Procurement is just a fancy word for buying things. Many steps and actions happen
before, during, and after you buy something.
These steps and actions are "processes." Some of these processes can make buying things easier, and some
can make it harder. We want to understand these processes, so we can make
buying things as efficient and effective as possible.
1. Budgeting and Financial Planning:
Deciding how much money you must spend and planning how to spend it.
Detailed Explanation:
Before you can buy anything, you need to know how much money you
have. Budgeting and financial planning are the processes that
determine the financial resources available for procurement. If your
budget is tight, you might need to find cheaper suppliers or delay
certain purchases. Good financial planning helps you avoid
overspending and ensures that you have enough money to buy the
things you need.
For example, a company might create an annual
budget that allocates specific amounts of money for different
departments to spend on supplies, equipment, and services.
If the
budgeting process is poorly done, then the procurement team might
not have the money they need to buy essential items.
Poor planning
can lead to delays, and purchasing lower quality products. A solid
budget, and financial plan, is the foundation for effective procurement.
2. Needs Assessment and Requirements Definition:
Figuring out exactly what you need to buy and what it needs to do.
Detailed Explanation:
Before you start looking for suppliers, you need to know exactly what
you need. This involves assessing your needs and defining the
requirements for the goods or services you want to buy.
This process
helps you avoid buying things that you do not need or that do not meet
your requirements. For example, if you need to buy new computers,
you need to decide what kind of computers you need, how many you
need, and what features they need to have. If your needs assessment
is inaccurate, then you might end up buying the wrong computers, or
not enough computers. A good needs assessment ensures that you
buy the right things for the job.
3. Supplier Selection and Evaluation:
Choosing the best company to buy from and checking if they are reliable.
Detailed Explanation:
Once you know what you need, you need to find a supplier who can
provide it. This involves selecting and evaluating potential suppliers.
You need to consider factors such as price, quality, reliability, and
delivery time. For example, you might compare quotes from different
suppliers, check their references, and visit their facilities.
If your
supplier selection process is flawed, then you might end up working
with an unreliable supplier who provides poor quality goods or
services.
A good supplier selection process ensures that you work
with a reliable supplier who can meet your needs.
4. Contract Management:
Making sure everyone follows the agreement and handling any problems that
come up.
Detailed Explanation:
After you have selected a supplier, you need to create a contract that
outlines the terms and conditions of the agreement. This involves
contract management, which includes monitoring the supplier's
performance, processing payments, and resolving any disputes.
For
example, you might need to track delivery schedules, inspect the
quality of goods, and handle any warranty claims.
If your contract
management process is weak, then you might end up with disputes,
delays, or financial losses.
Good contract management ensures that
the agreement is followed and that any problems are resolved quickly
and efficiently.
5. Inventory Management:
Keeping track of what you have in stock and making sure you do not run out.
Detailed Explanation:
After you have bought your goods, you need to manage your inventory.
This involves keeping track of what you have in stock, storing it
properly, and ensuring that you don't run out.
For example, you might
use an inventory management system to track stock levels, set reorder
points, and forecast demand.
If your inventory management process is
poor, then you might end up with stockouts, excess inventory, or
damaged goods.
Good inventory management ensures that you have
the right amount of stock at the right time.
6. Performance Evaluation and Feedback:
Checking how well you did with buying things and learning how to do better
next time.
Detailed Explanation:
After the procurement process is complete, it is important to evaluate
your performance and gather feedback. This involves reviewing the
entire process, identifying any areas for improvement, and making
changes for future procurements. For example, you might review your
supplier selection process, your contract management process, and
your inventory management process. If you do not evaluate your
performance, then you might keep making the same mistakes. Good
performance evaluation helps you improve your procurement
processes and make them more efficient and effective.
Procurement Models
What are Procurement Models?
Imagine you are building a house. You can hire one company to do everything, or
you can hire different companies to do different parts. The way you choose to
organize who does what is your "model." Procurement models are just different ways
to organize how a company buys things.
