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Lecturers:

Ho Trung Thao (thao.hotrung@hoasen.edu.vn)

Chapter 9
Procurement

Aims of this chapter


DEFINE the role of procurement
APPRECIATE the importance of procurement in the

supply chain
CHOOSE an appropriate supplier
DISCUSS the steps in a procurement cycle
DESCRIBE e-procurement and its advantages
TALK about different arrangements for purchasing

8.1 procurement
8.1.1 Definition
What is procurement?
Procurement is responsible for acquiring all

the materials needed by an organization.


It consists of all the related activities needed to
get goods, services and any other materials
from suppliers into an organization

8.1 procurement
8.1.2 Importance
From a broad view, procurement forms an
essential link between organizations in the
supply chain, and it gives a mechanism for
coordinating the flow of materials between
customers and suppliers

tips

8.1 procurement

Not only is procurement essential, but it is also

responsible for a lot of expenditure. For a


typical manufacturer, 60% of its spending goes
on materials, with companies like General
Motors spending over $50 billion a year. So
procurement is directly responsible for most of
a companys spending, and a relatively small
improvement can give substantial benefits

8.1 procurement
8.1.3 Aims of procurement
organizing a reliable and uninterrupted flow
of materials into an organization
working closely with user departments,
developing relationships and understanding
their needs
finding good suppliers
buying the right materials

8.1 procurement
8.1.3 Aims of procurement
negotiating good prices and conditions
keeping stocks low
moving materials quickly through the supply
chain, expediting deliveries when necessary
keeping abreast of conditions

8.1 procurement
8.1.4 Organization of procurement
The way that procurement is
organized clearly depends on the
type and size of the organization.
Usually procurement is organized
as a single department to get the
benefits
of
centralized
purchasing.
These
benefits
include:

8.1 procurement
consolidation of all orders of materials to get quantity
discounts
coordinating associated activities to reduce costs
eliminating duplicated effort and haphazard practices
having a single point of contact for suppliers
developing

specialized

skills

and

improving

procurement operations
allowing other people to concentrate on their own work
without diverting into purchasing
concentrating responsibility for procurement, making
management control easier.

8.2 CHOOSING SUPPLIERS

8.2.1 Qualified suppliers

1.How to choose?
Procurement starts,
qualified supplier.

then,

by

finding

This is one who can actually deliver the


materials needed. In general, organisations
look for suppliers who:

8.2 CHOOSING SUPPLIERS


are financially secure with good long-term
prospects
have the ability and capacity to supply the
necessary materials
accurately deliver the requested materials
send materials of guaranteed high quality
deliver reliably, on time with short lead
times
quote acceptable prices and financing
arrangements

8.2 CHOOSING SUPPLIERS


are flexible to customers needs and changes
are experienced and have expertise in their
products
have earned a good reputation
use convenient and easy procurement systems
have been used successfully in the past and
can develop long-term relationships

8.2 CHOOSING SUPPLIERS


2.In what kind of situation ,you neednt
consider too much about suppliers?
it is buying low value materials
there is only one possible supplier
there is already a successful arrangement
with a supplier
there is not enough time for extended
negotiations
the organization has a policy of selecting
specific types of supplier

8.2 CHOOSING SUPPLIERS


3. Some kind of procurement
The organization compares all the bids submitted
and chooses the one that best meets the prescribed
criteria. This is called open tender.
A variation reduces the administrative effort by
putting some qualifications on suppliers, perhaps
based on experience, size or financial status. This
gives limited tender.

CHOOSING SUPPLIERS
8.2

4. about the power to suppliers

8.2 CHOOSING SUPPLIERS


8.2. 2 Number of suppliers
Advantages of single sourcing:
a stronger relationship between customers and
suppliers, often formalized in alliances or
partnerships
commitment of all parties to the success of the
relationship
economies of scale and price discounts
easier communication
less variation in materials and their supply
easier to keep requirements, conditions and so
on, confidential

8.2 CHOOSING SUPPLIERS


Advantages of multi-sourcing:
competition between suppliers reduces prices
there is less chance of disrupted supplies, as problems
can be avoided by switching suppliers
can deal more easily with varying demands
involving more organizations can give access to wider
knowledge and information
is more likely to encourage innovation and improvement
does not rely on trusting one external organization.

8.2 CHOOSING SUPPLIERS


Two other methods for using more
suppliers:
forward buying. this happens when an

organization
orders more materials than it currently needs and
keeps the excess in stock
uses contracts to deliver materials at specific
points in the future.

8.2 CHOOSING SUPPLIERS

Benefits of the two ways:

First, they guarantee supplies for some


period in the future and minimize the effect of
possible disruptions.
Second, the price of materials is fixed,
avoiding the effects of future price rises or
uncertainty.

8.2 CHOOSING SUPPLIERS


8.2. 3 Monitoring supplier performance

Most organizations monitor their suppliers


to make sure that they continue to give
satisfactory service. This is called supplier
rating or vendor rating.

8.2 CHOOSING SUPPLIERS


common approach uses a checklist of

important factors and. checks that


the supplier meets an acceptable
standard in these. The checklist
might ask whether the supplier is
financially sound; whether it delivers
on time; if material quality is high
enough; if there is technical support;
whether the price is competitive;
about relevant trends, and so on.

