The Ministry of Education and Science of the Russian Federation

Plekhanov Russian University of Economics

Chair of Foreign Languages 
 
 
 
 
 
 

PROJECT

“Procurement process” 
 
 
 

            Performed by

      Veronika Zabolotnaya

         Marketing Faculty

         Group 1510 

     Supervised by

       Elena Zavorina 
 
 
 
 
 
 
 

     Moscow 2011 

Contents 

Introduction 3

1. Definition 4

2. Procurement process. 5

3. Procurement Importance Matrix 8

4. Managing the Procurement Process. 12

Conclusion 14

Bibliography 15 

 

     

Introduction

     Procurement is a logistics function and it also plays a very important role supply chain management. With the increase in outsourcing of goods and services, the procurement function is very significant in the organization. Procurement today is a highly technical, scientific field. “Most industries spend from 40 to 60 percent of their revenues on materials and services from sources outside of the organization”¹. Procurement savings is a substantial area that managers usually focus on.

     Effective procurement of goods and services contributes to the competitive advantage of an organization. The procurement process links members in the supply chain and assures the quality of suppliers in that chain. The quality of the materials and services that are input affects finished product quality and hence customer satisfaction and revenue. Input costs are a large part of total costs in many industries. With the importance of procurement as a determinant of revenues, costs, and supply chain relationships, it is easy to understand why it has been receiving more attention from both, practitioners and academics.

     The purpose of this work is to determine the procurement process and give its detailed description. 
 

 

     

1. Definition

     Procurement can be a complex process that is difficult at times to define, understand, definition and manage. However, to manage the process, it must be understood; to understand the process, it must be defined. Depending on the circumstances, procurement can be defined, in a narrow sense, as the act of buying goods and services for a firm or, in a broader perspective, as the process of obtaining goods and services for the firm. The procurement process is, however, more than just the culmination of an activity; it is the successful completion of a series of activities that often cut across organizational boundaries. To formalize the definition, then, procurement consists of all those activities necessary to acquire goods and services consistent with user requirements².

     The term purchasing and procurement are often used interchangeably, although they do differ in scope. Purchasing generally refers to the actual buying of materials and those activities associated with the buying process. Procurement is broader in scope and includes purchasing, traffic, warehousing, and all activities related to receiving inbound materials.

            To sum up all the information above it is clearly that procurement is the process of purchasing materials and services from outside organizations to support the firm’s operations from production to marketing, sales, and logistics.

      

       

2. Procurement process.

     The activities that follow for the procurement process apply to the purchase of both goods and services in industrial markets.

Figure 1. Procurement process³.

 

     These activities often cut across both functional boundaries (intrafirm) and organizational boundaries (interfirm) and cannot be effectively completed without input from all parties involved in the transaction. The successful completion of these activities maximizes value for both the buying and selling organizations, thereby maximizing value for the supply chain:

