Procurement in Industrial

ManagementBPT 3133

Introduction to Procurement

Chapter Outline

• Nature of Procurement• Development of Purchasing and Supply

Strategies• Knowledge of Supply Markets• Purchasing Decisions and Business

Strategy• The Legal Aspects of Purchasing

Learning Objectives

• Understand the nature of procurement

• Understand the legal aspects of purchasing

• Identify purchasing and supply chain as a procurement activity

What is Procurement?A process of obtaining services, supplies and equipments in conformity with applicable law and regulations.The acquisition of appropriate goods or services at the best possible total cost of ownership.The term has wider meaning and it covers all purchasing activities whose purpose is to give buyer the best value for money.

Nature of Procurement

Cycle View of Supply Chain Processes

Nature of Procurement

•Occurs at the customer/retailer interface.•Includes all processes directly involved in receiving and filling the

customer’s orders.

Customer Cycle•Occurs at the/distributor interface.•Includes all processes involved in replenishing retailer inventory.•To meet future demand.

Replenishment Cycle

•Occurs at the distributor/manufacturer interfaces.•Includes all processes involved in replenishing distributor inventory.Manufacturing

Cycle

•Occurs at the manufacturer/supplier interface.•Includes all necessary processes to ensure that all materials are

available for manufacturing.

Procurement Cycle

Types of Purchases:1. Commodities/Raw materials – petroleum, gas

oil, rubber, copper, gold, cotton, soybeans, grains etc.

2. Semi finished Products and Components – single part number components, subassemblies, subsystems etc.

3. Finished Products – outsourced all production capability and capacity

4. Maintenance, Repair and Operating Items5. Production Support Items – pallets, tape,

bags etc.6. Services – consultants, machine repair, courier

etc.7. Capital Equipment – furniture, machinery etc.8. Transportation and Third-Party Purchasing

Nature of Procurement

Nature of Procurement

Nature of Procurement can be broadly categorized into:

Strategic Procurement

Non-strategic Procurement

Routine Procurement

Strategic ProcurementIncludes those goods that are essential to the achievement of key outputs/objectives of the procuring party

Characteristics of strategic procurement:•Contracts are high value and efficient planning is required•Specifications of goods are complex and refined•Strict adherence to quality and timeline is essential•Selection of the right source is the key to success of a contract•Competitive vendor selection to get value for money•Sharing risks between parties•Workable relationship for both parties mutual benefit is vital

Nature of Procurement

Non-Strategic ProcurementIncludes goods that are not especially critical to the achievement of the key objectives of procuring party

Characteristics of non-strategic procurement:•Procurement activities are not multifaceted•Specifications of goods are not very complex•Source selection process is relatively simple•Value of procurement may not very high

Nature of Procurement

Routine ProcurementIncludes purchase of low value goods

Administrative cost can reduced by:Streamlining the ordering and payment proceduresGreater use of electronic commerceWorkable arrangement with supplier for specific good at agreed price

Nature of Procurement

Principles of Good ProcurementPrinciple hallmarks of proficient public procurement include:

-Value for money (VFM)-Competition-Efficiency-Economy-Effectiveness-Ethic

-Accountability-Transparency-Documentation-Disclosure-Fairness-Dealing with complaints

Nature of Procurement

30 years ago• Concerned with

buying supplies at the lowest price. Activity

was essentially clerical. Reactive• Little

involvement with supplier

15 years ago• Still concerned with lowest price

but aware of other factors

affecting price (quality & delivery)• More

involvement with suppliers

and other internal

functions

Today• Purchasing and supply

become strategically involved – organization

seen purchasing as strategic advantage

• Closely involved with suppliers and other activities concerned

more with true ownership cost than

price

The future• Application of

leading-edge concepts throughout

the supply chain• Value addition

displaces cost reduction as primary

role• Potential of

developing technology realized

• Total customer focus

Development of Purchasing

Development of Purchasing

A four-stage purchasing development model :Passive

Independent

Supportive

Integrative(Source: Reck and Long, 1988)

PassiveDefinition The purchasing function has no strategic direction and primarily reacts to the requests and other functions

Characteristics• High proportion of purchaser’s time is spent on quick-fix

and routine operations• Purchasing function and individual performance are based

on efficiency measures• Little inter-functional communication takes place because

of purchasing low visibility• Supplier selection is based on price and availability

Development of Purchasing

IndependentDefinition The purchasing function adopts the latest purchasing techniques and practices, but its strategic direction is independent of firm’s competitive strategy

Characteristics• Performance is primarily based on cost reduction and

efficiency measures• Co-ordination links are established between purchasing and

technical disciplines• Top management recognizes the importance of professional

development• Top management recognizes the opportunities in

purchasing for contributing to profitability

Development of Purchasing

SupportiveDefinition The purchasing function supports the firm’s competitive strategy by adopting purchasing techniques and practices which strengthen the firm’s competitive position

