Procurement:

Procurement is the acquisition of goods, services or works from an outside external source. It is
favorable that the goods, services or works are appropriate and that they are procured at the best
possible cost to meet the needs of the purchaser in terms of quality and quantity, time, and location.
Corporations and public bodies often define processes intended to promote fair and open competition
for their business while minimizing exposure to fraud and collusion.

Procurement is the process of purchasing goods or services. There are many different routes by which
the design and construction of a building can be procured. The selected procurement route should
follow a strategy which fits the long-term objectives of the client's business plan. Considerations are
likely to include:

Speed.
Cost.
Quality.
Specific project constraints.
Risk.
Asset ownership.
Financing.

In the public sector:

Public sector organizations use procurement for contracts to achieve benefits such as increased
efficiency and cost savings (faster and cheaper) in government procurement and improved transparency
(to reduce corruption) in procurement services. E-procurement in the public sector has seen rapid
growth in recent years.

Procurement in the public sector is emerging internationally. Hence, initiatives have been implemented
in Singapore, UK, USA, Malaysia, Australia and European Union. Procurement projects are often part of
the country’s larger e-Government efforts to better serve its citizens and businesses in the digital
economy. For example, Singapore’s GeBIZ was implemented as one of the programmes under its e-
Government master plan.

E-procurement systems:
An e-procurement system manages tenders through a web site. This can be accessed anywhere globally
and has greatly improved the accessibility of tenders. An example is the System for Acquisition
Management (SAM), which on July 30, 2013 combined information from the former Central Contractor
Registration and Online Representations and Certifications Application (ORCA), in the United States.
Types of Procurement:
Single procurement

Single procurement is triggered by a specific customer order and initiates the supplier’s process of
production.

Stock procurement

Stock procurement means that goods are shipped to stock in periodically defined terms without any
specific order of a customer. The important premise is, that the demand can be forecasted. When
finishing the production process, the goods will be stocked until the next order is received from the
customer. One way of applying stock procurement by the customer is to define the minimum stock
level. If the stock level falls below this defined limit, the procurement process is initiated. This type of
procurement offers high flexibility to the customers, but the procurement costs tend to be higher.

Vendor Managed Inventory (VMI)

By using the VMI-concept the supplier is responsible for the stock at the customers company. A crucial
premise to achieve optimized processes, lower costs and high flexibility is a close network with the
supplier.

Just in time procurement

This integrated concept is based on the production system of Toyota / Japan. Toyota Just-in-Time-
System

Just in time procurement is characterized by low stock levels at the customers’ company. This leads to a
reduction of costs and to lean and balanced processes. The entrepreneurial appliance of just in time
delivery only makes sense, if the suppliers' place is in the maximum radius around 100 km to the
customers’ place. In times of global sourcing, logistic centers are therefore established in strategic areas
close to the customer.

For a successful implementation of just in time procurement it is very important to install and build up
an operating, close network. Therefore processes with the suppliers, communication, transport and
logistics as well as quality management are crucial processes. These processes need to be perfectly
coordinated.

Just in sequence procurement

This concept is based on the just in time concept. It is extended by the supply of goods in the required
sequence at a defined time. This leads to a very efficient and lean way of procurement.

Ship to line

The goods are directly delivered from the last value added process of the supplier to the first value
added process of the customer. That means that only few logistical steps are needed.
 Direct procurement and indirect procurement

TYPES

Direct procurement Indirect procurement

Capital
Raw material and Maintenance, repair, and
goods and
production goods operating supplies
services

Quantity Large Low Low

Frequency High Relatively high Low

Value Industry specific Low High

FEATURES
Nature Operational Tactical Strategic

Crude oil
Crude oil in
Examples Lubricants, spare parts storage
petroleum industry
facilities

Procurement vs. Acquisition

The US Defense Acquisition University (DAU) defines procurement as the act of buying goods and
services for the government.

DAU defines acquisition as the conceptualization, initiation, design, development, test, contracting,
production, deployment, Logistics Support (LS), modification, and disposal of weapons and other
systems, supplies, or services (including construction) to satisfy Department of Defense needs, intended
for use in or in support of military missions.

Acquisition is therefore a much wider concept than procurement, covering the whole life cycle of
acquired systems. Multiple acquisition models exist, one of which is provided in the following section.

Acquisition process

The revised acquisition process for major systems in industry and defense is shown in the next figure.
The process is defined by a series of phases during which technology is defined and matured into viable
concepts, which are subsequently developed and readied for production, after which the systems
produced are supported in the field.
Model of the Acquisition Process

The process allows for a given system to enter the process at any of the development phases. For
example, a system using unproven technology would enter at the beginning stages of the process and
would proceed through a lengthy period of technology maturation, while a system based on mature and
proven technologies might enter directly into engineering development or, conceivably, even
production

Concept and Technology Development: is intended to explore alternative concepts based on

assessments of operational needs, technology readiness, risk, and affordability.

