SCM MODULE 2

• Procurement has been a vital, transactional part of conducting

business for almost as long as commerce has existed.
• Although the days of scribes tracking purchases on papyrus
scrolls are long past, the process of carefully selecting and
purchasing the goods and services needed for day-to-day
business operations remains as important as ever.
• By enabling the company to reliably get the supplies it needs at
the lowest cost, procurement can directly impact the bottom line
 What Is Procurement?
• Procurement encompasses a range of activities involved in
obtaining goods or services.
• What is the purpose of procurement? In general, procurement
teams work to obtain competitively priced supplies that deliver the
most value.
• However, not all companies define procurement in the same way.
• Many companies consider that procurement encompasses all the
stages, from gathering business requirements and sourcing
suppliers to tracking the receipt of goods and updating payment
terms, while others define procurement as a narrower range of
activities, such as issuing purchase orders and making payments.
• Traditionally, some businesses have used the term procurement
synonymously with purchasing.
• But now, purchasing is often seen as just one stage in a larger,
more strategic procurement process. So, what exactly is
procurement?
• Procurement involves every activity involved in obtaining the goods
and services a company needs to support its daily operations,
including sourcing, negotiating terms, purchasing items, receiving
and inspecting goods as necessary and keeping records of all the
steps in the process.
 Why Is Procurement Important in Business?
• Procurement is an important step in understanding supply chains, because it
helps a company find reliable suppliers that can provide competitively priced
goods and services that match the company’s needs.
• That’s the case whether the company is seeking raw materials for manufacturing,
a marketing services provider or new office supplies.
• For example, if a company needs a new supplier to provide an ongoing service for
an indefinite period of time such as an email security solution the procurement
process helps the company choose the supplier that best meets all of the
business’s requirements at a reasonable price.
• It enables the business to avoid wasting time, money and valuable resources
dealing with an inadequate supplier.
• Minimizing cost is one important aspect of improving your procurement processes.
• But it’s also vital to identify suppliers that provide the quality of goods and services
that the company needs and have the capacity to deliver reliably and a track
record of doing so.
 Types of Procurement
• Procurement can be categorized in several ways. It can be classified as
direct or indirect procurement, depending on how the company will use
the items being procured. It can also be categorized as goods or services
procurement depending on the items that are being procured.
• Direct procurement refers to obtaining anything that’s required to
produce an end-product.
• For a manufacturing company, this includes raw materials and
components. For a retailer, it includes any items purchased from a
wholesaler for resale to customers.
• Indirect procurement typically involves purchases of items that are
essential for day-to-day operations but don’t directly contribute to the
company’s bottom line.
• This can include anything from office supplies and furniture to advertising
campaigns, consulting services and equipment maintenance.
• Goods procurement largely refers to the procurement of physical
items, but it can also include items like software subscriptions.
• Effective goods procurement generally relies on good supply chain
management practices. It may include both direct and indirect
procurement.
• Services procurement focuses on procuring people-based
services.
• Depending on the company, this may include hiring individual
contractors, contingent labor, law firms or on-site security services.
It may include both direct and indirect procurement.
 Types of Procurement
Services
Direct Indirect Goods
Procurement
Procurement Procurement Procurement

What is it? Any good or All non- Physical items All people-based
service required production- typically held as services
to produce an related goods or inventory, procured,
end product services whether for direct whether for direct
or indirect or indirect
procurement procurement
purposes purposes

