Purchasing

and
Procurement
Module 2
Module Outline
Define Purchasing and Procurement
 Purchasing Management
 Purpose & Process Flow
 Supplier Resource Management: Supplier Selection
&
Selection Process
 Sourcing Strategy-TCO

Supply Chain Models

 The supply chain operations reference model (SCOR)
 Plan, Source, Make, Deliver, Return
 Benefits of Using the SCOR Model
Define Purchasing and Procurement
Definition
Procurement Purchasing

 Procurement refers to the  Purchasing is the set of

process of identifying, functions associated with
shortlisting, selecting, acquiring the goods and
and acquiring suitable services that an
goods or services or works organization requires.
from a third-party vendor Purchasing is a small subset
through a direct purchase, of the broader procurement
competitive bidding, or function. This process
tendering process while includes activities like
ensuring timely delivery in ordering, expediting,
the right quality and receiving, and fulfilling
quantity. payment.
Procurement is often mistaken for purchasing, and the two
terms are often used interchangeably. But those two
functions are actually quite distinct in their intent, the
tasks they cover, the people involved and, most notably,
what they accomplish.
Procurement Steps
 Planning & Identification
– this is the identification for the need for the goods or service
requests require approval from either head of the
department/organization or the CEO. It involves emails, memo’s
detailing the business need and impact for the good, service, or work.

 Sourcing Suppliers
– here, invitations are sent out to suppliers or vendors to respond to
accordingly.

 Supplier Selection & Contracting

– this is where the appropriate vendor or supplier is selected after
critical evaluation by the procurement team and is then offered a
contract to supply or provide the goods or services as expected.
 Contract Management
– a stage where a contract is completed between the
relevant parties for all to fulfil contractual obligations to
avoid misunderstanding.

 Receiving and Storing

– this is the receipt of the final order with quality
inspection by the organization and audit department
carried out. This ensures the product delivered
conforms to the purchase order.

 Payment & Evaluation

– Once procurement of the product/service is
completed, payment to the Supplier/vendor is
completed. That is managing the Procure-to-Pay
Process.
Purchasing Steps
 Ordering, making requests for the
good or service needed.
 Raising purchase orders to the supplier
or vendor which the intended goods are
to be bought from
 Receiving of ordered goods as per the
purchase order
 Payments are made after the goods
have been supplied and met the
requirements of the purchase order.
 Procurement is a business management
function.
 Procurement is essentially an acquisition of products and services,
especially for the business purpose. It covers a complete range of
activities from identifying the need of goods and services to its
allotment. In a more broader sense if we talk, Procurement
involves activities like;

 1)Selecting vendors
 2)Establishing payment terms
 3)Negotiating Contracts
 4)Regulatory compliance
 5)Analysis and sourcing

 Thus, procurement is an umbrella term under which Purchasing is

just a component. Since procurement is an umbrella term and
includes all the core business activities, it should be considered an
important corporate activity.
Purchasing is a subset of
Procurement.
 Though these terms are being used
interchangeably they mean different.
Purchasing simply involves buying
and selling of the goods and services.
 Purchasing is only restricted to
receiving and making payments.
 Purchasing can be best known as the
transaction-oriented function of
Procurement.
Supplier Resource Management:
Supplier Selection &
Selection Process
Supplier Selection
 Suppliers play a critical role in helping
companies succeed.
 In order to find the right ones,
businesses need to consider a number
of critical factors, including:
Supplier Characteristics
Value for money

 If you are a start-up, a key consideration in

choosing a supplier may be affordability.
However, cheap suppliers don't always
represent the best value for money.

 If you want reliability and quality from

your suppliers, you'll have to decide how
much you're willing to pay for your supplies.
It is important to strike a balance between
cost, reliability, quality and service.
Quality and reliability

 Thequality of your supplies needs to be

consistent - your customers associate
poor quality with you, not your
suppliers. Equally, if your supplier lets
you down with a late delivery or faulty
supplies, you may let your customer
down.
Speed and flexibility

 Being able to place frequent, small orders lets

you avoid tying up too much working capital in
stock.
 Flexible suppliers help you respond quickly
to changing customer demands and sudden
emergencies.
 If you want to cut down the time it takes you
to serve your customers, suppliers that offer
you a quick delivery service will rate higher
than those that compete on other factors - for
example, on price alone.
Strong service and clear communication
 Communication is important in ensuring
a good working relationship with your
supplier. From the initial briefing,
through continual feedback and
routine meetings, your supplier should
communicate openly and regularly.
 Need your suppliers to deliver on
time, or to be honest and give you
plenty of warning if they can't.
Financial stability

 It's
always worth making sure your
supplier has sufficiently strong cash
flow to deliver what you want, when
you need it.
 A credit check will help reassure you
that they won't go out of business when
you need them most.
Selection Process
Selection Process
 When you strategically think about each supplier
in your network and invest the time to examine all your
options, you will set your organization up for success.