1. Identify or reevaluate needs. A Procurement transaction is usually initiated in response to either a new or an existing need of a user. The need can be identified by any of a variety of functional areas in the firm or even by someone outside the firm, for example, by customers.
2. Define and evaluate user requirements. Once the need has been determined, its requirement must be represented by some type of measurable criteria.
3. Decide whether to make or buy. Before outside suppliers are solicited, the buying firm must decide whether it will make or buy the product or service to satisfy the user's needs. Even with a "make" decision, however, the buying firm will usually have to purchase some types of inputs from outside suppliers.
4. Identify the type of purchase. The type of purchase necessary to satisfy the user's needs will determine the amount of time needed for the procurement process and the complexity of the process. The three types of purchases are (1) a straight rebuy or routine purchase; (2) a modified rebuy, which requires a change to an existing supplier or input; and (3) a new buy, which results from a new user need.
5. Conduct a market analysis. Knowing the type of market will help the procurement professional determine the number of suppliers in the market, where the power/dependence balance lies, and which method of buying might be most effective—negotiations, competitive bidding, and so on.
6. Identify all possible suppliers. This activity involves the identification of all possible suppliers that might be able to satisfy the user's needs. It is important at this stage to include possible suppliers that the buying firm has not used previously.
7. Prescreen all possible sources. When defining and evaluating user requirements, it is important to differentiate between demands and desires. Demands for a product or service are those characteristics that are critical to the user; desires are those that are not as critical and are therefore negotiable. Prescreening reduces the pool of possible suppliers to those that can satisfy the user's demands.
8. Evaluate the remaining supplier base. With the possible pool of suppliers reduced to those that can meet the user's demands, it is now possible to determine which supplier or suppliers can best meet the user's negotiable requirements, or desires.
9. Choose a supplier. The actual choice will be based upon criteria to be discussed subsequently, such as quality, reliability, total required price, and so on.
10. Receive delivery of the product or service. This activity occurs with the first attempt by the supplier or suppliers to satisfy the user's needs. The completion of this activity also begins the generation of performance data to be used for the next activity.
11. Make a postpurchase performance evaluation. Once the service has been performed or the product delivered, the supplier's performance must be evaluated to determine whether it has truly satisfied the user's needs. This also is the "control" activity. If supplier performance did not satisfy the user's needs, the causes for this variance must be determined and the proper corrective actions implemented.

      All of the activities are subject to influences control of the procurement professional. These influences can determine how effectively each activity is performed. They include intraorganizational and interorganizational factors and external factors such as governmental influences.

        

3. Procurement Importance Matrix

     The products and services purchased by a company are not all the same. Some products are more important and require greater procurement attention.

     The quadrant technique enables the supply chain manager to assess the importance of each product or service being purchased. The quadrant technique utilizes a two-by-two matrix to determine а procured item's relative importance on the basis of value and risk. The criteria used to delineate importance are value or profit potential and risk or uniqueness.

     The value criterion examines product or service features that enhance profits for the final product and the firm's ability to maintain a competitive advantage in the marketplace.

     Risk reflects the chance of failure, non-acceptance in the marketplace, delivery failures, and source non-availability.  

 
 
 
     

Figure 2. Item Procurement Importance Matrix⁴.

 
     Figure 2 depicts the value risk quadrant and categorizes item importance.

     Generics are low-risk, low-value items and services that typically do not enter the final product. Items such as office supplies and maintenance, repair, and operating items (MRO) are examples of generics. The administrative and acquisition processing costs are more significant than the purchase price of generics, and, for some generics, the administration and processing costs may exceed the price paid for the item or service. The strategic procurement thrust for generics is to streamline the procurement process to reduce the cost associated with purchasing generics.

     Commodities are items or services that are low in risk but high in value. Basic production materials (bolts), basic packaging (exterior box), and transportation services are examples of commodities that enhance the profitability of the company but pose a low risk. These items and services are fundamental to the company's finished product, thus making their value high. Risk is low because commodities are not unique items and there are many sources of supply. The procurement strategies used for commodities include volume purchasing to reduce price and just-in-time systems to lower inventory costs.

     Distinctives are high-risk, low-value items and services such as engineered items, parts that are available from only a limited number of suppliers, or items that have a long lead time. The strategic focus for distinctives is developing a standardization program to eliminate or reduce the uniqueness of the distinctives, thereby changing these items to generics.

     Finally, criticals are high-risk, high-value items that give the final product a competitive advantage in the marketplace. The procurement strategy for criticals is to strengthen their value through use of new technologies, simplification, close supplier relations, and/or value-added alterations. The focus of critical procurement is on innovation to make the critical item provide greater market value to the finished product.

     Once purchases have been categorized in this way, the process by which they are to be purchased may be decided upon. Buying processes include:

     • online catalogues;

     • tendering;

     • a system of approved suppliers;

     

Figure 3. Appropriate buying process⁵.

     • strategic partnerships.

      
 

     Figure 3 shows how the appropriate buying process may be matched with the purchase categorization described in Figure 2.

