BMS: PRINCIPLES OF PROCUREMENT MANAGEMENT
By the end of the course, the learner should be able to:
Describe the procurement procedures
Discuss mechanisms used to control quality and quantity in procurement
Explain the purchasing methods
Discuss aspects of professional behavior in procurement
INTRODUCTION
Definitions:
Procurement means acquiring goods and/or services from an outside source. Procurement is the term
generally used by government, while business uses the term purchasing and outsourcing is commonly
used by the information technology industry.
The term “procurement” refers to the process of acquiring goods, works and services. The process
spans the whole cycle from identification of needs through to the end of a services contract or the
useful life of an asset.
Purchasing as an activity of procurement can be defined as the process that consists of all activities
that lead to effective buying of raw materials, parts, components, equipments, spare parts, tools and
supporting items required by any organisation to deliver quality products to meet customer
requirements at competitive prices.
Procurement is wider in scope and includes purchasing, traffic, receiving, and storing materials.
A major goal of purchasing and procurement management is the acquisition of materials, supplies,
equipment, and services that will add value to the acquisition process and entire production operations
in achieving strategic goals and objectives.
ACTIVITIES INVOLVED IN PROCUREMENT AND PURCHASING
1. Procurement/ purchasing planning
2. Standards determination
3. Specifications development
4. Supplier research and selection
5. Value analysis
6. Financing
7. Price negotiation
8. Making the purchase
9. Supply contract administration
1
, 10. Inventory control and stores, and
11. Disposals and other related functions
PROCUREMENT OPERATIONS
Procurement/ purchasing procedure
A typical procurement/ purchase department is usually engaged in purchasing a number of
goods/materials and services falling in different categories. The activities are performed regularly by
purchase professionals with the objective of fulfilling organization’s goods/materials and services
needs.
Naturally, depending upon the nature of procurement, environmental practices etc the purchasing
systems and procedures may also vary substantially. However, purchase procedure can be seen to
have a bit of standardization across the globe and therefore a professional procurement/ purchasing
system can show the following steps that eventually constitute a purchasing cycle:
Recognition & description of need
Transmission of need
Selection of source to satisfy the need
Contracting with the accepted source
Following up with the source
Receiving and inspecting goods/materials
Payment and closure of the case
RECOGNITION OF THE NEED/ TRANSMISSION OF NEED
The initiation of procedure starts with the recognition of the need by the needy section or department.
The demand is lodged with the purchase/procurement department in the prescribed Purchase
Requisition Form forwarded by the authorised person either directly or through the Stores
Department. The purchase requisition clearly specifies the details, such as, specification of materials,
goods or services, quality and quantity, suggested supplier, etc. Generally, the low value sundries and
items of common use are purchased for stock while costlier and special items are purchased according
the production programmes. Generally, the corporate level executives are authorized signatories to
such demands. Such purchases are approved by the Board of Directors. The reference of the approval
is made on requisition and a copy of the requisition is sent to the secretary for the purpose of overall
planning and budgeting.
THE SELECTION OF THE SUPPLIER
The process of selection of supplier involves two basic aspects: searching for all possible sources
and short listing out of the identified sources. The complete information about the supplier is
available from various sources, such as, trade directories, advertisement in trade journals, direct
2
,mailing by the suppliers, interview with suppliers, salesmen, suggestions from business associates,
visit to trade fair, participation in industries convention, etc. Identification of more and more sources
helps in selecting better and economical supplier. It should be noted that the low bidder is not always
the best bidder. When everything except price is equal, the low bidder will be selected. The
important considerations in the selection are the price, ability to supply the required quantity,
maintenance of quality standards, financial standing etc. It should be noted that it is not necessary
to go for this process for all types of purchases. For the repetitive orders and for the purchases
of low-value, small lot items, generally the previous suppliers with good records are preferred.
PLACING THE ORDER
Once the supplier is selected the next step is to place the purchase order. Purchase order is a
letter sent to the supplier asking to supply the said material or goods. At least six copies of purchase
order are prepared by the purchase section and each copy is separately signed by the purchase officer.
Out of these copies, one copy each is sent to store-keeper, supplier, accounts section, inspection
department and to the department placing the requisition and one copy is retained by the purchase
department for record.
FOLLOW-UP OF THE ORDER
Follow-up procedure should be employed wherever the costs and risks resulting from the delayed
deliveries of goods are greater than the cost of follow-up procedure, the follow-up procedure
tries to see that the purchase order is confirmed by the supplier and the delivery is promised. It
is also necessary to review the outstanding orders at regular intervals and to communicate with
the supplier in case of need. Generally, a routine urge is made to the supplier by sending a printed
post card or a circular letter asking him to confirm that the delivery is on the way or will be made
as per agreement. In absence of any reply or unsatisfactory reply, the supplier may be contact
through personal letter, phone, telegram and/or even personal visit.
