Procurement Essay ⋆ Business Essay Examples ⋆ EssayEmpire

Procurement can be simply defined as the acquisition of goods and services for the firm at the “best” price. Procurement includes sourcing (identifying and working with appropriate suppliers) and purchasing (the specific functions associated with the actual buying) and covers all the activities necessary to obtain goods and services consistent with user requirements from the placement of an order through to its delivery.

Companies procure direct goods that go straight into the production of a product, such as coffee beans or rubber; indirect goods that do not directly go into a product, such as office supplies and furniture; and services that support the production process or the supply chain, such as warehousing, distribution, or information systems. Purchased parts and materials may account for over 60 percent of the cost of finished goods. Procurement is therefore one of the primary activities related to the supply chain.

A major element when developing a procurement strategy is the establishment of links between the company and its suppliers. To sustain these links communication and proximity are the keys. Today many suppliers work alongside their clients in product-design development from the very beginning of the production process, and to minimize inventory levels and support Just-in-Time (JIT) systems, have moved closer to their customers, sometimes on the same industrial park. Many companies have instituted certification and award programs to recognize their best suppliers.

The development in IT systems is having a major impact on procurement activities. The most common technology used is electronic data interchange (EDI) that involves the electronic transmission of data (e.g., purchase orders, order status, tracking, and tracing information) between a firm and its suppliers. Another e-procurement application is the development of electronic catalogues, allowing buyers rapid access to product specifications and prices. Buying exchanges or e-marketplaces are another development. They represent cooperative efforts among companies, frequently competitors, to deal with their common base of suppliers. A process used by e-marketplaces is the reverse auction, where suppliers bid on order contracts. When the auction is closed, the company can compare bids on the bases of purchase price, delivery time, and supplier reputation for quality.

According to John Coyle, Edward Bardi, and John Langley, there are 11 steps in the procurement process: identify new or existing needs of the users; define and evaluate user requirements; decide whether to make or buy; identify the type of purchase (routine purchase, modified rebuy, new buy); conduct a market analysis to determine the number of suppliers in the market and which method of buying (e.g., negotiation, competitive bidding) might be most effective; identify all possible suppliers that might be able to satisfy the user’s needs; prescreen all possible sources to reduce the number of possible suppliers to those that can satisfy the user’s demands; evaluate the remaining supplier base; choose a supplier; receive delivery of the product or service; and make a post-purchase performance evaluation.

Some products or services purchased by a company are more important than others and require greater procurement attention. Products may be placed in a two-by-two matrix on the basis of value and risk. Four different categories can be found: Generics are low risk, low-value goods that typically do not enter the final product (e.g., office supplies). The procurement process should be simplified to reduce the purchasing cost. Commodities are low-risk, high-value goods that are fundamental to the finished product (e.g., bolts or packaging) but with many sources of supply. Procurement strategies include volume purchasing to reduce price and JIT to lower inventory costs. Critical items are high-risk, low-value goods that pose a threat to continued operation (e.g., parts with a long lead time). Strategies include ensuring availability and developing a standardization program moving these items to generic. Finally, strategic items are high-risk, high-value items that give the final product a competitive advantage in the marketplace. Close and long-term supplier relationships should be looked for.

Products and services may be sourced from around the world. The main advantages of local/national sourcing are close cooperation, lead times not affected by transport delays, short lead times may eliminate inventory, fulfillment of social responsibilities to the local community, easier resolution of disputes. Global sourcing may allow for lower costs but risks are often higher and companies have to be aware of cultural differences, variable lead times resulting from shipping schedules or storms at sea, lower quality, use of child labor, higher costs of doing business, laws and regulations, and nontransparent costs (such as procurement costs, management time, plant visits).

A final issue relates to the number of suppliers. A single supplier may allow for better prices or an easier establishment of EDI and JIT links but may also be regarded as a risk. The trend in sourcing today is to have fewer suppliers and to build better relationships with them.

Bibliography:

Peter J. H. Baily, Procurement Principles and Management (Prentice Hall Financial Times, 2008);
Fernando Bernstein and Francis de Vericourt, “Competition for Procurement Contracts With Service Guarantees,” Operations Research (v.56/3, 2008);
Thomas A. Cook, Mastering Purchasing Management for Inbound Supply Chains (Productivity Press, 2009);
John Coyle, Edward Bardi, and John Langley, The Management of Business Logistics (Thomson, 2003);
Jose Garrido, Ana Gutierrez, and Rebeca San Jose, “Organizational and Economic Consequences of Business E-Procurement Intensity,” Technovation (v.28/9, 2008);
Robert M. Monczka, Purchasing and Supply Chain Management (South-Western, 2009);
Jeffrey P. Wincel, Lean Supply Chain Management: A Handbook for Strategic Procurement (Productivity Press, 2008);
Joel Wisner, Keong Leong, and Keah-Choon Tan, Principles of Supply Chain Management (Thomson, 2005);
Yan, S. L. Tang, and G. Yen, “Quick Response Procurement Cost Control Strategy for Fabric Manufacturing,” International Journal of Production Research (v.46/17, 2008).

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