MODULE: II-A

Procurement Management
in Supply Chain in Supply Chain
Presentation by
Dr !ilas " Shin#e
Pro$essor % &ea#'
Mechanical Engineering Department'
Datta Meghe College o$ Engineering'
Airoli' (a)i Mumbai-*++,+- .I(DIA/
PU0C&ASI(1 A(D P0OCU0EME(2
Intro#uction
Procurement and Purchasing are the related terms used to acquire the
optimum quality and quantity of material, goods or services at the
lowest cost in timely manner for the enterprises as per requirement
The term Procurement can broadly defined as it is the overarching
function that describes the activities and processes to acquire goods
and services for the enterprise
The term Purchasing refers to the process of ordering and receiving The term Purchasing refers to the process of ordering and receiving
goods and services. It is refers to the process involved in ordering
goods /services
The Purchasing is a subset of the wider procurement process
Importantly, the Procurement is distinct from Purchasing,
procurement involves the complete activities right from in
establishing fundamental requirements.
It includes sourcing activities, such as, market research, vendor
evaluation and negotiation of cost or contracts. It can also include the
purchasing activities required to issue the purchase order and receive
goods
Scope an# Importance
Procurement is the most important activities of the element of
supply chain management
Purchasing is most important function of materials management
The material planning functions determines the requirement of
raw materials, such as, material, spare parts and components
required for the purpose of manufacturing the required product/s.
The requirement of these raw materials has designed by the The requirement of these raw materials has designed by the
material requirement planning (MP!I"
This process can take the decision regarding the buying of raw
material, #hat, $ow and #hen to buy% &ccordingly the
procurement plan can be prepared by the concerned
This procurement plan will be forwarded to the purchase
department in the form of requisitions
The suppliers evaluation is also one of the important task of the
procurement process
P0OCU0EME(2 MA(A1EME(2 I( SC
Procurement Process
To understand the need of fundamental business
requirement of any material by the concerned
department
To verify the requirement with respect to its
specifications, quality and quantity
To search for the vendors and suppliers along with their
DE3I(E 2&E "USI(ESS (EED
To search for the vendors and suppliers along with their
details who can supply the required material
In the 'upply (hain e)ecution the business requirement
can be publici*ed on the intranet through software to
receive the information of requirement
The purchase requisition should include all the required
parameters of the material in the procurement process
DE!ELOP P0OCU0EME(2 S20A2E14
+epending on the scale of requirement, there are very wide range
of potential solutions and approaches to the business need
There are number of ways of searching the market and selecting a
supplier to fulfill the requirement
To understand the importance and timely need of required intend
To verify whether the suggested vendors / suppliers are on the
approved list of the company or not approved list of the company or not
To verify the records and the reputation of the vendors / suppliers
suggested by the intender
To decide the strategy and flow down the complete procedure
right from floating of tender to the purchase for the procurement
of said material
To take the approval from the concerned authority so as to enable
to e)ecute the process e)peditiously
The quality material shall be procured with optimum lowest cost in
minimum time
SUPPLIE0S E!ALUA2IO( A(D SELEC2IO(
To evaluate the tenders received or on!line action after
establishing your procurement process
To draw the compatible evaluation criteria or plan to choose
the appropriate solution by comparing the different solutions
The process for the selection of the supplier involves two basic
aspects,
Searching $or all possible sources Searching $or all possible sources
Short listing the i#enti$ie# sources out o$ it
The criteria for comparing different solutions and suppliers
are critical which includes all the important parameters
To focused on the key criteria heavily and don-t give much
importance to aspects that will have little impact on the
solution
(E1O2IA2IO( A(D A5A0D O3 CO(20AC2
+espite of selecting the suppliers after following the procedure, it
is necessary to negotiate for the complete deals.
This is not .ust about the cost of the material but its all about the
e)penses incurred on other necessary things, such as, delivery
time, carriage cost, maintenance contract etc..
