Chapter 2

Become familiar with the
procurement process
CHAPTER 2 1
The three items purchased by a procurement
department included in a contract
 Three elements are purchased and necessary for

procurement department:
• Object
• Price
• Protection
2
2 Become familiar with the
procurement process
Learning Objectives
At the end of this chapter, you will be able to:
• Determine the purchases (object, price, protection) made by a company;

• Describe the procurement process;
• Explain the concept of procurement Mix (the four '' O '' (Object, Objective,
Organisation, Operations)
• Determine the benefits for the company;
• Apply leverage effect on purchases and on sales.
3
The three items purchased by a
procurement department-Object
• Production product: raw material (wood, steel, wheat, cotton, etc.), components, consumables
required for the processing stage;
• Distribution product: final product that is a first input of all distribution networks (computer, car,
machine, track, telephone, furniture, etc.);
• Service: services required for certain operations of the company (banking operations, consultation,
advertising slogan design, accounting audits, transport and logistics services etc.);
• Computer licence: right to use the functionalities of a software;
• Royalty fee: the amount paid for the use of an intellectual property (patent, trade-mark, industrial
design, copyright);
• Result: solution to a problem offered by a supplier;
• Insurance policy: protection of the company's assets.
4
procurement department-Price
Object’s Price
• Transfer value accepted by the supplier and the buyer

during the commercial exchange (identified in the
contract).
Other Prices • Transfer value with all complementary suppliers to make

the object available to the company (transport
companies, customs brokers, banks that will issue bank
documents required for an international transaction,
insurance companies if a deposit is required, etc.).
5
procurement department - Price
Acquisition Costs
• The value of the object at the time it is received by the
company.
 Acquisition costs=transfer value with (the main supplier + all
complementary suppliers)=Object’s price + Other prices
Internal Costs
• Example of internal costs : cost of preparing an order,
storage costs, shortage costs, costs of use.
 Total cost of object’s procurement = Internal costs + Acquisition costs

6
procurement department - Protection
• One of the main task of the buyer is ensure a maximal protection

for his company;
• Buyer identifies with the supplier the possible risks that may arise
and tries to introduce protective measures for each of them;
• There are two categories of risks :
1. Risks related to the object;
2. Risks related to the suppliers.
7
1. Risks related to the object : The most known object protection measures
• Insurance policy: protection that guarantees to the company the payment of an

agreed sum in case of an object’s damage is identified in advance (civil liability
insurance, insurance on products, cargo insurance, etc.);
• Caution : a clause explaining a guarantee commitment intended to mitigate a
possible failure of a supplier (a supplier who fails to deliver the product on time);
• Guarantee: a clause specifying the protection against the object’s dysfunctions
during a period of time;
• Modification during execution: clause allowing the buyer to ask for modifications on
what must be delivered between the moment a purchase order of an object is issued
and the moment of its delivery. 8
1. Risks related to the object : The most known object protection measures (Continued)
• Stoppage or suspension: a clause defining the instruction that will be given by the buyer
indicating to the supplier that the object is no longer required.
• Better price: a clause indicating that if a price offered to another customer of the supplier is
lower than that paid by the company, the latter is entitled to compensation for the
difference.
• Intellectual property: a clause that indicates the properties and use of what will be created
by one or other partners.
• Use of logos: clause indicating to the supplier the rules surrounding the use of the logos.
9
The three items purchased by a procurement
department included in a contract
Object Price Protection

• Product • Object’s price • Insurance policy
• Service • Prices (other • Caution
• IT licences suppliers) • Guarantee
• Royalty fees • Acquisition costs • Modification during
• Result • Internal costs execution
• Insurance policy • Total cost • Stoppage or
Suspension
• Best price
• Intellectual property
• Use of the logo
10
Procurement Process
Private sector Public sector
1. Expression of the need 1. Expression of the need

2. Procurement mix 2. Procurement mix
3. Market Exploration 3. Market Exploration
4. Negotiation 4. Call for tenders
5. Purchase decision 5. Negotiation with the lowest tenderer
6. Evaluation 6. Purchase decision
7. Evaluation
11
Procurement process-expression of the need
• Each company has different needs that it tries to fill;
• Expression of the need is triggered by the factors presented by