Characteristics• Purchasers are included in sales proposal teams• Supplier are considered a resource which is carefully

selected and motivated• People are considered a resource with emphasis on

experience, motivation and attitude• Markets, products and suppliers are continuously monitored

and analyzed

Development of Purchasing

IntegrativeDefinition Purchasing strategy is fully integrated into firm’s competitive strategy & constitutes part of an integrated effort among functional peers to formulate & implement a strategic plan

Characteristics• Cross-functional training of purchasing

professionals/executives is made available• Permanent lines of communication are established among

other functional areas• Professional development focuses on strategic elements of

the competitive strategy• Purchasing performance is measured in terms of

contributions to the firm’s success

Development of Purchasing

Market structure - identifies how a market is made up in terms of:•The number of firms in the industry•The nature of the product produced•The degree of monopoly power each firm has•The degree to which the firm can influence price•Profit levels•Firms’ behaviour – pricing strategies, output levels and non-price competition •The extent of barriers to entry•The impact on efficiency

Knowledge of Supply Markets

Perfect Competition

Pure Monopoly

Monopolistic Competition Oligopoly Duopoly Monopoly

The further right on the scale, the greater the degree

of monopoly power exercised by the firm.

Knowledge of Supply Markets

Perfect Competition One extreme of the market structure spectrum

Characteristics: Large numbers of firms Products are homogenous (identical) – consumer

has no reason to express a preference for any firm

Freedom of entry and exit into and out of the industry

Firms are price takers – have no control over the price they charge for their product

Each producer supplies a very small proportion of total industry output

Consumer and producers have a perfect knowledge about the market

Knowledge of Market Structure

Imperfect Competition / MonopolisticWhere the conditions of perfect competition do not hold, ‘imperfect competition’ will existCharacteristics: Large number of firms in the industry May have come element of control over price due

to the fact that they are able to differentiate their product in some way from their rivals

Entry and exit from the industry is relatively easy – few barriers to enter and exit

Consumer and producer knowledge are imperfect

Knowledge of Market Structure

OligopolyCompetition between the few - may be a large number of firm on the industry but the industry is dominated by a small number of very large producersCharacteristics: Price maybe stable across the industry Potential for collusion Behavior of firms affected by what they believe

their rivals might do Good could be homogenous or highly

differentiated High barriers to enter

Knowledge of Market Structure

DuopolyMarket structure where the industry is dominated by two large producersCharacteristics: Collusion may be a possible feature Price leadership by the larger of the two firms

may exist Highly interdependent

Knowledge of Market Structure

Monopoly Where only one producer exists in the industry; one firm dominates the marketCharacteristics: Price – could be deemed too high, price

discrimination is possible Efficiency – could be inefficient due to lack of

competition Innovation – could be high because of the

promise high profitability Collusion is possible to maintain the monopoly

power

Knowledge of Market Structure

Strategy – game plan for the future, mapping out the future for the organization. Organization’s sense of purpose and direction. Developing a strategy, organization need to consider:

What are the target objectives?How are the target objectives to be achieved?

Strategy covers:Moves and approaches, new actions, innovation, choosing among alternatives and doing the right thing at the right times.

Business Strategy

Level of Strategy Within an Organization

CORPORATEAll-embracing,

linking the business together

BUSINESSConcerned with broad issues, such as how to compete in different market

OPERATIONALConcerned with functional activities such as marketing,

purchasing, production or finance

Business Strategy

Factors influence the choice of a strategy:The position of the business in its supply chainThe number of effective sources in the

company’s supply marketThe pace of technological development

(supply and end market)The volatility of the supply and/or end marketsThe degree of government involvement in the

marketplaceThe ability of the buying company to manage a

strategy

Business Strategy

Effective Supply-Market StrategiesBased on analysis, weighing up probabilities, defining strategies and planning their implementation in detail: a) analyze the supply chain to find key

advantage or threats existb) understanding the potential impact of

strategic intervention upon supply marketc) alternative routes – select the most beneficiald) predicting the outcomes with reasonable

accuracye) convincing colleagues within business of the

benefits

Business Strategy

Public Procurement in Malaysia• Financial Procedure Act 1957• Government Contract Act 1949• Treasury Instruction• Treasury Circular LettersApply to procurement by all federal and state governments and semi-governmental agencies but not state-owned enterprises

The Legal Aspect of Purchasing

• Open tendering is used for procurement above RM 200,000

• Closed tendering for procurement between RM 50,000 to RM 200,000

• Direct purchasing for procurement below RM 50,000

• Nature of procurement can be categorized into 3 : strategic, non-strategic and routine

• Purchasing and supply chain management recognized as an area for reducing cost and adding value.

• 4 stage purchasing development model : passive, independent, supportive and integrative

• Appropriately developed supply chain management enable purchasing make operational, tactical, and strategic improvement in the area.

Summary