Examples Raw materials, Office supplies, Raw materials, Law firms,

components and marketing wholesale items, contractors,
parts, machinery, services, utilities office supplies contingent labor,
items purchased on-site security
for resale services
 How Procurement Works
• The procurement process generally involves a number of steps.
• The business identifies particular goods and/or services that it needs,
sources the suppliers that will help the company reach its business
objectives, negotiates terms and costs and then purchases and
receives the relevant items.
• A small company may have just one person handling procurement of
all goods and services.
• Larger companies may have a team of people specialized in dealing
with different suppliers or supporting specific internal business
groups.
• For some items, the team may need to gather input from several
different business groups in order to determine the company’s overall
requirements.
 9 Steps in the Procurement Process
• Procurement processes vary greatly depending on each company’s
structure and needs, but generally include the following nine core steps:
• 1. Identify which goods and services the company needs. First, a
business must identify its requirements for a specific item or a service.
• This may be a new item that the company hasn’t previously purchased,
a restock of existing goods or a subscription renewal.
• This step typically involves delving into the nitty-gritty details of what the
business needs, such as the precise technical specifications, materials,
part numbers or service characteristics.
• At this stage, it’s a good idea to consult all business departments
affected by the purchasing decision to ensure the procured items
accurately reflect the needs of each department.
• 2. Submit purchase request. When an employee or business group needs
to procure a significant quantity of new supplies or services, they make a
formal purchase request (also known as a purchase requisition).
• A purchase request notifies the company that a need exists, usually via
department managers, purchasing staff or the financial team, as well as
specifications such as price, time frame needed, quantity and other important
things for the purchasing team to keep in mind.
• The department overseeing the purchase can then approve or deny the
purchase request. If approved, the procurement team can proceed with
selecting a vendor and making the purchase.
• 3. Assess and select vendors. With a clear list of requirements and an
approved purchase request, now is the time to find the best vendor and
submit a request for quote (RFQ) – this is what the purchasing team sends to
potential suppliers in order to receive a quote – it is important to be as
detailed as possible so you can compare apples to apples.
• Vendor assessment should focus not only on cost but also on reputation,
speed, quality and reliability.
• Many companies consider ethics and social responsibility as well, since
procurement is often intertwined with corporate identity.
• A retailer that prides itself on sustainability would stand to benefit from
partnering with environmentally responsible suppliers, for instance.
• 4. Negotiate price and terms. A common best practice is to get at
least three quotes from suppliers before making a decision.
• Examine each quote carefully and negotiate where possible. If you
need to walk away from a deal, be sure that you have concrete
alternative options.
• Once you’ve agreed on final terms, be sure to get them in writing.
• 5. Create a purchase order. Fill out a purchase order (PO) and send it
to the supplier.
• The PO should be sufficiently detailed to identify the exact services or
goods needed and to enable the supplier to fill the order.
• 6. Receive and inspect the delivered goods. Carefully examine
deliveries for any errors or damage.
• Make sure everything is delivered as specified in the PO and that the
quality meets or exceeds expectations.
• 7. Conduct three-way matching. Accounts payable should conduct three-way matching
by comparing the purchase order, order receipt or packing list and invoice.
• The goal is to ensure the goods or services received match the purchase order and to
prevent payment for unauthorized or inaccurate invoices.
• Highlight any discrepancies between the three documents and resolve issues before
arranging payment.
• 8. Approve the invoice and arrange payment. If the three-way match is accurate,
approve and pay the invoice. Businesses should strive to have a consistent invoice
payment process through accounts payable that checks that payments match the invoice
amount and due date.
• A standardized process can help make sure invoices are always paid on time, which can
prevent late fees and build good relationships with suppliers.
• 9. Recordkeeping. It’s important to maintain records for the entire procurement process,
from purchase requests to price negotiations, invoices, receipts and everything in between.
• These records may be useful for multiple reasons. They help the company reorder goods
at the right price in the future, as well as assist with auditing processes and calculating
taxes.
• Clear, accurate records can also help resolve any potential disputes
PROCUREMENT PROCESS
 Stages of Procurement
The nine major steps of the procurement process can also be thought
of in three distinct stages: the sourcing stage, the purchasing stage
and the receiving stage.
• Sourcing stage: This covers the initial steps in which the business
identifies its needs, creates a purchase request and assesses vendors.
• Even after the initial sourcing steps are complete, it’s a good practice to
build a strong relationships with suppliers.
• They can establish grounds for suppliers to learn from partners, improve
products and processes and develop trust.
• Purchasing stage: This stage includes negotiating terms, creating
orders and receiving and inspecting goods and services.
• Payment stage: Accounts payable conducts three-way matching to
ensure order and invoice accuracy.
• The invoice can then be approved and the payment is arranged.
• Records of all invoices, orders and payments should be kept and
carefully maintained.
 Procurement Life Cycle
• Organizations commonly think of steps in the procurement
process as a life cycle.
• This perspective provides a reminder that all the tasks and stages in
the procurement process overlap and rely on each other and that the
process is continuous.
• A carefully thought-out procurement life cycle also recognizes the
integration between the process and the business as a whole,
including the need to align with existing company rules and
procedures covering areas such as budgeting.
• The process is not always linear, and sometimes adjustments need
to be made to account for a dynamic digital supply chain with shifting
suppliers, availabilities and costs.
 Three Components of Procurement
• Three key components work together to make the procurement
process happen: people, process and paperwork.
• People: People generally are responsible for initiating or authorizing
every step of the procurement process.