the following approaches:
1. Instinctive approach
2. Planned approach
3. Contractual approach
4. Provoked approach
12
Procurement process-expression of the need
Instinctive Contractual Provoked
Planned approach
approach approach approach
• the company has • the company • the company is • The company is
learned from plans and committed by alerted by a
experience to determines, contract to sudden internal
determine an depending on its perform a or external
event or to resources, when procurement event. For
recognize an to undertake the process. This may example,
instinctive process leading be the obligation equipment
reaction that to the purchase to purchase a failure leads to
triggers a of a product. certain volume of the desire to buy
procurement merchandise spare parts, a
process. It would during a given supplier presents
be the case for a period, perform a new product
lack of stock for a engine (opportunity) for
product having maintenance the company.
reached the after a certain
procurement number of hours
stage. of flight.
13
Procurement Mix
 Analyse the four variables (O) that summarize the request presented by the
company to acquire an object, price and protection.
• Object of procurement : What object do we procure?
• Objective of procurement : why do we procure this object?
• Organisation of procurement : Who is involved in the object procurement?
• Operation of procurement : How is the acquisition process made?
14
Procurement Mix-Object of procurement
1. The first "O": the object of procurement

• Complete description of the object.
specification Image Color

logo
properties
Known part by the user Performance
appearance Dimension
Resale value Update
Guarantee Price devaluation

Intellectual property
Unknown part by the user
Life cycle
Training Budget
Energy After-sale service

Waste of time
stock management
15
Procurement Mix-Object of procurement
1. The first "O": the object of procurement
• Object may take several forms (product, service, computer licence, right of use);
• For the buyer the object is the combination of seven variables;
• The buyer must create a balance between the six variables and the total cost.
quality
quantity
Time
Location Total Cost
Service
Source
16
Procurement Mix-Objective of procurement
2. The second "O": the objective of procurement

• Analyse and take in consideration the factors influencing the object procurement.
Managing Direction
Culture, values and mode

Mission Company’s balance
of operation
Procurement criteria Buyer Environmental factors’ analysis

Quantity Political and legal
Quality Demographic
Time Social
Location Technological
Service Cultural
Source Ecological
Cost Market and competition
17
• Managing direction : Influences how to negotiate and behave with suppliers,

it guides the procurement decisions from the three main guidelines (culture,
values, modes of operation);
• Culture, values and mode of operation : The culture of a company is

constituted by its history and a set of knowledge acquired in one or more
fields. In the same vein, the values of the company represent the moral,
intellectual and physical guidelines to be respected. The modes of operation
are the rules of conduct that each employee of the company must follow.
18
• Mission : The company also expects from the buyer to respect the mission and
the deontology of his profession. The mission takes the form of :
 Who we are ?
 Why do we exist?
 What are our products and services?
 Who are our customers ?
19
• Mission
Example : "In Canada, Walmart's mission is clear - we want to save

Canadians money to help them live better. We believe Canadians deserve
access to the quality products they need, at everyday low prices, in the
ways they want to shop for them. That's our commitment to you“.
20
• Company’s balance
 The company regroups a set of resources: material, human, financial,

assets, etc.
 Leaders must analyse each component of this set in order to establish a
balance between the current situation and the goals to achieve.
21
• Buyer : by defining the objective of procurement, the buyer allows the

company to realize a whole series of benefits. Among the most
popular expected benefits are : leverage, improved asset performance,
centralization of information, maintaining the company's competitive
position.
22
• Buyer : In the following section, we will cover only leverage effect:
 Purchasing’s Profit Leverage Effect (PLE) : shows the result on the

profit of an upward/increase or downward/decrease variation in the
purchase (price/volume).
 Leverage Effect on Sales (LES) : shows the result on the profit of an

increase/decrease in sales. It is made either by an increased/decrease
volume of sold units or by a higher/lower selling price or by a
combination of both options. 23

 Strategy of decrease of purchase costs
• Situation 1: reduction of purchase cost by 1%.
The turnover of a phones’ cases retailer is 900,000 $ annually. The unit selling price is 10$, while the distributor pays 7.5
$ per unit. The company's operating expenses attributable to proceeds totalled 125,000 $. The following table presents
the company's results based on these data. Unit Total Percentage Total cost
cost
Unit cost Total
Sales 10.00$ 900 000 $ - 1.00% 900 000 $
Sales 10.00$ 900 000 $
- Purchasing 7.5$ 675 000 $ 6 68 250 $
- Purchasing 7.5$ 675 000 $ cost
cost
= gross 2.5$ 225 000 $ 231 750 $
= gross profit 2.5$ 225 000 $ profit
- Operating 1.39$ 125 000 $
costs - Operating 1.39$ 125 000 $ 125 000
costs
= Net profit 1.11$ 100 000 $
= Net profit 1.11$ 100 000 $ +6.75% 106 750 $
 Net profit pass from 100 000 $ to 106,750 $ , an increase of 6 750 $ or 6.75%. 24

