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Explore the proactive role of procurement, supplier evaluation, contract management, and cost control. Understand the importance of quality, quantity, place, time, and price in procurement decisions.
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Contexts of Procurementand Supply Diploma in Procurement and Supply
Procurement Traditional definitions of purchasing and supply: • Imply that purchasing is ‘reactive’ • Imply that purchasing is ‘transactional’ • Imply that purchasing is ‘tactical’ • Imply that purchasing is always about ‘buying’ goods and services in return for some form of payment
Procurement and purchasing • Procurement is a wider term than purchasing • Procurement embraces a broader process than ‘purchasing’ • Procurement reflects the more proactive, relational, strategic and integrated role of the function in modern organisations
What does the procurement function do? • Supply market monitoring • Supplier evaluation and selection • Processing procurement or stock replenishment requests • Providing input to the preparation of specifications • Negotiating, buying and developing contracts • Expediting or contract management • Clerical and administrative tasks
Goods, services and works • Goods are tangible or material items, which can be consumed • Services are actions individuals or organisations perform which confer a benefit, but do not result in the ‘ownership’ of anything • Constructional works include projects such as the construction, alteration, repair, maintenance or demolition of buildings or structures; the installation of fittings; and so on
Production materials • Raw materials • Items extracted from the ground, such as minerals, ores and petroleum • Agricultural and forestry products • Components and assemblies • The finished output of other manufacturers upstream in the supply chain • Work in progress • Part-finished output, which is not yet ready for sale to customers
Commodity procurements • Producers • Buyers • Traders • Speculators
Goods for re-sale • Bottom line thinking • Broad assortment • Buying against supplier specifications • Short feedback loop • Technical complexity
A ‘stocking for inventory’ policy • In situations of independent demand • In situations of stable/predictable demand for low-value, non-perishable items • Where there is a long lead time • Where items are critical for operations • Where there is a legal requirement to hold stocks • Where inventory appreciates in value over time • Where prices are expected to rise • Where demand is seasonal
Distinctive features of services • Intangibility (or in procurement terms, ‘lack of inspectability’: Baily et al) • Inseparability • Heterogeneity or variability • Perishability (or in procurement terms, ‘impracticability of storage’) • Ownership (or in procurement terms, ‘uncertainties in contractual agreements’)
Measures of service quality • Tangibles • Reliability • Responsiveness • Assurance • Empathy
Monitoring service levels • Observation and experience • Spot checks and sample testing • Business results and indirect indicators • Customer/user feedback • Electronic performance monitoring • Self-assessment by the service provider • Collaborative performance review
Other general objectives • Internal customer service • Risk management • Cost control and reduction • Relationship and reputation management
The five rights of procurement • Quality Obtaining goods which are of satisfactory quality and fit for their purpose • Quantity Obtaining goods in sufficient quantity to meet demand and maintain service levels while minimising excess stock holding • Place Having goods delivered to the appropriate delivery point, packaged and transported in such a way as to secure their safe arrival in good condition • Time Securing delivery of goods at the right time to meet demand, but not so early as to incur unnecessary inventory costs • Price Securing all of the above at a price which is reasonable, fair, competitive and affordable
What is the ‘right price’? • The ‘right price’ for the supplier or seller to charge(the sales price) will be: • A price which ‘the market will bear’ • A price which allows the seller to win business, in competition with other suppliers • A price which allows the seller at least to cover its costs, and ideally to make a healthy profit
What is the ‘right price’? The ‘right price’ for the buyer to pay(the purchasing price) will be: • A price which the buyer can afford • A price which appears fair and reasonable, or represents value for money • A price which gives the buyer a cost or quality advantage • A price which reflects sound procurement practices
Factors in buyers’ decisions on price • The buying organisation’s relative bargaining power • The number of suppliers in the market and the possibility of substitute products • The type of procurement • The prices paid by competitors • The total package of benefits offered for the price • What the buyer can afford • What is a ‘reasonable’ price, based on price and cost analysis • What is a ‘fair’ (ethical and sustainable) price
Definitions of quality • Performance • Features • Reliability • Durability • Conformance • Serviceability • Aesthetics • Perceived quality
Quality control • Establishing specifications, standards and tolerances for work inputs and outputs • Inspecting delivered goods and monitoring production processes • Identifying items that are defective or do not meet specification • Scrapping or re-working items that do not pass inspection
Quality management system (QMS) A QMS is designed to ensure that: • An organisation’s customers can have confidence in its ability reliably to deliver products and services which meet their needs and expectations • The organisation’s quality objectives are consistently and efficiently achieved, through improved process control and reduced wastage • Staff competence, training and morale are enhanced • Quality gains, once achieved, are maintained over time
Providing ‘the right quality’ • Selecting suppliers with quality management systems • Appraising the quality management systems and ‘track record’ of suppliers • Preparing preferred or approved supplier lists • Influencing the quality of product design • Translating design requirements into clear, accurate materials and service specifications • Developing goods inwards procedures for quality inspection and testing • Managing relationships with suppliers • Monitoring and controlling suppliers’ quality performance over time • Working with suppliers to resolve quality disputes
What determines ‘right quantity’? • Demand for the final product • Demand for procured finished items • The inventory policy of the organisation • The service level required • Market conditions • Supply-side factors • Factors determining the economic order quantity • Specific quantities notified to buyers by user departments, according to identified needs
How much stock should you hold? • Stocks reduce the risks of disruption to production • Stocks allow rapid replenishment of goods which are in constant use • Buyers may be able to take advantage of bulk discounts, lower prices or reduced transaction costs by placing fewer, larger orders • Buyers may be able to protect against anticipated shortages, price increases, or exchange rate fluctuations, by buying in advance of need • Stocks of finished or almost-finished goods may be prepared ready for unexpected peaks in customer demand • Stocks of finished goods may be prepared during periods of slow demand
Pull inventory systems • Just in time (JIT) • Materials requirements planning (MRP) • Manufacturing resources planning (MRP II) • Enterprise resource planning (ERP)
Understanding supplier lead times • Internal lead time The lead time for the processes carried out within the buying organisation • External lead time The lead time for the processes carried out within the supplying organisation • Total lead time A combination of internal and external lead time: that is, the time between the identification of a need by the buyer to delivery of goods by the supplier
Key considerations in inbound delivery decisions • The correct delivery point • The timelines of the delivery • The exposure to risk of goods in transit • The total distribution cost • The environmental impact of transport • The need to monitor, track or ‘expedite’ deliveries
Further ‘rights’ for external procurement • The right procurement (or the right need) • The right supplier (or supply chain) • The right relationship • The right process
Obtaining value for money • The use of value analysis to eliminate non-essential features • Challenging user-generated specifications • Proactive sourcing • Consolidating demand • Adopting whole life costing methodologies • Eliminating or reducing inventory and other ‘wastes’ • Using IT systems to make procurement processes more efficient • International sourcing
The ‘Triple Bottom Line’ • Economic sustainability (Profit) • Environmental sustainability (Planet) • Social sustainability (People)
Materials management (MM) • Materials and inventory planning • Procurement of the necessary materials, parts and supplies • Storage and inventory management • Production control
Physical distribution management (PDM) • Warehousing and storage • Transport or distribution planning • Materials handling • Inventory management and control • Transportation and delivery