• In addition to procurement specialists, the people involved include
other stakeholders, such as accounts payable and the business
groups that request the goods and services.
• The number of people involved often depends on the value of the
goods and services; more stakeholders may be involved in specifying
and approving high-value purchases.
• Process: An effective procurement process can help a company succeed
by keeping costs down and ensuring supplies arrive when the business
needs them.
• A well-designed and methodical process helps to promote accuracy and
timeliness because every person involved knows exactly what they need
to accomplish and how long they have to complete the tasks.
• In contrast, a disorganized procurement process results in inefficiencies
and potentially costly errors.
• Overpayments, for example, can impact the bottom line, while late
payments negatively affect relationships with suppliers.
• Paperwork: It’s important to maintain records for every stage of the
procurement process and ensure they are easily accessible.
• These records act as a store of organizational knowledge about payment
terms and supplier performance, helping the business maintain an efficient
procurement process — even if the procurement staff changes over time.
• In the case of an audit or a dispute, a business must be easily able to
follow the paper or electronic trail through each stage of the procurement
process.
 Procurement, Purchasing and Supply Chain:
What’s the Difference?
• The terms procurement, purchasing, sourcing and supply chain are often
used interchangeably. However, there are important distinctions between
them.
• Procurement vs. purchasing: If procurement involves purchasing, you
might be wondering: What’s the difference between purchasing and
procurement?
• The answer is that purchasing is essentially transactional, focusing on
managing specific orders to meet company needs.
• Procurement is a much broader and more complex set of processes,
including establishing and maintaining supplier relationships.
• Another way to think about the difference between purchasing and
procurement is that procurement takes a proactive approach that starts
with analyzing the company’s needs, whereas purchasing is a reactive
approach — simply focusing on obtaining what the company has already
decided it needs.
• Procurement vs. sourcing: Sourcing, like purchasing, is
only part of the overall procurement process.
• Sourcing is an early stage of the procurement cycle.
• It encompasses activities such as identifying and assessing
potential suppliers of goods or services, negotiating terms and
selecting the vendors that best meet the company’s needs.
• Procurement vs. supply chain: Procurement covers one aspect
of supply chain management.
• Procurement includes sourcing, obtaining and paying for goods
and services.
• Supply chain management also covers the logistics involved in
obtaining goods, such as shipping and warehouse management,
as well as transforming the procured goods into products and
distributing them to customers.
 Principles of Procurement
• In public-sector organizations, the procurement process is generally
similar to the process in private-sector organizations — but with a few
important differences.
• Because the people involved handle public funds, they generally
must follow rigorous principles during the procurement process.
• These principles can be regarded as an ethical code of conduct that
holds public servants accountable for their purchases.
• Some of the principles may also be beneficial to private-sector
organizations.
• The principles vary somewhat depending on the organization.
Here are seven of the most common procurement principles:
• Value for money: The organization must manage funds efficiently and
economically when procuring goods and services.
• This may include conducting cost-benefit analyses and risk assessments.
• It’s worth noting that low cost does not necessarily equate to greater
value; characteristics such as quality and durability also factor into
determining whether the purchase represents value for money.
• Fairness: Procurement should not provide preferential treatment to
individuals or suppliers. All bids should be assessed objectively, based on
how well they meet the organization’s needs.
• Competition: Organizations should seek competitive bids from multiple
suppliers, unless there are specific reasons not to do so, such as a sole-
source provider where the good or service is only available from a single
vendor.
• Efficiency: Procurement processes must be carried out efficiently to help
maximize value and avoid delays.
• Transparency: Organizations should make relevant procurement
information available to everyone, including the public as well as
suppliers.
• Information should be kept confidential only when there are legal or
other valid reasons to do so.
• Integrity: Those who practice public procurement should always
strive to be perceived as trustworthy, reliable, honest and
responsible.
• Funds must be used for their intended purpose and in the public
interest.
• Accountability: People involved in the procurement process are
accountable for their actions and decisions.
• They are required to report procurement activities accurately,
including any errors.
 Procurement & Finance
• In many companies, procurement and finance teams operate as separate departments.
Historically, they have sometimes been at odds for one major reason:
• Procurement spends money, while finance focuses on profitability, which sometimes means
finding ways to spend less.
• However, a strategic partnership between the two groups can benefit the business as a whole,
partly because each group can provide unique insights into the business’s operations.
• For example, a well-run procurement team may have a deep understanding of how carefully
sourced goods and services can help business groups maximize profitability.
• This helps the finance group get a better overall picture of company spending and how it
affects the bottom line.
• Integrated supply chain management software that can connect information from across the
business, including finance, is an important tool to bridge the traditional divide and help teams
work together to advance business objectives.
• Supply chain management software can also help you track progress toward goals by
providing the information you need for key performance indicators (KPIs) in a simple-to-
understand format for your procurement team.
TAKE AWAYS

• Procurement is a vital business function. When managed efficiently

and done well, it can help increase your business’s profitability.
• It includes a range of activities involved in obtaining goods and
services, including sourcing, negotiating terms, making purchases,
tracking when supplies are received and maintaining records.
• It’s important to continuously monitor and assess the procurement
process to improve any weak spots or inefficiencies.
• Technology can reduce procurement cost and administrative
overhead by automating and tracking procurement processes.