COURSE TITLE : Principles of Procurement & Logistics Management

COURSE CODE : NUPLM31104:

LEVEL : Degree Year 1, Semester 1
COURSE CREDITS : Contact Hours 45, Credit Units 3.

Course Overview

The goal of this course is to provide an understanding and knowledge in

procurement principles and logistics management. Students will be in
position to gain knowledge of how procurement is done from planning to
disposal of assets. This perspective will help with implementation decisions
on how to set up procurement plans, and also creating business process
practices.

a) Course Description

This course unit provides a firm foundation to the understanding of the basic
concepts, principles and practices in Procurement and logistics management.
It covers a broad range of key issues, applications and systems that are vital
in the present competitive business environment. The course is practical
oriented with emphasis on theory and its practical applications in both the
public and private sectors. It is geared towards understanding the specifics
and management of the procurement process, logistics and the supply chain.

b) Objectives

The course will help students achieve the following objectives:

 To expose students to the principles and practices of procurement and

logistics.
 To equip students with knowledge and develop their capacity for
effective procurement, logistics and supply chain management.
 To emphasize the need for the procurement and logistics functions in
organisations in order to achieve organisational competiveness and
profitability.

 To enhance the knowledge and skills of students to enable them work

in procurement, logistics and supply chain Management Environment.

c) Outcomes

Lecture note by Mr. Denis N. Page 1

By the end of this course, the learner will be able to:

 Understand and apply the principles and practices of procurement and

logistics Management in organisations in order to achieve
organisational competitiveness and profitability.
 Demonstrate ability to make positive contribution to the success of an
enterprise by managing the activities in procurement and logistics
management.

 Appreciate the role of procurement and logistics as vital functions in

the affairs of both public and private sectors to ensure accountability
for funds and value for money.

d) Indicative Content

Topic 1: Introduction:

 Meaning of Procurement.
 Purchasing Function, Procurement and Supply Management
 The concept of logistics
 Materials, logistics and distribution management
 Procurement in different environments
 Factors that have accelerated the development of the procurement
Function.

Topic 2: Procurement objectives, Principles, operating Policies and

Procedures.

 Procurement objectives.
 Procurement Principles.
 Operating Policies and Procedures.
 Procurement cycle.
 PPDA of Uganda: Procedures and Practices.
 Procurement records and documentation.

Topic 3: Key Procurement variables/issues.

 Source
 Quality
 Quantity
 Time
 Price/ Total cost of ownership

Lecture note by Mr. Denis N. Page 2

  Place

Topic 4: Logistics and Supply chain Management.

 The supply chain concept.

 Logistics and supply chain.
 Logistics Management.
 Supply Chain Management.
 The Concept of value chain
 The concept of lean thinking.
 Lean and Agile Supply.

Topic 5: Supplier sourcing

 Attributes of a good supplier.

 The sourcing process.
 Sources of information on potential suppliers.
 Supplier partnership
 Supplier Assessment and evaluation
 Outsourcing,
 Make or buy decisions
 Reciprocity
 Tendering
 Sub-Contracting
 Benchmarking
 Contract Management
 International/ Global sourcing

Topic 6: Negotiations in Procurement.

 Definition of Negotiations
 Purpose of Negotiations
 Negotiation process
 Approaches to Negotiation.
 Body language concept.

Topic 7: Capital Procurement.

 Distinction between capital and revenue Procurement

 What are capital items?
 Role of procurement in acquisition of capital items
 Leasing and hiring of capital goods

Lecture note by Mr. Denis N. Page 3

  The concept of life cycle/lifetime costing

Topic 8: An overview of other key aspects in Procurement

 E – Procurement systems.
 Procurement ethics.
 Legal considerations.
 Corporate social responsibility.
 Disposal management.
 Sustainable procurement
 Public - Private Partnerships Procurement (PPP)

Topic 9: Other Key aspects of Logistics management

 Chemicals and cold chain logistics

 Warehousing management
 Logistics Communication
 Customer Service management
 Transport management

Teaching and Learning Methods

This will be through Lectures, Group discussion, Simulation and role play,
Individual presentations and Case Studies

Assessment and Grading Systems

Course work constitutes 30% broken down as Individual Essay 10%, Seminar
Presentation (Group work) 10%, Class Test 10% and the Final examination
constitutes 70%. The course will be graded out of maximum of 100 marks
and assigned appropriate letter grades and grade point averages as shown
below:

Average Mark Grading Cumulative Remarks

(%) Letter Grade Point
average
80-100 A 5.0 Distinction
75-79 B+ 4.5 Very good
70-74 B 4 Good
65-69 C+ 3.5 Good
60-64 C 3 Fair
55-59 D+ 2.5 Fair
50-54 D 2 Pass

Lecture note by Mr. Denis N. Page 4

00-49 F 0 Fail
The pass mark for this course is 50%
References

 Peter Baily & David Farmer (2005 Purchasing Principles and

management Prentice Hall Ninth Edition.
 Gower (1995) Handbook of Purchasing & Supply Management. Prentice
Hall, London 2ndEdition
 Jessop Mirrison (2004). Storage and Supply of materials Theory and
Application 6th edition Pitman
 Malcolm Saunders (2000) Strategic Purchasing and Supply Chain
Management.
 Menon KS Stores Management Second Edition Vikas
 Nystrom, Paul Henry (2009) Retail Selling and Store Management.
Pitman
 Kenneth Lysons& Brian Farnington (2000) Purchasing and Supply Chain
Management. McMillan
 Peter Baily et el (2001) Purchasing Principles and Management
McMillan
 Stuart F (1996) Purchasing Principles and Application, Butterworth
 Malcom Saunders (1999) Strategic Purchasing and Supply Chain
Management
 Menon P (1998) Handbook of Purchasing and Supply Management.
Vikas.

Lecture note by Mr. Denis N. Page 5

 UNIT ONE:

OVERVIEW OF PROCUREMENT MANAGEMENT FUNCTION

Since the 1970’s, the role of the purchasing function has gone through
considerable changes. In the past, it was regarded as a clerical function with
the objective of purchasing a good or service at the lowest price.
Management viewed purchasing as having a passive role in the organization
with purchasing being an administrative rather than a strategic function.
However, the 1973 – 79 oil crisis and related raw materials shortages drew
significant attention to the importance of purchasing. Thus the strategic
importance of the purchasing function to the organization was beginning to
receive recognition. This is what gave birth to procurement.

MEANING OF PURCHASING:

For most organizations, the areas of greatest expenditure are purchasing

and payments to personnel. The importance of involving purchasing in
strategic decisions intended to strengthen the competitive advantage of a
business unit has been enhanced by such factors as;

 Intensified competition associated with the globalization of

manufacturing has emphasized the importance of quality, not only in
relation to design but also the materials, parts and components that
comprise the product.
 The change in many industries from a relatively stable to a dynamic
environment, which is a key factor in determining added value.
 The contribution of procurement to supply chain strategy and
management
 The strategic contribution that procurement can make to the design,
development, manufacture, and marketing of products that will enable
the company to compete more effectively both nationally and
internationally.

Purchasing is a function responsible for obtaining by exchange of cash, lease

or other legal means, materials, equipment, works and services, required by
an organization for use in its operations or for resale. It only applies to goods
and services paid for with money or other undertakings.

The classical definition of purchasing states that; “it is the acquisition of

goods and services of the right quality, in the right quantity, from

Lecture note by Mr. Denis N. Page 6

the right source, delivered to the place at the time.” However, it has
been observed that the term ‘right’ is situational. What is right, changes with
the purchasing environment.

The primary aim of purchasing is to obtain the correct equipment, materials,

supplies and services in the management of quantity or the management of
quality from the management at the right time and cost. It has however, a
whole of the other duties as an organization “window – on – the world”
provided any information on the new products, processes, materials and
services.

Purchasing should also advise on probable price, deliveries and

performances of product under consideration by the research and the design
and development functions.

Since the total cost of bought – in – items may form a very large proportion
of the final selling price of the organizations’ product or services, purchasing
is an extremely important specialized function which should never be under
estimated.

However, Procurement strictly is a wider concept of acquisition than

purchasing. It specifically means the obtaining of goods, services and works
by various means such as loans, transfer, or hire as well as straight forward
purchasing. It starts with need identification and focuses on customer
satisfaction. The concept advocates for the evaluation of the whole process
at the end of each transaction for the purpose of increased improvement.

DEFINITION OF PROCUREMENT

The (PPDA Act, 2003) defines “Procurement” to mean acquisition by

purchase, rental, lease, hire purchase, license, tenancy, franchise, or any
other contractual means, of any type of works, services or supplies or any
combination;

Procurement embraces both purchasing and supply management so as to

contribute to the competitive advantage of the organization and achieve its
goals by adding value and minimizing costs.

“Procurement is the business management function that

ensures identification, sourcing, access and management of
the external resources that an organisation needs or may need
to fulfill its strategic objectives.” (CIPS, 2005)

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Procurement exists to explore supply market opportunities and to implement
resourcing strategies that deliver the best possible supply outcome to the
organisation, its stakeholders and customers. Procurement applies the
science and art of external resource and supply management through a body
of knowledge interpreted by competent practitioners and professionals.

One of the difficulties in defining the term ‘procurement’ is that it does not
deal with a single action or process. Procurement covers the complete range
of events from the identification of a need for a good or service through to its
disposal or cessation.

Procurement includes activities and events before and after the signing of
a contract as well as the general management activities associated with a
range of contracts:

 Pre-contract activities such as planning, needs identification and

analysis, and sourcing,
 Post-contract activities such as contract management, supply chain
management and disposal, and
 General activities such as corporate governance, supplier relationship
management, risk management and regulatory compliance.

Procurement delivers a range of benefits. It not only seeks to reduce costs

and to ensure supply, it also supports strategic organisational objectives
such as market expansion and product innovation. CIPSA has identified
seven core benefits of procurement:

 Security of supply,
 Lower costs,
 Reduced risk,
 Improved quality,
 Greater added value,
 Increased efficiency,
 Innovation.

Of the other terms we use, ‘supply management’ is very similar to the

term ‘procurement’ and might be a synonym, but other common terms
generally relate to just part of the overall process captured by procurement.

Strategic procurement is one, it relates to the strategies and mechanisms

used to approach and interact with the supply market that take account not
just of present business needs but also what the organisation’s business

Lecture note by Mr. Denis N. Page 8

future needs might be. Strategic procurement requires an active approach to
market building with regard to the acquisition of goods and services that are
critical to an organisation's viability. It reflects the belief that the buyer can
and should influence the behaviour of the supply market rather than accept
it the way it is.

Purchasing is another, while it may be used interchangeably with buying it

is just part of procurement. Purchasing begins with the placement of a
requisition, which upon approval, becomes a purchase order and is sent to a
supplier. Whereas procurement necessarily includes a contract development
stage purchasing does not always include contract development.

DIFFERENCE BETWEEN PURCHASING AND PROCUREMENT

Purchasing is a function responsible for obtaining by exchange of cash, lease

or other legal means, materials, equipments, works and services required by
an organization for use in its operations or for resale. It only applies to goods
and services paid for with money or other undertakings.

The classical definition of purchasing states that is the acquisition of goods

and services of the right quality, in the right quantity, form the right source,
delivered to the right place at the right time obtained at the right price.”
However, it has been observed that the term ‘right’ is situational. What is
right, changes with the purchasing environment.

Procurement is defined by the Public Procurement and Disposal of Public

Assets Act, 2003 as the acquisition by purchase, rental, lease, hire purchase,
license, tenancy, and franchise or any other contractual means of any types
of works, services or supplies or any combination of the above.

Supplies means goods, raw materials, products, equipment or objects of any

kind and description in solid, liquid or gases form or in the form of electricity
or intellectual and proprietor works as well as works or services, incidental to
the provision of those supplies, where the value of the works or services
does not exceed the value of supplies.

Procurement is strictly a wider concept of acquisition than purchasing. It

technically means obtaining goods and services by various means such as
loans, transfer or hire as well as straight forward purchasing.

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It starts with need identification and focuses on customer satisfaction. The
concept advocates for evaluation of the whole process at the end of each
transaction for the purpose of increased improvement.

Procurement embraces both purchasing and supplies management so as to

contribute to competitive advantage of the organization and achieve its
goals by adding value and minimizing costs. Thus, from the above analysis,
purchasing and procurement give the following implications;

 Purchasing is transactional with its primary concern being the

mechanics of order placing on a one-off basis. While procurement is
relational in that it seeks to establish appropriate long-term
collaborative relationships with suppliers.

 Purchasing is tactical rather than strategic; that is, purchasing is

focused on short-term buying while procurement is largely concerned
with achievement of long-term corporate goals.

 Purchasing is reactive; that is, it is a service activity buying what is

it’s instructed to buy while procurement takes a proactive approach
that helps to determine policies of acquiring required supplies, services
or works. Because of this reactive and proactive nature, further
differences between purchasing and procurement can be drawn to
including;

Purchasing Procurement

Purchasing uses quality control/value Procurement uses quality

analysis as an approach to quality assurance/value engineering in
management-reject defective materials. approaching quality management-avoids
occurrence of defective materials.
Purchasing is a cost center i.e. it is Procurement focus is value addition i.e.
involved in simply determining what is to procurement is a value adding center
be spent on the acquisition of required which aims at minimization of waste
supplies, services or works. throughout supply chain operations.
Receives specifications, terms of Procurement and suppliers contribute to
reference, and scopes of works from specifications, terms of reference, and
user departments and designers. scopes of works.
Price is a key variable in making Total cost of ownership and value are
acquisition decisions. key variables in making acquisition
decisions.
The purchaser’s systems are Systems of the procuring organization
independent of suppliers. may be integrated with the systems of

Lecture note by Mr. Denis N. Page 10

 its suppliers.
Purchasing reports to finance, marketing Procurement is a main management
or production. function that reports to top management
of the organization like the Chief
Accounting Officer.
Problems relating to supply of required Problems are a shared responsibility of
supplies, services or works are the the buyer and supplier.
responsibility of the supplier.
Nature of negotiation is a ‘win-lose’ i.e. Negotiations are ‘win-win’ or even better
they are competitive i.e. they are collaborative.
Many suppliers are regarded as security Many suppliers are viewed as lost
against risk of supply failure. opportunities to minimize cost, manage
quality, obtain commitment etc.
Holding stock is security against stock Holding stock is waste.
outs.

NB: inspite of the above differences, the two terms are used
interchangeably.

EVOLUTION AND DEVELOPMENT OF PURCHASING

Adapting the basic definition for purchasing according to the book

“Purchasing and Supply Chain Management” by Kenneth Lysons and Brian
Farrington “purchasing” is a function, a process, a relationship, a problem-
solving, a discipline and a profession in practical business life.

According to Kenneth Lysons (2003), the classic definition of purchasing is

“To obtain materials of the right quality in the right quantity from the right
source, delivered to the right place at the right price”. This introduces the
concept of the “five rights” in purchasing (also known as the 5 Rs in
purchasing). This definition perfectly describes what we would like to achieve
when we go out to purchases a needed item.

Purchasing is seen by today's successful organization as an activity of

considerable strategic importance. However, not all businesses see
purchasing as a function best undertaken by a specialized department, there
are those who see the activity more appropriately performed close to the
point of need of the goods or services being acquired.

The fact that the strategic role and contribution of purchasing and supply is
well recognized in many leading commercial concerns has meant that the
strategic purchasing decisions may be taken at board level, rather than by a
departmental manager.

Lecture note by Mr. Denis N. Page 11

The evolution of purchasing has been summarized in into 4 stages;

 Product centered purchasing

This was mainly focused on the product and put much emphasis on the
rights which concentrated exclusively on the purchase of tangible products.

 Process centered purchasing

This was also product focused but moved further to examine the outcomes
and begin to measure the process through which the outcomes are
delivered.

 Relational purchasing

This was a further refinement of the process centered purchasing. It

expanded to include buyer-vendor relationships and how these could be
used to manage the quality and nature of the supplier.

 Performance centered purchasing

This stage focused on the best method of product management and

employed a methodological integration to manage relationships, process and
outcomes. It emphasized cross functional training of purchasing
professionals and measurement of purchasing performance in terms of
contribution in firms success.

 Objectives of the Purchasing Function

Progressive organisations recognize purchasing as an important function and

establish a separate purchase department to look after this function.
Objectives of purchasing should be clearly laid down by the organisation for
the justification of the functioning of the purchase department. It should be
seen that objectives of purchasing should match with the overall objectives
of the organisation.

Purchasing Goods; The purchasing department is also responsible for

procuring goods and services. Purchasing employees look at delivery
methods and options to find the best deals on prices and shipping methods.
When placing purchases, all employees must follow purchasing procedures
established by the company.

Lecture note by Mr. Denis N. Page 12

Controlling Costs; Controlling the cost of goods and services is one of
purchasing management's top objectives. Purchasing employees always look
for the best buy at the lowest cost without sacrificing quality. Purchasing
employees also must negotiate with suppliers on price and shipping rates
and methods to find the best deal.

Controlling Inventory Levels; Purchasing management controls inventory

levels. One objective is maintaining an inventory supply that is as low as
possible, but still ensuring that all goods needed are always on hand. When a
company invests too much money in unneeded inventory, that money is tied
up unnecessarily. By monitoring inventory levels and looking for patterns,
purchasing management is able to control the level of inventory on hand.

Relationships With Suppliers; Purchasing management also seeks to

build strong relationships with suppliers. When relationships are strong,
confidence and trust is maintained between the parties. This is beneficial for
both companies. The purchasing management department uses suppliers
that offer great deals and service.

Customer Satisfaction; Purchasing managers play a fundamental role in

ensuring customer satisfaction. Managers have this obligation in two ways:
quality of product and on-time deliveries. When buyers select high-quality
ingredients at lower costs, these cost savings can be issued to the customer.
Likewise, poor quality deters customers from returning to the business.
Delayed and defective products are other ways customers are affected by
the decisions of purchasing managers. Thus, these employees play a critical
role in shaping the customer's experience with the organization.

Maintaining continuity of supply: The purchasing function must ensure

the continuous availability of material, supplies and equipments to maintain
production schedule or to avoid disruption in production. The purchasing
function also requires investments in reserve inventories. The efficiency of
purchasing function lies in proper balancing of these factors which require
experience, judgment of future activities and trends and various other
activities on the part of purchasing authority.

Avoidance of duplication, waste and obsolescence: The purchasing

authority must have the accurate knowledge of the items in hand and the
requirements of materials for a particular period in order to have proper
decision in view of long range and short range plans. This is necessary to

Lecture note by Mr. Denis N. Page 13

avoid duplication, waste and obsolescence with respect to various items
purchased.

Maintenance of company's competitive position: The purchasing

authority must constantly examine his specifications for the purchase of
right material. This is necessary to make sure that his company's quality
standards are neither higher nor lower than those of close competitors and
to maintain his company's position in the industry.

Developing alternative sources of supply: Alternative sources of supply

should be exposed for increasing the bargaining power of the buyer and
minimizing the cost of purchases. Purchases can be made from alternative
sources if a particular supplier fails to supply the required items.

The following broad statements about the overall purchasing objectives are
suggested by Peter Baily (2005):

 To supply the organization with a flow of materials and services to

meet its needs.
 To ensure continuity of supply by maintaining effective relationships
with existing sources and by developing other sources of supply either
as alternatives or meet emerging or planned needs.
 To buy efficiently ad wisely, obtaining by any ethical means the best
value for every pound spent.
 To maintain sound co-operative relationships with other departments,
providing information and advice as necessary to ensure the effective
operation of the organisation as a whole.
 To develop staff, policies, procedures and organization to ensure the
achievement of these objectives.

In addition, some more specific objectives from Baily those also sourcing
managers have to keep in mind:

 To select the best suppliers in the market.

 To help generate the effective development of the new products.
 To protect the company’s cost structure.
 To maintain the correct quality/value balance.
 To monitor supply market trends.
 To negotiate effectively in order to work with suppliers who will seek
mutual benefit through economically superior performance.
 To adopt environmentally responsible supply management.

Lecture note by Mr. Denis N. Page 14

CATEGORIES OF PROCUREMENT

Procurement can be simple or complex depending on what is procured.

There are three basic procurements which are usually done by organisations.

 Works; means any work associated with construction, reconstruction,

demolition, installation, testing and commissioning of any plant,
equipment or material decoration and finishing.

 Supplies/ goods; Means raw material, product equipment or object of

any kind and description in solid, gasses or liquid form or in the form of
electricity , or in intellectual and property rights as well as services or
works incidental to the provision of such supplies where the value of the
work or service does not exceed the value of supplies.

 Services; Means any object of procurement or disposal other than

works and supplies, that is intangible and includes, professional and
non- professional or commercial types of services as well as supplies
and works which are accidental to ,but not exceeding the value of those
services. These include security, maintenance, repair, education, health
services etc.

SUPPLY CHAIN MANAGEMENT

The term ‘supply chain management’ was first used in the early 1980s to
refer to the view that manufacturing firms should think of their own internal
operations as an integrated whole, rather than as separate departments
such as purchasing, stores, production, finished good warehouse, distribution
and so on. It was quickly extended to cover relationships with suppliers and
with immediate customers – the idea being that working more closing and
cooperatively and co-ordination that would lead to:-

 Reduced inventory
 Better quality and delivery performance
 Reduce cost for very involved

Today, the supply chain has been described as the main artery of every
business because it links trade patterns through coordination of materials,
information and money. The supply chain can be likened to a well-balanced
real team in which the entire team is coordinated to run the chain. It
emphasizes the process approach concerned with how a product or service is

Lecture note by Mr. Denis N. Page 15

delivered to the customer. This approach is based on the recognition that the
customer at the right time and right place.

What is supply chain?

A supply chain consists of the set of organizations that interact with one
another to bring a product and right place.

Or

A supply chain is a network of organizations that are involved through

upstream and downstream linkages, in the different processes and activities
that produce value in the form of products and services in the hands of the
ultimate customer. Thus, the supply chain is all those specific actions
required to bring specific products from raw materials to a finished product
in the hands of the consumers. It should be noted that every product has got
its own supply chain. The Supply chain exists in every organization whether
they recognize it or not.

 In a manufacturing environment, it is straight forward to trace the

material and product flow that link the supply chain.
 In non – manufacturing organization, information flow and services may
be traced in addition to protect flows.

A supply chain is that network of organizations that are involved trough

upstream and downstream linkages, in the different process and activities
that produce value in the form of products and services in the hands of the
ultimate customer.

Illustration of the above relationships

Supplier

Manufacturer

Distributor

Lecture note by Mr. Denis N. Page 16

 Retailer

Information flow Customer

It should be noted that every organization has unique chains tracing distinct
flow and all organizations regardless of sectors benefit by tracing their own
chain and determining the supply chain management strategies that will fit
best.

Supply chain emphasizes the process approach concerned with how a

product or service is delivered to the customer. A process is simply a set of
logically related tasks performed to achieve a defined business outcome. The
concept of supply chain, suggests a series of processes linked together to
form a chain. This approach is based on the recognition that the customer is
concerned that the required product or service delivered at the right time
and place.

Thus, supply chain is all specific actions required to bring specific products
from raw materials to a finished product in the hands of a consumer. It
should be noted that each product has its own supply chain.

Supply chain management (SCM) is the process of planning,

implementing, and controlling the operations of the supply chain with the
purpose to satisfy customer requirements as efficiently as possible. Supply
chain management spans all movement and storage of raw materials, work-
in-process inventory, and finished goods from point-of-origin to point-of-
consumption. It "encompasses the planning and management of all activities
involved in sourcing and procurement, conversion, and all logistics
management activities. Importantly, it also includes coordination and
collaboration with channel partners, which can be suppliers, intermediaries,
third-party service providers, and customers. In essence, Supply Chain
Management integrates supply and demand management within and across
companies. Thus, it has been also defined as the integration of key business
processes from end user through original suppliers that provide products,
services and information that add Value for Customers and other
stakeholders (Lambert and Coopers, 2000).

Supply chain management may be described as the integrated approach to

planning and controlling the flow materials from the suppliers through the
distribution channels to the end user. It emphasizes the management of

Lecture note by Mr. Denis N. Page 17

upstream and downstream relationships and the law of supply chain
optimization increasing customer value at the lowest cost.

Supply chain management is a cross-functional approach to managing the

movement of raw materials into an organization and the movement of
finished goods out of the organization toward the end-consumer.

