PRINCIPLES OF PROCUREMENT

CUSCM 101

INTRODUCTION
 Learning Outcomes

By the end of this lecture students should be able to demonstrate an

understanding of the fundamental issues of principles of procuremen
by:

1. describing the key concepts of purchasing and procurement.

2. explaining the variables of procurement.

3. describing categories of organisational procurement requirements.

4. explaining objectives and importance of procurement.

5. analysing procurement in different sectors.

 Introduction

 The module provides a clear understanding on some of the

terms that are used interchangeably in the buying profession.

 Supply chain management is not merely a fashionable set of

words for supply, purchasing, and procurement!

 Understanding the differences is crucial to the development of a

world-class culture.
 Supply Chain Management

 The term applies to the collaborative relationships of members of different

levels of the supply chain who have common and agreed practices
performed jointly by one or two or more organisations.

 Before SCM can be developed, the supply chain members must first have
specific behaviours, called Supply Chain Orientation (SCO).

 These are trust, commitment, common vision and goals or top management
support (Miguel and Brito 2011) etc.
 Supply Chain Management

 It emphasises ‘serial cooperation’ or ‘working together’ in turn:

each player contributes value at its stage of sequence of activities.

 It emphasises mutual dependency and collaboration.

 because each link in a chain is essential to the completeness and

strength of the whole.

 Procurement under such structures emphasise the importance of

 Logistics

 There is a lot of confusion surrounding the terms logistics and

supply chain management.

 Supply chain is the network of activities and Logistics is what

happens in the supply chain.

 ‘The process of ensuring that the right products reach the right
place in the right quantities at the right time to satisfy customer
demand.’(Institute of Logistics and Transport).
 Discussion

i. Distinguish logistics and Supply Chain Management.

ii. What is the essence of logistics in supply chain management?

 PURCHASING AND PROCUREMENT

 The terms procurement and purchasing are often used interchangeably.

 However, they have important similarities and differences between them.

 It is important to remember that procurement and purchasing activity are

subsections of Supply Chain activity.

 So, when considering the relationship between procurement and supply chain we

need to remember that:

 Supply chain is strategic

 Procurement is tactical
 PURCHASING

 Purchasing is a function within the procurement process.

 It is largely transactional and associated with how goods and services

are ordered.

 Involves receiving and processing purchase requisitions (requirements)

and converting them to purchase orders (POs) (awards to suppliers).

 focused on short-term buying

 Responsible for obtaining by exchange of cash, lease or other legal

means, materials, equipment, works and services required by an
organization for use in its operations or for resale.
 PURCHASING

1. Reactive rather than proactive:- a service activity, buying what is

instructed to buy rather than one that takes the initiative in helping to
determine purchasing policies.

2. Transactional rather than relational:- primarily concerned with the

mechanics of order placing on a once-off basis rather than the
establishment, where appropriate, of long-term, collaborative supply
relationships.

3. Tactical rather than strategic:- focused on short-term buying rather

 PROCUREMENT

 It is the management of all processes involved in obtaining the

goods and services required by an organisation.

 Focuses on:-

 sourcing activities

 negotiating with suppliers

 the strategic selection of goods and services that enable an

organisation to maximise value from a select group of key supplier
partners.
 PROCUREMENT
 Obtaining goods and services by various means such as loans, transfer or hire as well as straight
forward purchasing.

 It starts with need identification and focuses on customer satisfaction.

 The concept advocates for evaluation of the whole process at the end of each transaction for the
purpose of increased improvement.

 Procurement embraces both purchasing and supply management so as to contribute to competitive

advantage of the organisation and achieve its goals by adding value and minimizing costs.
 Factors that Guide Procurement Decision Making

 Quality (value or dimensions that define a product’s fitness for

purpose)

 Quantity (volumes required)

 Source (supply market)

 Place (point of delivery)

 Time (when is delivery required by users?)

 Price (cost of the procurement-focus on total cost of ownership)

 Service (meeting expectations of users)

 Categories of Procurement

 Goods  Non-Consulting Services

– Tangible items – Combination of works an

– Equipment services

– Installation
 Works

– Construction/Reconstruction

– Rehabilitation/Renovation

 Consulting Services

– Intellectual services
 Organisational Procurement Requirements
Supplies or goods are tangible requirements of relatively low value
compared to works and services classified as:

 Consumables - obtained for consumption or short-term usage.

• usually are repetitive needs of relatively low value compared to capital

supplies e.g. stationery, fuel, food supplies, etc.