To draw the procedures carefully by which the goods or services
will be ordered and approved will be ordered and approved
To consider the claws for delivery terms and returned the material
if necessary
To decide the appropriate invoice process for payment terms and
prepare the M/0 between supplier/s and the company
&fter following the complete procedure the contract can be
awarded to the selected and negotiated supplier/s
To consider the whole Purchase to Pay process (P1P" which will
help to reduce total costs and risk significantly
I(DUC2IO( A(D I(2E10A2IO(
To induct the supplier in the company process, the
contract shall be signed by the supplier/s
2o goods or services should be ordered until the
contract is signed
The P1P process needs to be in place and also needs to The P1P process needs to be in place and also needs to
be understood by both, buyer and supplier
To draw the mechanism for evaluate the service levels
of the suppliers
egular review procedure should be established to
integrate the complete procurement procedure
24PES O3 PU0C&ASES A(D I2S POLICIES
The primary ob.ective of purchasing is to insure the un!interrupted
flow of quality raw materials at the lowest possible cost in pre!
defined time to produce the product to the customer satisfaction
Purchasing is the crucial link between the suppliers and the
manufacturer with supportive overlapping activities to enhance the
manufacturability of both.
The purchase procedure is little bit different from the procurement The purchase procedure is little bit different from the procurement
procedure.
There are eight stages of the purchase procedure, some of them
also involved in procurement process
The significance of the role of purchasing is based on the si*e of
e)penditures for goods/services as reflected in balance sheet.
The whole concept of purchasing activities is now changing from
traditional material controlling to managing supply chains.
24PES O3 PU0C&ASES
There are four primary type of purchases which is classified on the
basis of classes of buyers
Personal Purchasing: The buyers who purchases the materials /goods
for their personal consumption and survival in economical prices. The
whole economy is depends upon this group of buyers.
Mercantile Purchasing: The buyers who purchases the goods /
material for the purpose of resale to meet customer-s requirements but
not for their own consumption. 0nder this group the buyers are
distributors, wholesalers, retailers and agents who creates the channels
not for their own consumption. 0nder this group the buyers are
distributors, wholesalers, retailers and agents who creates the channels
of distribution of goods from manufacturers to the consumers.
In#ustrial purchasing: The buyers who purchases the semi!finished
goods / raw material to consume or convert into finished product. It
involves buying of raw materials, components, consumable stores and
supplies, spares and tools, machines and equipments, office
appliances. 0nder this group the buyers are manufacturer,
industrialist, small or medium scale business proprietors.
Institutional or 1o)ernment Purchasing: The buyers who
purchases the material / goods for public utilities. 0nder this group the
buyers are governmental agencies and institutions.
The manufacturing enterprises can segregate the types of purchases
according to the category of required material.
These type of purchases requires a specific sets of skills to fulfil the
requirement and accomplish the process.
The types of purchases according to category of materials:
aw material
Purchased parts and
components
In 4eneral Purchasing
describes,
The process of buying
components
Maintenance epair
operating (M/"
Packaging
Tools and equipments
'ervices
esale items
The process of buying
5nowing the need
'uppliers selection
Price negotiation
6ollow!up
Timely delivery
PU0C&ASE P0OCEDU0E
PU0C&ASI
(ee# 0ecognition
Selection o$
Supplier
Maintenance
o$ !en#ors
6
7 -
PU0C&ASI
(1
P0OCEDU
0E
0ecei)ing % Inspection
Placing Or#er
3ollo8-up
Payment
o$ In)oice
Maintenance
o$ 0ecor#s
9
:
*
; ,
PU0C&ASE POLICIES
&n enterprises requires to enhance and achieve continuous
process improvement in order to produce their products
/services more effectively. There are some policies an
enterprises can organi*e the purchasing/supply function in its
quest to achieve the ob.ectives. The policies are as follows,
Placement of Purchasing &uthority
esponsibility for &naly*ing equirements
esponsibility of Purchasing7Materials Management
(entrali*ation versus +ecentrali*ation
The Team &pproach as Part of the /rgani*ational 'tructure
/rgani*ing 'upply (hain Management
(reating organi*ation for the future
PLACEME(2 O3 PU0C&ASI(1 AU2&O0I24
The four ma.or prerogatives of the purchasing department should be emphasi*ed
in the company8s written ob.ectives and policies.