Characteristics of supply chain

 Supply chains are multi – tied i.e. they span beyond an organizations’
immediate suppliers and customers.
 Supply chains are customer driven.
 Supply chain management is an ongoing journey and not a destination.
 Supply chain management (management) activities are not necessarily
true supply chain management activities.

Goals of supply chain management

The objectives of supply chain management are to improve the total

performance of an organization by embracing its responsiveness to the
market place and reducing the overall costs of suppliers.

The potential goals of supply chain management are;

1. Reduce waste and non- value added activities

2. Reduce amount of handling (brokerage)
3. Reduce excess inventory both material and finished goods
4. Increase customer service or responsiveness
5. Customer satisfaction
6. Improve supply chain communication
7. Increase speed.
8. Increase accuracy of information flow
9. Reduce cycle time
10. New product development
11. Reduce order lead times
12. Improve coordination of efforts
13. Ensure continuous channel improvement
14. Understand goals.

THE CONCEPT OF LOGISTICS

Lecture note by Mr. Denis N. Page 18

Logistics deals with planning and controlling of the flow of materials and
related information in an organization from the point of production to the
point of consumption. Broadly speaking is mission is to get the right material
to the right time in the right place from the right source at the right price
while optimizing a given performance measure. ie. Minimizing total operating
costs and satisfying a given set of constraints i.e. Budget constraints.

In military context, Logistics is concerned with the supply of troops with food,
armaments, ammunitions and spare parts as well as the transport of troop’s
themselves. In civil organizations logistics issues are encountered in firms
producing and distributing physical goods. The key issue is to decide how
and when raw materials, semi produced goods and final products should be
acquired, moved and stored.

Logistics are concerned with the physical and information flow and storage of
raw materials through to the final destination of the finished products. Thus
supply and materials management represent the storage and flows into and
through the production process, while distribution represents the storage
and flows from the point through to the customer or end user.

Meaning of logistics;

As an important business management concept, you would expect Logistics

to have a well known and agreed-to definition. But it hasn’t. To many, its
meaning may be as limited as Transportation Management or as broad as
what might be called Supply Chain Management. Denali’s definition, from the
Council of Logistics Management (CLM) is: "Logistics is that part of the
supply chain process that plans, implements, and controls the efficient,
effective forward, and reverse flow and storage of goods, services, and
related information between the point of origin and the point of consumption
in order to meet customers' requirements".

Logistics is the art and science of managing and controlling of the efficient,
effective forward and reverse flow of goods, information and related
resources. (Wikipedia) Logistics is the positioning of resources at the right
time, in the right place, at the right cost, at the right quality. (CILT UK, 2005)

Meaning of Logistics Management

The council of supply chain management professionals define logistics

management as “the part of supply chain management that plans,
implements and controls the efficient and effective forward and reverse flow

Lecture note by Mr. Denis N. Page 19

and storage of goods, services and related information between the point of
production to the point of consumption in order to meet customer
requirements.

Illustration: Logistics elements and flows in the supply chain

Source: Rushton et al 2006

Logistics really looks at the three types of movement namely;

 Movement of raw materials, where materials are moved from

suppliers into the organization. Here logistics is concerned with
purchasing inward transport, receiving, storage and retrieval.
 Movement of work – in progress, where materials are used within
the organization are moved. Here logistics look at handling, movement
and storage of goods during operation.
 Movement of finished goods, where materials are moved out of the
organization to the customers. Here logistics looks at packaging,
storage and retrieval for the warehouse, shipping and distribution to
customers.

Activities of Logistics
Logistics management can first of all be divided into activities concerning
physical flows as well as activities concerning information flows;

a) Activities concerning physical flows:

i) Physical handling in receiving and unloading of goods and re-

grouping into storage control, internal transport, physical

Lecture note by Mr. Denis N. Page 20

 handling out including order picking, grouping and loading,
reconditioning and packaging, external transport both at national
and international, delivery, completing returns, shipment,

b) Activities concerning information flows

i) order entry, clerical handling including goods clearance, quality

and quantity checks, creditworthiness check, completion of
customer papers, stock control, invoicing (outgoing), customer
service (complaint resolutions), providing management
information (performance indicators).

According to Waters Donald (2003) logistics management activities can be

grouped into inbound activities as well as outbound activities, but generally if
you follow some materials as they move through the organization, the
following logistics activities could be observed:

1) Procurement/purchasing: Procurement is the act of acquiring goods,

services and works in order to achieve organizational objectives. The
flow of materials through an organization is usually initiated when
procurement sends a purchase order to a supplier, this means that
procurement finds suitable suppliers, negotiates terms and conditions
with them, organizes delivery, arranges insurance and payment and
does everything needed to get materials into the organization. While
this function of procurement was traditionally regarded as a clerical
function, modern procurement is more strategic.

2) Inward transport. Inward transport is sometimes known as traffic

management and moves materials from suppliers to the organization’s
receiving area. It is concerned with fundamental decisions among
them being choosing the type of transport (road, rail, air etc0 from the
best transport operators then designs a route and makes sure that all
safety and legal requirements are fulfilled ensuring that deliveries are
on time as well as within the reasonable costs. It has to be done within
other rights of logistics.

3) Receiving. This activity of logistics is concerned with ensuring that

materials delivered correspond to the order, ensuring that goods
received are acknowledged, uploads delivery vehicles, inspects
materials for damage and sorts them ready for storage.

Lecture note by Mr. Denis N. Page 21

 4) Warehousing. As we shall see in the later unit, warehousing and
stores management are key logistics functions that are heavily
influenced by modern trends. As a function of logistics, warehousing or
stores is responsible for moving materials into the storage area and
takes care of them until they are needed. It should be emphasized that
there are some materials while in these stores or warehouses need
special attention probably because of their nature. Warehousing has to
take special considerations for such goods. Furthermore, as well as
ensuring that materials can be available quickly when needed.
Warehousing has to ensure that these materials are kept in the right
conditions and the treatment as well as the packaging should keep
them in good conditions.

5) Stock control. In logistics management, organizations hold a lot of

stock or inventory. These stocks may be raw materials, WIP and
finished goods and services. Stock control sets the policies for
inventory; it considers the materials to store, overall investment,
customer service, stock levels etc.

6) Order picking. This activity of logistics is concerned with finding and

removing materials from stores. Once a customer has placed an order,
the goods/materials for that order have to be located within the stores,
identified, checked, and removed from the storage racks then they are
consolidated into a single load, they are packed or wrapped and
moved to the departure area for loading into delivery vehicles.

7) Material Handling. This activity of logistics is concerned with moving

materials through the operations within an organization. It is
concerned with moving materials from one operation to the next and
also moves materials picked from stores to the point where they are
needed.

8) Outward transport. This takes materials from the departure area and
delivers them to customers. Outward transport is concerned with
making decisions during inward transport except that the emphasis of
the two is different.

9) Distribution, physical distribution management is a general term for

the activities that deliver finished goods to customers including
outward transport. It is one of the activities that provides a link to the
downstream activities of the supply chain

Lecture note by Mr. Denis N. Page 22

 10) Recycling/returns and Disposal. When goods have been
delivered to the customers, the work of logistics has not ended
because there are so many factors that may come into play e.g. the
delivery of materials may be faulty or too many could have been
delivered or they are completely not matching the of the customers,
they may also be unused materials and all these have to be collected
and returned. Some materials may just be brought back for recycling.
That activity of logistics is called reverse logistics or sometimes called
returns management.

11) Location. Some of the logistics activities can be done in different

locations. Stocks of finished goods for example can be held at the end
of production, moved to nearby warehouses, put into stores near
customers, passed on to find the best location to these activities

12) Communication. In the definition of logistics, the concept of “flow

of information” was emphasized. A long the physical flow of materials,
logistics is also concerned with the flow of information.

Finally, it should be emphasized that the activities of logistics are not limited
to the twelve activities identified above. Different organizations may have
other different activities depending on the nature of their operations.
However, what is clear is that the scope of logistics activities spans the
entire supply chain. I.e. covers both inbound and outbound activities.

MATERIALS MANAGEMENT

Materials are physical items that are needed for producing goods and
services or any other type of item. Materials are one of the inputs to a
process and typically account for 60% of costs to the company. Managing of
these materials and proper movement should not be minimized by the
logistics function.

What is materials management? Is a coordinating function concerned

with the aim of maximizing the level of customer service. It integrates the
flow of Materials or supplies into, through and out of the organization. It
includes the function of procurement, materials handling and storage as well
as production and inventory control, packaging transport and associated
information system throughout the chain.

The information involved in material flow within various functions

include;

Lecture note by Mr. Denis N. Page 23

Planning, here materials flow activities relate to preparation of material,
budgets, product research and development, standardization o specification
etc.

In procurement activities include determining order quantities, processing of

works and store requisitions, supplier appraisal, negotiation, planning of
contracts, progress of deliveries, certifying payments and vendor rating.

Storage activities, here activities relate to store location, layout and

equipment coding and catalogue , receipt of purchases, inspection, storage,
protection of stores , issues to production, provision of cost data, stock
records, disposal of waste and surplus as well as scrap.

Production control, forward ordering arrangements, preparation of

production schedule, issue to production, emergence action to meet material
shortages, make or buy decisions, quality reliability, feedback etc.

Distribution, here activities include, warehousing, packaging and extended

transportation.

The information involved in material flow within various functions

include;

Planning, here materials flow activities relate to preparation of material,

budgets, product research and development, standardization o specification
etc.

In procurement activities include determining order quantities, processing of

works and store requisitions, supplier appraisal, negotiation, planning of
contracts, progress of deliveries, certifying payments and vendor rating.

Storage activities, here activities relate to store location, layout and

equipment coding and catalogue , receipt of purchases, inspection, storage,
protection of stores , issues to production, provision of cost data, stock
records, disposal of waste and surplus as well as scrap.

Production control, forward ordering arrangements, preparation of

production schedule, issue to production, emergence action to meet material
shortages, make or buy decisions, quality reliability, feedback etc.

Distribution, here activities include, warehousing, packaging and extended

transportation.

Lecture note by Mr. Denis N. Page 24

LOGISTICS AND DISTRIBUTION MANAGEMENT

Logistics and the supply chain has grown with the associated names and
different definitions that are used are important to be given attention. Some
of the different names that have been applied to distribution and logistics
include;

 Physical distribution
 Logistics
 Business logistics
 Materials management
 Product flow
 Supply chain management
 Marketing Logistics
 Demand chain logistics
 Procurement and supplyEtc.

There is, realistically, no 'true' name or 'true' definition that should be

pedantically applied, because products differ, companies differ and systems
differ. Logistics is a diverse and dynamic function that has to be flexible and
has to change according to the various constraints and demands imposed
upon it and with respect to the environment in which it works.

There are many terms used, often interchangeably, in literature and in the
business world to define logistics. One quite widely accepted definition that
uses some of these terms also helps to describe one of the key relationships.
This is as follows:

Logistics = Materials management + Distribution

An extension to this idea helps to illustrate that the supply chain covers an
even broader scope of the business area. This includes the supply of raw
materials and components as well as the delivery of products to the final
customer. Thus:

Supply Chain = Suppliers + Logistics + Customers

Logistics and the supply chain are concerned with physical and information
flows and storage from raw material through to the final distribution of the
finished product. Thus, supply and materials management represents the
storage and flows into and through the production process, while distribution

Lecture note by Mr. Denis N. Page 25

represents the storage and flows from the final production point through to
the customer or end user.

Physical Distribution and Transportation

Physical distribution encompasses all the activities involved in with the

physical movement of products through distribution channels. Specifically,
physical Distribution involves all activities related to storage, handling and
movement of the goods to make these goods available when and where
customers demand them.

The Physical Distribution System

Supplies
Warehous
Consumers
The Firm
Parts es

Wholesaler
Raw
Materials s
 On time delivery
 Willingness to meet customers’ emergency requirements
 Careful handling of merchandise
 Willingness to take back defective merchandise
 Re-supply quickly
 Willingness to carry inventory for customers

Physical distribution management refers to the movement of finished goods

from their point of production into the hands of consumers. Physical
distribution activities as a result focus on managing inventories of semi-
finished and finished goods, warehousing these inventories en-route to
middlemen, handling these goods within production and warehousing
facilities and arranging and managing their transportation through the
channel.

Major transportation forms that move products

Lecture note by Mr. Denis N. Page 26

Trucking: Trucks, or motor carriers, are the most frequently used
transportation mode. They carry goods with short shelf lives and ones that
are expensive for a business to keep in inventory

Pipelines: Pipelines are most frequently used to transport oil and natural
gas from oil fields to refineries. Pipeline construction requires a high initial
investment, but operation costs are relatively small. Pipelines have the best
safety record among major transportation systems.

Air Cargo: Airplanes are generally used to ship high-value items and things
needed quickly, such as emergency parts, instruments and Medicines

Rail roads: Railroads are one of the lowest cost transportation modes
because trains carry large quantities at relatively low per unit costs. The
biggest disadvantage of rail transport is the lack of flexibility

Shipping:

Summary of the Components/Elements of efficient Physical

Distribution

 Inventory planning and control: proper handling of stocks

 Transportation. Shipping of products on time and right place.
 Warehousing. Keeping of goods until they are delivered.
 Order processing, receiving, recording, filling and assembling orders
for shipment.
 Material handling. Moving goods over short distances into and out of
warehouses and manufacturing houses

All of these activities must be coordinated to provide optimal service to the

firm's customers at the lowest possible cost. Many experts agree that firms
can boost their profitability by effectively controlling physical distribution
costs. Some PD activities certainly are more costly than others. As a result,
some managers mistakenly have tried to reduce costs associated with one
activity only to drive up the costs of others. For example, a transportation
manager may be able to reduce shipping costs by over 50% by shifting from
trucks to railroads as the major shipping medium. However, in order to
maintain the same level of customer service as before, additional inventory
may need to be warehoused closer to customer centres, driving up
warehousing and inventory costs. The net result may be higher total
physical distribution costs and lower profits.

Lecture note by Mr. Denis N. Page 27

Reverse logistics

Meaning: is the process of planning, implementing and controlling the

efficient, cost – effective flow of materials, in process inventory, finished
goods and related information from the point of consumption to the point of
origin for the purpose of recapturing value or proper disposal.

The two principle drivers of interest in reverse have been the increased
importance attached to the environment aspects of waste disposal and
recognition of the potential returns that can be obtained from the reuse of
products or parts or the recycling of materials. Reverse logistics may also
apply to goods sent to distributorson sale or return basis, un used materials
to be returned to stores from contracts or project sites or from
subcontractors.

PROCUREMENT IN DIFFERRENT ENVIROMENT

Essentially the purchasing and supply activity is to be found in all types of

organizations. However, all organizations are not exactly the same and even
within similar types of organizations in the same industry, they still may not
operate in the same way. Whereas, there may be some similarities between
them, they may also have created different organization arrangements in
order to carry out their own purchasing and supply activity.

The main reasons for those organizational differences include:-

 The primary function of the organization and its different resource needs.
 The size of the organization in whatever it is measured.
 The complexity in reaction to product and the geographical spread.
 The ownership type i.e. whether it is public or private sector.
 Whether the organization operates in a market or non-market mode.

Types of Organizations

There are 3 different types of organizations.

1. Primary (extractive) sector organizations.

2. Secondary (manufacturing) sector organizations.
3. Tertiary (service) sector organizations

Primary Sector/ Extractive producers

Lecture note by Mr. Denis N. Page 28

Primary industries are concerned with extraction of materials from the
natural resources of the earth. They are involved with the extracting a
product or material which already exists in nature. Examples includes;
mining, forestry, fishing agriculture, etc.

Characteristics of Primary Sector

 Purchasing is heavily involved with capital equipment and consumables.

 There is relatively a high purchasing spend (expenditure is very high).
 High stock levels are required because of isolated locations of operation.
(Need to purchase in bulk to minimize transport costs)
 There is need for local supplier development schemes as very often, the
supplier market is very far away from the place of operation.
 There is need for specialized purchasing expertise as many inputs are
highly complex.
 There is need for supplier appraisal for environment (green) performance
as the potential negative impacts of primary industries on the green
issues are high.
 There is a strong focus on cost management as selling price of the output
is often fixed that is determined by demand and supply for the commodity
in question.

Secondary sector/ industrial buyers

This sector consists of manufacturing organizations. The main function in this

sector is to process, shape, transform, convert or assemble materials, parts,
components and sub-assembles into finished or intermediate products for
sale to external customers.

Manufacturing operations in this sector are classified and variety. The

operations can be of high variety low volume or low variety with high
volume.

Tertiary Sector/ intermediate buyers

This comprises of businesses or organizations involved in wholesale, retail or

services. They are a part of the supply chain between the producer and the
customers whose aim to satisfy the demands of their customers. Unlike in
manufacturing, there is no transformation process of converting inputs into
outputs; what you buy is what you sell.

Lecture note by Mr. Denis N. Page 29

Serve industry organizations usually tend to have a lower percentage of
spend on bought – in- goods and materials relative their other costs.
Significant amounts of purchasing are done outside the purchasing function.
This tends to give purchasing a much lower profile in service industries and
consequently, it is generally less developed than in manufacturing. Many of
the non-core activities are outsourced i.e. organizations’’ purchases are
made by third parties.

FACTORS THAT HAVE ACCELERATED THE DEVELOPMENT OF THE

PROCUREMENT FUNCTION

The role and contribution of purchasing has increased quite steadily over the
second half of the twentieth century, with quite a dramatic upsurge in
interest in the activity taking place in the last few years.

These factors can be grouped into three categories; background factors,

developmental factors and internal organizational factors.

Background factors

There is an increasing emphasis on core business. A lot of non-core

activities are being outsourced e.g. transport, security; catering, etc. this has
led to increased demand in procurement related skills.

The realization that some resources are finite thus the need for their proper
management

Organizations today need to be more flexible and responsive. They

cannot be so unless their suppliers are also flexible. This has led to the
increased attention to the procurement function.

Development factors

Changing partners of trade; buyers today no longer need to buy locally

just because of global village concept. The development of large trading
blocs like COMESA, SADAC, ECOWAS, European Union, etc. has opened up
market and increased competition.

Government intervention; globally governments have realized change in

stand in terms of procurement in both local and central governments. The
implications of the above have led to procurement reforms that are aimed at
adopting the best practices in procurement. The quest for greater efficiency
in the public sector has led to a great deal of market testing; a process

Lecture note by Mr. Denis N. Page 30

through which internal providers of services are assessed against the
commercial providers in the market place. This has led in many cases to
services being contracted out, and to an increasing purchasing responsibility
of the core staff.

The growth of professional bodies like “CIPS”, “ISM”: These bodies

have spent considerable time and efforts at national and international levels
demonstrating the importance and contribution of effective procurement of
both private and public sectors.

The leading-edge concepts; the development of concepts and techniques

such as Just-In-Time (JIT),Total Quality Management (TQM), Customer Focus,
Lean Supply, Supply Chain Management (SCM) and Electronic Data
Interchange (EDI), have had an important impact on the development of
procurement. If the procurement function is not well developed, the
implementation of these concepts will almost be impossible.

Organizations employing leading edge approaches to the management of

materials are putting into practice integrative ideas which are at least in
part, based on a strategic and integrated role for purchasing. The
demonstrated success of these organizations is stimulating great interest,
and as other organizations are attempting to replicate their success, so
Purchasing is brought to the fore. The expression 'world class concepts' is
sometimes employed to describe these and similar ideas, meaning ‘world’s
'best' or as used by the world's leading organizations'

Competitor activity; as competition increases among organizations, the

tendency of fighting-costs becomes a critical issue. The procurement
function has been found to be one of the leading areas where costs can be
effectively managed.

Customer demands; globally customers are increasingly demanding for

better services at the same or even less costs. Therefore, the need to
manage quality and costs right from input, through and out of the
organization- a role in which procurement is a prominent participant.

Technological changes; technological progress necessitates that

organizations should have formulated plans to handle any development
taking place hence the development of E-procurement, Electronic Funds
Transfer (EFT), Electronic Point of Sale (EPOS), etc. Technology and
associated complexity has meant that most businesses now specialize in a

Lecture note by Mr. Denis N. Page 31

narrower range of activities and are compelled to buy a greater proportion of
theory requirements from those who have the specialist expertise, patents,
intellectual property or design rights associated with complex or advanced
technology.

Increasing environmental awareness; The recognition that it is good

business sense to go green, and to be seen responsible in this respect.
Recycling, the specification of renewable raw materials, a greater concern
with the effects of waste and by -products, wider concern for the use of
returnable packaging, and many other related concerns, all have
implications for purchasing and are affecting perceptions of the function.

Internal organizational factors

Performance measurements; there has been increased emphasis on

performance measurement within organizations that measure, the
contribution of the purchasing and supply, its status has been effectively
affected.

Top management has become aware of its contribution to cost reduction

and its strategic capabilities

The level and percentage of bought-out-items/increasing proportion

of revenue spent externally; as the external expenditure increases as a
proportion of the total, greater attention is paid to the input activities: Such
expenditure is of crucial importance and needs close attention at policy
level. Organizations are spending a greater proportion of their income
externally, and less on internal costs such as wages and over -heads. With
the increased share of expenditure, comes an increasing responsibility for
purchasing.

Lecture note by Mr. Denis N. Page 32

 UNIT TWO:

PROCUREMENT OBJECTIVES, PRINCIPLES, OPERATING POLICIES AND

PROCEDURES

OBJECTIVES OF PROCUREMENT FUNCTION

Procurement describes the range of activities that are responsible for buying
the materials needed by an organization. It is generally responsible for
getting materials from the supplier into the organization.

Many organizations use the term purchasing and procurement to mean the
same thing. Generally, though purchasing refers to the actual buying of
materials, procurement has a broader meaning and can include purchasing,
contracting, expediting, materials handling, transportation, warehousing and
receiving goods from suppliers.

The purpose of procurement is to make the material needed to support

operations are available at the time they are needed. Obviously, if a process
does not have the material it needs it cannot work properly. Perhaps
operations are interrupted, customers demand is not met, costs are too high,
deliveries are delayed and productivity is reduced.

Specific objectives of procurement are;

 To avail relevant services when they are needed by the user

department
 To ensure appropriate use of funds without fraud and corruption
 To ensure efficient use of funds, or getting the most from a fixed sum
of money
 To ensure accountability to relevant stake holders that fund where
properly utilized to realize the set goals
 To ensure value for money

Lecture note by Mr. Denis N. Page 33

  To ensure realization of policy objectives
 Functions of the purchasing function
 Identifying the needs of a particular organization.
 Identifying the right suppliers of the required goods, services or works.
 Negotiation with the identified suppliers of the required goods where
there is need.
 Placing an order upon agreement with a particular supplier.
 A continuous following up especially for complex items, services or
works.
 Receiving and inspecting the orders to issue that they conform to the
agreed specifications and conditions.
 Auditing to ensure that the value for money principal is being adhered
to
 Processing payment upon satisfaction by the auditors and inspectors.
Opening and closing a file.
 Carrying out research to improve future purchasing inefficiency and
effectiveness

Procurement objectives;

a. To support the organization’s operation with uninterrupted flow of

materials and services.
b. To buy competitively by monitoring the forces of demand and supply
that regulate prices and availability or access of goods and services in
the market
c. To buy wisely through continuous search for better values that yields
the best combination of quality, service and price in relation to buyer’s
needs.
d. To keep inventory investment and inventory losses at a practical
minimum level
e. To develop effective and reliable sources of supply by cooperating with
potential and willing suppliers
f. To develop good relationships with the supplier community and good
continuous relationships with active suppliers.
g. To achieve maximum integration with other departments or functional
areas of an organization by understanding the needs of the user
departments.
h. To perform the supply management function proactively in a
professional and cost effective way.

Lecture note by Mr. Denis N. Page 34

 NB: The aim and objective of procurement is to carry out activities related
to procurement in such a way that the goods and services so procured are of
the right quality, from the right source, are at the right cost and can be
delivered in the right quantities, to the right place, at the right time.

