Chapter 5 - Procurement policies, procedures and support tools

Unit 5
Learning Objectives

LO1 Explain the strategic nature of procurement by comparing and contrasting different
purchasing structures andprocedures.
Procurement Policy
• The term ‘policy’ includes ‘all the directives, both explicit and implied,
that designate the aims and ends of an organisation and the
appropriate means used in their accomplishment.
• Policy refers to a set of purposes, principles and rules of action that
guide an organisation
Major levels of organization policy
• There are four major levels of organisation policy, namely:
• Executive Policies ‘company level’
• Sets out executive managements directives
• Provides guidance for strategic direction of the organisation
• Defines strategic intent of the organisation
• Functional Policies
• Provides guidance for functional; areas, e.g. procurement
• Aligns functional policies with executive policies
• Defines specific facets of functional policy.
Major levels of organization policy
• Operating procedures ‘detailed action to be made to return’
• Describes range of functional duties
• Describes mandatory steps to complete specific tasks, e.g. Contract Award
• Provides supportive detail for each procedure
• Rules and Regulations ‘for workers’
• Sets constraints on individual behaviour, e.g. hospitality
• Establishes minima behaviour for audit purposes
• Describes organisational rules that govern professional behaviour
Procurement procedures
• A procedure is a system of sequential steps or techniques for getting a
task or job done.
• Procedures are also the formal arrangements by means of which
policies linking strategies are implemented.
• A cluster of reliable procedures, each comprised of a number of
operations that, together, provide information enabling staff to
execute and managers to control those operations, is called a system.
Salient content of procurement procedures
• A procurement procedure will set out:
• how procurement will engage in each facet of the process, including
identifying the business need and subsequent specification development
• the need to deal effectively with intellectual property rights
• the process for engaging with the supply market, including soft market testing
• how to avoid creating a monopoly supply scenario
• the need for usage forecasts to be as accurate as possible
• how potential suppliers will be pre-qualified; for example, through the use of
pre-qualification questionnaires, interviews and other evidence of
competencies.
Notification of authority to purchase
• The procurement procedure will set out:
• who and how an appropriate requisition will be initiated or other
means to authorise the purchase
• budget approval and appropriate finance code
• issue of bills of material when these are applicable
• the management of emergency needs to purchase and to permit a
standard procedure to be bypassed according to defined rules.
Creating a legally binding contract
• The procurement procedure will set out:
• how purchase orders are to be raised and issued
• how one-off contracts are to be negotiated and issued
• the methodology for dealing with order acknowledgements, and the
implications of accepting the supplier’s sales acknowledgement
• what actions to take when a supplier fails to enter into a contract
• how to create and maintain a master contract file.
The contract management phase
• The procurement procedure will set out:
• who is accountable for contract management
• the requirement for prompt supply of management information by the
supplier
• the involvement of procurement when disputes arise
• acceptance procedures for goods and services
• payment processes
• contract close-out procedure
• feedback of supplier’s performance into a vendor rating system.
E-supply chain management
• E-supply chain management (e-SCM) is concerned with streamlining
and optimising the whole supply chain by means of internal
applications, with the aim of ensuring maximum sales growth at the
lowest possible cost. This includes setting up an internal online
procurement system, joining an industrywide electronic marketplace
and implementing e-SCM across the entire value chain.
E-supply chain management
• Procurement benefits include:
• the ability to purchase, both directly and indirectly, materials at a lower cost, primarily
due to price transparency and competition, so, while large purchasers can exert powerful
leverage to obtain more substantial price reductions and discounts, small purchasers
using such systems can obtain more favourable prices as many suppliers are competing
for the business of purchasers via the medium of e-marketplace and trading exchanges
• achievements of greater efficiency when purchasing goods and services and ultimately
lowering the overall cost of transactions, as business-to-business marketplaces often offer
smaller purchasers opportunities to discover lower prices for things that would be
prohibitively expensive to discover by human effort alone
• purchasers being able to form strong ties with suppliers, in forecasting, scheduling and
planning production data and sharing product data designs to develop supplier
collaboration.
E-supply chain management
• Supplier benefits:
• enhancement of forecasting ability, resulting in the capacity to meet
and exceed customers’ demands,
• achieve the right combination of products and services at the right
time and
• Align production schedules, manufacturing capacity and inventory to
customers’ buying patterns.
An example of an end-to-end integrated
model of e-SCM
E-procurement
• The CIPS definition of e-procurement is:

• E-procurement is using the Internet to operate the transactional

aspects of requisitioning, authorising ordering, receiving and payment
processes for the required services or products.
E-procurement
• The CIPS statement also points out that e-procurement is typically the
focus of local business administrators (one of the key goals of e-
procurement is to devolve buying to local users) and covers the
following areas of the buying process:
• requisition against agreed contract
• authorisation
• order
• receipt
• payment.
The evolution of e-procurement models
The evolution of e-procurement models
Electronic data interchange (EDI)
• Electronic data interchange (EDI) may be defined as follows:

• The technique based on agreed standards, which facilitates business

transactions in standardised electronic form in an automated manner
directly from a computer application in one organisation to an
application in another.
How EDI works
• 1 Company A creates a purchase order using its internal business
software.
• 2 EDI software translates the order.
• 3 Company A sends the purchase order to company B over a
thirdparty value-added network (VAN) or encrypted in EDIFACT
format over the Internet.
• 4 Company B receives the purchase order document and will translate
it from EDI to its proprietary format and, typically, company B will
send an acknowledgement to company A.
EDI example
• EDI at the supermarket
• One of the best examples of EDI is EPOS (electronic point-of-sale) at
the supermarket. When a product is purchased, the checkout
operator scans a barcode on its label, which automatically registers
the price on the cash till.
• That same signal also triggers a computer process that reorders the
item from the manufacturer, sets off a production cycle, and arranges
invoicing, payment and transportation of the new order. EDI
effectively puts the product back on the shelf with no paperwork and
a minimum of human involvement.
The advantages of EDI
• Replacing the paper documents – purchase orders, acknowledgements,
invoices and so on – used by buyers and sellers in commercial
transactions with standard electronic messages conveyed between
computers, often without the need for human intervention.
• Reduction in lead times as buyers and suppliers work together in a real-
time environment.
• Reduction in the cost of inventory and release of working capital.
• Promotion of such strategies as JIT as a consequence of the previous
two points.
• Better customer service.
The advantages of EDI
• Facilitation of global procurement using international standards, such
as EDIFACT, which is compatible with most equipment in most
countries.
• Facilitation of invoice payments by the computer-to-computer
transfer of money, which eliminates the need for the preparation and
posting of cheques.
• The integration of functions, particularly marketing, procurement,
production and finance.
• EDI tends to promote long-term buyer–supplier relationships and
increase mutual trust.
Hubs
• In the context of internal technologies, a hub is a device that connects
several networks together. As used in e-businesses, a hub generally
means a central repository or private exchange
Exchange
• An exchange is a business-to-business (B2B) website where
purchasers and suppliers meet to transact business. A distinction may
be made between private and public exchanges
• Private exchanges can be either one-to-one (1T1) or one-to-many
connections (1TM). The former are direct connections, while the
latter connect all the actors through the central Internet hub. Private
exchanges are normally specified by a single operation and available
by invitation only to the organisation’s suppliers and trading partners.
Such private exchanges are frequently used for collaborative business
procedures, such as real-time supply chain management and logistics.
Exchange
• Public exchanges – often referred to as portals – extend outside the
boundaries of the company and involve many-to-many (MTM)
interactions. Public exchanges may be run either by a consortium of
big players within a specific industry (consortium portals) or by an
independent entity starting up its business as an intermediary
(independent portals).
Marketplace
• Like an exchange, a marketplace is a website that enables purchasers to select from
many suppliers. With e-marketplaces, the buyer is in control as open marketplaces
enable purchasers to evaluate all potential suppliers for a particular product or
service and make informed decisions regarding what and where to buy.
• markets are large and the search costs to find suppliers are high because of the
large number of potential suppliers
• product specifications and information are subject to rapid change
• buyers have difficulty in comparing similar products from different vendors because
of an excess of features and characteristics that may not be clearly indicated
• internal costs of such processes as locating, appraising and evaluating the
performance of suppliers are high.
Study
E-catalogues
• At their simplest, B2B marketplaces are just online catalogues. An e-
catalogue may be defined as:

• A web page that provides information on products and services

offered and sold by a vendor and supports online ordering and
payment capabilities.
Advantages of e-catalogues
• E-catalogues benefit both purchasers and suppliers in that they:
• facilitate real-time, two-way communication between buyers and sellers
• allow for the development of closer purchaser–supplier relationships due to improved vendor
services and by informing purchasers about products of which they might otherwise be unaware
• enable suppliers to respond quickly to market conditions and requirements by adjusting prices
and repackaging
• virtually eliminate the time lag between the generation of a requisition by a catalogue user and
the issue of the purchase order as:
• authorisation, where required, can be done online and notified and confirmed by e-mail
• where users are authorised to generate their own purchases (subject to value and item constraints), the
order can be automatically generated without the intervention of the procurement department
• maverick or ‘off-contract’ purchasing is reduced because it is simpler and quicker to purchase
from contracted suppliers than to go outside the official system.
Types of e-catalogue
• Sell-side catalogues These provide potential purchasers with access to
the online catalogues of a particular supplier who provides an online
purchasing facility.
• Buy-side catalogues These are catalogues created by procurement
organisations. Normally, such catalogues are confined to goods
covered by prenegotiated prices, specifications and terms and run by
a program that is integrated into the procurement organisation’s
intranet.
E-auctions
• One step up from e-catalogue is e-auctions. An e-auction may be
defined as:
• An electronic market, which can exist in both business-to-business
and business-to-consumer contexts. Sellers offer goods or services to
buyers through a website with a structured process for price setting
and fulfilment.
Reverse auctions
• In a reverse auction, buying organisations post the item(s) they wish
to buy and price they are willing to pay while suppliers compete to
offer the best price for the item(s) over a prescribed time period
• Most reverse auctions are used for spot buying and eliminate the
time-consuming offline process of selecting suppliers, requesting
quotations and comparing quotes received.
Reverse auctions
• Reverse auctions are particularly useful in the following
circumstances:
• when there is uncertainty as to the size of the market and the
willingness of sellers to supply a product
• when purchasing large quantities of an item for which clear
specifications are possible
• when selling surplus assets
• for some services, such as car rentals, freight services, travel.
Reverse auctions
• The benefits for suppliers include:
• an opportunity to enter previously closed markets, which is
particularly important for smaller companies
• reduced negotiation timescales
• provision of a good source of market pricing information
• clear indications of what must be done to win the business.
E-payment
• E-payment may be by a standalone method, as with a purchasing
card, or incorporated into software.
• Security and auditing are important aspects of e-payments. Security
risks include unauthorised access by hackers, illegal acquisition of
PINs and data theft. Approaches to security concerns include:
• encrypted technologies – the art of encoding information in such a
way that only the holder of a secret password can decode and read it
• certification authorisations – organisations that clarify and provide
proof that a signature is valid.
Procurement manuals
• Essentially, a procurement manual is a medium for communicating information regarding
procurement policies, procedures, instructions and regulations.
• Policies may be general or consequential. General policies state, in broad terms, the
objectives and responsibilities of the procurement function. Consequential policies state, in
expanded form, how general policies are applied in specific activities and situations, such as
the selection of suppliers.
• Procedures prescribe the sequence of activities by which policies are implemented, such as
the receipt of bought-out goods.
• Instructions give detailed knowledge or guidance to those responsible for carrying out the
policies or procedures, such as suppliers with who call-off contracts have been negotiated.
• Regulations are detailed rules regarding the conduct of procurement and ancillary staff in
the various situations arising in the course of their duties, such as concerning the receipt of
gifts from suppliers.
Advantages of procurement manuals
• Advantages claimed for procurement manuals include the following:
• writing it down helps with precision and clarity
• the preparation of the manual provides an opportunity for consultation
between procurement and other departments to look critically at existing
policies and procedures and, where necessary, change them
• procedures are prescribed in terms of activities undertaken or controlled
by procurement, thus promoting consistency and reducing the need for
detailed supervision of routine tasks
• a manual is a useful aid in training and guiding staff
• a manual can help the annual audit
Advantages of procurement manuals
• a manual coordinates policies and procedures and helps to ensure
uniformity and continuity of procurement principles and practice, as
well as providing a point of reference against which such principles
and practice can be evaluated
• manual may help to enhance the status of procurement by showing
that top management attaches importance to the procurement
function
• computerisation, which needs detailed and well-documented
systems, has given further impetus to the preparation of procurement
manuals.
Disadvantages of procurement manuals
• Some disadvantages of manuals are that they:
• are costly to prepare
• tend to foster red tape and bureaucracy and stifle initiative
• must be continually updated to show changes in procedures and
policy.