RECEIVING AND INSPECTION OF THE MATERIALS
The receiving department receives the goods/materials supplied by the vendor. The quantity are
verified and tallied with the purchase order. The receipt of the goods or materials is recorded on the
specially designed receiving slips or forms which also specify the name of the vendor and the
purchase order number. It also records any discrepancy, damaged condition of the consignment or
inferiority of the goods and materials. The purchase department is informed immediately about the
receipt of the goods or materials. Usually a copy of the receiving slip is sent to the purchase
department.
3
, PAYMENT OF THE INVOICE
When the goods are received in satisfactory condition, the invoice is checked before it is approved for
the payment. The invoice is checked to see that the goods were duly authorised to purchase, they were
properly ordered, they are priced as per the agreed terms, the quantity and quality confirm to the
order, the calculations are arithmetically correct etc.
MAINTENANCE OF THE RECORDS
Maintenance of the records is an important part and parcel of the efficient purchase function. In the
industrial firms, most of the purchases are repeat orders and hence the past records serve as a good
guide for the future action. They are very useful for deciding the timings of the purchases and in
selecting the best source of the supply.
MAINTENANCE OF VENDOR RELATIONS
The quantum and frequency of the transactions with the same key suppliers provide a platform for the
purchase department to establish and maintain good relations with them. Good relations develop
mutual trust and confidence in the course of the time which is beneficial to both the parties. The
efficiency of the purchase department can be measured by the amount of the goodwill it has with its
suppliers.
Proactive procurement
It is involved in coordinating procurement system
It enables the development of suppliers
Long-term contracts
Involved in development of requirements
Involved in Planning for recurring requirements
Concerned with Procurement adding value
Active in source selection
Deals with near defect-free materials/goods and services
Emphasises on cost reduction, enhancing quality, and timely deliveries
Relationships: Transactional and collaborative
Bottom-line impact: Profit contributor
Reporting: Upper management
Data: Facilitates sourcing and pricing of goods /materials and services
Fulfilling of the social responsibilities
It involves e-Commerce
4
By the end of the course, the learner should be able to:
Describe the procurement procedures
Discuss mechanisms used to control quality and quantity in procurement
Explain the purchasing methods
Discuss aspects of professional behavior in procurement
INTRODUCTION
Definitions:
Procurement means acquiring goods and/or services from an outside source. Procurement is the term
generally used by government, while business uses the term purchasing and outsourcing is commonly
used by the information technology industry.
The term “procurement” refers to the process of acquiring goods, works and services. The process
spans the whole cycle from identification of needs through to the end of a services contract or the
useful life of an asset.
Purchasing as an activity of procurement can be defined as the process that consists of all activities
that lead to effective buying of raw materials, parts, components, equipments, spare parts, tools and
supporting items required by any organisation to deliver quality products to meet customer
requirements at competitive prices.
Procurement is wider in scope and includes purchasing, traffic, receiving, and storing materials.
A major goal of purchasing and procurement management is the acquisition of materials, supplies,
equipment, and services that will add value to the acquisition process and entire production operations
in achieving strategic goals and objectives.
ACTIVITIES INVOLVED IN PROCUREMENT AND PURCHASING
1. Procurement/ purchasing planning
2. Standards determination
3. Specifications development
4. Supplier research and selection
5. Value analysis
6. Financing
7. Price negotiation
8. Making the purchase
9. Supply contract administration
1
, 10. Inventory control and stores, and
11. Disposals and other related functions
PROCUREMENT OPERATIONS
Procurement/ purchasing procedure
A typical procurement/ purchase department is usually engaged in purchasing a number of
goods/materials and services falling in different categories. The activities are performed regularly by
purchase professionals with the objective of fulfilling organization’s goods/materials and services
needs.
Naturally, depending upon the nature of procurement, environmental practices etc the purchasing
systems and procedures may also vary substantially. However, purchase procedure can be seen to
have a bit of standardization across the globe and therefore a professional procurement/ purchasing
system can show the following steps that eventually constitute a purchasing cycle:
Recognition & description of need
Transmission of need
Selection of source to satisfy the need
Contracting with the accepted source
Following up with the source
Receiving and inspecting goods/materials
Payment and closure of the case
RECOGNITION OF THE NEED/ TRANSMISSION OF NEED
The initiation of procedure starts with the recognition of the need by the needy section or department.