Meeting the following objectives of procurement enables the Logisticians to

fulfil the “Six Rights”:

 buy quality materials, items and services economically from reliable

sources;
 ensure timely delivery through the selection of capable and efficient
suppliers;
 continuously locate, evaluate and develop economical and reliable
supply sources;
 Identify the most reliable sources of supply through either open tender,
multi-stage tendering (pre-qualifying suppliers and retaining only those
that are capable of meeting the organization’s requirements - strategic
sourcing) and limited tendering.
 investigate the availability of new materials and monitor trends in
market prices;
 buy in accordance with organizations policies;
 estimate, position and monitor appropriate levels of stocks based on
estimated needs, operational policy, objectives and priorities,
estimated time for replenishment and availability of funds; and
 Participate in planning and coordinating purchasing needs across all
central procurement teams and the field in order to reduce
administration and make the best use of money spent.

It is important to recognize that the ‘Six Rights’ are interrelated and may
influence each other but do not carry the same weight depending on the
situation. For example, in an emergency situation it may be possible to
obtain the right quantity but not at the right price. There may be competition
for certain goods, so to get the quantities required may mean paying a
slightly higher price.

According to Teregren and Boer (1998), public procurement objectives

involve the following;

 To ensure efficient use of funds or getting the most from a fixed sum of
money
 To ensure value for money

Lecture note by Mr. Denis N. Page 35

  To ensure availability of relevant services when they are needed by the
citizens or user department
 To ensure appropriate use of public funds without fraud and corruption
 To ensure accountability for all procurements made

Note: it should be noted that the overall objective of public procurement I to

ensure value for money. For example, Value every shilling spent or getting
the most from a fixed sum of money through the efficient, effective and
economic use of resources.

Meaning of value for money; DIT(Department of Trade and Industry), UK

define value for money as taking into account the optimum combination of a
whole life cost and quality necessary to meet the customer requirements,

How to achieve value for money in procurement

A number of procurement techniques may be used to obtain the best value

for money. These include;

 Value analysis especially in the elimination of non- essential features

 Consolidation of demand, that is aggregating several orders to
negotiate reduced price or discounts
 Negotiate contracts and price centrally
 Proactive sourcing, ensuring competition by challenging the repeated
use of regular suppliers
 Up grading of existing second hand items instead of buying new ones
 Encouraging standardization to reducing cases of repair , spare parts
and maintenance
 Elimination or reduction of inventory, thereby avoiding unnecessary
storage and holding stock
 Application of E- procurement
 Global procurement
 Evaluating non- productive cost drivers, such as travel expenses,
training, energy, consulting services and similar items. etc.

PROCUREMENT PRINCIPLES

The public procurement and Disposal of Public Asset 2003 as amended of

Uganda provides the following principles that guide public procurement;

Non – discrimination, the principle requires that a bidder or an interested

supplier should not be excluded from participating in public procurement and

Lecture note by Mr. Denis N. Page 36

disposal on the basis of race, religion, sex, gender, and other criterion not
related to qualification, except to the extent provided for in the Act, (PPDA
Act Section 44).

Accountability, Accountability is defined as the state of being accountable,

responsible to accept any action made. Accountability has a literal meaning
related to counting and accounting for items of monetary value, but as a
concept its expanded meaning covers ethics and corporate social
responsibility- procurement officers need to ensure good governance,
absence of corruption, accountable for action etc.

Open competitive bidding; the principle requires that open competitive

bidding should be the preferred method of procurement

Best evaluated bid, the contract should be awarded to the bidder with the
best evaluated bid on the basis of the methodology or criteria detailed in the
bidding document

Transparency/ openness

Fairness, this is the principle of equality of treatment which requires that no

bidder should be discriminated but should be based on the idea of fairness
i.e. Treating two suppliers from the same country differently could be
unequal treatment

Economy,this is a principle that is often used to describe the technical

efficiency of the procedure itself, i.e. Whether the planning has been
appropriate and carried out on time, whether the various responsibilities
have been engaged, Whether sufficient time has been given to all bidders to
prepare suitable tenders, whether procurement is made on timely manner.

Ethics, procurement activities should be carried out in an a manner that is

ethical by observing the codes of ethics

Efficiency, efficiency to speed up procurement is of high essence so as to

avoid bogging down implementation of public programs at expense of
transparence. This means that through standardized procedures and
consistent application of best practices to minimize delays in procurement.

Confidentiality; A procuring entity is under the obligation not to disclose

any information that would;

Lecture note by Mr. Denis N. Page 37

  Amount in breach of law
 Impede law enforcement
 Inhibit fair competition
 Prejudice legitimate commercial interests of the parties

The exception to this is when required to do so by an order of court.

Preservation and Reservation; A procuring and disposing entity shall

permit providers to participate in the procuring process without regard to
nationality, except in cases in which the procuring and disposing entity
decides to limit the participation on the basis of nationality on grounds
specified either in regulations made under this Act or by any other
competent authority, (PPDA Act Section 50).

Publication of opportunities and information, the principle require that

any procuring entity should advertise all bid opportunities through invitation
to express interest or bid and communication that subsequent award on its
notice board

In conclusion, procuring entities are spending public money, generally

derived from taxation imposed on citizens. It is therefore fundamental that
procuring entities are accountable for the money spent on procurement on
their behalf.

PROCUREMENT OPERATING POLICIES AND PROCEDURES

Purchasing staff are in many cases dealing with considerable sums of money.
And are in effect the guardians of the organization’s treasury. For this
reason, it is important that such coordinated and defined orderly procedures
are adopted by the organization in order to ensure that possibilities of fraud
are reduced or eliminated.

Procedures refer to a system of sequential steps or techniques describing

how a task or job is dome. They are formal arrangements through which
policies linking strategy formulation at all levels are implemented.

Purchasing involves three main phases each involving specific documents as

indicated below:-

a) The identification phase

Lecture note by Mr. Denis N. Page 38

 This phase involves notification (by the user department) of the need
to purchase different goods and services. It could involve the use of
either of the following documents;

i. Bills of materials – this is issued by the production control in the

user department requiring items from the store. If the items are not
available I n the store, it is the duty of the store’s manager to issue
a store requisition note to the purchasing office.

Note: (the learner should research about the following)

 The movements of the documents

 Contents of the documents

 Importance of the document.

ii. Requisition note – this is a document issued by the stores or stock

control department. This note creates a record of who needs or
which item is needed. It usually shows the stock level of that
particular item whether zero or below minimum stock level. It also
signals the buyer to source or re-buy the item.

b) The ordering phase

The buyer after receipt of the requisition or bill of materials, checks for
accuracy in-terms of conformity to specifications and also to identify
whether it is a new purchase or a re-buy. If the item is a re-buy, then
the purchasing department issues a purchase order. If it is a new item
to be bought then the following documents are used:-

i. Inquiry letter- it’s a request for information sent to suppliers.

This is done to ascertain who is willing and able to supply and at
what price and the terms of delivery.

ii. Quotations – this is an expression of interest received from

different suppliers in response to the inquiries. The interested
suppliers make themselves known to the buying organization.
Quotations show the price, quality, delivery and other business
terms at which the supplier is willing to supply goods to the
organization.

Lecture note by Mr. Denis N. Page 39

 iii. Purchase order- this is a document of acceptance issued to the
supplier authorizing supply of items. It gives confidence to the
supplier that he will be paid after supplying. It includes the
quality of goods required, their quantity and price. It should be
duly signed by the head of procurement department to general
manager depending on the policies in place.

iv. Order acknowledgement note – this is normally sent by the

supplier to the buying organization indicating that the purchase
order has been accepted on the terms and conditions that were
agreed upon.

c) Post ordering phase

This phase involves the following documents:-

i) An advice - this is sent by the supplier notifying the buying

organization that the goods have been dispatched or already for
collection. This enables the buyer to make arrangements for
receipts/ receiving the goods.

ii) Delivery note – this is produced by the supplier on delivery of the

consignment. It gives the details of goods supplied. The receiving
department does a physical examination to ensure that the
document conforms to the physical examination to ensure that the
document conforms to the physical delivery. The document is duely
signed by the authorized receiving officer.

iii) Goods received note – this document gives a summary of the

items received by the stores department and is always sent to the
purchasing department. The purchasing department then informs
the fiancé department that the supplier should be paid on receipt of
the invoice of a particular delivery in question.

iv) Invoice – this is a document that claims payment for the goods
supplied. Its received from the supplier and is compared with a
purchase order and goods received note. It is then sent to the
accounts department to prepare payments to the supplier.

BENEFITS OF DOCUMENTATION

Lecture note by Mr. Denis N. Page 40

 o Auditing: Procurement and contract records are important because
they serve as an audit trail of how the process was carried out.
Procurement and contract records are the basis for internal and
external audits, and are needed to determine compliance with the
procurement legal and institutional framework.

o Proof of purchase: Procurement and contract records are the

evidence of all actions taken to award contracts, and of the results of
the monitoring and oversight of contract implementation.

o Transparency and accountability: Maintaining procurement and

contract records should be mandated by law given the use of public
funds and the need for transparency and accountability. Records are
important for accountability and are a powerful deterrent against
procurement and financial malpractices. Weak records management
practices mean officials cannot be held accountable for their actions.

o Internal controls: Procurement records provide the controls that

document how a procurement action was undertaken, and protects
essential audit trails. Disorganized records mean reviewers and
auditors take an excessive amount of time to locate needed records.

o Proper information management: A well managed procurement

records management system will enable the physical and logical
control of records and prevent unauthorized access, tampering, loss,
misplacement or destruction of documents. Proper records
management is essential for ensuring transparency and probity in the
procurement and financial management.

THE PROCUREMENT PROCESS/CYCLE

Procurement cycle is the cyclical process of the key steps followed when
procuring goods or services

The procurement process (All steps are to be carried out and are
laid out in the PPDA Regulations, 2014 ;)

Stage 1: A procurement plan is a determination of the future procurement

Procurem needs of an entity, the timing of their acquisition and determining
ent the source of funds.
Planning
User Department (UD) based on approved budget, prepares the
departmental procurement plans for the User Department and

Lecture note by Mr. Denis N. Page 41

 submit it to the Procuring and Disposing Unit (PDU).

The PDU for each Financial Year (FY), prepares an annual

procurement plan for the Procuring and Disposing Entity (PDE)
using the procurement plans of the user departments. (SI 2014 No.
7).

UD notifies the PDU of any change in the procurement plan for

Review and approved by the Contracts Committee.

No procurement is done outside the procurement plan

Stage 2: Procurement requisition (Form 5) kick-starts the implementation of

Initiation the procurement plan
of
Procurem User Department initiates using the Request for Approval of
Procurement: Reg. 3(5), 12(3), 13(3), 14(4), 15(4), 17(2), 44 (5,
ent
45(4)

Conditions:

Description of requirements for services, Works and or Supplies

Estimated value of requirements based on Market price.

The User prepares the Request, and the head of department

confirms the procurement request;

Confirmation of funding must be done by the Accounting Officer or

one with the delegated authority;

The procurement requested must be reflected in the procurement

plan (Avoid retrospective procurements).

Stage 3: The choice of procurement method is determined in accordance to

Choosing the fourth schedule of the Act and Threshold Guidelines – 2014 and
a is based on:
procurem
(a) Estimated value of the requirement.
ent
(b) The circumstances pertaining to the requirement i.e. Single
method Source, Emergency, framework etc; and
(c) The type of procurement, whether supplies, works or non
consultancy services.

The following procurement methods can be used depending

on the thresholds and type of procurement:

 Open domestic and International bidding

 Restricted domestic and International bidding

Lecture note by Mr. Denis N. Page 42

  Micro procurement
 Procurement for consultancy firms/Individual (With and without
Publication of EOI)

Direct procurement method can be used, before deciding to use

consider to use in descending order:

(a) the restricted bidding method;

(b) the quotations method; or
(c) Any other competitive method.

This is a responsibility of the PDU to determine the procurement

method after Aggregation of Requirements;

 Avoid splitting requirements

 Division into Lots where its anticipated to have several contracts

The contracts committee must approve the procurement method

according to the threshold in respect to the estimated value of the
requirements to be procured; or

Consider the circumstances pertaining to the requirement to be

obtained if direct method is applied

Stage 4: Preparation of Bidding Documents and OR Prequalification

Preparati documents and Notices is the responsibility of the PDU which must
on of be approved by the Contract Committee (CC)
bidding
PDU effects changes to the instructions to bidders in the bid data
document
sheet;
s
PDU completes the Special Conditions of contract;

Statement of requirements are modified as may be required (TORs,

SOW, Drawings and or Specifications);

No textual or other changes are made to the instructions to

bidders/Consultants section and General Conditions of Contract

Stage 5: A PDE invites a bidder to bid through—

Bidding
Methods Publication of a bid notice - Published in at least one newspaper of
wide circulation;

Through a pre-qualification exercise;

Development of a shortlist - at least three bidders to are invited to

ensure competition; and or the register of providers of PPDA; list of
pre-qualified providers of another PDE; or knowledge of the market
by the PDE.

Lecture note by Mr. Denis N. Page 43

 Direct invitation of a sole or single provider - verify that only a sole
source provider exists and ensure that the sole bidder is eligible
and qualified before recommending the source.

Stage 6: PDE Receives bids —

Receipt &
Bid Through the staff of the PDU, in person, who shall acknowledge a
opening receipt; or by use of a bid box.

 PDE fills the form for Record of Bids Received and signed using
Form 11 in the Schedule - Regulation 59(3), 59 (8), 60(7)
 This process of opening is managed by the PDU, assisted as may
be required by other staff of the PDE
 Form 12: Record of Bid Opening - Regulation 65 (9), 65(10)
 Information is read out on bid opening relating including the
name of bidder, bid security and total price etc.

Stage 7: This process aims to determine the best evaluated bid and
Evaluatio Evaluation of bids is the responsibility of the EC
n of Bids
Purpose of Evaluation is to assess:

 Compliance of the bid with the SORs;

 Ability of the bidder to perform the proposed contract; and
 Ability of the bid to meet the objectives of the procurement.

Key considerations in Evaluation:

 Evaluation is as per evaluation criteria

 Evaluation methodologies as per the PPDA regulations and
guidelines
 Individual score sheets are attached where merit point has been
used
 All members of EC signed the code of ethical conduct of
business
 All members of the EC sign the evaluation report
 Approve the evaluation report by CC

Stage 8:  PDE places a Notice of Best Evaluated Bidder

Award of  Debriefing un successful bidders
Contract  A PDU submits a recommendation for award of a contract to the
CC after completion of the evaluation
 Stating the Requirements such as Packaging, etc
 Contract Pricing – Use of Price adjustment clause
 Payment Terms for the contract and Payment method;
 Advance Payments

Stage 9: A PDE can uses any of the following types of contracts: (a) Lump
Contract sum; (b) Time-based; (c) Admeasurements; (d) Framework; (e)
Percentage; (f) Cost reimbursable; (g) Target price; (h) Retainer; (i)

Lecture note by Mr. Denis N. Page 44

 design Contingency or success fee; (j) A combination of any of these types
of contracts; and (k) Petty contract.

A CC (contracts committee) approval of the contract type which is

most appropriate to the procurement requirements and which
offers an equitable contract to the provider. The type of contract
selected is specified in the bid document.

Stage 10: This involves the Receipt, inspection of goods; works and or
Contract services procured;
Managem
ent  Nominating and appointing the contract supervisor and
monitoring progress and execution of contract
 Monitoring payments
 Submitting Reports to PDU, CC, AO i.e. monthly reports,
progress reports, quarterly/annual reports
 Evaluating performance against approved work plans and
procurement plan.
 Communicating anomalies to technical staff
 Managing contract amendments, Variations and Change Orders

Contract amendments are approved by Contracts

Committee

Stage 11: Assess compliance to quantity, quality, delivery period

Performa
nce Monitoring progress of work to ensure milestones agreed are
Review achieved

Contract review meetings- to review contract performance and

identify the control action that is to be taken to correct any
deviations from the contract plan.

Termination of Contract (if any) will be approved by

Contracts Committee

PROCUREMENT METHODS

A number of methods are specified in the public procurement laws and

regulations. These are: -

(a) Open Tendering (national and international)

Open tendering is the most widely used and preferred tendering system in
Uganda. The laws and regulations clearly state that other methods of
procurement will be used only in exceptional circumstances. In such cases,
the procuring entities will have to give and record reasons for the choice of
other procedures.

Lecture note by Mr. Denis N. Page 45

Open tendering can be at two levels: national and international.

Open national procurement is a method of procuring goods, works and

services which is open to participation on equal terms by all providers
through advertisement of the procurement. This tendering process
specifically seeks to attract domestic firms although foreign firms are
allowed to participate.

Open national/ domestic procurement as per section (80) sub section(2) is

referred to as a procurement or disposal method which is open to
participation on equal terms by all providers through advertisement of the
procurement or disposal opportunity.

 Subsection (3) Open domestic bidding shall be used to obtain

maximum possible competition and value for money.

 Subsection (4) Nothing shall prevent a foreign or international bidder

from participating in open domestic bidding.

Open international tendering, on the other hand is open to participation

on equal terms by all providers although it specifically seeks to attract
foreign providers. This type of tendering is used where national providers
may not provide competitive bids and ensure value for money. The
procurement laws and regulations provide guidelines of the procedure of
open tendering including the enforcement mechanisms.

 Section (81) subsection(1); Open international bidding is the

procurement or disposal method which is open to participation on
equal terms by all providers, through advertisement of the
procurement or disposal opportunity and which specifically seeks to
attract foreign providers.

 Subsection (2) Open international bidding is used to obtain the

maximum possible competition and value for money, where national
providers may not necessarily make this achievable.

(b) Restricted Tendering (national and international)

Restricted tendering is a procurement procedure where bids are obtained by

direct invitation without open advertisement. This procedure can be used
where it is believed that the value or circumstances do not justify or permit
the open bidding process. Procurement entities in this case maintain a list of

Lecture note by Mr. Denis N. Page 46

“pre-qualified providers” who are then directly invited to participate in the
tendering.

Restricted tendering is also possible at two levels: national and international.

Restricted national bidding is the procurement where bids are obtained
nationally by directly inviting pre-qualified providers. In case of a restricted
international bid, only pre-qualified international firms are invited. In both
cases, the procuring entity must demonstrate that open tendering is not
viable or prudent. It needs to be noted here that the process of pre-
qualification is often abused and is an important source for corruption in
public procurement.

(c) Quotations and Proposals

Procurement entities are also allowed in exceptional circumstances to call for

quotations and proposals. Quotations and proposals are simplified
procurement procedures, which compare price quotations obtained from a
number of providers. Quotations are used mainly in works, while proposals
are used for services.

There are specific restrictions on proposals and quotations in some

instances. For example, in some instances, requests for proposals must be
addressed to no less than three and no more than seven candidates selected
by the procurement entity. Similarly for works, the procuring entity must
obtain quotations from as many candidates as practicable, but from at least
three candidates.

This method of procurement is used to obtain competition for simple

procurements and where the value does not justify/permit open bidding
process. The procedure and documentation is quicker hence reduced lead
times are achieved. RFQ/RFP is used for low value procurement and also in
emergency situations. It should however be noted that RFQ is used for
supplies and works whereas RFP is used for services.

(d) Direct Procurement / Single Source Procurement

Direct procurement is a sole source procurement method used when

exceptional circumstances prevent competitive bidding. This method is used
mainly for low value procurements involving no contracts.

In the process of public procurement, the interest of three groups — the

tender issuers, the bidders and the public procurement system itself —

Lecture note by Mr. Denis N. Page 47

determine the types of procedures. The primary rule is that the prospective
buyer must proceed in accordance with the rules of open tendering
procedures; the other two procedure types inviting limited bidders or
negotiation may be used in exceptional cases. The PPDA Act is very clear on
these procedures. To ensure compliance with the fundamental principles of
publicity and transparency, notices in local dailies must announce major
events of the process.

(e) Micro procurement

This is a simple and quick method of procuring goods for the entity where
the value involved does not justify competitive bidding. This procurement is
characterized by low value goods. For example from a single
source/provider.

EVALUATION AND SELECTION OF PROVIDERS (Bid evaluation

procedures)

Bid Evaluation: Evaluation and Selection of Providers

This involves making a consideration of the bids as submitted by the bidders

to determine the best bidder to whom the contract is awarded. The main
purpose of bid evaluation therefore, is to determine the lowest evaluated
substantially responsive bid among the bids submitted before the bid closing
time on the date specified in the bidding documents. After the Evaluation
Process, the ‘Best Evaluated Bidder’ is determined. It should be noted that
the lowest evaluated substantially responsive bid may or may not
necessarily be the lowest price bid.

Principles of Bid Evaluation

Evaluation of bids must be consistent with the terms and conditions

stipulated in the bidding documents. Fair, accurate and transparent
evaluation of bids is one of the most important aspects of procurement.
Specific principles of bid evaluation include:

(a) Confidentiality of procedures

After the public opening of bids, no information relating to the examination,

clarification and evaluation of bids, and recommendations concerning
awards, shall communicated to any person not officially concerned with

Lecture note by Mr. Denis N. Page 48

these procedures until the announcement of the award of the contract to the
successful bidder has been made.

(b) Clarifications and Alterations of Bids

No bidder will be permitted to alter its bid after the bids have been opened.
Only clarifications, which do not change the substance or price of the bid
may be requested accepted by the Executing Agency. The request for
clarifications and response by the bidder shall be in writing or by fax (the
term "fax" is deemed to include electronic transmission such as facsimile or
telecopy, cable and telex). Any response to an inquiry of the Executing
Agency which leads to a change in the bid price shall be considered as an
alteration and shall not be considered in the bid evaluation. The records or
all clarifications sought and received must be kept by the Executing Agency.

(c) Rejection of bids

All valid bids received shall be evaluated in accordance with the terms and
conditions of the bidding documents, and only those bids which do not
substantially meet the specifications or the bidding requirements may be
rejected.

THE BID EVALUATION PROCESS

The Bid Evaluation process follows three sequential stages:

 A preliminary examination to determine the eligibility of a bidder and

the administrative compliance of bids received in accordance with
regulation 185;
 A detailed evaluation to determine the commercial and technical
responsiveness of the eligible and compliant bids in accordance with
regulation 188; and
 A financial comparison to compare costs of the eligible, compliant,
responsive bids received and determine the best evaluated bid in
accordance with regulation 190.

(I) Preliminary Evaluation

According to Regulation 185, a preliminary examination should be conducted

to determine the following: -

 Whether a bidder is eligible; and

Lecture note by Mr. Denis N. Page 49

  The administrative compliance of a bid to the basic instructions and
requirements of the solicitation document.

(a) Eligibility Requirements (Provided for under Regulation 186):

The minimum eligibility requirements are that:

 A bidder has the legal capacity to enter into a contract;

 A bidder is not:

o insolvent;
o in receivership;
o bankrupt; or

o being wound up;

 a bidder's business activities have not been suspended;

 a bidder is not the subject of legal proceedings for any of the
circumstances mentioned above
 a bidder has fulfilled his or her obligations to pay taxes and social
security contributions;
 a bidder does not have a conflict of interest in relation to the subject of
the procurement; and
 A bidder is not subject to suspension by the Authority in accordance
with regulation.

Documentary evidence that may be based upon to certify the eligibility of

the bidder may include, but is not limited to;

 a copy of the bidder's trading license or equivalent;

 a copy of the bidder's certificate of registration or equivalent;
 a copy of the bidder's income tax clearance certificate or
equivalent;
 a copy of the bidder's VAT registration or its equivalent;
 a signed statement that the bidder does not have a conflict of
interest in the subject of the procurement; and
 Any other relevant documents or statements which shall be stated
in the solicitation documents.

(b) Administrative Compliance

Lecture note by Mr. Denis N. Page 50

Eligibility and administrative compliance shall be determined on a pass or fail
basis and a bid which is not eligible or substantially compliant shall be
rejected. Only bids that pass the preliminary examination shall be considered
further. Administrative compliance is determined by measuring whether a
bidder has conformed satisfactorily to the basic instructions and
requirements detailed in the solicitation document and may include but shall
not be limited to-

a) submission of a bid security, if required, in the correct form and

amount;
b) submission of the correct number of copies of the bid;
c) submission of the bid in the required format;
d) signature and authorization of bids in accordance with the instructions
in the solicitation document;
e) signature of curriculum vitae, if required;
f) correct bid validity; and
g) Submission of any additional documentation or samples required.

(II) Detailed Evaluation

According to regulation 188, a detailed evaluation should be conducted to

assess the following: -

 the commercial responsiveness of a bid to the terms and conditions

of the solicitation document; and
 The technical responsiveness of bids to the statement of
requirements or the relative quality of bids received.

