source: Financial Performance of Companies, ICICI, Jan.1995. No. of Companies studied: 565.
 The Pros and Cons of Centralized and
Decentralized Purchasing
Centralized Structure Decentralized Structure
Advantages Advantages
• Aggregation of requirements • More responsive to local needs
• Economies of scale/learning • Better understanding of local requirements
• Negotiating leverage • Closer relationship with internal customers
• Standardization • More effective use of local suppliers
• Reduce Duplication of Efforts • Better risk assessment and response
• More effective supply strategy
• Fewer suppliers
• Closer relationships with key suppliers
• Talent development

Disadvantages Disadvantages
• Increased bureaucracy • Leads to duplication
• Reduced flexibility • Reduces leverage
• Slower than decentralized • More costly than centralized

Adapted from Magnan and Fawcett, 2006

 What should be measured?
Examples of purchasing performance indicators
Dimension Measurement aimed at C/I* Examples
Purchased materials Purchased materials cost control C Materials budgets, variance reports, price inflation, reports, purchasing turnover
prices and costs Purchasing cost saving and avoidances, impact on return and investment
Purchased materials cost reduction C

Product / quality of Early purchasing involvement in design and development I Time spent by purchasing on design and engineering projects, sampling reject
purchased materials Incoming inspection quality control and assurance rate (%)
C Reject rate (%), line reject rate (%), quality costs per supplier

Purchasing logistics and Monitoring requisitioning I/C Purchasing administration lead times, order backlog (per buyer), rush orders,
supply Delivery reliability (quality and quantity) delivery reliability index per supplier, materials shortages, inventory turnover
ratio, JIT deliveries

Purchasing staff and Training and motivation of purchasing staff I Time and workload analysis of purchasing department, purchasing budget,
organization Purchasing management quality purchasing and supply audit
Purchasing systems and procedures
Purchasing research

* Note: C = continuous and I = Incidental

 Supply Management
Alternative Approaches

• Multiple Sourcing (Traditional)

• Dealing with multiple suppliers every time an item is procured and obtaining some
gains from the competitive scenario that a supplier faces in the process
• Single Sourcing
• Developing long term collaborative relationship based on mutual trust and
dependability to obtain lower prices and several other benefits that were missed out
in a multiple sourcing model
Multiple Sourcing & Single Sourcing
A comparison
Deal with several suppliers for every Deal with only one supplier for every
item procured item, rarely with two

Set up competitive situation among the

suppliers when an item needs to be Multiple Avoid engaging in any conflicts with the
supplier
procured Sourcing
Engage in joint cost reduction exercises
Engage in price negotiation every time to obtain low cost inputs
an item is procured

Withhold information; Obtain better Exchange relevant business

price in the process information; Obtain better business
gains

Suppliers face uncertainty about future Suppliers informed of future business

business; Business uncertainty weakens Single prospects; Capacity and Technology
supplier position investments on account of certainty
Sourcing
Benefit from their weaknesses, Benefit from cooperation, mutual trust,
confusions and fears & dependability
Trends in Purchasing
Management
Long-term Contracts and Consolidation
Supply Base Reduction
Global Purchasing
Supplier Performance Measurement

Supplier Technology

Information Technology

Professionalism in Purchasing
 New Strategies

• Multi-source VS. Single source (Purchasing)

• JIT Supply VS. Regular supply) (Purchasing)
• Push system VS. Pull system
• Value- addition activities at Ware-houses
( Packing, Bulk breaking, Assembly, Kitting etc. )
• Third Party Service Providers
• SLA Based reward system
 Vendor Rating
Objective
On Time 50 % (automatic)
Deliveries
Delivery
Quality
70%
Approval 50 %

Overall
Subjective
Rating
Order 65 (manual)
Change % 30%
Support
Delivery
Change 35%