The demand is lodged with the purchase/procurement department in the prescribed Purchase
Requisition Form forwarded by the authorised person either directly or through the Stores
Department. The purchase requisition clearly specifies the details, such as, specification of materials,
goods or services, quality and quantity, suggested supplier, etc. Generally, the low value sundries and
items of common use are purchased for stock while costlier and special items are purchased according
the production programmes. Generally, the corporate level executives are authorized signatories to
such demands. Such purchases are approved by the Board of Directors. The reference of the approval
is made on requisition and a copy of the requisition is sent to the secretary for the purpose of overall
planning and budgeting.
THE SELECTION OF THE SUPPLIER
The process of selection of supplier involves two basic aspects: searching for all possible sources
and short listing out of the identified sources. The complete information about the supplier is
available from various sources, such as, trade directories, advertisement in trade journals, direct
2
,mailing by the suppliers, interview with suppliers, salesmen, suggestions from business associates,
visit to trade fair, participation in industries convention, etc. Identification of more and more sources
helps in selecting better and economical supplier. It should be noted that the low bidder is not always
the best bidder. When everything except price is equal, the low bidder will be selected. The
important considerations in the selection are the price, ability to supply the required quantity,
maintenance of quality standards, financial standing etc. It should be noted that it is not necessary
to go for this process for all types of purchases. For the repetitive orders and for the purchases
of low-value, small lot items, generally the previous suppliers with good records are preferred.
PLACING THE ORDER
Once the supplier is selected the next step is to place the purchase order. Purchase order is a
letter sent to the supplier asking to supply the said material or goods. At least six copies of purchase
order are prepared by the purchase section and each copy is separately signed by the purchase officer.
Out of these copies, one copy each is sent to store-keeper, supplier, accounts section, inspection
department and to the department placing the requisition and one copy is retained by the purchase
department for record.
FOLLOW-UP OF THE ORDER
Follow-up procedure should be employed wherever the costs and risks resulting from the delayed
deliveries of goods are greater than the cost of follow-up procedure, the follow-up procedure
tries to see that the purchase order is confirmed by the supplier and the delivery is promised. It
is also necessary to review the outstanding orders at regular intervals and to communicate with
the supplier in case of need. Generally, a routine urge is made to the supplier by sending a printed
post card or a circular letter asking him to confirm that the delivery is on the way or will be made
as per agreement. In absence of any reply or unsatisfactory reply, the supplier may be contact
through personal letter, phone, telegram and/or even personal visit.
RECEIVING AND INSPECTION OF THE MATERIALS
The receiving department receives the goods/materials supplied by the vendor. The quantity are
verified and tallied with the purchase order. The receipt of the goods or materials is recorded on the
specially designed receiving slips or forms which also specify the name of the vendor and the
purchase order number. It also records any discrepancy, damaged condition of the consignment or
inferiority of the goods and materials. The purchase department is informed immediately about the
receipt of the goods or materials. Usually a copy of the receiving slip is sent to the purchase
department.
3
, PAYMENT OF THE INVOICE
When the goods are received in satisfactory condition, the invoice is checked before it is approved for
the payment. The invoice is checked to see that the goods were duly authorised to purchase, they were
properly ordered, they are priced as per the agreed terms, the quantity and quality confirm to the
order, the calculations are arithmetically correct etc.
MAINTENANCE OF THE RECORDS
Maintenance of the records is an important part and parcel of the efficient purchase function. In the
industrial firms, most of the purchases are repeat orders and hence the past records serve as a good
guide for the future action. They are very useful for deciding the timings of the purchases and in
selecting the best source of the supply.
MAINTENANCE OF VENDOR RELATIONS
The quantum and frequency of the transactions with the same key suppliers provide a platform for the
purchase department to establish and maintain good relations with them. Good relations develop
mutual trust and confidence in the course of the time which is beneficial to both the parties. The
efficiency of the purchase department can be measured by the amount of the goodwill it has with its
suppliers.
Proactive procurement
It is involved in coordinating procurement system
It enables the development of suppliers
Long-term contracts
Involved in development of requirements
Involved in Planning for recurring requirements
Concerned with Procurement adding value
Active in source selection
Deals with near defect-free materials/goods and services
Emphasises on cost reduction, enhancing quality, and timely deliveries
Relationships: Transactional and collaborative
Bottom-line impact: Profit contributor
Reporting: Upper management
Data: Facilitates sourcing and pricing of goods /materials and services
Fulfilling of the social responsibilities
It involves e-Commerce
4