Concept and Technology Development phase begins with concept exploration. During this stage,
concept studies are undertaken to define alternative concepts and to provide information about
capability and risk that would permit an objective comparison of competing concepts.

System Development and Demonstration phase. This phase could be entered directly as a result of a
technological opportunity and urgent user need, as well as having come through concept and
technology development.

The last and longest phase is the Sustainable and Disposal phase of the program. During this phase all
necessary activities are accomplished to maintain and sustain the system in the field in the most cost-
effective manner possible.

Procurement systems
Another common procurement issue is the timing of purchases.

Procurement process

Procurement may involve bidding process known as tendering. A company or organization may require
some product or service. If the price exceeds a threshold that has been set (e.g.: government
department procurement policy: "any product or service desired whose price is over X must be put to
tender"), depending on policy or legal requirements, the purchaser is required to state what is required
and make the contract open to the bidding process. The concept of total cost also comes into play. At
times, not just price, but other factors such as reliability, quality, flexibility and timing, are considered in
the tendering process. A number of potential suppliers then submit proposals of what they will provide
and at what price. Then the purchaser will usually select the lowest bidder; however if the lowest bidder
is deemed incompetent to provide what is required despite quoting the lowest price, the purchaser will
select the lowest bidder deemed competent. In the European Union, strict rules on procurement must
be followed by public bodies, with contract value thresholds determining the processes required
(relating to advertising the contract, the actual process etc.).

Procurement steps
Procurement life cycle in modern businesses usually consists of seven steps:
Identification of need: This is an internal step for a company that involves understanding of the
company needs by establishing a short term strategy (three to five years) followed by defining the
technical direction and requirements.

Supplier Identification: Once the company has answered important questions like: Make-buy, multiple
vs. single suppliers, then it needs to identify who can provide the required product/service. There are
many sources to search for supplier; more popular ones being Ariba, Alibaba, other suppliers and trade
shows.

Supplier Communication: When one or more suitable suppliers have been identified, requests for
quotation, requests for proposals, requests for information or requests for tender may be advertised, or
direct contact may be made with the suppliers. References for product/service quality are consulted,
and any requirements for follow-up services including installation, maintenance, and warranty are
investigated. Samples of the P/S being considered may be examined or trials undertaken.

Negotiation: Negotiations are undertaken, and price, availability, and customization possibilities are
established. Delivery schedules are negotiated, and a contract to acquire the P/S is completed.

Supplier Liaison: During this phase, the company evaluates the performance of the P/S and any
accompanying service support, as they are consumed. Supplier scorecard is a popular tool for this
purpose. When the P/S has been consumed or disposed of, the contract expires, or the product or
service is to be re-ordered, company experience with the P/S is reviewed. If the P/S is to be re-ordered,
the company determines whether to consider other suppliers or to continue with the same supplier.

Logistics Management: Supplier preparation, expediting, shipment, delivery, and payment for the P/S
are completed, based on contract terms. Installation and training may also be included.

Additional Step - Tender Notification: Some institutions choose to use a notification service in order to
raise the competition for the chosen opportunity. These systems can either be direct from their e-
tendering software, or as a re-packaged notification from an external notification company.

Procurement performance

In July 2011, Ardent Partners published a research report that presented a comprehensive, industry-
wide view into what is happening in the world of procurement today by drawing on the experience,
performance, and perspective of nearly 250 Chief Procurement Officers and other procurement
executives. The report includes the main procurement performance and operational benchmarks that
procurement leaders use to gauge the success of their organizations. This report found that the average
procurement department manages 60.6% of total enterprise spend. This measure commonly called
"spend under management" refers to the percentage of total enterprise spend (which includes all direct,
indirect, and services spend) that a procurement organization manages or influences. The average
procurement department also achieved an annual savings of 6.7% in the last reporting cycle; sourced
52.6% of its addressable spend, and has a contract compliance rate of 62.6%.
Public procurement
Government procurement

Public procurement generally is an important sector of the economy. In Europe, public procurement
accounts for 16.3% of the Community GDP.

Green public procurement

In Green public procurement (GPP), contracting authorities and entities take environmental issues into
account when tendering for goods or services. The goal is to reduce the impact of the procurement on
human health and the environment.

In the European Union, the Commission has adopted its Communication on public procurement for a
better environment, where proposes a political target of 50% Green public procurement to be reached
by the Member States by the year 2010.

Alternative procurement procedures

There are several alternatives to tendering which are available in formal procurement. One system
which has gained increasing momentum in the construction industry and among developing economies
is the Selection in planning process which enables project developers and equipment purchasers to
make significant changes to their requirements with relative ease. The SIP process also enables vendors
and contractors to respond with greater accuracy and competitiveness as a result of the generally longer
lead times they are afforded.

Procurement frauds

Procurement fraud can be defined as dishonestly obtaining an advantage, avoiding an obligation or

causing a loss to public property or various means during procurement process by public servants,
contractors or any other person involved in the procurement. An example is the kickback, whereby a
dishonest agent of the supplier pays a dishonest agent of the purchaser to select the supplier's bid,
often at an inflated price.