CHAP 2: PROCUREMENT BASICS by Ngac Huy Thuan (K17 HL)

Purchase vs Procurement

thuannhhs170631 — 2024-03-18 03:07:42 UTC

Purchasing definition

thuannhhs170631 — 2024-03-18 03:08:13 UTC

Purchasing is a simple and a concise term that will incorporate providing money for a product or goods. It can even be said that purchasing is a small and one of the aspect of procurement.

Procurement definition

thuannhhs170631 — 2024-03-18 03:59:33 UTC

Procurement encompasses end-to-end supply chain management strategies which includes negotiating contracts, sourcing, and acquiring services or work from external sources, goods, raw materials, then it will follow through to make sure contracts will be fulfilled according to the terms of the contract. The goal or the objective of the procurement are spending control, cost savings, and workflow efficiency.

Context

thuannhhs170631 — 2024-03-18 04:00:23 UTC

A simple and a concise term that will incorporate giving the money for a product or goods as stated earlier.

Context

thuannhhs170631 — 2024-03-18 04:00:46 UTC

A broader term that will include designing, processing, sourcing, negotiating and fixing the standards.

What it incorporates

thuannhhs170631 — 2024-03-18 04:02:14 UTC

Purchasing term generally will Incorporate purchasing or say buying of goods or an object, i.e. paying the money against the goods or the object.

Is it inclusive

thuannhhs170631 — 2024-03-18 04:02:43 UTC

Purchasing is subset of the process of the procurement.

What it incorporates

thuannhhs170631 — 2024-03-18 04:03:09 UTC

Procurement generally will Incorporate the aspect of specifications contract, supplier market researc marketing, negotiation, value analysis, buying activities, and control of the inventory, the traffic, receiving and the stores.

Stakeholder management

thuannhhs170631 — 2024-03-18 04:03:47 UTC

Is it inclusive

thuannhhs170631 — 2024-03-18 04:04:24 UTC

Procurement includes the term purchasing as part of its process as explained above.

The importance of procurement

thuannhhs170631 — 2024-03-18 04:06:05 UTC

Delivering value and savings

thuannhhs170631 — 2024-03-18 04:08:59 UTC

•Suppliers have substantial impact on a firm’s total cost

•Many product features originate from suppliers

•In manufacturing, purchased content can be more than 50% of revenues

•Avoiding costs through early involvement in product design stage

Building strong relationships and driving innovation

thuannhhs170631 — 2024-03-18 04:09:34 UTC

•Traditional approach is to bargain hard for price reductions

•New approach is to conduct joint cost reduction with suppliers

•Both buyer and supplier must benefit

•Suppliers can contribute innovative ideas

Improving quality and reputation

thuannhhs170631 — 2024-03-18 04:10:09 UTC

•Buyer focuses on core competencies and outsources non-core activities and materials

•The importance of Risk Management

•Need for ability to track materials back up through supplier’s supply chain

•Supplier quality -> product quality

Reducing time-to-market

thuannhhs170631 — 2024-03-18 04:10:56 UTC

•Include suppliers early in product design process to take advantage of their expertise

•Early supplier involvement can lead to an average of 20% improvement on material costs, material quality, and product development times.

Contributing to Competitive Advantage

thuannhhs170631 — 2024-03-18 04:12:58 UTC

•Growing recognition of Procurement’s contribution to firm’s profitability

•Continue to see Procurement responsibilities grow to include such things as P2P, BPO, Mergers & Acquisitions

•Formal Recognition of Certifications such as CPSM

PROCUREMENT BASICS

thuannhhs170631 — 2024-03-18 04:15:59 UTC

Procurement processes

thuannhhs170631 — 2024-03-18 04:17:43 UTC

Forecast and/or plan requirement

thuannhhs170631 — 2024-03-18 04:20:08 UTC

•Beginning of purchasing cycle

•Sources of need

+Annual or biannual planning process

+New product development process

+Operational needs

•Sometimes, actual needs are difficult to define clearly

Needs clarification: Requisitioning

thuannhhs170631 — 2024-03-18 04:21:34 UTC

•Purchase requisitions and/or statements of work

•Forecasts and customer orders (e.g. from MRP)

•New product development teams

Elements of a Purchase requisition

thuannhhs170631 — 2024-03-18 04:22:46 UTC

•Description of required material or service

•Quantity required

•Estimated unit cost

•Operating account to be charged

•Date of requisition

•Date required

•Authorized signature

Supplier identification and selection

thuannhhs170631 — 2024-03-18 04:24:54 UTC

•Existing supplier

+Familiarity and track record

+List of preferred suppliers

•New supplier

+Need to identify potential suppliers

+Need to evaluate and qualify

•Bidding vs Negotiating

•Request for quotation (RFX, RFQ, and RFP)

•Statement of Work (SOW), Specifications or Blueprints

•Supplier evaluation

Purchase Order

thuannhhs170631 — 2024-03-18 04:33:30 UTC

•Drafted after supplier evaluation and selection is completed

•Legally-binding document

•Visibility throughout company

Receiving Process

thuannhhs170631 — 2024-03-18 04:34:05 UTC

Receipt and Inspection

thuannhhs170631 — 2024-03-18 04:34:50 UTC

•Electronic vs paper documents

•Materials packing slip

•Bill of lading

•Receiving discrepancy report

Invoice Settlement and Payment

thuannhhs170631 — 2024-03-18 04:35:36 UTC

•3-way match required to pay invoice

+P.O.