Note: The detailed evaluation is only conducted on a bid that is determined

to be eligible and compliant during the preliminary examination.

The detailed evaluation makes a comparison of the details of the bid

received with the terms, conditions and criteria stated in the solicitation
documents; the detailed evaluation shall not be based on any terms,
conditions or criteria that was not included in the solicitation document.

Note that the method of detailed evaluation must be in accordance with the
methodology selected and the solicitation document and may use:

 an assessment of whether the bid conforms to all the terms and

conditions of the solicitation document, including the statement of
requirements, without material deviation or reservation;

Lecture note by Mr. Denis N. Page 51

  a pass or fail system against a minimum technical standard detailed in
the statement of requirements to determine whether a bid is
substantially responsive to the minimum standard required;

 a merit point system, with a variable number of points awarded to

each bid for set criteria out of a maximum number of points stated in
the statement of requirements to obtain a total score indicating the
relative quality of each bid; or

 A combination of (a), (b) and (c).

(III) Financial Comparison

A financial comparison is conducted to examine and compare financial bids

and determine the best evaluated bid. The financial comparison shall only be
conducted on a bid that is-

 eligible and administratively compliant; and

 Substantially, commercially and technically responsive or meet the
required minimum technical standard or score.

The financial comparison helps:

(i) Determine the bid price;

(ii) Correct any arithmetic errors in the bids.
(iii) Apply any non-conditional discounts offered in a bid.
(iv) Determine whether the financial bids are complete, costing any
missing items and adding them to the original bid price.
(v) Make adjustments for any non-material nonconformities or
omissions.
(vi) convert all bids to a single evaluation currency for purposes of
comparison if required;
(vii) Apply any margin of preference in accordance with the
procedure specified in the solicitation documents;
(viii) Determine the total evaluated price of each bid;
(ix) award a financial score or rank bids, in accordance with the
evaluation methodology selected; and
(x) Determine which is the best evaluated bid in accordance with the
methodology and criteria in the solicitation document

Lecture note by Mr. Denis N. Page 52

Evaluation (and Selection) Methods

The Methods of evaluation are:

 Quality and Cost Based Selection, (QCBS).

 Quality Based Selection, (QBS),
 Fixed Budget Selection, (FBS),
 Least Cost Selection, (LCS),
 Technical compliance selection,

(A) Quality and Cost Based Selection

This is an evaluation methodology that takes into account both the quality
and the cost of bids in a process under which technical bids are evaluated
without access to financial bids. Under this method both the Technical, and
Financial Bids are evaluated for each Bidder. For this Evaluation Method the
following Stages are involved:

(a) a preliminary examination; to determine whether a bidder is eligible

and to determine administrative compliance with the basic instructions
and requirements of the solicitation document;

(b)a detailed evaluation to assess-

a. responsiveness to the terms and conditions of the solicitation

document; and
b. the technical quality of bids against set criteria on a merit point
system, to determine the technical score of each technical bid and
to determine which technical bid reached the minimum technical
score; and

(c) a financial comparison to determine the financial score of each

financial bid, to weight the technical and financial scores and to
determine the total score of each bid.

Note: The bid Submission method should be a ‘One Stage- Two envelope’
Method1, or a Two stage-Two envelope or Two stage Method 2, to enable
independent evaluation of the Technical and Financial Bids.

(B) Quality Based Selection

1
2

Lecture note by Mr. Denis N. Page 53

This method uses quality as the primary factor in a process under which a
technical bid is evaluated without access to a financial bid and a financial
comparison is undertaken only for the best technical bid. This implies that
the two bids (technical and financial) are opened at different times. However,
the bidder may be present at the opening of both the technical and financial
bids.

The Quality Based Selection method uses the following three-stage

methodology:

a) a preliminary examination to determine whether a bidder is eligible and

to determine administrative compliance to the basic instructions and
requirements of the solicitation document;

b) a detailed evaluation to assess-

(i) responsiveness to the terms and conditions of the solicitation

document; and
(ii) the technical quality of a bid against set criteria on a merit
point system, to determine the technical score of each
technical bid and to determine which is the best technical bid;

And

c) a financial comparison to examine the financial bid of the best technical

bidder only and prepare for negotiations.

Note: The bid Submission method should be a ‘One Stage- Two envelope’
Method, or a Two stage-Two envelope or Two stage Method.

(C) Fixed Budget Selection is the evaluation methodology that

recommends the bidder with the best technical bid, which is within the
budget. This Particular method uses the following three-stage methodology;

(a) a preliminary examination to determine whether a bidder is eligible

and to determine administrative compliance to the basic instructions
and requirements of the solicitation document;

(b)a detailed evaluation to assess-

(i) responsiveness to the terms and conditions of the solicitation

document; and

Lecture note by Mr. Denis N. Page 54

 (ii) the technical quality of bids against set criteria on a merit point
system, to determine the technical score of each technical bid
and to determine which technical bid reached the minimum
technical score; and

(c) a financial comparison to reject a bid which exceeds the budget and
determine the best technical bid which is within the budget.

Note: The bid Submission method should be a ‘One Stage- Two envelope’
Method, or a Two stage-Two envelope or Two stage Method.

(D) Least Cost Selection

It is the evaluation methodology that recommends the lowest priced bid,

which meets all the requirements of the procuring and disposing entity, both
commercial and technical. It uses the following three stage methodology.

a) a preliminary examination to determine whether bidders are eligible

and to determine administrative compliance with the basic instructions
and requirements of the solicitation document;

b) a detailed evaluation to assess-

i) responsiveness to the terms and conditions of the solicitation document;

and

ii) the technical quality of a bid against set criteria on a merit point
system, to determine the technical score of each technical bid and to
determine which technical bid reached the minimum technical score;
and

c) a financial comparison to determine the lowest priced bid which meets

the minimum technical score.

Note: The bid Submission method should be a ‘One Stage- Two envelope’
Method, or a Two stage-Two envelope or Two stage Method.

(E) Technical Compliance Selection

This methodology recommends the lowest priced bid, which is substantially

responsive to the commercial and technical requirements of the procuring
and disposing entity. It uses the following three-stage methodology.

Lecture note by Mr. Denis N. Page 55

 (a) a preliminary examination to determine whether a bidder is eligible
and to determine administrative compliance to the basic instructions
and requirements of the solicitation document;

(b)a detailed evaluation to-

(i) assess responsiveness to the terms and conditions of the

solicitation document;
(ii) determine whether a bid is technically responsive to the
statement of requirements in the solicitation document; and

(c) A financial comparison to determine the lowest priced bid which is

eligible, compliant and responsive.

Lecture note by Mr. Denis N. Page 56

 UNIT THREE:

KEY PROCUREMENT VARIABLES/ISSUES

The key variables or issues in procurement include not limited to the

following

 Source
 Quality
 Quantity
 Time
 Price/ Total cost of ownership
 Place etc. and they are discussed as bellow.
QUALITY

What is quality?

There is no agreed definition of quality. Earlier definitions of quality came

from the goods sector. To understand quality however, we need to con
consider the perspectives of quality i.e. quality as defined by the users,
quality as defined by the nation and quality as defined by the manufacturers.

The user based approach

Users define quality in terms of how well the product fulfills its intended
function. If a product can fulfill all the functions and even beyond the
functions, users can say it is very good quality. E.g. if the life of a mobile
phone is 5 years but it lasts for more than 4 years without any problems, it
means this is a very high quality firm. On the other hand, if it lasts for 2½
years, it is not of good quality.

To manage risk therefore, ' producers need, to find out what is quality as far
as consumers are concerned and produce only those goods that shall fully
satisfy customer needs even beyond.

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Manufacturers approach to quality

As far as manufacturers are concerned quality is viewed as conformity to

specification. These specifications are determined by product designers e.g.
size 5 shoes should fit size 5 feet; it should not be more or less.

Value based approach

This is looking at quality in terms of prices and costs. According to this

approach, a quality product is one that provides performance at an
acceptable price. It should be noted that the price of product must reflect its
performance and therefore its quality. It a product is highly priced, its
assumption normally is that, such a product is of good quality.

The right quality should be one that consumers will appreciate. It is one that
provides satisfaction to consumers at minimum costs and obtained at the
right time.

The right quality therefore, is determined by balancing technical

considerations such, as fitness for use, performance safety, and reliability
with economic factors like price availability.

Partners in the supply chain therefore, should always strive to provide the
right quality for their customers because this shall help them overcome
uncertainties.

It should be noted that the right quality also involves the aspect of reliability.
Reliability is a measure of the ability of a product to function successfully
when required and under specific conditions.

What is total quality management (TQM)?

TQM can be defined as the management of initiatives and procedures that

are aimed at achieving the delivery of quality products and services. A
number of key principles can be identified in defining TQM, including;

PRINCIPLES/ TOOLS/ TECHNIQUES TO ATTAIN QUALITY

Executive Management, Top management should act as the main driver

for TQM and create an environment that ensures its success.

Training - Employees should receive regular training on the methods and

concepts of quality.

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Customer Focus - Improvements in quality should improve customer
satisfaction.

Decision Making - Quality decisions should be made based on

measurements

Methodology and Tools - Use of appropriate methodology and tools

ensures that non-conformance incidents are identified, measured and
responded to consistently.

Continuous Improvement - Companies should continuously work towards

improving manufacturing and quality procedures.

Company Culture - The culture of the company should aim at developing

employees ability to work together to improve quality.

Teamwork - To become successful in business, teamwork is also a key

element of TQM. With the use of teams, the business will receive quicker and
better solutions to problems. Teams also provide more permanent,
improvements in processes and operations. In teams, people feel more'
comfortable bringing up problems that may occur, arid can get help from
other workers to find a solution and put into place. There are manly three
types of teams that TQM organizations adopt:

Quality improvement teams or excellence teams (QITs) - These are

temporary-teams with the purpose of dealing with specific problems that
often recur. These teams are set up for period of three to twelve months.

Problem solving teams (PSTs) - These are temporary teams to solve

certain problems and also to identify and overcome causes of problems.
They generally last from one week to three months.

Natural work teams (NWTs) - These teams consist of small groups of

skilled workers who share tasks and responsibilities. These teams use
concepts such as employee involvement teams, self-mar aging teams and
quality circles. These teams generally work for one to two hours a week.

Employee Involvement - Employees should be encouraged to be pro-

active in identifying and addressing quality related problems.
Communication: - this is the binding of TQM efforts in the supply chain.
Management should put in place a system of providing information

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especially to those below regarding quality processes to enable stake holders
to learn, implement, control and evaluate TQM activities and principles.

Specification, specification is a statement of requirement to be satisfied by

a product or material. Quality is achieved once conformity to these
requirements have been attained. Thus organizations should come up with
specifications that shall deliver a product perceived as of quality by the
intended user.

Communication binds everything together. Starting from foundation to

roof of the TQM house, everything is bound by strong mortar of
communication. It acts as - a vital link between all elements of TQM
Communication means a common understanding of ideas between the
sender and the receiver. The success of TQM demands communication with
and among all the organization members, suppliers and customers.
Supervisors must keep open airways where employees can send and receive
information about the TQM process. Communication coupled with the
sharin=g of correct information is vital. For communication to the credible
the message must be clear and receiver must interpret in the way the
sender intended.

Vendor rating, this involves a logical evaluation by the purchaser of bought

out articles in order to produce a quality grading factor for each supplier
which can be used to make procurement decisions.

Certifications, quality may also be measured based on third party

certification i.e. UNBS. It is perceived that companies certified by UNBS have
high quality products.

QUANTITY

The right quantity to order is not always the quantity requested. This would
be appropriate for a single isolated requirement such as a replacement
machine tool or a new factory, but most purchases are for regular
requirements which recur.

Thus buyers must determine how much units of the required item should be
procured. Planning for procurement should integrate the variable with other
variables like price, and quality given the resource envelope of the
organization.

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The inventory management policy of the organization should also be referred
to in determining the quantity pursuit of the order size that will keep both
ordering and holding costs to a minimum may be failed. For some
companies, regular requirements are bought either for stock or else for
direct use in the production or operation. Part of the functions of stock
planning and control. And of production planning, is to calculate what
quantities are needed and why are needed to meet requirements for stock or
production.

Stocking planning and control could be defined as the policies and

procedures which systematically determine and regulate which things are
kept in stock and what quantities of them are stocked.

For each item stocked, decisions are needed to the size of the requirement,
the time at which further supplies should be ordered and the quantity which
should be ordered.

Production planning and control could be defined as the policies and

procedures which systematically determine and regulate manufacturing
programmes and which establish requirement for parts and materials to
support production.

For each item required, decisions are needed as to the size of the
requirement, the time at which it should be ordered and the order quantity.

In companies the most important factors that determine the right quantity
include;

 The demand for the final product into which the bought out materials
and components are incorporated
 Whether job batch, Assembly or process production method are
applicable
 Whether demand for the item is independent or dependent
 The service level , that is the incidence of the availability needed
 the market condition, such as financial, political and other
considerations that determine whether or not requirement shall be
purchased
 The rate of usage
 The ordering costs
 The holding costs etc.

Ordering policies used by purchasing

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 These include;

i) Blanket order which group many small requirements together for

contractual purposes
ii) Capacity booking order which reserves suppliers capacity for the
production of various parts used in conjunction with more orders which
state delivery date quantity
iii) Period contracts stating an estimate total quantity for the period and
the agreed price
iv) Economic order quantity
v) Part – period balancing, lot- for lot and other approaches favored by
production controller in conjunction with material requirement planning
(MRP)

TIME

Introduction:

Companies which can react promptly and accurately to the needs of their
customers are obviously more likely to attract orders than those who cannot.
The achievement of time is a standard purchasing objective. If goods and
materials arrive late or work is not completed at the right time, sales may be
lost, production halted and damage. Clauses may be invoked by dissatisfied
customers.

Price used to be of paramount importance in choosing between suppliers.

Now the cost of time is far more influential.

Competitive,advantage can be gained by being able to respond to

customers’ needs as soon as they use this demand that not only is the
supplier responsive but his supplier too.

PRICE:

Price is the value of a product or commodity measured in terms of a

standard monetary unit.

Factors that affect price decisions

 Competition
 Value as perceived by the consumers
 Cost of production

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  Price of other competitors Etc.

These factors end to pull in different directions and one may be a key factor
in the price decision.

Supply and demand, pricing in nearly all types of business is affected by

what economists call the price mechanism that is the theory of demand and
supply. There is the notion of an equilibrium price which means that at the
equilibrium or market price.

OR

Is both demanded and supplied. In most free market economies, the process
of an equilibrium price helps decide what is produced and what is not
produced.

Price and cost of production, cost based pricing is widely used. Buyers may
be able to insist that prices are justified by cost, evidence when goods are
produced specifically to their requirements.

Apart from variable cost which vary directly and proportionately with the
quantity produced, the cost of production must include a contribution to
overheads and profit.

Price and perceived value, another factor in pricing is how customers value
the offering. A supplier market offering may include, in addition to the
product itself, such things as reliability, durability and good value pricing is
based on the customer’s perception of relative value rather than cost.

How buyers obtain prices

 A price list made available

 Prices are quoted on request, based on an internal price available to
customers
 Individual quotations based on separately prepared estimates are
made on request
 Sealed bids or tenders are submitted etc.

SOURCE

Sourcing involves more than picking a supplier or contractor for each

requirement in isolation. It involves continuing relationship both with
preferred sources which are actually supply goods and services, and with

Lecture note by Mr. Denis N. Page 63

potential source which may have been passed over for the present nut are
still in running.

Effective source decisions will only be made when all relevant factors have
been considered and weighed against the risk and opportunities which apply.

Sourcing options

 The options include whether to buy or to make requirements

 Whether to use local or foreign suppliers
 Whether to use one or more than two suppliers
 Whether to use small or large supplier

Attributes of a good supplier

 Delivers on time
 Provide consistent quality
 Has a stable background
 Gives a good price
 Responsive to company needs
 Keeps promises
 Provides technical support
 Keep the buyer informed on progress

Sources of information on potentialsuppliers

 Catalogues
 Trade directors
 Database
 Sales persons
 Trade journals.
 Informal exchange of information between buyers
 Organizations promoting trade e.g. UMA.
 Customers both external and internal
 Press e.g. newspapers, TV/Radio.
 Trade shows or fairs or exhibitions.
 Archives i.e. documents that are kept over time.

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Lecture note by Mr. Denis N. Page 65
 UNIT FOUR

LOGISTICS AND SUPPLY CHAINMANAGEMENT

The term “supply chain” is defined as the interconnected set of business

procedures and business parties that manages the flow and delivery of
information from the point of design to the delivery of the product or service
to the final consumer.

A supply chain also refers to the flow of materials and information through a
business from the initial function through the operation and eventually to the
consumer. The organizational process of making a product and selling it
stands between the supply market and the customer market.

Thus, the supply chain is all those specific actions required to bring specific
products from raw materials to a finished product in the hands of the
consumers.

It should be noted that every product has got its own supply chain.

Supply chain exists in every organization whether they recognize it or not.

 In a manufacturing environment, it is straight forward to trace the

material and product flow that link the supply chain.
 In non – manufacturing organization, information flow and services may
be traced in addition to protect flows.

Every organization has unique chains tracing distinct flow and all
organizations regardless of sectors benefit by tracing their own chain and
determining the supply chain management strategies that will fit best.

Supplier Buyer Customer

E.g.

CHARACTERISTICS OF SUPPLY CHAIN

1. Supply chains are multi – tied i.e. they span beyond an organizations’
immediate suppliers and customers.
2. Supply chains are customer driven.
3. Supply chain management is an ongoing journey and not a destination.

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4. Supply chain management (management) activities are not necessarily
true supply chain management activities.

Supply Chain Management

Supply chain management may be described as the integrated approach to

planning and controlling the flow materials from the suppliers through the
distribution channels to the end user.

It emphasizes the management of upstream and downstream relationships

and the law of supply chain optimizationincreasing customer value at the
lowest cost.

The interface between the operation and the first tier supply is the focus of
traditional purchasing and supply management activity (upstream only).

The interface between the operation and the first tier customer is termed as
physical distribution management (downstream only).

Supply chain management is the term used to describe the management

and coordination of all the activities both upstream and downstream.

Illustration of Supply Chain

2nd tier 1st tier 1st tier 2nd tier

Supplier supplier customer Customer

A C E G
The
operating
firm H
B D F

K L J I
Pur. & SS Mat physical distribution

Material Management

Supply Chain Management

Lecture note by Mr. Denis N. Page 67

From the diagram above, the organization can be a supermarket such as
Shoprite in the upstream; the first tier supplier could be a distributer.

In the downstream, Shoprite may sell sugar to a wholesaler or a retailer (first

tier customer).

The interface between Shoprite and the producer of sugar (say Kakira) is the
focus of traditional purchasing supply management.

The interface between Shoprite and say Kakira wholesalers is the focus of
physical distribution management.

Note

i. Vendor B is the most important second tier supplier because he

supplies all the first tier suppliers. If he has a problem, the firm’s
operations are most likely to be affected.
ii. Customer F is the most important first tier customer because he
supplies or acts as a distributor to the majority of the final customers.
iii. Customer I is unique because he is the only customer who buys from
the organization and form its customers.
iv. Customer E is different from the other two first tier customers (F and J)
because he has only one customer.

If vendor C supplies to customer E directly, the firm may lose some

business./ He may be able to undercut the organization on price and in effect
may become a competitor while also being a supplier to the organization.

The contribution of procurement to supply Chain Management

 Provides expert analysis for forecasting servicing delivering and supplies

information throughout the supply chain.
 Provides critical information to strategic management on price,
availability and supplier issues.
 Enhances long term relations with key suppliers and resolves problem
that may arise.
 Secures the maximum possible value in engineering costs through the
implementation of value engineering and value chain analysis.
 Enables effective negotiation of the best terms in respect to
transformation and distribution.
 Advise on major sourcing policies such as make or buy decision,
outsourcing, leasing, etc.

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 Ensures that purchasing staff training provides an understanding of all the
elements of the supply chain system.

Benefits of supply chain management in organizations.

 Reduction in internal organizational conflict.

 It encourages inter-departmental cooperation and makes team work
much easier.
 Improvement in communication within the organization and the external
stakeholders.

 Adoption of modern concepts in material management such as JIT, MRP,

TQM, etc. becomes easier.

LEAN SUPPLY AND SUPPLY CHAIN RELATIONSHIPS

Lean supply is a set of ideas which aim at providing maximum customer

satisfaction or delight at minimum total cost to the entire supply chain. It is
an approach that focuses on satisfying fully the end customer’s requirements
at a minimum cost by eliminating waste wherever it exists in the supply
chain. Note: In lean supply, the supply, the customer is a king but a partner.

Lean Thinking

This is a way of looking at the supply chain with the view of cutting out waste
where it exists in the supply chain. The supply chain should therefore be
turned into a value chain.

Waste: - it is the opposite of value and it refers to any human activity which
absorbs resources but creates no value. For example;

a) Over production
b) Waiting
c) Un necessary transportation
d) Overstaying

e) Inspection, etc.

Therefore, value chain = supply chain –waste.

How to Achieve Lean Supply

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  Specify value as defined by the end user or consumer in terms of
quality, availability, packaging, etc.

 Identifying the supply chain and cut the unnecessary steps. Review all
the specific actions required in producing a specific product or service
from raw materials state unto the finished product ready for
consumption.

 Make the remaining value steps flow. With the elimination of non-value
adding activities, you have a value chain. Focus on the product and its
need rather than the organization or equipment so that all activities
needed to produce that item occur in a continuous flow.

 Let the customer pull a product from you as needed rather than you
pushing the product to the customer.

 Seek perfection i.e. cultivate a culture of continuous improvement and

remember to benchmark with the best industry.

 Ensure goods communication between you and your supplier.

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 UNIT FIVE:

SUPPLIER SOURCING

Sourcing is a core activity in the procurement function that can create value
for the customers, spur innovation and identify new products and market
possibilities for modern organizations.

Sourcing, from a strategic point of view, can be defined as a systematic

process that directs purchasing and supply managers to plan, manage, and
develop the supply base in line with the organization’s strategic objectives.
Sourcing is not simply a way to find the best price for a certain product but it
has become a decision-making process that can shape the business of an
entire organization. Nowadays sourcing is a critical activity in order to get a
competitive advantage.

According to (Deloitte 2014), Sourcing refers to the value added process of

selecting suppliers and the respective cooperation scheme and it must be
supported by advanced analytics & market intelligence, supplier
performance information and a concrete and well developed strategy. James
L. Patterson (2011) further affirmed that, Sourcing is essentially a cross-
functional process, aimed at managing, developing and integrating with the
supplier capabilities to achieve a competitive advantage.

Sourcing involves crucial and strategic decisions because it involves much

more than simply picking a supplier or contractor for each requirement in
isolation. It involves continuing relationships, both with preferred sources,
which are actually supplying the goods and services, and with potential
sources, which may have passed over for the present but are still in running.
It involves decisions about how to allocate the available business, and what
terms to do the business.

Attributes of a good supplier

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  Commitment; a good supplier should be committed to the market
(buyer) and this is important when choosing a supplier for a long term
contract.
 Capability; the potential supplier should be able to provide solution to
the need i.e. providing consistent quality. This is especially important
when using suppliers for the first time.
 Cost; a good supplier should give good prices which are competitive
and sustainable. This is important when the buying organization sells
in a market where the margins are tight.
 Control; the supplier should have good quality control and quality
assurance procedures in place. This is necessary if there is a potential
of failure costs due to quality being less than 100%.
 Cleanliness; a good supplier should be aware of his environment
impact and should be in position to reduce any negative impacts on
the environment. This is so important if the buying organization is a
well known brand in the public eye.
 Competence; a good supplier should employ skilled and competent
staff and should be able to invest in staff training and development.
 Capital/ cash resources; the supplier should be financially stable
especially when significant investment is required on the supplier’s
side.
 Capacity; a good supplier should be able to handle the volumes
required especially if the buying organization expects its customer
demand to increase quickly.
 Culture; the business and ethical values of a supplier should be in line
with those of the buying organization.
 Consistency/continuity; a good supplier should work or operate on
recognized standards especially when customers of the buying
organization wish all inputs to be traced. For example, ISO 9000
certification

Types of sourcing

Global sourcing; the sourcing and procurement of goods and services from
various geographical locations with the goal of obtaining additional cost
savings, efficiencies, or other benefits from suppliers in those regions.

