Procurement function

Introduction

The supply chain process is a complex systematic flow of events that captures a segment of the operations of the business from the procurement of suppliers and supplies to the manufacturing of products in anticipation of demand or based on actual orders to the storage of manufactured products to the pull-out of store products for delivery to distributors or dealers and to customers until the receipt of feedback from the customer.

           

Supply chain process is basically an important process involved in the supply chain management because it encompasses every effort in producing and delivering a final product or service, from the supplier’s supplier to the customer’s customer ( 2002). Therefore, the supply chain of an organization is composed of interdependent processes that are important in the production and delivery of goods. It does not only involved knowing how to produce products but to know how and where to obtain the needed materials and supporting materials in order to produce the products, how much to produce and to whom the products are produced . It also involved knowing the right process of delivering the final product to the customers on time and at its best form. Therefore, supply chain management includes managing supply and demand, sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across al channels, and delivery to the customer ( 2002).

           

            In order to do the activities involved in managing the supply chain, it is important to determine and be familiar with the activities within the different process in the supply chain. One of the key processes in the supply chain is procurement. In this report, the different activities and the value-added elements in the activities in the procurement function is examined and measured. The paper includes defining procurement and its function before enumerating the activities involved in the process. This study is conducted in order to determine the crucial activities that make up the procurement process and to describe the importance of these activities in a business organization.

 

Procurement Defined

            Procurement can be simply defined as the purchasing of materials needed by an organization. In a business organization, purchase of goods or materials is not as simply as just buying it to the vendor and then using it in the business process to whatever purposes they served. According to  (1992)  (1994), procurement includes all of the activities involved in acquiring goods or services and managing their flow from the supplier to the different areas of the company purchasing the goods or services. These goods are the raw materials needed in the manufacturing of the company’s products, and the support materials such as computers and office supply products that the company uses.

 

            The definition above means that procurement process does not end when the goods are already purchased; it also involves management of the flow of the goods purchased. When we say management of the flow, it means knowing the demand of goods in the company or determining how many of the materials to be purchased are needed to produced a particular number of products; and determining the number of suppliers and who among them can provide the needs of the company thus procurement involves establishment of good business relationship to the suppliers.

            Moreover, in many organizations especially the manufacturing companies, procurement function is categorized into two: direct or production-related and indirect or non-production-related procurement ( 2001).

 

Direct Procurement

Direct procurement refers to the purchasing of items that immediately enter a manufacturing process ( 2001). Items bought in direct procurement become part of an end product, such as the processor for computers or engine for car manufacturing. Since this kind of procurement is directly related to the production of products, it is considered to be critical and is often the center of attention of researchers, managers and engineers who are the ones responsible for making direct procurement efficient and effective. They are focused on how they reduce the cost of the material but at the same time acquire high quality materials that are used in making high-quality products.

            Some of the issues related to direct procurement that has captured the attention of organizations include relationship and communication with the suppliers, product life cycle, inventory period, innovation, and cost reduction. These issues are actually related to each other. Having a good relationship and communication with the suppliers helps a company determine the latest development and technology in the materials or parts they used. This will help a company in product innovation, helps shorten its products’ life cycle and helps achieve timely inventory and delivery. A good example of this Dell Computer; In order to build its computers and sell it directly to the customers, the company is required to depend heavily on close relationship with its suppliers that resulted to just-in-time inventory and shorter delivery period.

 

Indirect Procurement

            Indirect procurement refers to the non-production-related purchases but supports the manufacturing process and other processes in the company such as clerical works, information systems management, marketing and sales. Indirect procurement includes purchase of maintenance, repair and operations supplies that are require to keep up the manufacturing process, as well as items such as office supplies, computer equipment, promotional material, travel and other services as well as capital goods ( 2000, 2001).

Indirect procurement also involves the procurement of capital goods which have significant value, are purchased less often and are not included in a company’s regular procurement but involves greater risk thus all of the necessary information regarding both the potential supplier and the good to be purchased must be gathered (1998). Examples of capital goods are equipments, machineries, robots and other related equipments and technology. The demand involved in indirect procurement depends on the needs of the employee unlike in direct procurement that depends on the demands of external customers thus it covers a wider range of products and services with less predictability with respect to volume and frequency ( 2001). 

 

Procurement Activities

            Procurement, as noted above, includes various activities that are needed to be performed in order to have efficient and effective procurement function in an organization. According to  (2000) and  (2006), the stages of the procurement process in businesses today are: (1) the need to procure a particular good or service/identifying the needs of the company/information gathering; (2) the search for potential suppliers and the definition of other possible alternatives; (3) evaluation of the alternatives; (4) contact with suppliers to begin the negotiating process which may involve requesting for information, bids, quotes or proposals; (5) background review on the suppliers and evaluation of the offers; (6) negotiation and agreement on the type of supply; (7) contract signing and sending of orders; (8) fulfillment which involved receiving the order, managing the transaction, warehouse management, managing transportation, customer response, and reverse logistics management (2000 , 2002); (9) consumption, maintenance and disposal; and (10) renewal or the reordering of the products with consideration to whether to continue being supplied by the same supplier or to order to other suppliers.