6irst, selection of the supply source is wholly a matter of purchasing
authority. The need to buy originates in other departments, where required
quality is defined. The purchasing authority is fully responsible for the
purchases so as to satisfy the all measures of the requisition made by
concerned.
'econd, all contacts with vendors / suppliers should be made through the
purchasing department, right from first sales interview to the delivery of
material and approval of the vendor8s invoice or any ad.ustments that may be material and approval of the vendor8s invoice or any ad.ustments that may be
necessary.
Third, it is the duty of the purchasing authority and buyers to check purchase
requests against the need, referred as 9+emand Management:. They can also
suggest necessary modifications in the requisitions to make it more
economical or more e)peditious procurement in order procured the material
in time to meet the necessary need.
6ourth, the commercial aspects of the purchases are within the .urisdiction of
the purchasing department. These include the method of purchase, the price
and pricing method, the terms and conditions of the order or contract,
packing and shipping instructions.
0ESPO(SI"ILI24 3O0 A(AL4<I(1 0E=UI0EME(2S
This is the another policy that should be framed for the companies and
enterprises.
The purchasing authority has the responsibility to analy*e requirements
which is made by the concerned with complete and accurate
information.
The purchasing department has the duty to purchase and fulfill any
legitimate, properly authori*ed requisition.
The purchasing authority can question on any requisition as to the The purchasing authority can question on any requisition as to the
material or quantity specified for purchase, if in its .udgment, the request
is out of line with current usage or best buying policy.
0sually, purchasing also has the right of revising quantities on a
requisition for purposes of buying most advantageously, provided the
total requirement is procured in time to meet the need and funds are
available.
In absence of formal authori*ation, the purchasing authority may assume
added responsibility, acting beyond the scope of their stated function,
assuming that the manager does not infringe upon the authority of other
departments.
0ESPO(SI"ILI24 O3 PU0C&ASI(1 DEPA02ME(2
The ultimate responsibility of the quality and types of materials must be
rest with those who use and are responsible for the results.
In this sense, the user departments are 9customers; of the purchasing
department, and they must be satisfied, but this does not place the
responsibility or authority for selection with the user department.
The responsibility for accurate definition or specification of the product, in
quality, in terms of formula or analysis, in commercial standards, blueprints quality, in terms of formula or analysis, in commercial standards, blueprints
or dimensional tolerances, or the intended purpose of the material.
The scrutiny of requisitions made by user department is a part of the duty of
purchasing authority to avoid duplication, e)cessive stocks, and
unnecessary rush orders that would disrupt the procurement program and
incur e)tra costs on the company.
The purchasing authority are responsible for all commercial aspects of the
transaction, such as, negotiations, delivery, guarantees, terms and
conditions of the contract and ad.ustments as to over! and under!shipments
or deficiencies in quality.
CE(20ALI<A2IO( VS DECE(20ALI<A2IO(
#hen the purchases are huge in quantity, at a very high cost or
budget or management feels to keep tight control over a purchase,
it is desirable to e)ecute the organi*ation centrali*e purchasing.
There are many advantages and disadvantages to centrali*e as well
as decentrali*e. $owever, there are times when it makes sense to
decentrali*e. decentrali*e.
4enerally, the enterprises e)ecutes the decentrali*ed purchasing
when companies process single natural raw materials< technically
oriented firms that are heavily involved in research (scientists"<
operation of multi!site institutional = manufacturing organi*ations
(centrali*ed planning at corporate level, ordering at plant level"<
autonomy of a manager< or purchase of non!technical odds and
ends (purchase cards".