Low -cost country sourcing; the activity of procuring goods or services

from countries having lower labour, and production cost, as a cost cutting
measure. Low -cost country sourcing is a component of an overall global
sourcing strategy.

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E-Sourcing; electronic sourcing is enabling the sourcing process via an
online, web -based application. E-sourcing allows buyers to submit their
items for bidding through a web based interface, then invite suppliers to
view, enter and submit their bids through that interface.

Collaborative sourcing; An emerging partnership approach where

disparate buying teams (from within the same organization or from different
companies) who are sourcing the same or similar goods and services from
the same types of suppliers combine their RFPs and sourcing needs into the
same sourcing event. A request for proposal is a document utilized by many
organizations to receive offers of services or goods from potential vendors.
Goals of collaborative sourcing may include enhancing overall supply chain
efficiencies, driving greater cost reductions through more volume -based
discounts and indirect cost savings.

Stages of the sourcing process

Establish need of the organization; this is the first stage in the sourcing
process where specifications, contractual terms, important requirements of
users are established.

Invite potential suppliers; this can be through a pre-qualification for

supply of various goods and services and invitation for bids/ tenders or an
expression of interest.

Screen suppliers and develop a short list; potential suppliers who are
likely to be unable to satisfy the organization’s needs are dropped at this
stage. The screening should be done on the aspects of size, location,
minimum order quantities, possession of ISO 9000 certification etc.

Send inquiry to request for information from the short-listed

potential suppliers. The inquiry may include questionnaires for the
supplier to complete and return to the buyer for analysis. The inquiring
should have an introduction, the type of product, experience, the number of
organizations dealt with, credit facilities etc.

Evaluate responses- potential suppliers are rated according to the pre-

determined criteria that reflect the needs of the organization. The major
areas of appraisal are; quality, financial, commercial, environmental and
ethical issues.

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Select the supplier; the supplier selected is placed on the approved list or
a supplier database.

Negotiate with the supplier; this is done amidst the purchasing

organization with the selected supplier so as to agree on the actual terms in
the contract such as the actual prices, quality and quantity of products to be
transacted. Justifications are considered under this stage and areas where
further clarification or if the offer can be improved upon are considered.

Place the purchase order; the procurement department is responsible

with this task of producing a purchase order and forwards it to the supplier
requesting for the supply of goods, services or systems as agreed in the
contract. This stage sparks off the actual contract implementation.

Rate supplier performance; this entails getting feedback from users on

supplier performance. This is called vendor rating (performance after
delivery or after use).

Sources of information about potential suppliers

Sourcing managers have many resources when they collect and collate the
information about potential suppliers.

Trade Shows; Attending national and international trade exhibitions is a

common way to meet new suppliers.

Commercial Publications; International purchasers can often find potential

suppliers and their products from the advertisements in trade journals, trade
magazines, and newspapers. Import Expert Journal, Commercial News USA,
Transport Magazine, Trade Channel Organisation, Valore International are
journals covering issues related to international trade and development.

Government Agencies; The Department of Commerce is a government

agency concerned with trade issues. Its subdivision, the International Trade
Administration (ITA), provides information services to U.S. importers and
exporters. Importers can obtain various statistics and information on the
laws of different countries.

Crediting Rating Organizations; The credit rating companies such as Dun

& Bradstreet Business Information, IBCA and Duff & Phelps Credit Rating Co.
provide reports on foreign companies. The reports provide detailed resumes
of company histories, the names of the owners of the businesses, the scope

Lecture note by Mr. Denis N. Page 74

of their activities, and a summary of their financial position and paying
history. In addition to the company data, these rating organizations also
analyze foreign markets, find contacts for importers and exporters, appoint
distributors, establish sources of supply, and publish market guides and
directories of foreign merchants.

Personal Contacts; In many countries, personal introduction is a very

important to conduct business. Chinese people give better deals to those
whom they have a connection with. An international buyer can contact
manufacturers directly through an introduction from an acquaintance

Suppliers and Customers; A supplier who does not perceive an inquiry as

a threat to his own business can be helpful to your overseas product
search. He may have suppliers overseas, or he may have overseas contacts
in the industry of your interest. Even if the supplier has a conflict with
foreign sourcing, its bank, freight forward company, or law firm may have
their international contacts. Many companies proudly listed their suppliers’
names and contacts in their annual reports or promotional materials.
Through contacting the suppliers’ local offices, purchasers can find their
offshore contacts.

Foreign Consulates; Many countries have governmental offices abroad

called “trade development boards,” “industrial promotion offices,” “chamber
of commerce,” or “trade institute and business information centres” for
promoting their domestic products. Their services are various but most
consuls can at least offer names of major firms and their addresses. Buyers
can also inquiry foreign consulate about visa and passport information that is
necessary for international travel. Many of these consulates have been
found to be extremely diligent and cooperative. They often published
periodicals to advertise their domestic products

Trade Associations; Attending trade association meetings is a good way to

meet people in all aspects of the international trade. International buyers can
find global suppliers by joining the associations grouped by the companies in
the same industrial. They can also join import/export associations to
familiarize themselves with those in the international logistic business –
packing, forwarding, insurance, shipping, and customs brokerage.

Internet/Electronic Bulletin Boards; The rate of people accessing

Internet is growing more than 200% each year. Many companies use the
Internet to post product information, corporate histories, company locations
Lecture note by Mr. Denis N. Page 75
and contacts, and new promotional events. International purchasers not
only can search the web to find more information about their suppliers but
can also use some web pages to find the best price.

International purchaser can also find shipping companies, brokers, cargo

handlers, transfer agents, and consultants’ advertising on Trade Port. It
saves buyers time and money.

Major Sourcing Policies/ Decisions.

Make or buy – this decision refers to the problem encountered by an

organization when deciding whether a product or service should be
purchased from outside sources or generated internally.

Reasons for make

a) To use the resources which would otherwise be idle

b) Need for secrecy and security of the organization
c) The quantities required may be too small to interest suppliers
d) To develop and retain expertise
e) Quality reasons especially if you perceive that the supplier will not give
you the best quality.
f) If it is cheaper to manufacture inputs than buying them.
g) To reduce on the lead time effect on the organizations’ operations.

Reasons for buyer

a) inadequate available resources

b) If quality needed is too big
c) If is expensive to goods of better fashions in the outside market
d) If the good once made internally may not meet the required quality
standards.

Single, dual, multiple sourcing

Single sourcing is buying from one supplier.

Dual sourcing from two suppliers whereas multiple sourcing is buying from
more than two suppliers.

Benefits of single sourcing

a) Less administrative overheads / costs

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b) Standardization is mad easier
c) Easier communication and scheduling of suppler requirements
d) More commitment from the supplier is experienced
e) Traceability of resources is easier with singe supplier i.e. it is easier to
conform to quality requirements

NB: Standardization (and variety reduction) means the reduction of varieties

of an item in stock to a minimum workable level.

Revision Question: “Discuss the short comings of single sourcing”

Benefits of multiple sourcing

a) Increased competitive pressure which leads to better performance in

terms of quality price, time, deliveries, etc.
b) Supply security – the buyer is always assured of continuity of supply
c) It enables the buying organization to keep in touch with market
developments especially with industries or sectors that are associated
with high levels of innovation.
d) It can be used as a way of supporting smaller, local or new suppliers
e) The buyer enjoys a wide variety of items.

“Discuss the short—coming of multiple sourcing.”

INTERNATIONAL / GLOBAL SOURCING

International sourcing may be defined as buying outside the firms Country of

manufacture.

Difference between international procurement and Global sourcing

International procurement is a commercial transaction between a buyer and

a seller located in different countries.

Global sourcing has been defined in different ways as bellow:

Global sourcing is a contract between multinational organizations to service

the needs of the contract worldwide on a local or using local suppliers
controlled from a central corporate Centre.’

John Stevens gives a clearer definition of global sourcing as; the integration
and coordination of procurement requirements across the worldwide

Lecture note by Mr. Denis N. Page 77

business units, looking at common items, processes, technologies and
suppliers.

Quality is more often one of the reasons involved in the decision to procure
from abroad but quality in this context can mean several things i.e. the
buyers of raw materials for process industries may find what is apparently
same commodity available from several countries; but the quality available
from each can vary greatly e.g. the inherit purity of a raw material in
question.

To other buyers the quality factor in procuring abroad can be associated with
the reliability and consistency of manufactured goods produced under
different conditions and methods in each source.

There may be strategic reasons for foreign purchases, for instance to

improve supply security by having a 2nd source in another country.

Insufficient domestic capacity; sometimes domestic capacity may not be

enough to meet demand, so the gap has to be filled from abroad.

Price; price is most frequently quoted as the major reason for purchasing
abroad. The pressure to reduce costs pave way for international
procurement The explanation for this is peculiar to each situation but can
usually be explained by identifying one or more of the following:-

 Larger qualities,
 Lower wages,
 Better productivity.
 Better plant,
 Lower raw material cost perhaps associated with proximity to source,
 Government subsidy,
 Lower transportation, and
 Economics of large scale production.

Customer preference; - the buyer must understand the advantages

offered by different markets to their demands. Customer preference may
also be based upon perceived quality and value or on the reliability of foreign
goods in comparison to those of local origin.

Brand; - preferences influence purchasing decisions. In situations where a

particular brand is desired by customers specified by product designers, the

Lecture note by Mr. Denis N. Page 78

buyer has few options other than purchases abroad if that is where the
particular brand originates.

I.e. The buyer may be compelled to go abroad to get what is required. Many
raw materials may not be produced at all in a particular country; for instance
cocoa, coffee, cobalt are not produced in the UK, and rubber is not produced
in Uganda.

Reciprocal/counter trade arrangements; - many countries use reciprocal

trading practices to help balance their foreign currency transactions.
Reciprocity implying that you buy from me I also buy from you

However companies may also prefer buying on a local basis because

of the following reasons.

 Speak the same language

 Belong to a similar culture
 Do business in the same legal system
 Work to the same standards
 No currency exchange problems
 Shorter lines of communication
 Quicker delivery periods which are less subject to delays.

Problems of buying form abroad

a) Language difficulties in the advent of the single European market has

increased the importance of language skills, for purchasing negotiators as
well as for others such as telephonists, telex operators, secretaries, lorry
drivers and management. Communications problems are bound to occur
when the two parties have different first languages.
b) Currency differences – the rate at which one currency exchanges for
another tends to dwindle (change) all the time because of the changes in
the demand for and supply of each currency. These exchange rate
changes can affect purchase and sales transaction in the same way as a
change in price.
c) Differing legal systems – it is necessary to determine the following:-
i) What law shall govern the transaction i.e. that of the importing or
exporting nation? In general, this will be the law of the nation in which
the contract is made.
ii) Arrangement for arbitration

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 iii) Terms and conditions applicable to deliveries and delays and the
passing of property
iv) Protection of buyer against product liability.
d) Incoterms (International Commercial Terms) – these are the standardized
international shipping or trade rules that govern the responsibilities of the
buyer and seller. Incoterms become a problem in case there is a
disagreement between the parties I a contract. Many contract terms are
in use worldwide for international trade such as:-
i) C.I.F (Cost Insurance Freight) – the seller is responsible for goods until
they reach the port of destination and the price covers transport and
insurance to that port.
ii) Ii) C & F – to a named destination similar to CIF except the buyer
arranges insurance. F.O.B (Free on Board) – the seller is responsible for
goods until they are shipped and pays for transport and handling to
that point.
e) Transport – there are several delays that are likely to occur in an
international buying. All the five modes of transport are in international
trade i.e. road, air railway, water and pipeline are employed in
international trade.
f) Customs – in case the goods delay in customs, every day’s delay adds t
cost. Inaccurate, incomplete or incorrect information on documents such
as invoices, way bills, and letters of credit causes delay.
g) The European Community – it is not easy to carry out trade in the member
state countries when you are not a member of the European Community.
h) The time required for negotiation is generally longer than with home
suppliers.
i) Intensive documentation e.g. bills of lading, certificates or origin, customs
entry forms may cause delay and all these are not necessary in home
trade.
j) Specification, especially where there are difference in units of
measurements.

KEY ELEMENTS TO SUCCESSFUL SOURCING ABROAD

The following crucial factors must be considered when executing

international sourcing;

a) Transport costs
b) Customs
c) Product quality.
d) Location of the supplier

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 e) Political situation
f) Trade regulations.
g) Time zones
h) Communication capabilities
i) Incoterms
j) Language
k) currency issues
l) Payment methods
m) Culture difference
n) Ethical standards

Task: (Students should engage in finding more about the factors)

Revision question: “Discuss the view that the buyer should only source
from overseas/ abroad when all domestic sources have been evaluated
thoroughly”

CONTRACT MANAGEMENT

According to Farrington (2004) the process of contract management must

ensures that the suppliers’ performances meet contractual requirements and
the buyer performs as par the terms of the contract. On larger procurement
functions contract administration is concerned with managing the interfaces
among the various providers. This means optimizing the efficiency,
effectiveness and economy of the service or relationship described by the
contract, balancing costs against risks and actively managing the customer–
provider relationship. Contract management may also involve aiming for
continuous improvement in performance over the life of the contract a key
point is that the foundations for contract management are laid in the stages
before contract award, including the procurement process.

Aims of contract management

 The central aim of contract management is to obtain the goods and

services as agreed in the contract and achieve value for money.
However, the function also aims at achieving the following:
 Ensure that the buyer performs according to terms of the contract
 Building a good working relationship between customer and provider
 Contract management consists of a range of activities that are carried
out together to keep the arrangement between customer and provider
running smoothly

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  Improved quality of service, and lastly, improved customer focus.

Benefits of contract management

 These accrue both to the contractor and the procuring entity and they
include among others:
 Timely service delivery
 Achieving value for money
 Cost control and savings;
 Increased crisis management
 Avoiding disputes
 Evaluation of the specifications against contract performance and
identification of changes that would benefit future contracts.

Critical success factor

Good preparation; an accurate assessment of needs helps create a clear

output-based specification. Effective evaluation procedures and select will
ensure that the contract is awarded to the right provider.

The right contract; the contract is the foundation for the relationship. It
should include aspects such as: allocation of risk, the quality of service
required, value for money mechanisms, procedures for communication and
dispute resolution.

Single business focus; each party needs to understand the objectives and
business of the other. The customer must have clear business objectives,
coupled with a clear understanding of why the contract will contribute to
them. In the same way, the provider must also be able to achieve their
objectives, including making a reasonable margin.

Service delivery management and contract administration; effective

governance will ensure that the customer gets what is agreed, to the level of
quality required. The performance under the contract must be monitored to
ensure that the customer continues to get value for money.

Relationship management; mutual trust and understanding, openness, and

excellent communications are as important to the success of an
arrangement as the fulfillment of the formal contract terms and conditions.

People, skills and continuity; there must be people with the right
interpersonal and management skills to manage these relationships on a

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peer-to-peer basis and at multiple levels in the organization. In addition the
following must be observed:

 Clear roles and responsibilities should be defined, and continuity of key

staff should be ensured as far as possible
 A contract manager (or contract management team) should be
designated early on in the procurement process
 The customer must have clear objectives, coupled with a clear
understanding of why the contract will contribute to them
 The provider must also be able to achieve their objectives, including
making a reasonable margin.

Change management; Contracts should be capable of change (to terms,

requirements and perhaps scope) within the regulations.

Knowledge; Those involved in managing the contract must understand the

business fully and know the contract documentation inside out (customer’
capability). This is essential if they are to understand the implications of
problems (or opportunities) over the life of the contract.

Proactivity; Good contract management is not reactive, but aims to

anticipate and respond to unforeseen changes.

Continuous improvement; Improvements in price, quality or service should

be sought and, where possible, built into the contract terms.

The role of a contract manager

 Study closely provisions of the contract and be able to understand and

interpret it, namely;
 Payment terms (i.e. advance, stages)
 Full particulars of the contractor (supplier) name, address, location, key
staff (their telephone, fax, email contacts), names and addresses of
bankers and lawyers.
 The rights and obligations/liabilities of the parties in the event that
something
 Dispute resolution procedure.
 Who can terminate the contract and in which circumstances.
 Contract duration, and options for extension
 Contract price schedule etc.

BENCH MARKING

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It is a technique-where by the performance of an organization is measured
against another organization. Performance is measured in accordance with
how the best-in-class achieve their performance levels.

Lysons and Farrington (2006) define a benchmark as:' A measured

'best in class achievement - a reference or measurement standard for
comparison that is recognized as the standard of excellence for a specific
business process.

The objective of benchmarking is to understand and evaluate the current

position of the business in relation to the best in the industry and to identify
areas and means of performance improvement. The assumption is that the
best-in-class have learnt how to manage risks over the years.

Bench marking involves looking outwards i.e. outside a particular

organization or industry to examine how others achieve their performance
levels and to understand the process they use. It should be noted that if
lessons learnt from a benchmarking exercise are applied appropriately, they
facilitate improved performance in critical functions within an organization. A
function like procurement may be benchmarked with that of the best-in-class
organization and be able to realize risk reduction in procurement related
activities as well as overall supply chain operations of the organization.

Bench marking helps to overcome resistance to change by demonstrating

their methods of solving problems from those currently employed by a
particular organization.

It also demonstrates that these methods really work because they are being
used by others.

Bench marking is not concerned with copying methods and systems that
other organizations use, and is also not concerned with copying on other
organizations but rather its undertaken openly with full knowledge and
cooperation of the organization against which benchmarking is undertaken.

Bench marking is also not done once. It is not a one-off exercise but it is a
continuous exercise and should be an integral part of an ongoing
improvement process.

TYPES / CATEGORIES OF BENCHMARKING

Functional/internal benchmarking

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A method of comparing internal functions with those of the best external
practitioners of those functions irrespective of the industry they are in. It
may also be referred to as operational or genuine benchmarking. It involves
bench marking operations within the same organization. It is applicable in
organizations with a number of functions, departments or locations carrying
out comparable activities.

The assumption of internal bench marking is that several business units

(departments) within the same organization exhibiting good practice and
management wants to spread this across the entire organization. The aim of
internal bench marking is to ascertain and learn from the best internal role
models. The main advantage of internal benchmarking is that, there is
access to sensitive data and usually less time as well as resources is needed.

Competitive benchmarking

This is the continuous measurement of an organization performance against

the standards of the best competitive and other companies who are
recognized as leaders. It provides opportunities of learning from those who
are the best in the industry.

The objective is to find ways of improving similar functions within an

organization.

The advantage of competitive bench marking is that, it can lead to

innovation and dramatic improvement. But it can also take up significant
time and resources to ensure the comparability of data, incredibility of
funding and development of sound recommendations.

International benchmarking

This is also called the best practice bench marking. It is the type of bench
marking where performance of an organization is rated against world class
enterprises. The aim of international benchmarking is to achieve world class
status. The advantage with international benchmarking is that, the
companies always take advantage of advanced technology, can be
innovative and an incentive to remain at the top

Strategic benchmarking

Method for evaluating alternatives, implementing strategies and improving

performance by understanding and adapting successful organizations that

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may be competitors or partners. This is critical in developing appropriate risk
management strategies for the organization and integrating them in the
overall corporate direction.

The benchmarking procedure/process

Step 1: Form a benchmarking team

This should consist of between 6 and 12 members, with representatives from

both management and employees. Separate teams may be assigned to
different benchmarking projects. Each team should have a leader to ensure
that the benchmarking exercise is successfully completed.

Step 2: Decide what to benchmark

Almost anything can be the subject of a benchmarking exercise. In general,

four prime considerations should be borne in mind when selecting subjects
for benchmarking.

 Does the activity have a significant influence on internal and

external satisfaction?
 What activities have the greatest potential for differentiation or
providing competitive advantage?
 What activities offer the greatest potential for improvements?
 What activities absorb the highest percentage of cost?
 The following aspects of procurement offer considerable
opportunities for benchmarking:
 price and cost comparisons of supplies and services purchased
 procurement processes and management comparisons of
purchasing methods and procedures
 procurement personnel comparisons of numbers, competences and'
training
 internal and external customer satisfaction with procurement
 services
 supplier performance, in terms of quantity and delivery, because, as
stated earlier, in general the satisfaction provided by purchasing to
both internal and external customers derives from the performance
suppliers
 Miscellaneous aspects, including comparisons of environmental OT
ethical policies and inventory management.

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Step 3: Establish performance measures for the key activities
identified in step 2

These measures will normally take the form of ratios. A ratio may be defined
as: the relationship between two quantities of which the quotient is the
measure.

For the purpose of comparison, "ratios are expressed as percentages. It

would be impracticable to list all the possible ratios applicable to the
benchmarking of purchasing activities here - the American Center for
Advanced Purchasing Studies, for example, has produced a list of 78 such
ratios just fc*.public utilities.

The American Management Association noted six areas in which reported

savings can be credited to procurement:

 more economical savings on supplies developed by buyers

 specification changes at a buyer's suggestion in order to obtain a lower
price, longer life or reduce inventory and installation costs
 improved order practices resulting in obtaining a lower price, such as
combining orders to obtain bulk discounts
 negotiation of lower prices by the buyers
 Reduction of costs other than material price, such as handling or storage
costs increased returns from the sale of damaged, obsolete or surplus
material and scrap.

Many ratios give no indication of sound procurement judgment.

Step 4: Identify those organizations that achieve world or best in

class performance in the areas selected for benchmarking

These can be discovered by means of:

 databases
 supplier associations
 reputation
 cooperative information-sharing agreements the members of such
agreements may or may not be competitors and may or may not being
the same industry
 Out-of-industry organizations.

Step 5: Obtain information on the organization selected in step 4

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This may be achieved by visiting the companies and having discussions with
their managers and other employees. The key questions to which answers
should be sought are the following.

 How do you do it?

 Why do you do it better than we do?
 How can we do it better?

Step 6: Identify the lessons to be learned from world class or best in

class organizations.

Once identified, the team can consider how these can be implemented in
their own company.

Step 7: Make recommendations on the lessons learned

Then the recommendations distilled from the benchmarking exercise can be

taken to top management and approval obtained for the implementation of
suggested improvements. When such approval has been obtained, the ideas
can be 'sold" to employees.

Step 8: Implementation, review, and monitor

This refers to the use of collected information. It is to put the collected

information to good use. This information should be compared to the best
industry.

If after the analysis, it is discovered that a certain department or

organization is better than you are in particular areas, then strategies should
be put in place to either catch up with them or overtake them. This is
followed by regular reviews and monitoring to keep the risk management
strategies adopted under control.

Summary of the steps

The above steps can he summarized as:

 plan select functions and so on for benchmarking, identify

benchmarks, appoint a benchmarking team, decide where, when and
how to collect data
 analyze compare the organization with test in class organizations,
perform a gap analysis of- the differences in performance, ascertain
reasons for the gap can be closed

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  develop set new performance objectives/standards develop action
plans to achieve goals, secure acceptance of the action plan by top
management
 improve implement specific actions and- integrate them into the
business process
 Review monitors the results and improvements, review the
benchmarks and the ongoing relationship with the best in class
organization.

Advantages of benchmarking

 It enables best practices from an organization to be creatively

incorporated into the processes of another organization so as to
improve its performance.
 Break resistance due to traditional thinking; some organizations have
their own traditional thinking on very many activities within the
organization. This is known as paradigm blindness. Benchmarking
breaks this resistance to change.
 Research has indicated that many people are receptive to new ideas
and they can always improve their performance based on ideas
generated from the benchmarking exercise.
 Networking; benchmarking involves free exchange of information with
other departments or organizations. This helps to create networks
which are healthy between two organizations or departments.
 It helps to organizations to take advantage of changes in technology.
This is true for international benchmarking.
 It helps to explain the performance of others e.g. how competitors set
their targets and how they achieve their targets and the strategies
they use to achieve them.
 Many organizations have blind perception about the performance of
other organizations. Benchmarking helps to clarify this.

Disadvantages of benchmarking

Cost; - it is an expensive process and involves a lot of costs especially

competitive, international and strategic benchmarking.

Time; - it requires time to benchmarking other organizations/ departments.

This time may as well be used for other productive purposes.

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Personal commitment; - benchmarking is an intensive mission which
requires a lot personal commitment. Members of the benchmarking
organization need to be patient if the exercise is to be of any benefits.

UNIT SIX

NEGOTIATIONS IN PROCUREMENT.