            In some sources like that of  (2000), procurement process end at stage 7 and regards stage 8 to 10 as another process in the supply chain. However, since we defined procurement as the purchase of goods, it thus somehow involved stages 8 to 10 because procurement, aside from the purchasing department, has also impacted other organizational areas in a company that perform stages 8 to 10.

The procurement of materials, components, production machinery and equipment, and services required to manufacture a product as well as production of indirect materials is commonly performed by the purchasing department of a company while the logistics and production planning arrange the delivery; the receiving department receive and inspect the goods delivered and is responsible for storing/staging inbound items as well as initial quality and quantity checks; and the accounts payable department is responsible for processing the invoices received form suppliers and then releasing payment to the suppliers under agreed-upon terms (1999).

 

Classification of Procurement Activities

            According to  (2001), procurement activities can be categorized according to their “reach”: either long-term-oriented, strategic or short-term-oriented, transactional activities. Long-term oriented, strategic include tasks sourcing activities, identifying vendors and requirements, assuring quality, and establishing and managing supplier relationships, as well as contract negotiations and management, design and implementation of buying procedures, and financial and asset management ( 2001). These activities aimed to strategically build close and longer relationship to the supplier for the advantage of the company.

            Short-term-oriented, transactional activities are those activities that involved immediate results such as just-in-time arrangements, supply chain management, standardizing buying procedure, and streamlining buying and approval processes that meet basic requirements.

            These procurement activities primarily aimed to reduce cost in the part of the company. However, these procurement activities are considered to be traditional in modern businesses today and needed to be upgraded or added with elements that create more value to these activities.  

Value-Added Elements of the Procurement Function

            The procurement activities mentioned above are not enough to create value; that is every company are expected to perform the same activities thus it does not ensure competitive advantage. Industry leaders today, according to  (2005), focus on four areas that create value to procurement function: innovation and growth; value chain optimization; advanced cost-management; and risk management and supply continuity.

            Innovation and growth is driven by customer demands for new products and features, and improved customer service. Traditionally, the research and development department of a company is the sole responsible for innovation but since procurement functions as the interface between the supplier and the people in the company, it has been found out hat close collaboration between the R&D, procurement and supply chain processes lead to better product innovation. This is because the suppliers are the ones who developed the parts needed by the company while the R&D knows which particular parts should be assembled with the latest product of the company.

 

A good example of close collaboration of a company’s R&D, procurement department and suppliers is that of Dell Computer. Dell Computer’s R&D is known to have close collaboration with its suppliers that Dell considered them as its business partners. Dell leverages its partners by linking suppliers’ planning and execution activities with Dell’s system; Dell and its suppliers share data on supply and demand trends to forecast how many supplies the suppliers should provide Dell to address just-in-time inventory and to forecast also the demands of customers in terms of innovation. Dell gathers real-time information about the suppliers’ inventory level, capacity outlook and new technology drivers to determine the suppliers’ latest products that can be used and be included with Dell’s products and new designs (2004).

           

With close collaboration of a company’s R&D, procurement department and suppliers, information such quantity, quality and technology requirements are readily available for the procurement process to be conducted fast and easy. Additionally, with close collaboration, a company can determine its suppliers’ potential to innovate. Potential to innovate is frequently used as a key criterion for selecting suppliers, and track and evaluate contributions to innovation as part of the supplier development process (2005). This is important to most companies because suppliers can assist them in new product development, help to improve processes, quality and responsiveness (2005).   

            Value chain optimization involves determining what process and activities are truly essential for the company’s strategy ( 2005). This is important when choosing suppliers. There are suppliers that are worth to build close and long-term relationship with but there are also some that are for short-term, transactional relationship only, depending on the company’s activities.

            Advanced Cost-management can be done by applying different strategies properly such as value-based which is using supplier capability to generate other kinds of value such as shorter time to market or innovation (just like what Dell did); collaborative cost reduction  which is generating and implementing cost reduction ideas with suppliers; demand management which is rationalizing requirements, controlling approvals and reducing or eliminating non-essential purchases in certain categories (2005); and many other strategies that involved supplier in the cost management which will both benefit the company and the supplier.

            Since it is the responsibility of the procurement to supply the needed materials by purchasing it to the suppliers, it is also its responsibility to anticipate and manage risks by planning for contingency in case supply disruption happens. Therefore, it must be included in the procurement activities the ensuring that there are multiple suppliers for certain parts or there is single supplier but with multiple locations aside from demanding that key suppliers create contingency plans or better yet, choose suppliers with contingency plans already (2005) . Discontinuity of supplies can result to significant lost in the part of the company.

            Another value-added element that has now become an important tool in performing procurement activities is the use of information technology. IT supports real-time integration of suppliers’ inventory and a company’s applications, real-time collaboration and communication, better management of information needed in the procurement process, web-based purchasing, and on time inventory and delivery.

            These elements importance have been measured in terms of what and how it can help procurement in a company better with criteria including responsiveness, reliability, reflection of best practices, alignment with the people and the companies overall strategies and on the quality it can provide directly on the products or on other processes affected by the procurement.

Conclusion

            Procurement, although considered by others as supporting activity only, it has been proven with this study that it plays important role in an organization thus the activities involved in it should not only be performed in a way the company is comfortable with but there should be value-added elements associated with the procurement activities that help a company become more competitive. The addition of these elements with the procurement activities requires some measurement against the criteria set by the company itself to determine how it can improvement the procurement function of the company.  

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