     Online catalogues available to employees will allow them to purchase generics (routine) items quickly and easily. This speeds up the process and limits the cost of these transactions.

     The tendering process for high annual purchase value commodities will be appropriate where obtaining the best price is important.

     A network of approved suppliers and a formal system for approving suppliers are most appropriate where distinctives items are critical to the business but have a low annual purchase value. Suppliers will have been able to satisfy the purchasing department that they are able to meet certain criteria satisfactorily on a consistent basis. The criteria used may include delivery reliability, quality of goods supplied and value for money.

     Strategic partnership will be most appropriate to the critical items where the purchase has high annual value and is critical to the business. In these cases, it is in the interest of both purchaser and vendor to develop a strong working relationship.

 

4. Managing the Procurement Process.

     Managing the procurement process can be difficult for a multitude of reasons, ranging from inflexible organizational structures to inflexible organizational cultures. However, most firms should find the process relatively easy. What must be remembered when dealing with these activities is that all firms are different and will have different requirements for the procurement process. A four-step approach can be used and adapted to a firm's particular needs. Based on the discussion of the procurement process activities, the following steps can be used to maximize effectiveness:

1. Determine the type of purchase. In the procurement process, identifying the type of purchase (the fourth purchase activity) will many times dictate the complexity of the entire process. For example, a straight rebuy situation will mean that all of the procurement activities were completed previously and the only activities would be probably necessary. A modified rebuy may also not require all of the activities, but a new buy would normally require performing all of the activities discussed earlier (See Figure 1. Procurement process).
2. Determine the necessary levels of investment. The procurement process requires two major types of investments by the firm: time and information. Time is expended by the individuals involved in making the purchase: the more complex and important the purchase, the more time must be spent on it, especially if it is a new buy. Information can be both internal and external to the firm. Internal information is gathered concerning user requirements and the implications that the purchase will have for the firm. External information concerning the input to be purchased may be gathered from supply chain members, from potential suppliers, and others. The more complex and important the purchase, the more information is needed for the procurement process to be effective. By determining the type of purchase the procurement professional can determine the levels of investment necessary in the procurement process. Once the level of investment is decided, the procurement process can take place.
3. Perform the procurement process. This step includes performing those activities necessary to effectively make a purchase and satisfy user’s requirements. This step also allows the procurement professional to collect data on the time and information actually used in making a specific purchase. The ability to measure the actual investment and how well a user’s needs were satisfied is important to the final step in managing the procurement process.
4. Evaluate the effectiveness of the procurement process. This is a control step that is asks two questions: (1) Were the user’s needs satisfied? and (2) Was the investment necessary? The goal is to invest only enough time and information to exactly satisfy the user’s needs. When the procurement process is not effective, the manager must determine why and take corrective actions to make sure that future purchases will be effective.

     Thus, although the procurement process is complex, it can be managed effectively as long as the manager develops some systematic approach for the implementing it. A key factor in achieving efficiency and effectiveness in this area is the development of successful supplier (vendor) relationships. In fact, many professional procurement/materials managers agree that today's global marketplace requires developing strong supplier relationships in order to create and sustain a competitive advantage.

 

Conclusion

     Thus, the logic of research has led project’s structure consisting of an introduction, four chapters, conclusion and bibliography.

     Chapter 1 deals with the definition of procurement. So, procurement is the process of purchasing materials and services from outside organizations to support the firm’s operations from production to marketing, sales, and logistics. The procurement area plays a major role in materials management, and procurement is an important link in the supply chain.

     Chapter 2 deals with the components of a procurement process. Thus, the procurement process can be broken down into a set of activities that include identifying a need, defining and evaluating user requirements, deciding whether to make or buy. Identifying the type of purchase, performing a market analysis, identifying potential suppliers, prescreening possible vendors, evaluating remaining suppliers, choosing a vendor, receiving delivery of the product or service, and making a postpurchase evaluation.