Negotiation has been described as the finest opportunity for the buyer to
improve his or her company’s profits and obtain recognition.

Definition of Negotiation

a) Negotiation is the process whereby two or more parties decide on what

each wills give and take in an exchange between them due to a
disequilibrium in the terms of trade.
b) Negotiation is the process by which we search for terms to obtain what
we want from somebody who wants something from us.
c) Negotiation is a compromise to settle an argument or issue to benefit two
or more parries a\s much as possible.

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Negotiation is not only used for business purposes but also in or daily lives as
well. Communication is always the link that will be used to negotiate the
issue or argument whether it is face to face, on the telephone or in writing.

Negotiation is not only between two people but can involve several members
from two parties.

Purpose of Negotiation

Negotiation in a business context can be used for selling, purchasing staff

e.g. contracts, borrowing e.eg. Loans and transactions along with anything
else that you fell are applicable for your business.

Negotiation is not only used for business but also in our daily lives as well,
communication being the link that is used to negotiate the issue or
argument.

It might be face to face on the telephone or in writing. Negotiation is not only

between two people but can involve several members from two parties.

Objectives of negotiation

Several objectives are common to all procurement and sales negotiation.

Some of which may include the following,

 Quality, it aims at obtaining the best quality products, services or

works from the supplier. This objective is in line with the overall
objective of procurement, to obtain value for money.
 To obtain fair and reasonable prices i.e.; procurement negotiation aim
at obtaining goods, services and works at reasonable prices.
 On- time performance: The buyer expects that the supplier should
supply on time so that he can obtain the best possible value for money
procurement.
 Control i.e. buyers should negotiation for controls which should ensure
compliance with quality, quantity, delivery and services the terms of
contract.
 Continuous relations, Negotiation aims at ensuring that the relationship
between the buyer and the seller shall continue. It’s important to note
that when negotiating with suppliers, the buyer should recognize that
the current actions usually constitute on the part of a continuing
relationship.

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Approaches to Negotiation

a) adversarial negotiation – also referred to as distributive or win-lose

negotiation, is an approach in which the focus is on positions staked out
by the participants in which the assumption is that in the event time, one
party wins the other party losses. As a result, the other party is regarded
as an adversary.
b) Partnership negotiation – also referred to as integrative or win-win
negotiation is an approach in which the focus is on the merits of the
issues identified by the participants in which the assumption is that
through collective problem solving one or both parties can gain without
the other having to lose.
Since the other party is regarded as a partner rather than an adversary,
the participants may be more willing to share concerns, ideas and
expectations.

Characteristics of Adversarial and Partnership Negotiation

Partnership / integrative win-win

Adversarial / distributive win- negotiation
lose negotiation

1. The emphasis is o computing - The emphasis is on training the

goals to be attained at the goals had in common with the
adversary’s expense. other party.
2. Strategy is based on secrecy, - Strategy is based on openness,
retention of information and sharing of information and high
low trust in the perceived trust in the perceived partner.
adversary.
3. The approach is basically - The approach is basically friendly
hostile and aggressive. and non- aggressive.
4. The key attitude is that if we - The key attitude is how the
win you lose. respective goals of each party be
achieved so that both win.
5. Parties use threats and - The parties refrain from threats
ultimatum with the aim of which are seen as
keeping the adversary on the counterproductive to the
defensive. rationale.

Importance of Negotiation

It helps in obtaining the best value for money in respect of service, goods,
and works

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Outstanding and long term relationships are established through negotiation
especially where a partnership approach to negotiation is adopted e.g. JIT
approach, critical suppliers, outsourcing etc.

It helps in obtaining fair and competitive prices

It helps achieve customer satisfaction through negotiating quality that shall

meet better customer service

It facilitates conflict resolution. If there is non- performance by the provider

i.e. negotiating new terms or amendments in a contract can reduce conflict
and stress in relation that would crop up.

Negotiation aids proper contract management. This is achieved during

negotiation whether role of the employer, the contractor and sub –
contractors are defined nd agreed upon

Helps in obtaining on- time performance of the contract

General terms and conditions of a contract are agreed upon and determined
through negotiation.

The negotiation process /preparation for negotiation (pre –

negotiation phase)

“Cases are won in chambers” is the guiding principle in preparation for

negotiation i.e. legal victories are often the outcome of the preceding
research and planning or strategy on the part of counsel. Buyers can learn
much by studying the strategies and tactics of legal, diplomatic and
industrial relations and applying them to the purchasing field. The matters to
be determined at the preparation stage are as follows:-

a) Who is to negotiate?
I) Individual approach – when negotiation is to be between two
individuals, both should have sufficient status to settle
unconditionally without any reference back to higher authority.
II) Team approach – for important negotiation especially where
complex, technical, legal, financial, etc. Issues are involved or for
purchase of capital items, a team approach should be used. This is
because an individual buyer is rarely qualified to act as a sole
negotiator.
b) The venue

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The buyer should normally expect the vendor to come to him unless there
are good reasons to the contrary e.g. the buyer is seeking concessions or it
is desirable to inspect the vendor’s facilities. There are advantages in
negotiating on a home around. Not only are surroundings familiar but
obligation in respect of hospitality provided by the vendor.

c) Gathering intelligence

This normally involves;

i) Ascertaining the strengths and weaknesses of the respective negotiating

positions.
ii) Assembling relevant data relating to costs, production, sales, etc.
iii) Preparing data which it is intended t present at the negotiation in the
form of graphs, chats, tables, etc.
d) Determining objectives
Buyer should be clear as to what the negotiations are expected to achieve
e.g. if the mater under minimum is price, the vendor should come with a
minimum price which he/she should not go below. Similarity, the buyer
should set a maximum price above which he / she should not go. In other
words parties should establish their bottom line, their Zone of Possible
Acceptance (ZOPA) and Best Alternative to a Negotiation (BATNA)
E) Tactics and strategy, that is developing positions or attitudes to be
taken or adopted the negotiation designed to achieve set goals
F) The “Dummy run”, it is advisable to subject all argument, tactics and
overall strategies to a critical scrutiny.

The Introductory Phase of Negotiation

Successful negotiators in the introductory phase tend to expend

consideration effort in;

1. Establishing an atmosphere that is conductive to the agreement. They

may include social interchange, giving an impression of wishing to work to
a mutually advantageous goal.
2. Validating assumptions (acceptable assumptions_)
3. Testing the other party’s position, willingness to collaborate or propensity
to oppose.
4. Clarifying issues and the weighted gives to them by the other party.
5. Trying to ascertain whether any new information will be introduced by the
other party.

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In the introductory phase of negotiation, the following prescriptive points
should be given due consideration:-

h) Be on time – being late necessitates an apology and signals a lick of

organization.
i) Make brief opening statements, listen and be seen to be listening to the
other party.
j) Do not make quick decisions.

Actual Negotiation Phase

At the actual time of negotiation, you must put the following aspects into
consideration:-

1) Stages – even with a philosophy of partnership negotiation, the activates

of the participants will change at each stage of the negotiation process.
These activities alternate between competition and cooperation.
It is therefore useful for a negotiator to recognize its pattern of interaction
and also recognize the stage that has been reached in a particular
negotiation.
2) Techniques
i) In forming an agenda, the more difficult issues should appear later.
Thus enabling some agreement on less controversial matters to be
reached early in the negotiation.
ii) Questions are a means both of eliciting information and keeping
pressure on an opponent. Questions may also be used to control the
pattern and progress of the negotiation.
iii) Negotiation is between people – is therefore essential to be able to
weigh up the personalities of one’s opponent and the drives that
motivate them e.g. achievement, fear, etc.
3) Negotiating behavior – all negotiations involve interpersonal skills. The
negotiating styles applicable vary according to the specific situation.
Training in negotiation should therefore include training in behavior
analysis which should lead to an understanding of the responses likely to
be involved by particular behavior e.g. shouting usually causes the other
person to shout back.
4) Body language – it is important to note that over the centuries, man has
become more articulate, he has developed an ability to hide how he really
feels in situations.

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As a skilled negotiator therefore, you must watch the body language. No
matter what people say, how they feel, can often be picked up from their
body positions and gestures during the negotiations.

The following are some of the postures and what they might indicate.

The interpretation of postures

Posture Possible meaning

- Leaning forward when making a - Interested wants to emphasize a

point point
- Avoid eye contact - May be embarrassed, not telling
the truth
- Arms folded, body turned away - Defensive, no compromise not
from you interested.
- Looking away at watch or at - Wants to leave or avoided any
window further discussion
- Hands supporting head and - Confidence
leaning back in chair
- Stroking nose regularly with a - May be lying
finger avoiding eye contact
- Good eye contact, fingers stroking - Interested in what you are saying
face

Post Negotiations Phase

Once you have come to the final agreement, it is important to have it down
in writing in long with both parties’ signatures. Before the agreement is
signed or formally endorsed, do not say anything about the terms agreed
because your next sentence could break the agreement.

Sell the agreement to the constituents of both parties i.e. what has been
agree, why it is the basic possible agreement, what benefits will accrue, etc.

Implement the agreement e.g. place contracts, set up joint implementation

terms.

Establish procedures for monitoring the implementation of the agreement

and dealing with any problems that may arise.

Qualities of a good negotiator

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  He should be wise, i.e. should have learnt from the experience of
others and be able to utilize the experience he has gained during
his time as a practicing negotiator.
 A good negotiator should be fully equipped with all the technicalities
of a negotiation e.g. before going into a particular negotiation, he
should establish his BATNA (Best Alternative to a Negotiated
Agreement) should have a bottom line and should establish a Zone
of Possible Acceptable (ZOPA) ETC.
 Should have knowledge of the materials, services, works for the
procurement under question
 Should be patient and persistent
 Should have a clear thinking and broad ideas, in other words he
should be in position to make decisions that are suitable for
reaching at an optimum decision at a particular negotiating point
 Should have persuasive quality and should be logical
 He should believe in optimism and never let an opportunity slip out
of his hands.
 He should be in position to go along with people with ease and
enthusiasm.

Lecture note by Mr. Denis N. Page 97

 UNIT SEVEN

PROCUREMENT OF CAPITAL ITEMS

Capital goods or procurements are long term requirements often with a high
value used for production of goods or services.

Buying capital goods such as buildings, plant and machinery and computers,
differs in several ways from the purchase of non-capital goods. Unlike
production goods or office suppliers, capital goods are not bought for current
needs to be used up in a short time but are bought for long term
requirements to be used for the production of goods and services.

Categories of capital goods

a) Buildings; – this refers to permanent construction on a site to house or

enclose equipment and personnel employed in industrial, institutional or
commercial activities.
b) Installation equipment; – this refers to essential plant or machinery
or other major equipment used directly to produce the goods and
services of the producing organization.
c) Accessory equipment; – this is a durable major equipment used to
facilitate the production of goods and services or to enhance the
operation of goods and services.
d) Operating equipment; - this refers to semi - durable minor equipment
which is movable, used in but not generally essential to the production
of goods and services. For example; brooms, special foot ware, etc
e) Tools and Instruments; - these arc semi - durable or durable potable
minor equipment and instrument required for producing, measuring,
calculating, etc. associated with the production of goods and services
e.g. word processors, surgical instruments, timing devices, etc.
f) Furnishing and fitting equipment; - these are all goods and
materials employed to fit buildings for their organizational purposes but
not equipment used specifically in production. For example; carpets,
furniture, benches, etc.

Capital and Revenue Procurements

Capital goods or purchases are long term requirements often with a high
value used for production of goods or services.

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Buying capital goods such as buildings, plant and machinery and computers,
differences in several ways from the purchase of non capital goods

 Capital goods are items which are not obtained for re-sale either
directly or after processing but for retention within the business.
 Revenue procurements on the other hand are those which are re-
sold to the customer and hence bring some revenue to the
organization.

Distinctions between capital and revenue procurements

There are a number of factors that distinguish procurement of capital goods

from procurement of revenue goods:-

 The basic procurement price of a capital asset is only an element and

sometimes not an important element in total cost of acquisition. Other
costs are also relevant and may arise anytime over the life of an asset.
 The procurement of capital items tends to be non-recurring. It is unlikely
to have had a similar procurement in the recent past.
 The monetary value of the procurements may be high suggesting a
need for specialized techniques of evaluation and control. This also
raises a question relating to financing of the procurement.
 The benefits to be obtained from the procurement are often intangible
and difficult to evaluate. For example, a machine may be replaced by a
superior model in order to secure quality improvement.
 Negotiations are usually more extended and complex than in other
acquisition.
 Specifications for capital items are usually more difficult to draft
because of technical complexity of the items to be procured.
 A team approach is usually needed in which the contribution of other
departments and not just that of procurement must be effectively
coordinated and managed.
 Buying a capital asset usually means buying a service too.
 Some capital goods can be shared by partners.
 In capital goods’ acquisition, there is consideration for buying used
items.

Purchase of capital items

In economics, capital goods are tangible objects that are used in the
production of other goods or commodities during the provision of services.

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They can include things such as buildings, which can then be sold to another
party. The means of production might be owned by individuals, businesses,
organizations or governments.

In most cases, capital goods require a substantial investment on behalf of

the producer, and their purchase is usually referred to as a capital expense.
These goods are important to businesses because they use these items to
make functional goods for customers or to provide consumers with valuable
services. As a result, they are sometimes referred to as producers' goods or
production goods.

Capital Goods vs. Capital

The economic term "capital goods" should not be confused with the financial
term "capital," which simply refers to money or wealth.
Production goods generally are man-made and do not include natural
resources such as land or minerals. They also do not include "human capital”
the labour, intellectual skills and physical skills provided by people in the
production of other goods.

Types of Capital Equipment

Fixed Capital Equipment (FCE); Capital equipment is permanently

attached to a building. FCE has a useful life of more than two years and an
acquisition cost of ten million Uganda shillings or more. Fixed capital
equipment items are not issued inventory numbers and therefore are not
carried on inventory records. Examples of fixed capital equipment items are:
plumbing fixtures, heating and electrical equipment, among others.

Movable Capital Equipment (MCE); Movable capital equipment is defined

as capital equipment, which is not permanently attached to a building or a
structure. Movable capital equipment is not an integral part of its
surroundings. Its removal does not affect the value of the item or the value
of the real property. MCE items are issued inventory numbers and are
carried in the Generalized Inventory file. Change in status, i.e., moved, sold,
traded-in.

Characteristics of Capital Expenditure

In making a record of various expenditures, it is important for ventures to

properly categorize such cash outflows. One category that expenditures may
occupy is that of capital expenditures. Capital expenditures have certain

Lecture note by Mr. Denis N. Page 100

characteristics which distinguish them from revenue expenditures, and they
are;

Purpose; Capital expenditures are outlays of money invested by the

company and property or materials to be used to generate profits. Raw
materials, utility expenses, rent and insurance are not capital expenditures.
Capital expenditures are tangible and long term, while the previous
examples of expenditures fall into one or both of these categories. Any items
that do not materially contribute to the profitability of the firm are not capital
expenditures. Packaging materials and inventory are also excluded from
capital expenditures.

Longevity; Another aspect of capital expenditures is term-of-use. In order to

qualify as a capital expenditure, an asset thus acquired must be durable and
useful for a term greater than one year. Examples of assets that would
qualify are vehicles, manufacturing equipment, real estate and construction
of buildings. It is important to note that regardless of the nature of the items,
products intended specifically for resale are considered inventory not capital
expenditures.

Accounting Treatment; in accounting terms, a capital expenditure is

recorded as the acquisition of an asset. Because of the long-term use of a
capital asset, it is recorded as either a fixed or non-current asset. Some of
the other items mentioned, like raw materials or inventory, are recorded as a
current asset. Rent, utilities and insurance are recorded as revenue
expenditures, not assets. Also significant is the fact that maintenance of a
capital asset, that is an asset acquired via capital expenditure, may itself
constitute revenue expenditure, not capital expenditure.

Factors to consider when buying capital equipment

Capital expenditure decisions are very important and complex. They are
long-term in nature and require a large fund outlay. These expenditures
include purchasing new machinery, constructing new plants and upgrading
the information technology. Firms depend on capital investments to increase
their long-term growth. Therefore, the management has to evaluate these
projects to determine the most profitable ones. The management considers
financial and nonfinancial factors, and they are:

 Purpose of the equipment

Lecture note by Mr. Denis N. Page 101

  Flexibility i.e. the equipment should be capable of being used for
purposes other than those for which it was primarily acquired.
 Standardization; - the equipment should be compatible with any
already installed equipment so as to reduce the cost of holding stock.
 Life; - this refers to the period the equipment will have before it is
written off due to depreciation or obsolescence.
 Reliability; - the equipment should be reliable so as to avoid
breakdown which leads to loss of good will through extended deliveries
and possibilities of high investment in stock.
 Durability; – the equipment should be used for a long time for its
intended use.
 Cost of operation; – for example; cost of fuel, power maintenance, etc.
it is important to ascertain whether specialized or additional labour will
be required.
 Cost of installation; – does the price include the cost of installation,
commissioning and training of operators.
 Cost of maintenance i.e. can the equipment be maintained by own
staff or special arrangements have to be made.

Other factors to consider include;

The expected returns, Returns are the expected increase in profits and
other benefits. Firms undertake investments to increase their long-term
financial profitability. These profits are realized due to an increase in sales or
a reduction in the operating costs. When a firm is evaluating different
projects, it should prioritize projects with higher returns. The firm should also
consider the trend of earnings because this is a long-term investment. It
should undertake projects that guarantee sustainable profits.

Availability of funds, the cost of an investment is a financial aspect. Firms

should consider the availability of funds when making capital expenditure
decisions. Long-term investments require a lot of money to meet costs.
These costs include the purchase cost of equipment, increase in working
capital and future costs, such as repair and maintenance costs. Before a firm
undertakes a project, it should consider whether it has sufficient funds to
properly implement and maintain the project.

Availability and Skills of the Personnel, This is a nonfinancial factor.

When a firm is considering the purchase of equipment, it should consider the
available personnel. The firm should consider whether they have enough
personnel to operate the machinery. They should also determine whether

Lecture note by Mr. Denis N. Page 102

they have the required technical knowledge to utilize the machinery. These
factors will determine the successful implementation of the project, which
will affect the profitability of the firm.

Government Regulation, It is important for a firm to consider the relevant

laws and requirements imposed by the government. It should establish the
licenses it needs and the payments required before undertaking a project. A
firm that wants to set up a new facility in a particular location needs to
adhere to the requirements. If the law prohibits development of such a
facility, it should look for an alternative location or abandon the project.

LIFE CYCLE COSTING

Life cycle cost is a sum of all recurring and one time (non-recurring) costs
over the full life span or a specified period of a good, service, structure, or
system. It includes purchase price, installation cost, operating costs,
maintenance and upgrade costs, and remaining (residual or salvage) value
at the end of ownership or its useful life.

Life cycle cost analysis calculates the cost of a system or product over its
entire life span. This also involves the process of Product Life Cycle
Management so that the life cycle profits are maximized.

The analysis of a typical system could include costs for;

 planning;
 research and development;
 production;
 operation;
 maintenance;
 Cost of replacement;
 Disposal;

This cost analysis depends on values calculated from other reliability

analyses like failure rate, cost of spares, repair times, and component costs.
A life cycle cost analysis is important for cost accounting purposes.

This is paying attention to all the costs that will be incurred during the entire
life of a product or a service.

Lecture note by Mr. Denis N. Page 103

  The increasingly competitive environment in which modern
business operates is leading to increased effort being applied in
trying to manage costs.
 Businesses need to keep costs to a minimum so that they can
supply goods and services at a price that customers will be
prepared to, at the same time generate a level of profits necessary
to meet the business objectives of enhancing share holder wealth.

Total life cycle of a product or a service has three phases

1. Pre – production Phase: During this Phase, research and development –

both of the product and of the Market is conducted. The product is
invented or designed and so is the means of production. The phase
culminates with acquiring and setting up of the necessary production
facilities, and advertising and promotion, is prepared for the launch of the
product.
2. The Production Phase: In this phase, the product is made and sold to
the market.
3. Post-production Phase: during this phase, any costs necessary to
correct faults that arose with products that have been sold (after- sales
services) are incurred. There would also be the costs of closing production
facilities, since after sales service will tend to arise from as early as the
first product being sold. Therefore well before the last one is sold, this
phase would typically overlap the manufacturing phase.

Life Cycle costing methodology

This involves four steps

1. Identify all relevant costs. These are broken down into;

 Acquisition costs;

- Initial costs
- Cost of transportation
- Cost of installation and commissioning
- Initial spares

- Costs of supervising / operator training.

 Operation and maintenance costs & disposal costs;

Lecture note by Mr. Denis N. Page 104

 - Cost of operation
- Supervision
- Operator wage & employment costs
- Expenditure of fuel, power.
- Cost of materials used
- Disposal costs
- Costs of depreciation (obsolescence)

- E.t.c and then categorized under each heading.

2. Calculate costs over the anticipated life of the asset of all the
elements identified in step 1.

Such costs may be;

- Known rates: - e.g. operator wages, maintenance charges

- Established rates: -based on historical figures or other empirical data.

- Estimates: - based on informed opinion

3. Use discounting to adjust future costs to the present.

4. Draw conclusions form the cost figures obtained by the above

procedure.

UNIT EIGHT

AN OVERVIEW OF OTHER KEY ASPECTS IN PROCUREMENT

SUSTAINABLE PROCUREMENT

Introduction:

Procuring organization should recognize that they have a role in furthering

sustainable development, through their procurement of buildings, goods,
works and services. Procurement decisions can have social, economic and
environmental implication both local and globally, now and for the future
generations. They should ensure that their procurement and contract
management activities follow the good practice through sustainable
procurement task forces flexible framework (SPTF FFs)

What is sustainable procurement?

Lecture note by Mr. Denis N. Page 105

Sustainable procurement is the process whereby organizations meet their
needs for goods, services, works and utilities in a way that achieves values
for money on a whole life basis in terms of generating benefits not only to
the organization, but also to society and the economy, whilst minimizing
damage to the environment.

The benefits of sustainable procurement to your organization can include

environmental economic and social and can relate to the local economy.
Cost savings, reduced carbon emissions, less waste, lower energy and fuel
consumption, improved health outcomes, more skills, apprenticeships and
training, plus more contract opportunities for small and medium sized
enterprises are some practical examples to consider and include within
procurement.

Figure 8.1 sustainable procurement concerns.

Sustainability can be incorporated into the whole procurement process:

defining the need evaluating options, design and specifying supplier
selection, tender evaluation, and post contract management and supplier
development.

Within the public procurement rules, the key opportunity to consider

environment issues is at the earliest stage of the process, in defining the
user requirement. Criteria such as 100% recycled fibre content for tissue

Lecture note by Mr. Denis N. Page 106

paper should be built into specification. Then at the award stage, the best
value for money option that meets the specification would be awarded the
contract. (In this example, tissue paper below 100% recycled would simply
be rejected as non- compliant).

Environment criteria can be used at the award stage, provided they are
relevant to the subject of the contract and provide a value for money benefit
for the awarding authority. However, it is preferable to introduce these
criteria upfront as part of the specification to avoid any potential conflict
later in the procurement process between buying green and securing value
for money.

8.1.2 Checking for sustainability through the procurement cycle.

Once you get into a procurement exercise you should check the
sustainability has been taken into account at each review stage or gateway.

The key is to motivate your supplier to offer more sustainability products.

This means that your customers and users have to move defining functional
performance specifications (including sustainability) rather than the

Lecture note by Mr. Denis N. Page 107

technical specification of known products. And your suppliers need advance
warning of a definite shift in your requirements.

If there is a business case for sustainable procurement, whole life costing is a

key tool in obtaining best value, for example , energy efficient products often
have an increased capital cost that is more than offset by reduced operating
costs, while recycled wood chips provide a longer –lasting alternative to bark
for planted areas.

However to secure value you have to be willing to look to new suppliers with
the motivation to offer price competitive alternative products. Quality can be
assured by specifying standards following standard policy frame work in
place.

E- PROCUREMENT

Procurement is cycle that consists of up to nine steps depending on the

value and complexity of the buy, as well as organizational policies. At a
minimum it starts with need identification (andrequisition) proceeds to the
generation and delivery of a purchase order (possibly after one or more
approval and results in the acceptance of an invoice and an eventual (e-
payment). However, for more complex purchases, the process will usually
include the generation of other mechanism; multi-way matching and
reconciliation of the purchase order, goods receipt, and invoice, ta tracking;
and rebate request preparation.

