Basics of Procurement

Nafyad Tola (MBA, Asst.Professor)

Academic Affairs Directorate, ArsiU
 Course objectives:
• After completion of the course, the student will
demonstrate:
– Explain the basic concepts of the procurement and
purchasing.
– Describe purchasing structure in the organizational.
– List the important of purchasing.
– Understanding the policies purchasing.
– Be able to perform materials specification.
– Know how to select suppliers
 1.1 what is procurement?
• There are many different interpretations of
what procurement is, and this definition can
vary from sector to sector, subject to the
activities undertaken within your organisation.
• Procurement is defined as the buying of goods
and services that enable an organisation to
operate its supply chains, in a profitable and
ethical manner.
• It can be private or public.
 Cont.
• Procurement is one of the basic and common
functions of every organization it is basic
because no business can run/operate with out
it, and the effective structuring of the
purchasing, material and management
function, considerably contribute to the
realization of organizational objectives.
• Procurement is a process of obtaining goods
and services with the 7Rs.
 Cont..
• Getting the Right product,
• in the Right quantity,
• in the Right condition,
• at the Right place,
• at the Right time,
• to the Right customer,
• at the Right price.
 The key elements of procurement operations

• There are four key elements of procurement operations:

sourcing, contracting, purchasing, and supplier management.
1. Sourcing: This is the
process of identifying and selecting suppliers who can provide
goods or services that meet the needs of the buyer. Sourcing
includes activities such as market research, request for proposal
(RFP) development, and supplier selection.
2. Contracting: This is the
process of negotiating and formalizing agreements with
suppliers. It includes activities such as contract development,
negotiation, and performance management.
 Cont..
3. Purchasing: This is the process of ordering
goods or services from suppliers. It includes
activities such as requisition development, order
placement, and receipt verification.
4. Supplier Management: This is the process of
managing supplier relationships to ensure that
they are meeting the needs of the buyer. It
includes activities such as
supplier performance monitoring, quality
assurance, and dispute resolution.
 Objectives of P Procurement
• The main objectives of procurement are:
 to maximize economy and efficiency;
 to promote fair competition;
 to promote integrity
· to increase transparency
· Accountability and
Promote local industry.
 Characteristics of Good Procurement
• To meet the procurement objectives, there are
certain characteristics which are necessary for
good procurement to occur;
1. Economical and Efficient
This means that the;
purchases are not wasteful,
they are based on market prices and
can generate savings.
 Cont…
2. Transparency
• The procurement process should be transparent and open to public
scrutiny.
• The processes should be capable of being questioned and
everything is above board
3. Participatory
• This implies that the suppliers, citizens and other stakeholders
effectively contribute to the operations of public procurement and in
the preparation of the essential legislation as and when necessary.
• It also means that the stakeholders are involved in the making of
decisions at all stages of the implementation of public procurement
processes.
 Cont…
4. Timely
• This means that procurement transactions are made and
commitments are met within the reasonable time frame as time is a
resource that must be conserved like all other re-sources.
5. Information Flow
• For effective public procurement, information should be made
available and effectively communicated and shared between various
stakeholders.
6. Arbitration Mechanisms
These are;
adequate,
representative,
prompt and
fair ways of receiving
 Types of purchasing in business
• There are two types of purchasing in business world:
these are (1) purchasing for resale and (2) purchasing for
consumption or conversion.
• Purchasing for resale is performed primarily by
merchants. Today’s merchants determine what their
consumers want, and buy it at a price to which they can
add a profitable make up, and sell it to the customer at a
satisfactory level of quality and service.
• Purchasing managers who buy materials for consumption
or conversion are called industrial buyers. This term
includes buyers for manufacturing firms, service business,
institutions (schools, hospitals, etc) utilities, and various
government agencies (city country state, etc.)
Procurement objectives from operational or functional
perspective

1. To support the company’s operations with an

uninterrupted flow of materials and services:
– this is a key reason for the existence of the
department.
2. To buy competitively
– keeping the balance of the forces of supply and
demand that regulate prices and availability of
materials in the market place.
– , it also involves an understanding of a suppliers
cost structure
 Cont..
3.To buy wisely:
• It involves a continual search for better values
that yield the best combination of quality,
service, and price relative to the buyer’s needs
4. To keep inventory investment and inventory
losses at a practical minimum
• a reasonable balance between the level of
inventory required to support operations and
the cost of carrying the inventory.
• Proper buying, packaging, and storing …..to
reduce losses.
 Cont…
5. To develop good relationships with the
supplier community and good continuing
relationships with active suppliers
• Good relationships with suppliers are
imperative, and good relationships with
potential suppliers are invaluable
 Contribution (importance) of procurement

1. Profit leverage effect

• through better purchasing a firm saves the
amount paid to venders for needed materials,
supplies and services, that saving amount will
directly goes to profit.
• The effect of saving is to decrease cost of
good sold (CGS).
 Cont….

2. Return on assets
– The reduction of purchasing costs will decrease the
inventory asset value, which increases the asset
turnover rate.
– Where as the increase of purchasing costs will
increase the inventory asset value, which decrease
the asset turn over rate.
3. Effect on efficiency:
– Effective purchasing leads to efficient operation to
other.
 Cont…
4. Effect on competitive position:
– A firm cannot be competitive unless it can deliver products or
services to its customer when they are wanted and at a price,
they feel it is faire.
5.Effect on image:
• The actions of the purchasing department
influence directly the public relations and
image of company.
• The poor image adversely affects the purchasing
ability to get new business and find new and better
venders.
 Cont….
6. Information source
– Information about prices, availability of goods, new
source of supply, new products and new technology
can be obtained from the purchasing unit.

RA: Relationships of procurement with other functions

 Ch2: Organization for Procurement
• The official business definition of Procurement
Organization Structure is a framework that
outlines the roles and responsibilities of
individuals and teams within an organization
responsible for the acquisition of goods and
services.
• It is designed to ensure that all procurement
activities are conducted in an efficient and
effective manner.
 Cont…
• It also defines the reporting relationships between
these individuals and teams, and outlines the
processes and procedures that need to be followed
in order to complete the procurement process.
• Additionally, the structure may also include the roles
of external suppliers and vendors, and the processes
and procedures that need to be followed when
dealing with them.
• The structure should be designed to ensure that all
procurement activities are conducted in a timely and
cost-effective manner, while still providing the
highest quality of goods and services.
 Quality dimensions:
Quality:
• Fitness for a purpose” or “suitability”
• Meeting requirement with reasonable cost
performance- the primary functions of the product or
service
features the styles (facial appearance )
reliability- the probability of failure with in specified
period of time
durability- the life expectancy of product
conformance- meeting the specification
serviceability- main ability of product and case of fixing
perceived quality the quality in the eyes of the customer
• The importance of purchasing and supply
management in any specific firm is
determined largely by four factors
Availability of materials: if materials used by the
firm readily available in competitive market and
some key materials bought in volatile market &
subject to periodic shortage and price instability
the purchasing function is a top level group.
Absolute dollar volume of purchase: if
organization spends a large amount of money for
materials the purchasing function is located at a
top level with other functions
Percent of product cost represent by materials: if
a highest cost of product constitutes a cost of
materials purchasing function needs creative and
professional buyer and the purchasing function
becomes a top level function.
Types of materials purchased: A given company
may use standard or non standard materials.
 If most of the materials used in the company are
non-standard the purchasing and supply function
is at top level function.
Organization for procurement and supply
management in a single plant company