 To create a network that is strong, reliable, and

aligned with your business objectives; utilize this five
step process:

 Create supplier selection scorecard

 Identify suitable suppliers
 Rank the scorecard
 Negotiate
 Create contract
Step 1 – Supplier Selection Scorecard
The first step in the supplier selection process is to create a supplier
selection scorecard.

The supplier selection scorecard contains all the important elements

you require in a supplier. It has long been stated, “That which does
not get measured, does not get done”.

Your scorecard should be quantifiable and include:

 Supplier characteristics
 The important strategic alignment factors you value
 Applicable business policies
 Any constraints – management directives, government
regulations, contracts already in place, and other
commitments
 At this step, make sure you are prioritizing your needs.
 All of the above may be important but some are more
important than others.
Step 2 – Identify Suitable Suppliers
Once you have the selection criteria in place, you must create the
pool from which you will select a supplier. During this part of the
process you will want to consider:

 Current suppliers – Starting with suppliers you have

experience with and established relationships is generally a
good idea
 Past suppliers – Depending upon the reasons why they are
‘past’ and not ‘current’
 Competitors – You may be in a position to buy from a
competitor if it is ethical and low-risk
 Industry groups – many of which are non-profit and maintain
data bases of member companies
 Recommendations and prior business relationships –
perhaps created while working at other companies
 Internet – which offers myriad opportunities to find, research,
and contact potential suppliers
Step 3 – Scorecard Ranking
Next, gather information from the identified suitable suppliers – perhaps in
the form of a Request for Quote (RFQ) or Request for Proposal (RFP).

Tabulate the information you collect and use the scorecard to rank the
potential suppliers.

Depending upon the complexity and/or criticality of the product or

service, you may:

 Select the highest ranking supplier – Recognize that while you are
not required to pick the top scorer, moving too far down the list is a red
flag, indicating the process was flawed
 Choose more than one for further qualification – May include
interviews, site visits, etc.

If all that work did not identify a clear winner, you may need to review your
criteria and/or expand your search.
Step 4 – Negotiate
 After you have narrowed the list to a manageable
number of best options, possibly just one, let the
negotiations begin!

 Depending on the critical good or service, you may

negotiate with just the top supplier on your
scorecard, even if others remain on the list of potentials.

 These others, of course, are not told they are not until
after you have completed negotiations and
agreements are completed.

 Based upon the complexity of the situation, lawyers

may be involved.
Step 5 – Create Contract
 Once an agreement is reached, a contract is
created and signed.

 For many transactions, the purchase order is the

contract. For complex situations, you may have a
contract and then create a separate purchase
order.

 Creating the purchase order will include

activating your procurement system. This should
be a standard operating procedure and include
getting your accounts payable process ready to
process the supplier invoice.
Strategic Sourcing
 Procurement is still evolving from
basic buying – getting the lowest price
for items, to being an integral part of an
organisation’s supply chains structure.

 Thisstructure includes the core

operational functions of:
- Procurement, Operations Planning
and Logistics; however, they can have
many titles, depending on the
organisation and location.
 Within your supply network, the
objective of Procurement should be to
achieve the lowest ‘total cost of
ownership’ (TCO) for the business.
 This takes account of all the cost
drivers in the supply chains, which
should be a major consideration when
developing sourcing strategies.
 For each cost element, there are cost
drivers, with the most common used in
TCO calculations identified in the
Total Cost of Ownership (TCO)
Sourcing becomes strategic
Sourcing is a key success factor for any organisation that buys goods and services
from suppliers.

The objective of strategic sourcing is to pull together the capabilities of the various
supply markets to obtain a lower TCO.

The elements of strategic Sourcing are:

 User needs: Working with user groups to identify and analyse the actual needs
for new physical or service items. Also, where there is a change of corporate
policy for an established item (i.e. change of packaging materials to bio-
degradable)

 Supply Market: understand the overall market and its economic drivers. Use
Risk Analysis to define uncertainties surrounding a supply market. To evaluate
current and potential suppliers, develop a standardised supplier capability
statement

 Sourcing tactics and the Buying process: Consider off-shoring, near-shoring

or on-shoring; exploit inter-dependencies in the market; extent of using e-
procurement or e-sourcing applications

 Requirements and evaluation criteria: Use of Functional (technical)

specifications or Performance (outcomes) requirements
Supply Chain Models
The supply chain operations reference model (SCOR)
SCOR Management Process
Plan, Source, Make, Deliver, Return
SCOR Framework Levels
SCOR Level 1 Process
Definitions
Three Levels of Process Model
SCOR Level 1
SCOR Level 2
SCOR Level 3
Benefits of Using the SCOR
Model
 It aligns improvement efforts with the
supply chain , and not the organization
 It provides a comprehensive analysis of
the supply chain focusing on the
customer as the end –point
 It enables selection of SCM
improvement projects which will have
maximum impact on the firm’s strategic
objectives