The goal of procurement is to obtain the right products of service at the right
place at the right time, at the right price in the most efficient manner
possible. This is because when done right, an organization will save time,
money and add value to their products or services offerings. However, if
done incorrectly, the organization could and almost 5% to the bottom line.

That’s why e- procurement, the electronic implementation of the

procurement cycle was introduced. Since technology was already improving
efficiency and saving money in other areas of the enterprise, the vision was
that the technology –enable the organization to acquire its goods and
services at the best value obtained

However e-procurement has been round for ever a decade but even best in
class organization ma out at 82% spend under management while average
organization implementing procurement only have 65% of spend under
management why? Although it’s had to say for sure it’s likely because most

Lecture note by Mr. Denis N. Page 108

e-procurement solutions on the market are not complete or even true end to
end solutions

What is e- procurement?

E- Procurement is the electric implementation of the procurement cycle not

to be confused with e- sourcing which is the electric implementation of the
sourcing cycle it of the technology- enabled acquisition of goods and services
required by an organization at the best value obtainable. The goal is the
right product or service at the right place at the right time, at the right price
in the most efficient manner possible.

E –procurement is the business – to – business or business – to – consumer or

business – to- government purchase and sale of supplies work, and services
over the internet as well as other information and networking systems, such
as Electronic Data Interchange (EDI) and Enterprise Resource Planning (ERP)
E- procurement is also sometimes referred as suppliers exchange

It can therefore be summarized that e- procurement is the automation of

traditional purchasing process using internet based tools in other words, the
intention is to see how best the traditional purchasing process can be
automated and how internet can be integrated in this process. Figure 8.2
the E- procurement cycle

Lecture note by Mr. Denis N. Page 109

E – procurement has many different definition in the market place and is still
confused with EIPP ( electronic invoice presentation and payment ) P2P
( procure to pay) and e- payment ( electronic payment) but none of these
technologies comes close to implementing the full procurement cycle

It’s also sometimes confused with, or thought to include e-RFX or e- auction

which is in the fact part of the e- sourcing cycle and sometimes also thought
to include contract management another major component of the e- sourcing
cycle. In fact it is catalog and content management that is much important
for day to day procurement.

True e- procurement is the enablement of the full procurement cycle from

initial requisition to final payment. It includes support for the location of the
required god or services the necessary authorizations, generation or
acceptance of the goods receipt invoice processing multi- way match based
reconciliation e- payment, payment acknowledgement and analysis and
reporting.

E- Procurement value/importance

E – Procurement is important because it saves time, money, and adds value

to the traditional procurement process through improved compliance and
added visibility

Requisitioners can also be assured that each supplier in the system meets
any regulatory and specification requirements, finally e- procurement
institutes and enforce best practice that increase spend under management ,
the ultimate key to procurement savings.

Spend visibility is the best defense against maverick spending as well as the
best offense you have to prevent information overload. Remember that
negotiation savings are just that negotiated savings. Unless all orders are
placed against the contract all invoices paid all contracted rates, and rebates
and discounts collected.

Furthermore, if users search the internet to find products they will be

inundated with potential suppliers, many of which will not be good choices
from a total cost of ownership viewpoint . without good e- procurement
systems and processes chances are that maverick spend is rampant in an
organization, even though it may not be the intent Maverick spend not only
eliminate the negotiated savings the sourcing team worked so hard to
deliver, but could even ad additional cost above and beyond previous cost

Lecture note by Mr. Denis N. Page 110

In reality e- procurement as the advantage of taking supply chain
management to the next level, providing real time information to the vendor
as to the status of a customer’s needs for example a vendor may have an
agreement with a customer to automatically ship material when the
customer’s stock level reaches a low point, thus bypassing the need for the
customer to ask for it. However the major benefits is going e- procurement
can be seen in following areas

Transaction costs.

1. There are 3 costs areas that are significantly reduced through e-

procurement

• Reduction of searching costs.

•. As buyers needs not go through multiple intermediately to search

information about supplier’s products and prices as it is in the case of
traditional supply chain in terms of effort, time and money spent, the
internet is more efficient channel. In business-business markets,
buyers and sellers are gathered together in a single online trading
community reducing search costs even further.

• Reduction in the cost of processing transaction (e.g. invoices,

purchase orders and payment). It is because business-business allows
for the automation of transaction process and therefore the quick
implementation of the same compared other channels such as a
telephone and fax. \

• Efficiency in trading process and transaction is also enhanced through

online auctions.

• Online processing improves inventory management and logistics.

2. Disintermediation

Through business-business e-market suppliers are able to interact and

transact directly with buyers, thereby eliminating intermediately and
distributors.

3. Transparency in pricing

Among the most evident benefit of e-market is increase in price

transparency. The gathering of large numbers buyers and sellers in single

Lecture note by Mr. Denis N. Page 111

 e-market reveals market price information and translation processing to
participants. The internet allows the publication of information on single
purchase or translation making the information readily available and
accessible to all members of e-markets.

Increased price transparency has the effect of pulling d own price

differential in market. In this context buyers are provided much more time
to compare prices and make more better buying decisions, moreover
business-business expand borders per dynamic and negotiated pricing
where in multiple buyers and sellers collectively participate in price setting
and two way auction. In such environments prices can be set through
automatic matching of bids and offers. In the e-market place the
requirements of both buyers and sellers are therefore aggregated to reach
competitive prices which are lower than those resulting from individual
auction.

The economies of scale and network effect

The rapid growth of business-business of e-market creates traditional supply-

side cost based economies of scale. Furthermore, the bringing together of a
significant number of buyers and sellers provide the demand-side economies
of scale product network effect each additional incremental participant in the
e-market creates value of all participants in the add-side. More participants
form critical mass which is key in attracting more people to the e-markets.

CORPORATE SOCIAL RESPONSIBILITY (CSR)

In the first decade of the twenty-first century Corporate Social Responsibility

(CSR) has been a big issue for the purchasing community. It has moved the
consideration o| ethics to a wider and more significant level than the mere
question of whether a procurement manager accepts a ticket to the football
cup final. The whole issue of CSR has become\more complex and the debate
is more sophisticated and far-reaching.

No matter what your sector, it is becoming increasingly urgent that risk

management strategy - not to mention the creation of opportunities includes
an integrated approach to CSR at board level.

What is corporate Social Responsibility?

Corporate Social Responsibility (CSR) has become the broadly accepted

concept to describe a collection of related issues, all of which combine to

Lecture note by Mr. Denis N. Page 112

represent an organization’s overall ethos, its personality, philosophy and
character.

'CSR actively manages the economic, social, environmental and human

rights impact of its activities across the world, basing those on principles
which reflect international values, reaping benefits both for its own
operations and reputation as well as for the communities in which it
operates'.

Therefore, procuring organizations to be regarded socially responsible

buyers need to put into consideration the following aspects;

• Environmental responsibility,
• Human rights,
• Equal opportunities,
• Diversity and supplier diversity,
• Corporate governance,
• Sustainability
• Impact on society
• Ethics and ethical trading
• Biodiversity, and
• Community involvement,

8.3.2 Scenarios of Corporate Social Responsibility in procurement

A brief scenario is provided for each of the headings identified previously,

which are then evaluated 'for and against' CSR after which a conclusion is
drawn. Note that many of the reasons given below against the given CSR
issue are invalid and only made in the course book for the sake of this
review.

• Environmental responsibility \

Situation: Recycled paper is not selected as an option by an organization,

or sources of supply are used knowing that the source of supply pollutes the
local river with the output of its processes.

Against CSR: Recycled items can cost more, the world will regenerate
itself, it isn't always possible to get recycled items, and recycled items are
not always the same quality as brand new items. I am a buyer, not an
environmentalist. It's not my job to tell suppliers how they do things.

Lecture note by Mr. Denis N. Page 113

For CSR: The environment impacts everyone, environmental legislation
exists and must be followed, care for the environment today will impact
future generations, there are limits beyond which the earth will not
regenerate itself. There are many cases when the quality of recycled
products is as good as new, other cases when a lower quality is acceptable
and other cases when the purchasing organizations may choose to incur cost
to purchase recycled items. Alternatives are available to chemicals that
damage the environment, even if they cost more.

Conclusion: Purchasing organizations should influence their supply chain,

using organizations with a good track record on environmental purchases
and choosing recycled *nd environmentally friendly products where
appropriate. If the goods and services Purchased cost more due to
environmental concerns and are within the tactical acquisition quadrant of
supply positioning, even a relatively large additional cost will not impact the
organizations spend in a major way. All organizations are stakeholders in our
environment and as the interface with the supply market it is appropriate
that buyers are intuitively aware of the impact 'of their actions on the
environment and vice versa.

• Human rights -

Situation:Work is placed with an Asian supplier '.known to have a dubious

record on employee rights.

Against CSR: It's not always our business to look into these things, anyway
the people are-
pleased to have the jobs even if they don't have the same union rights that
we have in the
West.

For' CSR: Can you actually argue against human rights for anyone? Our
commitment to people extends up the supply chain to staff at suppliers and
to people who use the goods and services that we make.

Conclusion: Human rights are fundamental. No purchasing professional or

purchasing organization should be involved in supply situations that infringe
the human rights of others. We may not be able to obtain western wages
and benefits for employees in this situation; however, we should work with
our suppliers to set minimum acceptable standards based on the four core
ILO conventions.

Lecture note by Mr. Denis N. Page 114

 • Equal opportunities y
Situation: Preferential treatment is given to a person within an
organization. Others who
may be suitable are not given a chance.

Against CSR: The survival of the fittest, it's my decision so I'll decide.

For CSR: One of the theories of motivation suggests that when people
consider that they have a fair chance to achieve they will be more
motivated. The theory also says that if the perception is that they can never
succeed they will reduce their input to a level which they believe equals
their reward. If we were unfairly treated we would complain, so why should
we believe that it is appropriate not to treat others equally? Equality is a
fundamental human right.

Conclusion: We are talking about people here. We should not seek to

discriminate.

Diversity and supplier diversity

Situation: During a selection process the buyers come to an informal

decision that a given supplier will not be selected because the organization
concerned originates from an inner city area of a European capital, in which
ethnic minorities tend to live.

Against CSR: 'We do not want to have to rely on organizations from that
sort of area, they will not be sound."

For CSR: First, unless the racial mix of the people is audited then the
above view is an assumption, and assumptions can be invalid. Second, what
is to say that the organization and its people go about their business in a
less effective way than other organizations located in prestigious parts of
the country? Indeed the given organization might have a lower cost base
than others. A supplier appraisal seems called for here.

Conclusion: the Temperature to come to a decision process with

baggage or prejudice must be resisted. The thought process" here can be
developed to include the fact ' that the smaller supplier may be keener and.
may have people who have new ideas and talents that by using a
conventional supplier we will miss. One of the roles of a buyer is to stimulate
change and growth. Taking input from suppliers here may well bring benefit.

Lecture note by Mr. Denis N. Page 115

Corporate governance

Situation: It is possible to obtain finance for a project in a way which

avoids the finance appearing on the balance sheet (off balance sheet
finance) and therefore makes our balance sheet appear to be better than it
really is, even though this practice is just outside the corporate governance
guidelines.

Against CSR: Profit is all that matters, not how it's made. We should not
be expected to
wash our dirty linen in public. If we cut corners no one will know. \

For CSR: Financial responsibility goes beyond short- or long-term 'profit', it

relates to the short- and long-term ability of an organization to
demonstrate that it is well managed, financially sound and able .to grow
and develop. There are standards which govern corporate -accounting.
Proper corporate governance means that there should be no deliberately
dirty linen to wash in public. Where an accidental example occurs, the
situation is best, admitted voluntarily and action taken to prevent a
repetition.

Conclusion: It is fundamental that all organizations behave properly, are

seen to behave properly and account for their behavior in accordance with
accepted standards. 'Off balance sheet' must be disclosed under the new
accounting standards and also under the ASB directives.

• Sustainability

Situation: We have the choice to use more expensive sustainable products

in our end product or lower-cost items which are not obtained from a
sustainable source.

Against CSR: Competitive and budget pressures rule here. It would be nice
to buy from a sustainable source, but it's going to cost us.

For CSR: In many cases there is a finite limit to the amount of resources
which can be consumed, it is in the interest of everyone that sustainable
resources are used.

Conclusion: We owe a duty to future generations to leave the world in at

least as good a State as we found it.

Lecture note by Mr. Denis N. Page 116

 • Impact on society

Situation: A new safer chemical is developed. The cost of using it and

replacing the previous more dangerous chemical from a product is high
and can only partly be recovered from an increase in the selling price of
the end product; The decision as.to.be taken to use
the new, safer or. Old, more dangerous chemical,

Against CSR: Who will "know that the new chemical exists? It is not
possible to consider
everyone when we make, a decision. People don't have to buy things that
they don't want
to. .

For CSR: We have, a duty of care to people and society at large not to
damage them or their environment by producing goods and services which
harm others or' Using processes that harm others.

Conclusion: Our activities should aim, on balance, to benefit society. They

should aim towards improvement and the elimination of dangerous
chemicals.

• Ethics and ethical trading

Situation: By using a disgruntled employee at a supplier and rewarding
the\person for
their efforts, the purchasing organization can gain knowledge of the
supplier's negotiating
position before a meeting. \
Against CSR: We can gain competitive advantage by knowing things like
dais. It doesn't
matter how it gets done, just do it and take all of the advantages and
benefits you can from
a situation, bear as few of the costs.

For CSR; there is a position beyond which we should not go and there are
activities which we as business people and particularly purchasing people
must not be involved in. Ethics is not a movable feast. You are either ethical
or not. Other people will respect your ethical behavior.

Conclusion: The situation here is clear. Purchasing people must not be

involved in activity like this.

Lecture note by Mr. Denis N. Page 117

• Biodiversity

Situation: The new freight terminal needs to be built close to the road
network and the railway line, but part of the site is classified as one of
special scientific interest as it is the only place in Scotland where three
species of birds nest.

Against CSR: Birds! We are talking of a £50 million investment and lots of
jobs for local people. Who cares about birds?

For CSR: The size of the budget and even additional local jobs must not
count as of right in front of a natural resource that could be lost forever.

Conclusion: Alternatives such as a nature reserve within the site can be

considered as ways of minimizing the impact upon the wildlife concerned
during both construction and operation.

• Community involvement

Situation; An organization is considering closing a plant in France

andmoving production to a low wage economy in the Far East, The
purchasing organization is the largest employer in the local community
and the closure will mean the loss of hundreds, of jobs,
Against CSR: If the people were keen they would be competitive. And
their factories -would
not shut. Why should I worry? The firm must stay competitive and. in
today's world this
means doing everything we can to lower costs. . . .

For CSR: The closure of the factory will devastate the local economy. Is a
duty not owed to the employees who are being made redundant? Could the
organization not consider packages for retraining?

Conclusion: It may be that there is no alternative to closing the factory.

However,
everything that can be done to lower costs should be done, alternative
products 'should be
investigated, to see if they can be switched to this site, and the people
concerned should be
kept fully here is the one of, 'What would happen to the whole organization if
it retained
factories which were uncompetitive? From a companywide perspective

Lecture note by Mr. Denis N. Page 118

there's an issue
here too

PROCUREMENT ETHICS

Ethics is concerned with the moral principles and values which govern our
beliefs, actions and decisions.

Procurement ethics is concerned with the moral principles and values that
govern beliefs, actions and decision made by the parties involved in
procurement. The term values in this definition is concerned with questions
relating to what is right, good and just. It forms the basis on which ethical
decisions are made.

Principles of procurement ethics

There are principles that have been development to guide procurement and
procurement procedures. These include the following:-

Confidentiality: This is very important in procurement officers have to keep

confidentiality so that to protect prospective suppliers. For example they
should not reveal organization relations to prospective supplier before such
supplier are given contracts. They should also not reveal particular
information concerning Organizations they work with.

Impartiality: Procurement practitioners should be impartial when

performing their duties. They should not take sides but should be
professional when making decisions.

Openness and full disclosure: They must do-work in the open. They
should not hide anything. They should not accept any hand- outs in form of
gifts, money and physical materials. If this happens they should be disclosed
to management.

Competency and a duty of care: They should be very competent when

performing duties. They have also a duty of care towards their suppliers and
employers. They must keep a record of events undone and should make a.
follow should make, a follow up on the same.

Conflict of interest: This should be avoided as much as possible. This may

men double standards. Situations that lead to conflict of interest should be

Lecture note by Mr. Denis N. Page 119

avoided. It should be noted that these principles may be integrated on light
of personal ethics. Personal ethics may include:

• Concern for the wellbeing of others: A morally right person should 'be
concerned with the health of other people in the circles they should
visit the sick, provide support

• Honesty and trustworthiness: A good person should be honest to

themselves. .They must also be in position to be trusted by others.
They must behave in a way that others can believe in them.

• Prevent harm: They should prevent harm both to themselves and

others.

Basic justice: They should be fair judgments should be made after

gathering enough information complied with experience.

• Compliance with the law: Ethical human brings must also comply with
the established law as well as cultural norms (common law is
developed from these). They should refrain from breaking the law and
must therefore avoid all situations that may lead them to courts of
law.

• Respect for others: A human being who has morals must have respect
for others. Respect for the young (both in age and rank) and the senior
person's i.e. both in terms of age and rank, good human beings must
also have respect for their parents and the elderly.

Procurement principles should also be integrated with global ethics

and these include:-

- Respect for culture of overseas suppliers. Overseas suppliers have

their own culture. This would be in form of packaging product (NAMES)
procurement procedures logistics transport, etc professional
procurement personnel should be able to integrate global ethics with
personal ethics and procurement ethics.

- Social responsibility. This looks at society in general for example

customers, consumers, government, the general public etc. Different
Organizations and different procurement personnel must put society
before self. The existence of

Lecture note by Mr. Denis N. Page 120

 Organizations depends, a lot on Society’s wellbeing such organizations
must
therefore come up and help-society (where applicable). •

- Many organizations today have a duty of care to society. They have

development corporate social responsibility programs for which society
has benefited, for example they have organized blood donation, built
homes for the needy, schools,, hospitals etc,

- Global justice. There arc- some international laws that must be

respected for example there are laws relating buying from particular
countries, there are some commodities relating to movement of
particular materials, laws relating to transfer of foreign exchange and
even an officer procuring overseas must have a knowledge of those
laws and must also abroad by them.

- A good procuring organization therefore should try to deal with only

those suppliers that are concerned with the environment;

 Those that do not pollute the environment

 Those that train their staff about environmental management

 Those that have a recycling policy and those that have

environmental management standard certificate.

The PPDA has come up with the following Code of Ethical Conduct
regulations 15(8), 23(3), 27(9).

• Integrity: - All employees should maintain an impeccable standard of

integrity in all their business relationships both outside and inside the
public offices in which they are employed

• Competence: -Public officers should foster the highest possible

standard of competence. They should work to their highest
professional levels and must therefore refrain from all those practices
that render them unprofessional. For example they should always
consult high authorities should have integrity and must know the law
applicable.

Lecture note by Mr. Denis N. Page 121

 • Resources: - public officers must make the best use of resources
available to them not for their personal gain but for the maximum
benefit of Ugandans.

• The law: public officers are not above the law and therefore must be
accountable for their acts. They therefore comply with the laws of
Uganda regulatory guidelines, must uphold the constitution of the
republic of Uganda must accept business practices in commercial
markets and any other law applicable including any by-laws in Uganda.

• Conflict of interest: - employees shall reveal any personal interest that

may impinge or might reasonable by deemed by others to impinge on
a number of business dealings. For example public officers' companies
cannot supply materials, works or services to public offices under
micro procurement.

• Business-gifts: - human beings by nature. Exchange gifts; -as a sign of

appreciation or love and care." In procurement, however one has to be'
careful with giving or receiving gifts. Public officers must not receive or
accept business gifts from either current or potential council supplier
unless such gifts are of. Very small intrinsic value says a calendar,
diary pen etc. It may also be important that such gifts are declared to
those in higher authority.

• Hospitality: - employees must refrain from any business hospitality that

might be viewed by others as having an influence in making a business
decision as a result of accepting that hospitality (e.g. one of the
members of the NSSF-Temangalo committee accepted a business trip
with the president)

• Restrictiveness: - a member of the authority a secretary of the

contracts committee or expert contracted to deliver specific series
shall not use to his or her personal or organizational advantages
information acquired by him or her by virtue of his or her association
with the authority or a procuring and disposing entity for a\period of
one year after vacating office or leasing to render the specific services.

What is the importance of ethics in procurement?

• Accountability: While dealing with the outside world purchasing staff

are ambassadors of the organizations they work with. Purchasing staff

Lecture note by Mr. Denis N. Page 122

 therefore are the representative of the organization in its dealing with
suppliers. They therefore must conduct themselves appropriative

• Suppliers' relations; Sound ethical conduct in dealing with suppliers is

essential to the creation of long term relationships with suppliers as
well as establishing supplier good will. Today there is a shift from
multiple to single sourcing and organizations cannot afford to lose
suppliers they have had relations with. Keeping old suppliers is only
possible when there is moral obligation on both sides

• Purchasing staff are practically probably more exposed to temptation

to act unethically than most other employees in the organization.
Having knowledge of procurement ethics is essential to them to act
ethically while performing their duties.

• Professionalism: Having knowledge of procurement ethics and acting

ethically helps build a professional purchasing department.

• Trust: Employees that act ethically earn trust to employees. These

employees are trusted and quickly grow in various Organizations.

DISPOSAL MANAGEMENT

Disposal means; the divestiture of public assets, including intellectual and

proprietary rights and good, will, and any other rights of-a procuring and
disposing-entity by any means, including sale, rental, lease, franchise,
auction, or any combination however, classified other

Than those regulated by the Public Enterprise Reform and Divestiture Statute
(PERS), 1993.

This is achieved through several activities undertaken by the PDE to

constitute the disposal cycle. The successive steps in the disposal cycle in
which these various- activities are conducted are what is referred to as the
disposal process. It includes;

1) Planning;

2) Choice of procedure;

3) Solicitation of offers from the bidders;

4) Examination and evaluation of offers; and

Lecture note by Mr. Denis N. Page 123

 5) The award of the contract.

The PPDA Act provides that the accounting officer should ensure that
the assets of the PDE are reviewed on an annual basis to identify
those which are obsolete and should be subject disposal.

Disposal process

1. Disposal Planning: This preceded by disposal initiation that is to say the

identification of disposal requirements. This is done by the user
departments who identify obsolete assets within their operations and thus
notify the PDU of the need to dispose them off. Even those assets
identified by the board of survey qualify for the disposal.

Each user department develops a disposal plan which includes a list of

assets to be disposed off detailing for each, type of assets, location, the
book or estimated value , disposal method and the time of disposal stated
over a given period.

The PDU plans all disposal activities and aggregates all the individual user
department plans into annual and multi-annual consolidated disposal
plans. Planning of disposal seeks to achieve the following;

a) Avoid emergency disposal;

b] Aggregate disposal requirements;

c] Avoid splitting of disposal requirements; and

d) Integrate disposal of all assets in the PDE.

2.Selecting the disposal procedure and method

After disposal planning, the method, of disposal in respect of a- particular

asset is-determined. Several methods are prescribed under the Act to
include;

a) Public Auction,
b) Public bidding,
c) Sell to public officers,
d) Trade-in,
e) Conversion,
f) Transfer,

Lecture note by Mr. Denis N. Page 124

 g) Destruction, and
h) Donation,

However in selecting a particular disposal method several factors should be

put into
consideration such as:-

i). Potential market value of the asset,

ii). Volume of the asset i.e. whether one or bulk of items,

iii). Numbers or location potential bidders,

iv). Location of the asset,

v). Restriction on export or end users,

vi). National security and public interest issues,

vii). Health and safety issues,

viii). Environmental considerations,

ix). Legal or Human rights issues,

x). Trade-in value of the asset, and

xi). Possibility of transfer to another entity.

Note: The selected method should be in line with the procedure of its use
provided in the Act, Rules and Regulations.

3) Solicitation of offers from bidders

This starts with preparation of solicitation documents by the PDU in which a

full and accurate description of the asset to be disposed is given, method of
disposal to be used, evaluation criteria, general and specific contract terms
of disposal, submission date, location, requirement of bid of security etc.