• Purchasing’s Profit-Leverage Effect (PLE) is calculated as follows:
%𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 var 𝑖𝑎𝑡𝑖𝑜𝑛

𝑃𝐿𝐸=
%𝑎𝑏𝑠𝑜𝑙𝑢𝑡 𝑒 𝑣𝑎𝑙𝑢𝑒𝑜𝑓 𝑝𝑢𝑟𝑐h 𝑎𝑠𝑒cos𝑡 var 𝑖𝑎𝑡𝑖𝑜𝑛
𝑝𝑜𝑠𝑡𝑒𝑟𝑖𝑜𝑟𝑖𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 −𝑝𝑟𝑖𝑜𝑟𝑖𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡

𝑥100
𝑝𝑟𝑖𝑜𝑟𝑖𝑛𝑒𝑡𝑝𝑟𝑜𝑓𝑖𝑡
𝑃𝐿𝐸= ¿
¿𝑝𝑜𝑠𝑡𝑒𝑟𝑖𝑜𝑟𝑖 𝑝𝑢𝑟𝑐h𝑎 se c𝑜𝑠𝑡 −𝑝𝑟𝑖𝑜𝑟𝑖 𝑝𝑢𝑟𝑐h𝑎 se c𝑜𝑠𝑡∨ 𝑥100¿
𝑝𝑢𝑟𝑐h𝑎 sec 𝑜𝑠𝑡 𝑎𝑝𝑟𝑖𝑜𝑟𝑖
25

106750 − 100000
𝑋 100
𝑃𝐿𝐸=
100000 6.75 %
668250 −675000 𝑃𝐿𝐸= =6.75 𝑡𝑖𝑚𝑒𝑠
¿ 𝑋 100∨¿ ¿ 1%
675000
 Each reduction of 1% of the purchase cost causes 6.75 % increase in net profit.
26

• Situation 2: reduction of purchasing cost by 5%
Unit cost Total Percentage Total cost
Sales 10.00$ 900 000 $ - 5.00% 900 000 $
- Purchasing 7.5$ 675 000 $ 641 250 $
cost
= gross profit 2.5$ 225 000 $ 258 750 $
- Operating 1.39$ 125 000 $ 125 000 $
costs
= Net profit 1.11$ 100 000 $ +33.75% 133 750 $
 Net profit increases from 100 000 $ to 133 750 $, an increase of 33 750 $ or 33.75%.
27

• Situation 2: reduction of purchasing cost by 5%

%𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 var 𝑖𝑎𝑡𝑖𝑜𝑛
𝑃𝐿𝐸=
%𝑎𝑏𝑠𝑜𝑙𝑢𝑡 𝑒 𝑣𝑎𝑙𝑢𝑒of 𝑝𝑢𝑟𝑐h𝑎 s e cos 𝑡 𝑣𝑎𝑟𝑖𝑎𝑡𝑖𝑜𝑛
1 33 750− 100000
𝑋 100
100000
𝑃𝐿𝐸=
6 41250− 675000
¿ 𝑋 100∨¿ ¿
675000
33 .75 %
𝑃𝐿 E= =6.75 𝑡𝑖𝑚𝑒𝑠
5%
 Each reduction by 5% of the purchase cost causes an increase of 33.75% in net profit.
28

 Strategy of sales increase.
• Situation 1: The following table illustrates the situation of a company that wants to increase its net
profit by adopting a growth strategy based on an increased volume (15%) of sold units rather than an
increase in selling prices.
Sales 10.00$ 900 000 $ +15.00% 1035 000 $
- Purchasing 7.50$ 675 000 $ 776 250 $
cost
= gross profit 2.50$ 225 000 $ 258 750 $
- Operating 1.39$ 125 000 $ 125 000 $
costs
= Net profit 1.11$ 100 000 $ +33.75% 133 750 $
 Net profit increases from 100 000 $ to 133 750 $, an increase of 33 750 $ or 33.75%.29

• Situation 1: The company increases its sales volume by 15 %.

