2.1.1 Purchasing and procurement
Purchasing and procurement is the broad process that buys the materials or services necessary for the organisation's production function to meet customer requirements. Included in the process are activities like identifying various suitable suppliers, purchasing from them, and monitoring their performance. While this is defined very neatly in a few words, the actual stages of the process can be quite extensive. For example, the stages involved may include:
- identifying needs
- defining requirements for purchasing
- deciding if purchase is necessary or best option
- decide if purchase is to be existing commodity or made specifically.
- studying the market for suppliers and their market power; i.e., is the market supplied by one, few or many suppliers
- listing all available suppliers
- selecting potential suppliers
- appointing suppliers
- receiving commodity or service
- evaluating commodity or service received.
The materials manager must be aware that externalities can influence each stage of this process. These externalities can be within or outside the organisation, or be government or regulation driven.
Activity2.2
In the space below, list the factors that could influence each of the above stages.
Let us now look at some of the factors that might influence supplier selection. This is an important part of the decision making process because a good supplier contributes to a good output. The relationship between the supplier and the purchaser is a close one because the happiness of one depends upon the happiness of the other. With the increasing use of just-in-time (JIT) production, the accurate supply of inputs is becoming crucial. The supplier-purchaser-relationship is becoming more like a partnership where the role of one impacts directly upon the role of the other.
The factors that may be considered in supplier selection would include, but not be limited to:
- quality of product supplied
- reliability of product and supplies
- technical and financial ability to meet needs
- location and attitude.
The relative importance of each of these factors depends on the commodity that is being purchased. The underlying factor that contributes strongly to the final decision to select a supplier is, of course, cost or the price paid for the service or commodity being purchased. In deciding on what price the firm is willing to pay its supplier, it obtains information from the obvious usual sources:
- the commodity markets
- published lists of prices
- inviting quotations
- negotiations with suppliers.
The main aim is to get the best purchase for the least price, always keeping in mind the total cost to the firm of the purchase. The aim is to achieve the lowest total cost for highest revenue. With this aim, the procurement process is depicted in Figure 3.1
Figure 1 Price measurement approaches
(Source: Coyle J., Bardi E. and Langley C. 1996, p. 80)
As you can see from the figure, in the tactical situation, the firm evaluates the purchase purely on cost basis. Total cost is not considered. In the operational situation, total cost to the firm is considered. In the strategic, or holistic, situation, the evaluation shifts from cost to the firm to value to the customer. As the firm moves from taking the tactical perspective to the strategic, the cost consideration shifts to customer satisfaction.
Cost categories for supply-side logistics. Broadly, costs in supply-side logistics can be categorised into:
- transport costs
- costs for receiving and preparation for use of received material
- costs in maintaining inventory
- production costs.
Any handling, management or control of the commodity will add costs to it. The aim of the firm should be to increase the value to the customer at each stage. This enhanced value must be greater than the added cost. Each step in the material management process must contribute to increasing the value of the final product to the final customer.
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