They help decide who makes the
decisions, how they make them, and how they work with suppliers.
1. Centralized Procurement Model:
One big office does all the buying for the whole company.
Detailed Explanation:
In a centralized procurement model, all purchasing decisions are made
by a single department or team.
This means that all requests for goods
or services, no matter where they come from within the company, are
processed through this central point.
This approach is often used by
large organizations or companies with multiple locations.
The main
advantage of this model is that it allows for greater control and
standardization. By having one central team handle all procurement,
the company can ensure that consistent processes are followed, that
bulk discounts are negotiated, and that overall spending is better
managed.
For example, if a company has offices in different cities,
instead of each office buying their own office supplies, the central
procurement team buys all the supplies at once, getting a better price.
This model also allows for specialized expertise to be developed within
the central team, leading to more efficient and effective purchasing.
However, it can sometimes lead to delays or a lack of flexibility if the
central team is overloaded or does not understand the specific needs
of different departments.
2. Decentralized Procurement Model:
Each part of the company does its own buying.
Detailed Explanation:
In a decentralized procurement model, purchasing decisions are made
at the local level by individual departments or teams.
This means that
each department has the authority to buy the goods and services it
needs, without going through a central point.
This approach is often
used by companies with diverse product lines or operating in different
markets. The main advantage of this model is that it allows for greater
flexibility and responsiveness. Departments can quickly purchase the
items they need, without waiting for approval from a central team.
For
example, a research and development department might need to buy
specialized equipment quickly, and a decentralized model allows them
to do so. This model also allows departments to develop closer
relationships with local suppliers, which can lead to better service and
faster delivery times.
However, it can sometimes lead to a lack of
control and standardization, as different departments might follow
different processes and pay different prices for the same items.
3. Hybrid Procurement Model:
A mix of both, some buying is done centrally, and some is done by each part
of the company.
Detailed Explanation:
A hybrid procurement model combines elements of both centralized
and decentralized procurement.
This means that some purchasing
decisions are made centrally, while others are made at the local level.
This approach is often used by companies that want to balance the
benefits of control and flexibility. For example, a company might
centralize the purchase of high-value items, such as equipment and
technology, while allowing departments to purchase low-value items,
such as office supplies, locally. This allows the company to maintain
control over strategic purchases while giving departments the flexibility
to meet their day-to-day needs. The hybrid model allows a company to
tailor its procurement strategy to its specific needs and circumstances.
It is often considered to be the most adaptable model.
4. Outsourced Procurement Model:
Hiring another company to do all the buying for you.
Detailed Explanation:
In an outsourced procurement model, a company hires a third-party
organization to handle all or part of its purchasing activities.
This
approach is often used by companies that want to focus on their core
competencies or reduce their operating costs. The outsourced provider
has specialized expertise in procurement and can often negotiate
better prices and terms with suppliers. For example, a small company
might outsource its procurement to a larger company that has greater
buying power. This allows the small company to benefit from the larger
company's economies of scale. Outsourcing can also help companies
to improve their procurement processes and reduce their risk of fraud
or errors.
However, it can also lead to a loss of control and a
dependence on the outsourced provider.
Different Procurement Models
What are Different Procurement Models?
Think of buying things like going to the grocery store. Sometimes you buy a lot of the
same thing (like milk every week), sometimes you need something right away (like
medicine), and sometimes you only need a few small things. Procurement models
are just different ways to organize how you buy things, depending on what you need
and how often you need it.
1. Blanket Orders:
A big agreement to buy a lot of something over a long time, but you only pay
for what you use.
Detailed Explanation:
A blanket order is like having a pre-approved agreement with a supplier
to buy a certain amount of goods or services over a specified period,
typically a year.
You don't take delivery of everything at once; instead,
you release smaller orders as needed.
This is perfect for items you use
regularly, like office supplies or raw materials.