• To calculate the Leverage effect on sales (LES), we use the following
formula :
% 𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 var 𝑖𝑎𝑡𝑖𝑜𝑛

𝐿𝐸𝑆=
% 𝑎𝑏𝑠𝑜𝑙𝑢𝑡 𝑒 𝑣𝑎𝑙𝑢𝑒of 𝑠𝑎𝑙𝑒𝑠𝑣𝑎𝑟𝑖𝑎𝑡𝑖𝑜𝑛
𝑝𝑜𝑠𝑡𝑒𝑟𝑖𝑜𝑟𝑖 net profit − 𝑝𝑟𝑖𝑜𝑟𝑖𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡

𝑥 100
𝑝𝑟𝑖𝑜𝑟𝑖𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡
𝐿𝐸𝑆= ¿
¿ 𝑝𝑜𝑠𝑡𝑒𝑟𝑖𝑜𝑟𝑖 𝑠𝑎𝑙𝑒𝑠 − priori sales∨ 𝑥 100 ¿
𝑝𝑟𝑖𝑜𝑟𝑖 𝑠𝑎𝑙𝑒𝑠
30

• Situation 1: The company increases its sales volume by 15 %.

• To calculate the Leverage effect on sales (LES), we use the following
formula :
LES 33 .75 %
𝐿𝐸𝑆= =2 . 25 𝑡𝑖𝑚𝑒𝑠
15 %
 This result shows that for each increase by 15% in sales, the net profit increases by 33.75%.
31

 Strategy of decrease of purchase costs and increase of operating costs.
• Situation 1: The table below shows a situation where the company can reduce its purchase cost by
5%, but she must increase its operating costs by 15,000 $.
Sales 10.00$ 900 000 $ -5.00% 900 000 $
- Purchasing 7.50$ 675 000 $ 641 250 $
cost
= gross profit 2.50$ 225 000 $ 258 750 $
- Operating 1.39$ 125 000 $ +12.00% 140 000 $

costs
= Net profit 1.11$ 100 000 $ 118 750 $
 This result shows that the received offer allows an increase of the net profit to 118 750$.
The company has an interest in investing. 32

 Strategy of decrease of purchase costs and increase of operating costs.
• Situation 1: Purchasing’s Profit-Leverage Effect (PLE) is calculated as follows:
PLE
PLE
PLE
 This result shows that for each decrease by 5% in purchase cost, which generates increase of
operating costs by 12% , the net profit will increase by 18.75% .
33

• Reading the environment
 Buyers conduct research and analysis because the marketplace is increasingly proposing to acquire
objects or to meet a need.
 Procurement analysis : complete, methodological, independent and periodic examination of the
internal and external factors:
 Political and legal factors (regulation, trade agreements, customs, labor laws)
 Demographic factors (consumption, trends)
 Social factors (immigration, behaviour, choice of society)
 Technological factors (equipment, energy)
 Cultural factors (history, peoples,)
 Ecological factors (vehicles, packaging, energy)
 Economic factors (exchange rates, interest rates, inflation, economic growth)
 Market size and competition (industry, e-commerce)
 This analysis is made in order to accept an action plan, obtain the greatest value from suppliers and
improve the productivity of the procurement department.
34
Procurement Mix-Organisation of procurement
3. The third "O": the organisation of procurement

• The organization of the procurement process has two aspects: the structure of the company and its
mode of operation.
• The structure of the company influences the procurement decision and reacts to it.
• Several person in the company may be called to intervene in the procurement decision :
 Initiator: the person who initiate the process by issuing the desire to buy an object
 Influencer: the person who directly or indirectly influences the final decision,
 Decision-maker: is the person who determines the different aspects of the decision by providing
answers to the questions, is it appropriate to buy ?, what? When? how much ? How?
 Purchaser: the person working on the procurement strategy
 Buyer: the person making the transaction
 User: the person who explores the functions of the acquired object
35
Procurement Mix-Operation of procurement
4. The fourth "O": the operation of procurement
• Consists in determining the method which will be applied for the acquisition of the
object;
• For the buyer, the operation is defined by the precise rules that allow anyone to
substitute him and obtain at all times the same result.
• It is the part of the buyer's work that he must delegate;
• The operations of acquisition process involves four steps:

 Purchase order
 revival
 Reception
 Payment and litigation
36
• Purchase order issuance : the issuance of an order form takes the form of a contract, an agreement
between two parties. An order form is a transaction document that contains the following information:
 General information about the parties, namely their name, address, date, etc.;
 Description of the object, i.e. the characteristics of the product, its dimensions, quantity, packaging,
specifications, etc. Since the supplier must not at any time be called to interpret one of the descriptive elements
of the object;
 Determination of prices, discounts, refunds, discounts, price protection clauses, indexation clauses, the chosen
currency;
 Determination of the particular commitments of each party, i.e terms of payment, delivery dates, conditions of
transport, liability, ownership of the goods during transport, guarantees, right of return, etc.;
 The supplier will accept the order and the conditions governing it by signing the order form or issuing an
acknowledgment of receipt;
 Nowadays, the electronic version is used more for sending purchase orders to the suppliers.
37
• Revival
 Allows the buyer to clarify the information contained in the order form.
 In order to avoid undue pressure on the supplier and to irritate him, it is preferable to restart it within a reasonable time
after the issuance of the purchase order.
• Reception
 Control of the goods at the warehouse from time to time discharges the various responsibilities mentioned in the
contract. To know :
 Transporter, when the receiver finds that the quantity and the outer packaging of each container are in conformity with
what the enterprise would receive;
 Supplier, when the product was subject of an inspection at the reception, in the laboratory or by the user.
• Payment
 Payment ends the purchase transaction;
 Each transaction should be treated separately;
38
 If an invoice is incorrect, it is better to contact the supplier to correct the situation.
Exercise 1
1. List objects that you believe are neither products nor services.
2. What are the purchased elements that are included in a contract ?
3. What are the six steps in the procurement process?
4. How can manifest the expression of the need corresponding to the first step
of the procurement process ?
5. Which section of the contract is devoted to the protection against product’s
dysfunctions?
6. Search mission, values and culture of a given company and explain how they
may contribute and influence the object’s procurement ?
7. What are the advantages related to describing the object of purchase ?
39
Synthesis
40

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Chapter 2

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Become familiar with the

 Three elements are purchased and necessary for

At the end of this chapter, you will be able to:

• Determine the purchases (object, price, protection) made by a company;

• Transfer value accepted by the supplier and the buyer

Other Prices • Transfer value with all complementary suppliers to make

 Total cost of object’s procurement = Internal costs + Acquisition costs

• One of the main task of the buyer is ensure a maximal protection

• Insurance policy: protection that guarantees to the company the payment of an

Object Price Protection

Private sector Public sector

1. Expression of the need 1. Expression of the need

• Each company has different needs that it tries to fill;

• Expression of the need is triggered by the factors presented by

• Object of procurement : What object do we procure?

• Objective of procurement : why do we procure this object?

• Organisation of procurement : Who is involved in the object procurement?

• Operation of procurement : How is the acquisition process made?

1. The first "O": the object of procurement

specification Image Color

Resale value Update

Guarantee Price devaluation

Energy After-sale service

2. The second "O": the objective of procurement

Culture, values and mode

Procurement criteria Buyer Environmental factors’ analysis

2. The second "O": the objective of procurement

• Managing direction : Influences how to negotiate and behave with suppliers,

• Culture, values and mode of operation : The culture of a company is

2. The second "O": the objective of procurement

2. The second "O": the objective of procurement

Example : "In Canada, Walmart's mission is clear - we want to save

2. The second "O": the objective of procurement

 The company regroups a set of resources: material, human, financial,

2. The second "O": the objective of procurement

• Buyer : by defining the objective of procurement, the buyer allows the

2. The second "O": the objective of procurement

• Buyer : In the following section, we will cover only leverage effect:

 Purchasing’s Profit Leverage Effect (PLE) : shows the result on the

 Leverage Effect on Sales (LES) : shows the result on the profit of an

2. The second "O": the objective of procurement

2. The second "O": the objective of procurement

• Situation 1: reduction of purchase cost by 1%.

• Purchasing’s Profit-Leverage Effect (PLE) is calculated as follows:

%𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 var 𝑖𝑎𝑡𝑖𝑜𝑛

𝑝𝑜𝑠𝑡𝑒𝑟𝑖𝑜𝑟𝑖𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 −𝑝𝑟𝑖𝑜𝑟𝑖𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡

2. The second "O": the objective of procurement

• Purchasing’s Profit-Leverage Effect (PLE) is calculated as follows:

2. The second "O": the objective of procurement

2. The second "O": the objective of procurement

• Situation 2: reduction of purchasing cost by 5%

2. The second "O": the objective of procurement

2. The second "O": the objective of procurement

• Situation 1: The company increases its sales volume by 15 %.

% 𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 var 𝑖𝑎𝑡𝑖𝑜𝑛

𝑝𝑜𝑠𝑡𝑒𝑟𝑖𝑜𝑟𝑖 net profit − 𝑝𝑟𝑖𝑜𝑟𝑖𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡

2. The second "O": the objective of procurement

• Situation 1: The company increases its sales volume by 15 %.

2. The second "O": the objective of procurement

= gross profit 2.50$ 225 000 $ 258 750 $

- Operating 1.39$ 125 000 $ +12.00% 140 000 $

2. The second "O": the objective of procurement

2. The second "O": the objective of procurement