CE(20ALI<ED PU0C&ASI(1
AD!A(2A1ES DISAD!A(2A1ES
Minimi*es over!ordering and
hapha*ard purchasing
Increases the likelihood that
appropriate products are
purchased
Increases buying power
Is time! and resource!intensive
Potentially increases the supply
time to obtain products because
orders placed through a purchase
department
Tendency to minimi*e legitimate
differences in requirements
Increases buying power
>nhances Inventory control
?ess operating e)penses
'tandardi*ation of the items
'ystem is more efficient in
administration
It provides better control on
purchases as well as on
suppliers
differences in requirements
?ack of recognition of unique
needs
6ocus of corporate requirements,
not on business unit strategic
requirements
2arrow speciali*ation and .ob
boredom
?ack of .ob fle)ibility
Tendency to create organi*ational
silos
2EAM APP0OAC&: O01A(I<A2IO(AL S20UC2U0E
+riven by pressures to reduce costs and improve the bottom line in
today8s cost effective marketplace, purchasing/supply departments have,
like most other functions, sought ways to streamline operations and
improve efficiency.
/ne of the approaches that has enhanced the effectiveness of the supply
/ purchasing management function is the use of teams.
There are various types of purchasing and supply management teams There are various types of purchasing and supply management teams
used, including cross!functional teams, teams with suppliers, teams with
customers, teams with both suppliers and customers, supplier councils,
purchasing councils, commodity management teams, and consortiums
Teams with 'upplier Participation make sense when requirements are
being developed by using supplier workshops to determine marketplace
capabilities
Teams with (ustomer Participation are developed in an effort to be
customer driven since customers are the ultimately consumers.
O01A(I<I(1 SUPPL4 C&AI( MA(A1EME(2
The supply chain management concept represents an integration of
information flows, e)tending from the supplier to end user while
materials management is generally involved with the flow in
materials into an organi*ation.
Many organi*ations combine materials management (input
function" with logistics (physical distribution" management which
includes all material flow function, both into and out of, an includes all material flow function, both into and out of, an
organi*ation.
The supply chain management in purchasing is not a traditional
pyramid structure for a new functional initiative that will replace
the procurement organi*ation.
It is a comprehensive collection of work tasks and role definitions,
processes, organi*ational mechanisms, and competencies that work
together to span functional groupings at geographic and business
locations.
C0EA2I(1 O01A(I<A2IO( 3O0 2&E 3U2U0E
(entrali*ed purchasing is where all main purchasing is controlled at
one central point for the entire firm.
In hybrid purchasing, purchasing is shared between corporate
offices and business units, operating plants, and/or divisions.
In decentrali*ed purchasing, all main purchasing is controlled at the
business units, plants, and/or divisions.
Mergers, acquisitions, management changes, and the emphasis on
cost saving prompt organi*ations to continually re!evaluate the way cost saving prompt organi*ations to continually re!evaluate the way
they conduct business.
+etermining a purchasing organi*ation structure requires
consideration of the advantages and disadvantages of centrali*ed,
hybrid and decentrali*ed structure for the company, then selecting
the most appropriate.
It is very difficult to sustain a situation where the organi*ation can
be opted either for centrali*ed or decentrali*ed, since cost savings
have been identified as the ma.or instigator of structural change by
adopting the supply chain and create organi*ation for future.
P0OCU0EME(2 P0OCESS I( SCM
The procurement process includes the activities right from material
requisitions to material acquisitions
The concept of adopting these activities are called as supply
management in the supply chain conte)t
The variables of the procurement in '(M directly affects the profit of
the enterprise/s
These variables are,
ight Material ight Material
/f ight @uality
6rom the ight 'ource
In the ight @uantity
In the ight (ondition
&t the ight Time
&t the ight Price and
6or the ight service
To achieve these all rights the techniques of procurement process supply
chain is used
0E3E0E(CES
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