8.2 CHOOSING SUPPLIERS


A more useful approach to rating

gives the supplier a score for


different aspects of performance.
They might, for example, give
each supplier a score out of ten
for on-time delivery, and if a
suppliers score drifts down below
eight the customer can discuss
ways of improving performance.

Next slip -Case: Philips Semiconductors, Stadskanaal

case

case

8.3 PROCUREMENT
8.3. steps of procurement
CYCLE

8.3 PROCUREMENT CYCLE


1. A user department:

identifies a need for purchased materials


examines materials available and prepares
specifications
checks departmental budgets and gets
clearance to purchase
prepares and sends a purchase request to
procurement

8.3 PROCUREMENT CYCLE


2. Then procurement:
receive, verify and check the purchase request
examine the material requested, looking at
current stocks, alternative products, production
options, and so on and after discussions with the
user department confirm the decision to purchase
make a shortlist of possible suppliers, from
regular suppliers, lists of preferred suppliers,
send a request for quotations to this shortlist.

8.3 PROCUREMENT CYCLE


3. Then each supplier:
examines the request for quotations
checks the customers status, credit, and so on
sees how it could best satisfy the order
sends a quotation back to the organization,
giving details of products, prices and conditions.

8.3
PROCUREMENT
CYCLE
4. Then procurement:
examine the quotations and do commercial
evaluations
discuss technical aspects with the user department
check budget details and clearance to purchase
choose the best supplier, based on the details
supplied
discuss, negotiate and finalise terms and
conditions with the supplier
issue a purchase order for the materials

8.3 PROCUREMENT CYCLE

5. Then the chosen supplier:


receives, acknowledges and processes the
purchase order
organises all operations needed to supply the
materials
ships materials together with a shipping
advice
sends an invoice..

8.3 PROCUREMENT CYCLE


6. Then procurement:
acknowledge receipt
do any necessary follow-up and expediting
receive, inspect and accept the materials
notify the user department of materials
received.

8.3 PROCUREMENT CYCLE

7. Then the user department:


receives and checks the materials
authorises transfer from budgets
updates inventory records
uses the materials as needed.

8. Then procurement:
arrange payment of the suppliers invoice

8.3 PROCUREMENT CYCLE


8.3. 2 e-procurement

1.advantages of the e-procurement


Most organizations already use some form of

e-procurement. Surveys suggest that over


60%of UK companies used e-procurement by
2002, and 80% of European managers soon
expect to use it extensively. Some of the
advantages this brings are:

8.3
PROCUREMENT
CYCLE
allowing instant access to suppliers anywhere in the world
creating a transparent market
automating procurement with standard procedures
greatly reducing the time needed for transactions
reducing costs, typically by 1215%
outsourcing some procurement activities to suppliers or
third parties
integrating seamlessly with suppliers information
systems.

8.3 PROCUREMENT
CYCLE

2 . Types of the e-procurement

B2B (where one business buys materials


from another business)
B2C (when a final customer buys from
a business).

8.4 TYPES OF PURCHASE


8.4.1. Different approaches for different
products
procurement effort depends on the importance of
materials:
non-critical materials have low profits with little risk in
supply, and need basic, simple procedures for purchasing
bottleneck materials have low profits but have more risk
in supply, and need long-term contracts with alternative
sources to avoid potential problems
strategic materials with higher profits need more formal
relationships with suppliers over the long term, possibly
developing into alliances and partnerships

8.4 TYPES OF PURCHASE


An important point here is the difference

between routine, repeat orders and new ones.


Ordering becomes routine and the organization

effectively sends a message to say, send


another order like the last one. With nonroutine purchases, an organization has to be
more careful and put more effort into the choice
of supplier, and conditions of purchase.

8.4 TYPES OF PURCHASE


8.4. 2 Terms and conditions

1. specific types of order


Purchase orders. It is essentially a letter from one
organization to another, giving details of the
materials it wants to purchase and its conditions
of purchase.
Blanket orders give a simple system for cheap,
standard
items,
such
as
stationery.
An
organization places a single order for all the
materials that it will need over some period, such
as a year. Then the supplier delivers batches of
materials when requested during the year.

8.4 TYPES OF PURCHASE


e-Procurement uses EDI or the Internet to
simplify purchases by replacing paper-based
procedures with electronic ones. This gives a
fast and efficient method for repeat, or
straightforward, orders.
Contracts give detailed descriptions of an
agreement between an organization and a
supplier;
they
describe
exactly
the
responsibilities, work and services for each,
togetherwith all relevant terms and conditions.

8.4 TYPES OF PURCHASE


Sub-contracts: when a supplier signs a contract with

an organization, it may not do all the work itself, but


prefers to pass on some work to a sub-contractor.
Then, there are two agreements the contract
between the organization and the supplier, and the
subcontract between the supplier and subcontractor.
Leases and rental. agreements again present the

terms and conditions of acquiring materials. They


are generally used for buildings or equipment that
is returned to the owner after some period of use.

8.4 TYPES OF PURCHASE

1. Price lists
2. Special quotation
3. Negotiation.
4. Commodity pricing