 Capital supplies - obtained for long term usage in an organisation’s

operations usually of high value compared to consumables

• Are of non-repeat nature as one item of the kind may procured over a
long period of time.
 Organisational Procurement Requirements

On the basis of purpose for which they are procured, supplies

are classified as:

 Revenue supplies - these are either consumables or capital

supplies.

 procured for resale to generate revenue.

 Repair, Maintenance and Operations supplies e.g. grease, oils,

spares parts, chains, gauges, fixtures,
 Organisational Procurement Requirements

On the basis of state in which they are along the supply

chain, supplies are classified as:

 Raw material supplies - inputs into the production process,

 Finished goods - supplies that have completely gone through the

production process ready for distribution to users for consumptions,

 Work-in-progress (WIP) supplies - undergoing conversion from

material state to finished goods supplies.
 Organisational Procurement Requirements

 WORKS

 Any work associated with the construction, demolition,

repair, or renovation of a building or structure.
 Includes the preparation, excavation, erection, assembly,
installation, testing and commissioning of any plant.
 Equipment or materials, decoration and finishing, turnkey
projects, build own and operate projects, build operate and
 Significance of Procurement

 Ensuring a continuous flow of materials, products, and services to support the firm’s
operations.

 Continually seek opportunities to reduce costs, minimize supply risk, and maintain
expected quality levels.

The importance of procurement can be seen by the key inputs it provides firms,
including:

 The raw materials and intermediate goods and services needed in the production of
goods and services.

 Finished goods and services required for resale or for operational purposes.
 Major Benefits of Effectively Managing
Procurement
 Cost reduction

 Procurement represents an excellent opportunity for saving money

because organisations can spend up to 60% or more of their
revenues on raw materials, work in process, finished goods, spare
parts, services, and other goods needed to keep operations going.

 Significant savings can be achieved by applying effective

procurement techniques.
 Major Benefits of Effectively Managing
Procurement
 Quality improvement

 Procurement directly impacts the quality of the overall products

sold by companies, because it is responsible for purchasing raw
materials and other unfinished or finished goods.

 The quality of raw and other materials used in producing goods

almost always affects the quality of the end products.
 Major Benefits of Effectively Managing
Procurement
 Product enhancement

 Procurement can also improve products and process designs.

 Help introduce new technologies into companies’ product and

service offerings.

 E.g. Procurement can work with internal and external engineering

personnel and suppliers to improve product reliability and
performance while also reducing costs.
 Perspectives of procurement In Business
 What is the role of procurement in business management & why is it
important?

 To answer these questions, Procurement function will be studied from

several perspectives.

1. Procurement as a function

2. Procurement as a process

3. Procurement as a link in the supply or value chain

4. Procurement as a relationship
 Perspectives of procurement In Business
1. Procurement as a function

 A ‘function’ is often defined as a unit or department in which people

use specialised knowledge skills and resources to perform
specialised tasks.

 Procurement is still a part of a segmented, departmentalised

structure in which the procurement of supplies is a discrete activity
in the sequence of activities.

 Procurement under such structures emphasise the importance of

cross-functional decision-making.
 Perspectives of procurement In Business

2. Procurement as a process

 Process as ‘a set of interrelated or interacting activities, which

transforms inputs into outputs” (quality management standard).

 A set of activities that uses resources to transform inputs to

outputs.

 Sequential chain of events from recognition of needs leading to the

acquisition of supplies to after procurement activities such as
supplier evaluation and development.
 Perspectives of procurement In Business

3. Procurement as a link in the supply or value chain

 Supply chains and value chains are synonymous.

 a linear map of the way in which value is added by means of a

process from raw materials to finished, delivered product.

 Procurement, along with activities such as production, warehousing

and transportation, is one of the links in the supply chain or
sequences of processes by which supplies are converted into
finished products and delivered to the customers.
 Perspectives of procurement In Business

4. Procurement as a relationship

 Procurement relationships may be both, internal and external, short

or long-term.

 Internal relationships are cross-functional and based on teamwork.

 Externally, relationships with other links in the supply chain e.g.

suppliers.

 Partnership with suppliers is required to ensure an adequate supply

of quality materials overtime at an optimal total acquired cost.

 Perspectives of procurement In Business

 The main issue is no longer about ‘buying the right products at the right time at the

right place’ but of handling and developing relationships with key suppliers over long
period.

5. Procurement as problem-solving

 Procurement is expected to be part of an integrated cross-functional problem-solving

team that brings solutions to the discussion table to satisfy customers’ needs.

 Customers are not looking for a product from a manufacturer.

 Instead they seek for a solution to a problem from a supplier.

 Business procurements are problem driven.