For example, a
company might have a blanket order for paper with a supplier. They do
not want to store a year's worth of paper at once, so they order smaller
amounts every month. This approach offers several benefits. It
simplifies the ordering process, reduces paperwork, and often leads to
better pricing due to the large volume commitment.
It also helps to
ensure a consistent supply of essential items.
2. Standing Orders:
An automatic order that happens regularly, like getting a newspaper delivered
every day.
Detailed Explanation:
A standing order is a recurring order for a fixed quantity of goods or
services that are delivered at regular intervals, such as daily, weekly, or
monthly. This is ideal for items that are consumed consistently and
predictably, like cleaning supplies or routine maintenance services. For
example, a restaurant might have a standing order for fresh bread that
is delivered every morning. This eliminates the need to place individual
orders each time, saving time and effort.
It also helps to ensure that
you always have the items you need on hand. Standing orders are
particularly useful for items with a short shelf life or that are essential
for daily operations.
3. Term Contracts:
A long-term agreement to buy something at a fixed price, even if the price
goes up or down.
Detailed Explanation:
A term contract is a long-term agreement with a supplier to provide
goods or services at a predetermined price for a specified period.
This
is often used for high-value items or services where price stability is
important, such as energy supply or long-term maintenance
agreements. For example, a city might have a term contract with a
construction company for road repairs over a five-year period. This
provides price certainty and helps with budgeting. It also allows for a
strong relationship between the buyer and the supplier. Term contracts
are beneficial when market prices are volatile or when you need to
ensure a consistent supply of critical resources.
4. Urgent Orders:
Buying something right away because you need it now.
Detailed Explanation:
An urgent order is placed when there is an immediate need for goods
or services due to an unexpected event or emergency. This might
include replacing a broken piece of equipment, purchasing medical
supplies, or responding to a natural disaster. For example, if a factory's
machine breaks down, they need a replacement part immediately.
Urgent orders require a fast turnaround time and often involve
expedited shipping or special handling.
They may also involve higher
costs due to the urgency. Having a process to handle urgent orders
efficiently is crucial for minimizing disruptions and ensuring business
continuity.
5. Low-Value Orders:
Buying small, cheap things without going through a lot of paperwork.
Detailed Explanation:
Low-value orders are for small, inexpensive items that are purchased
frequently. These might include office supplies, cleaning materials, or
small tools. To streamline the process, companies often use simplified
purchasing procedures, such as purchase cards or petty cash.
For
example, an employee might use a purchase card to buy printer ink
from an office supply store. This reduces the administrative burden and
allows for faster procurement of essential items. Low-value orders are
typically handled with minimal approvals and paperwork.
6. Buying Situations:
The different reasons and ways you buy things, depending on if it is new, the
same as before, or a little different.
Detailed Explanation:
Buying situations refer to the different scenarios that influence the
procurement process. These typically include:
New Task: Purchasing something for the first time. This
requires extensive research and evaluation.
Straight Rebuy: Repurchasing the same item from the same
supplier. This is a routine process.
Modified Rebuy: Repurchasing an item but with some changes,
such as specifications or supplier.
Understanding the buying situation helps to determine the appropriate
procurement strategy and level of effort. For example, a new task might
require a formal tendering process, while a straight rebuy can be
handled with a simple purchase order.
7. Pareto Analysis:
Focusing on the 20% of things that cause 80% of the problems or results.
Detailed Explanation:
Pareto analysis, also known as the 80/20 rule, is a technique used to
prioritize procurement activities.
It suggests that 80% of the effects
come from 20% of the causes. In procurement, this means focusing on
the 20% of suppliers or items that account for 80% of the spending or
problems. For example, a company might find that 20% of its suppliers
account for 80% of its procurement spending.
By focusing on these
key suppliers, the company can negotiate better deals and improve
supplier relationships. Pareto analysis helps to identify the most critical
areas for improvement and allocate resources effectively.