+Invoice

+Receiving report

•Electronic funds transfer (EFT)

•Mostly done electronically today

•Information used to Analyze Actual requirements

The RFQ Process

thuannhhs170631 — 2024-03-18 04:37:22 UTC

RFQ Documents

thuannhhs170631 — 2024-03-18 04:39:13 UTC

Invitation and description General terms and conditions (GTC) Pricing template Pre-qualification requirements and questionnaire Awarding selection criteria and weights

Direct vs Indirect Procurement

thuannhhs170631 — 2024-03-18 04:42:37 UTC

Definition

thuannhhs170631 — 2024-03-18 04:44:52 UTC

Direct Procurement involves purchasing materials, parts, or products that directly go into the production of the goods a company manufactures or sells. These are tangible components that become an integral part of the finished product.

Direct

thuannhhs170631 — 2024-03-18 04:45:07 UTC

Indirect

thuannhhs170631 — 2024-03-18 04:45:17 UTC

Nature and focus

thuannhhs170631 — 2024-03-18 04:45:55 UTC

Direct Procurement is closely aligned with the company’s core production activities. It is directly tied to the business’s manufacturing quantities, and any interruptions can significantly disrupt production.

Examples

thuannhhs170631 — 2024-03-18 04:46:31 UTC

Direct Procurement includes raw materials such as metal for car manufacturing, cotton for clothing production, or ingredients for food processing.

Budgeting and planning

thuannhhs170631 — 2024-03-18 04:46:50 UTC

Direct Procurement often involves large budgets and long-term contracts, given the critical importance of these purchases for production. Procurement decisions are closely linked to forecasted production volumes.

Strategic importance

thuannhhs170631 — 2024-03-18 04:47:14 UTC

Direct Procurement is strategically significant because it impacts the cost of goods sold (COGS) and, therefore, the company’s profit margins. The quality of direct purchases also affects the quality of the final product.

Supplier relationships

thuannhhs170631 — 2024-03-18 04:47:39 UTC

Direct Procurement often necessitates building strong, long-term relationships with suppliers, given the critical nature of the goods procured. Consistency in quality and timely delivery are paramount.

Definition

thuannhhs170631 — 2024-03-18 04:47:57 UTC

Indirect Procurement relates to acquiring goods and services that facilitate an organization’s operations but don’t end up in the final product. These purchases support the day-to-day activities and infrastructure of the business.

Nature and focus

thuannhhs170631 — 2024-03-18 04:48:21 UTC

Indirect Procurement, on the other hand, supports business continuity but isn’t critical to the production process itself. It focuses more on operations, administrative tasks, and general company activities.

Examples

thuannhhs170631 — 2024-03-18 04:48:33 UTC

Indirect Procurement covers areas like office supplies, software licenses, consulting services, cleaning services, and employee training programs.

Budgeting and planning

thuannhhs170631 — 2024-03-18 04:48:47 UTC

Indirect Procurement might involve more ad-hoc purchases and may not always be based on long-term contracts. The budgeting might be more decentralized, with different departments having separate budgets for their needs.

Strategic importance

thuannhhs170631 — 2024-03-18 04:49:06 UTC

Indirect Procurement, while sometimes seen as less strategically crucial, can cumulatively have a significant impact on operating expenses. Inefficiencies or wastages in indirect procurement can erode profit margins, albeit in a less direct manner.

Supplier Relationship

thuannhhs170631 — 2024-03-18 04:49:26 UTC

Indirect Procurement might involve a wider array of suppliers with varying degrees of relationship depth. Some might be long-term contracts (like software licenses), while others could be one-off transactions (like office furniture).

Internal

thuannhhs170631 — 2024-03-18 04:54:57 UTC

Department/Budget owners

thuannhhs170631 — 2024-03-18 04:55:40 UTC

Budget owners engagement is the most important and hence they are the most important stakeholders.

Finance

thuannhhs170631 — 2024-03-18 04:55:40 UTC

Engagement with finance is required to understand budgets as well close coordination to ensure that negotiated savings are reflected in your income statement (Reduction in expenses leading to increased EBITDA)

Legal

thuannhhs170631 — 2024-03-18 04:55:52 UTC

Ensure that all contracts adhere to corporate legal policies and contract risk is mitigated through proactive review of all key legal terms across various contracts.

Senior management

thuannhhs170631 — 2024-03-18 04:56:19 UTC

Management is always looking for visibility, procurement job is not just negotiating the savings but it is CPO’s (Chief Procurement Officer) job to ensure that the management understands value delivered by procurement. More important, the value needs to be presented in financial terms – for example how savings negotiated leads to better EBITDA margins

External

thuannhhs170631 — 2024-03-18 04:56:51 UTC

Suppliers

thuannhhs170631 — 2024-03-18 04:57:02 UTC

Other parties

thuannhhs170631 — 2024-03-18 04:57:09 UTC