Where no solicitation documents are required e.g. Direct Negotiation, and

Destruction, solicitation of any bids may be through a public invitation not a
notification of Auction, non-public invitation notice, discussions with another
PDE, Including a solicitation document for a procurement requirement as in

Lecture note by Mr. Denis N. Page 125

a trade-in, a third party responsible for conversion, reclassification or
destruction or a combination of the method.

Inspection of assets: Potential bidders should be allowed reasonable

opportunity to
-inspect the asset under disposal' before the date or deadline of bidding.
This should be
included in the invitation or solicitation document. .

Bid receipt and closing: Where a sealed written bid is required, the
receipt of the bids and bid closing should be conducted in accordance with
the provisions of Regulations 157,158 & 159 and be recorded.in the disposal
of public assets form (DPF 134). Of the Ninth schedule. Any other method in
procedure of bidding should be specified by the auctioneer in line with the
Act, Rules and Regulations.

Bid opening: The opening of bids should be in the presence of the bidders
that is, as
provided by Regulations 160,162 and recorded in the DPA Form 135 unless
otherwise
provided.

4) Evaluation of offers

The evaluation of offers is under taken by the Evaluation Committee usually

based on price only or price and other factors. Note that, price only is the
preferred evaluation methodology and criteria in the disposal of assets.
Other factors may include environmental impact, end user restrictions,
export restrictions, nationality security etc.

Where the highest "price bid" has been submitted by more than one bidder,
such bidders should be subjected to a re-bidding in which each submits a
revised bid. It should contain only a revised price and not revised terms and
conditions, and where rebidding fails the whole process is cancelled and
retendered in accordance with the regulations. And where other factors are
considered the Evaluation Committee shall follow the prescribed procedure.

5) Contract Award and Placement

The contract award is either by declaration of the successful bidder at the

time of bidding in the case of public auction or a decision of the Contracts
Committee for any other method of disposal. The contract shall include the

Lecture note by Mr. Denis N. Page 126

 price to be paid by the successful bidder, Subsidiary assets to be included,
transportation responsibility, date of delivery or collection of the asset, the
person responsible for any legal obligation linked to the asset etc.

Conditions for use of different proposal methods

1. Public bidding is used where;

- Assets are of high value,

- Assets are located in remote areas,

- Asset has end user of export restrictions e.g where post bid negotiation
are required

2. Public Auction: It is used under;

a. Existence of a large number of potential bidders or assets in one

location

b. No conditions of end user restrictions or export restrictions attached to

the sale,

3. . Sale to public Officers: It is used;

- Where using any other method gives no financial advantage to PDE

- Where assets are of low value to attract public interest,

- Where personal use of the asset by the public officer will directly
benefit the public officer,

- Where the asset is located in a remote area and the use of any other
methods will be difficult. '\

4. Direct negotiation:

- Where market is limited and a single buyer has been identified

willing to pay the reserve price.

- Where the asset is located in the buyer's premises on hire or

free basis.

Lecture note by Mr. Denis N. Page 127

 If the potential buyer is a tenant, occupier or user of the asset at
the time of the decision to dispose.

5. Trade-in

- Its offset of the purchase price of the new item provides a

convenient efficient and economical way of up grading
equipment.

6. Transfer to another PDE.

- Where the other PDE shall make use of the asset

- If transfer shall not be at a cost

7. Conversion and destruction:

This shall be used where it does not threaten National Security and
where the asset has no residual value in its current form.

Disposal management also incorporates other disposal concerns like

disposal of waste and sustainable disposal practices which procurement
and disposal managers owe to embrace in their practices.

LEGAL CONSIDERATIONS

Buyers must understand the legislative environment in which to operate.

The framework of legislation the procurement function of any organization
must comply with in delivering its contract and procurement strategy
includes organizational policies, national procurement regulations and
guidelines, and other legislations as well as local Contract Standing Orders.
Procurement legislation is refreshed and revised regularly impacting

Effective procurement and contract management practices, (This will be

detailed in the Learners.' study o f Procurement Law and Contract
Management].

The diagnostic legal environment should cover the existing legal, regulatory,
and policy frameworks including:

• Applicable laws, and existing regime for assigning authority and setting
performance
standards;

Lecture note by Mr. Denis N. Page 128

 • Oversight arrangements, regulatory bodies, regulations;

• M a j o r sector institutions and government entities related to the

sector;

• Tariff and subsidy policies and arrangements;

• Existence and applicability of legally mandated service quality

standards;

• Natural resource safeguards and management requirements

important to sector performance;

• Environmental and health regulations;

• Relevant labor laws and regulations; and

• Limitations on foreign ownership/sector participation, foreign

exchange restrictions, and limitations on repatriation of profits, i.e.,
foreign investment laws.

However, specific consideration should be given to the Procurement and

Supply Manuals or Handbooks of organizations, the Public Procurement and
Disposal of Public Assets Act, Regulations and Guidelines in case of public
sector entities, Sale of Goods Act, and other laws relating to Environmental
Standards, Drug Regulation, Consumer Protection, etc.

Scenarios of Corporate Social Responsibility in procurement

A public private partnership is a legally-binding contract between

government and business for the provision of assets and the delivery of
services that allocates responsibilities and business risks among the various
partners. In a PPP arrangement, government remains actively involved
throughout the project's life cycle. The private sector is responsible for the
more commercial functions such as project design, construction, finance and
operations.

The Government of Kenya's PPP Policy Statement of 2009 defines PPP as:

'A contractual arrangement between a public body and private party in

which the private party and Government enter into a long term
agreement, up to 30 years, to build a new infrastructure facility or to
rehabilitate an existing one for the purpose of undertaking a public

Lecture note by Mr. Denis N. Page 129

 service on behalf of Government... The private party is required under
the terms of the project agreement to take responsibility to mobilize
finance -equity as well as debt - in order to complete the facility
according to agreed specifications and schedule.'

CHAPTER NINE

OTHER KEY ASPECTS OF LOGISTICS MANAGEMENT

Lecture note by Mr. Denis N. Page 130

COLD CHAIN LOGISTICS

Introduction:

The cold chain involves the transportation of temperature sensitive

products along a supply chain through thermal and refrigerated packaging
methods and the logistical planning to protect the integrity of these
shipments. There are several means in which cold chain products can be
transported, including refrigerated trucks and railcars, refrigerated cargo
ships as well as by air cargo.

While globalization has made the relative distance between regions of the
world much smaller, the physical separation of these same regions is still a
very important reality. The greater the physical separation, the more likely
freight can be damaged in one of the complex transport operations involved.
Some goods can be damaged by shocks while others can be damaged by
undue temperature variations. For a range of goods labeled as perishables,
particularly food (produces), their quality degrades with time since they
maintain chemical reactions which rate can be mostly mitigated with lower
temperatures. It takes time and coordination to efficiently move a shipment
and every delay, can have negative consequences, notably if this cargo is
perishable. To ensure that cargo does not become damaged or compromised
throughout this process, businesses in the pharmaceutical, medical and food
industries are increasingly relying on the cold chain.

The cold chain is thus a science, a technology and a process. It is a science

since it requires the understanding of the chemical and biological processes
linked with perishability. It is a technology since it relies on physical means
to insure appropriate temperature conditions along the supply chain. It is a
process since a series of tasks must be performed to prepare, store,
transport and monitor temperature sensitive products.

Lecture note by Mr. Denis N. Page 131

Definition:

Cold chain is a Logistic system that provides a series of

facilities for maintaining ideal storage conditions for
perishables from the point of origin to the point of
consumption.

It extends and ensures the shelf life of products such as

fresh agricultural produce, seafood, frozen food, chemicals
and pharmaceutical drugs.

Cold chain retains the longevity of product characteristics,

active ingredients, freshness, nutritive value.

OBJECTIVE OF COLD SUPPLY CHAIN

• Reduce costs
• Improver product integrity
• Increase customer satisfaction
• Reduce wastage and returns of expired stock

SEGMENTS OF COLD SUPPLY CHAIN

- Storage surface

Refrigerated warehouses for storage of temperature sensitive

products.

- Refrigerated Transportation

Reefer trucks, containers, ships and trains for transport of temperature

sensitive products.

Key activities

- Procurement

Involves activities such as aggregation, grading, sorting pre-

cooling, packaging farms or manufacturers

- Transportation

It includes ail activities related to transportation of produce to

the market from farms or manufacturing location.
Lecture note by Mr. Denis N. Page 132
Others include the oil industry - a case that shall attract detailed treatment
because the oil developments in Uganda.

Industries using cold supply chain

Cold supply chain logistic process

- Pre-cooling facilities

- Cold Storages

- Refrigerated Carriers

- Packaging

- Warehousing

- Information Management systems (Traceability and Tracking etc.)

Drivers of cold supply

- Growth in organized retail

Lecture note by Mr. Denis N. Page 133

 - Shift towards horticultural crops

- Growth in processed food sector

- Demand from pharmaceutical sector

- Changing consumption pattern

The most common temperature standards

- Banana (13.c)

- Chill (2.c)

- Frozen (-18.c)

- Deep frozen (-29.c)

The major cold chain technologies

1. Dry ice.

* Solid carbon dioxide, is about -80"C and is capable of.keepi.ng a

shipment frozen for an extended period of time.

* It's used for the shipping of pharmaceuticals, dangerous goods and

foodstuffs.

* Dry ice does not melt, instead it sublimates when it comes in contact
with air.

2. Gel packs

* Gel packs are used to Chilled products like Pharmaceutical and

Medicinal product shipments.

- Gel packs contain phase changing substances that can go from solid
to liquid and vice versa to control an environment at a temperature
range between 2°C and 8°C

3. Eutectic plates

* The principle is similar to gel packs. Instead, plates are filled with a
liquid and can be reused many times

Lecture note by Mr. Denis N. Page 134

The major cold chain technologies

4. Liquid nitrogen

• Liquid nitrogen is an especially cold substance, of about -196°C.

• It is used to keep packages frozen over a long period of time.

• It’s mainly used to transport biological cargo such as tissues and

organs.

5. Quilts

• It's an insulated piece that is placed over or around freight to act as

buffer in temperature variations and to maintain the temperature
relatively constant.

• It’s used to keep Freight frozen for a longer time period.

• Quilts can also be used to keep temperature sensitive freight at room

temperature while outside conditions can substantially vary (e.g.
during the summer or the winter)

6. Reefers

• It's a Generic name for a temperature controlled container, which can

be a van,, small truck, a semi or a standard ISO container.

• Perishable or temperature sensitive items are carried in refrigerated

containers (called "reefers").

Challenges in cold supply chain

• Rising real Estate cost

• Location for Cold Storage.

• Lack of Proper Infrastructure

• High Energy Cost

• Uneven Distribution of Capacity

• The cold storages present in India can cater to

single commodities only

Lecture note by Mr. Denis N. Page 135

 • FDI Restrictions in Retail

Phase for cold chain shipment and logistics

• Shipment preparation

• ModaI Choice

• Custom procedures

• The "Last Mile"

• Integrity and Quality assurance

Cold Chains Operations

Moving a shipment across the supply chain without suffering any setbacks or
temperature anomalies requires the establishment of a comprehensive
logistical process to maintain the Shipment integrity. This process
concerns several phases ranging from the preparation of the shipments to
final verification of the integrity of the shipment at the delivery point:

• Shipment preparation. When a temperature sensitive product is

being moved, it is vital to first assess its characteristics. A key issue
concerns the temperature conditioning of the shipment, which should
already be at the desired temperature. Cold chain devices are
commonly designed to keep a temperature constant, but not to bring a
shipment to this temperature, so they would be unable to perform
specialization will remain important drivers for years to come in the
growing demand for perishable-goods and the cold chain logistics
supporting their transport,

TRANSPORT MANAGEMENT

Transportation involves the movement of goods and raw Materials. This

includes shipment of raw materials to the manufacturer and movement of
finished product to the customer. Transportation' also includes the
movement of parts to assembly areas as they are assembled.

Transportation: the backbone of logistics

Transportation is an indicator which measures the economic, social and

commercial progress of a country. It has transformed the entire world into

Lecture note by Mr. Denis N. Page 136

one organization and greatly contributed to the evolution of civilization.
Transportation is the most visible element of logistics operation. It has a
significant share in overall logistical cost of the firm and needs a great deal
of planning to control it. Transportation is the exciting and dynamic part of
the supply chain and managing transportation presents both opportunities
and challenges.

Role of logistics and transport manager

Fundamentally, the role of transportation and logistics management is

simple: get the right product to the right place at the right time and at the
lowest cost. Competition in terms of transportation and logistics depends on
speed and intelligence - making the best decisions, quickly turning decisions
into action and monitoring the operation every step of the way to deliver the
superior service customers expect. Achieving this objective is no small feat
in today's complex global environment. Companies are under intense
pressure now more than ever to streamline their operations and overcome
unprecedented economic, environmental and industry challenges while still
satisfying the ongoing expectations of a rapidly evolving customer base.

Additionally, global trade is significantly rising - depleting fuel and energy

resources, lengthening and straining supply chains and ultimately inflating
overall supply chain costs. Companies must navigate supply chain
bottlenecks and higher freight costs because of network congestion,
uncontrollable delays and longer transit times. In addition to offsetting
increasing costs, companies now also face progressively stringent security
and governmental regulations, as well as global pressure to reduce
emissions by making their operations greener. Adequately if a shipment is-
not-prepared and conditioned. Other concerns include-the destination of the
shipment and the weather. Conditions, for those regions, such as if the
shipment will be exposed to extreme cold or heat along the transport route.
Using a reefer with its own power unit usually mitigates such concerns,

• Modal choice. Several key factors play into how the shipment will be.
Moved. Distance between the origin and the final destination (which
often includes a set of intermediary locations)'/ the' size and weight of
the shipment, the required exterior temperature environment and any
time-restrictions (perishability) of the product all effect the available
transportation options. Short distances can be handled with a van or a
truck, while a longer trip may require an airplane or a container ship.

Lecture note by Mr. Denis N. Page 137

 In this case, the cost / perishability ratio becomes a factor in modal
choice.

• Custom procedures. If the freight crosses boundaries, custom

procedures can become very important, since cold chain products
tend to be time sensitive and

More subject to inspection than regular freight (e.g. produce,

pharmaceuticals and biological samples). The difficulty of this task
differs depending on the nation (or economic block) and the gateway
since there are variations in procedures and delays. Customs issues
are commonly identified as the most crucial in establishing reliable
international cold chains.

• The "Last Mile". The last stage is the actual delivery of the shipment
to its destination, which in logistics is often known as the "last mile".
Key considerations when arranging a final delivery concern not only
the destination, but the timing of the delivery so the critical labor and
warehousing space is available. Trucks and vans, the primary modes of
transportation for this stage, must meet the specifications necessary
to transfer the cold chain shipment. Since many deliveries of cold
chain products, particularly groceries, are taking place in an urban
setting congestion and parking difficulties. Also important, is the final
transfer of the shipment into the cold storage facilities as there is
potential for a breach of integrity.

• Integrity and quality assurance. After the shipment has been

delivered, any temperature recording devices or known temperature
anomalies must be recorded and made known. This is the step of the
logistical process that creates trust and accountability, particularly if
liability for a damaged shipment is incurred. If problems or anomalies
that compromise a shipment do occur, an effort must be made to
identify the source and find corrective actions.

Therefore, the setting and operation of cold chains is dependent on the

concerned supply chains since each cargo unit to be carried has different
requirements in terms of demand, load integrity and transport integrity.
Because of the additional tasks involved as well as the energy required for
the refrigeration unit transportation costs for cold chain products is much
higher than regular goods. The ongoing rise in standards of living and

Lecture note by Mr. Denis N. Page 138

economic. The main roles of logistic and transport manager respectively are
given sections 9.2.4 and 9.2.5.

Logistics Managers

• Planning routes and load scheduling for

deliveries.

• Booking in deliveries and liaising with

customers.

• Allocating and recording resources and movements on the transport

planning system.

• Ensuring all partners in the supply chain are working effectively and
efficiently to ensure smooth operations.

• Communicating effectively with clients and responding to their

requirements.

• Booking sub-contractors and ensuring they deliver within agreed

terms.

Transportation Managers

• Directing all transportation activities

• Developing transportation relationships

• Monitoring transport costs

• Negotiating and bargaining transportation prices.

• Dealing with the effects of congestion.

• Confronting climate change issues by implementing transport

strategies and monitoring an organization's carbon footprint.

Confronted with these and many other challenges, how can organizations
strategically streamline their transportation and logistics processes to
maximize supply chain efficiencies, customer satisfaction and profit margins?

- Organizational structure".

Lecture note by Mr. Denis N. Page 139

 - Method of ordering

- Order size constraints

- System flexibility

- Transaction elements

2. Transaction elements: these are the elements directly related to the

physical
transaction and are that are most commonly concerned with distribution
and
logistics. Under this heading would be included:

 Order cycle time

Order preparation

 Inventory availability

 Delivery alternatives

 Delivery time

 Delivery reliability

 Delivery of complete order

 Condition of goods

 Order status information

3. Post-transaction elements;

These involve elements that occur after the delivery has taken place, such
as:

 Availability of spares

 Call-out time

 Invoicing procedures

 Invoicing accuracy

 Products tracing/warranty

Lecture note by Mr. Denis N. Page 140

  Returns policy

 Customer complaints and procedures

 Claims procedures

Customer’s service element can also be classified by multifunctional

dimension. The Intention is to assess the different components of customer
service across the. Whole range
of company functions, to try to enable a seamless service provision.

Time, for example, constitutes a single requirement that covers the entire
span from order
placement to the actual delivery of the order-the order cycle time. One of-
the main
consequences of this approach is that it enables some very relevant overall
logistics
measures to be derived.

The four main multifunctional dimensions are;

- Time - usually order fulfillment cycle time

- Dependability - guaranteed fixed delivery times of accurate,

undamaged orders

- Communications - ease of order taking, and queries response \

- Flexibility - the ability to recognize and respond to a customer's

changing needs.

Elements of good customer service

Regardless of the product or service, in the final analysis, customers still are
people, and the vast majority of people tend to respond or react to certain
stimuli in very predictable, consistent ways. That means that the basic
elements of good customer service also tend to be rather common among
virtually all businesses and industries.

❖ Communications skills

Good telephone skills. Most companies, regardless of size, have a great deal
of interaction with customers via the telephone. In the hands of a trained,

Lecture note by Mr. Denis N. Page 141

effective, committed, customer service-Oriented employee, these telephone
communications can literally serve as a golden sales opportunity for the
company. In the hands of the untrained, unmotivated employee, however,
these communications can prove disastrous for the company!

From the initial greeting by the employee taking the call through the entire
conversation, the customer is forming an opinion of and an attitude toward
the company as regards customer service. If the initial greeting is abrupt,
delivered in a bored or less than friendly tone of voice, then the customer
understandably could easily perceive that the company is abrupt and not
very customer friendly. On the contrary, if the initial greeting is friendly,
upbeat and inviting, then the customer is far more likely to perceive that the
company is also friendly, upbeat and inviting.

Effective face-to-face interactions with customers’ in many companies of

course employees deal face-to – face with customers each day and every
business day. Unlike telephone communications, in which customers use
only "one of the five senses (sound) to evaluate the company and its
apparent attitude toward customers, these personal -encounters offer
customers the use of at least two more of the five senses, i.e.., sight and
smell, upon which to form their opinions. It is imperative therefore that all
employees .particularly those coming into regular contact- with customers
always present a professional, businesslike appearance and approach,
practice good personal hygiene and be courteous, friendly and sincere in
their approach to customers.

Remember, only eight to ten percent of what is actually being said to a

customer comprises the message actually being received by the customer.
Body language, personal appearance, tone of voice, attitude, etc., represent
the overwhelming content of the message.

The art of listening to customers: Effective communication isn't simply one-

way proposition. Communication directed toward the customer is important
but communication from the customer is probably even more important. If
you want to know what a customer really wants, many times it's really as
easy as listening to what the customer says (or doesn't say). Obviously, to
accomplish this feat one must develop good listening skills!

Learning to smooth a customer's "ruffled feathers." Obviously, not every

encounter, either on the telephone or in person, with a customer is going to
go smoothly. Inevitably, an employee is bound to encounter a customer who

Lecture note by Mr. Denis N. Page 142

is angry, upset, and unreasonable, unusually demanding, or "all of the
above." Any effective customer service program will include tried and true
methods of dealing with this type of customer.

❖ adopting a new, different perspective

The need to redefine the term "customer. Although most employees

erroneously think that the "customer" is the person who actually shops for
or buys the company's products or that doesn't quite go far enough. The
term "customer" can and should include fellow employees and other support
people, i.e., all of those other people with whom we come into contact daily
and who help us provide good service to customers. A thorough
understanding of and genuine appreciation for this principle is a vital
element in any effective customer service program.

The absolute necessity for teamwork: Consistently providing good customer

service is very much a "team" effort. Every single department, every single
employee in the company must thoroughly believe in and be absolutely
committed to the effort, as well as be supportive of other "team" members.
That oftentimes means taking personal initiative when and if it's required,
not "passing the buck" to other members of the team," in a company
dedicated to good customer service, there is no "place whatsoever -for an
attitude of 'that's not my job."

❖ Monitoring and measuring effectiveness

The need to monitor, measure results: An effective customer service

program is always subject to frequent monitoring and measurement. There
are several informal ways to conduct such monitoring and measurement.
One of the easiest and simplest ways is merely to ask customers themselves
how well they think you're doing. This can be accomplished by using such
basic tools as brief "exit" interviews with customers, etc. Another rather
simple approach is to utilize the time-tested MBWA (Management by
Walking Around] method. That is, company management merely walks
around and observes how well employees are providing service to
customers. At least annually, however, a formal, statistically sound
measurement should also be taken of your company's customer service
program. (This approach usually involves a customer service survey
questionnaire administered among a representative sample of the
company's customers.)

Lecture note by Mr. Denis N. Page 143

❖ The role of top management

Total commitment by top management required. The best designed, most

efficiently implemented customer service program will work only if top
company management is genuinely committed to making it work. If
employees perceive that top management is merely paying "lip service" to
the concept of providing good customer service, it is doomed to failure.

Finally, remember, good customer service training doesn’t cost, it pays! And
face it, today, regardless of the company or industry, most products and
services are very similar both in nature and price. Many times, that means
that the only way for a company to gain an "edge" over competition is to
provide something "extra," something over and above what the competition
provides. That something could easily be good customer service.

❖ Order processing

Order processing is the term generally used to describe the process or the
work flow associated with the picking, packing and delivery of the packed
item(s) to a shipping carrier. The specific "order fulfillment process" or the
operational procedures of distribution centers are determined by many
factors. Each distribution center has its own unique requirements or
priorities. There is no "one size fits all" process that universally provides the
most efficient operation. Some of the factors that determine the specific
process flow of a distribution center are:

• The nature of the shipped product - shipping eggs and shipping shirts can
require differing fulfillment processes

• The nature of the shipping packaging - cases, envelopes, pallets can

create process variations

• Shipping costs - consolidation of orders, shipping pre-sort can change'

processing operations

• Availability and cost and productivity of workforce - can create trade-off

decisions in automation and manual processing operations

• Timeliness of shipment windows - when shipments need to be completed

based on carriers can create processing variations

Lecture note by Mr. Denis N. Page 144

• Availability of capital expenditure shillings-have influence on manual
verses automated process decisions and longer term benefits

• Value of product shipped - the ratio of the value of the shipped product
and the order fulfillment cost

• Seasonality variations in outbound volume - amount and duration of

seasonal peaks and valleys of outbound volume

• Predictability of future volume, product and order profiles

• Predictability of distribution network - whether or not the network itself is

going to change.

QUESTION

Lecture note by Mr. Denis N. Page 145

Wenger Ltd is a company whose core business is manufacturing, production
and sale of casual and sportswear all over the world. Wenger Ltd now
intends to open up a manufacturing plant in Uganda Required:

a) As a procurement specialist, advise Wenger Ltd on how it can obtain

information about potential suppliers of its raw materials in Uganda.

b) What qualities of suppliers will Wenger Ltd consider as it looks for

suppliers in Uganda?

2. After 10 years of operating under the 2003 Act, the Authority moved on to
amend the PPDA Act and Regulation to meet the changing procurement and
business environment.

Basing on the above statement, explain the various procurement methods

regulated in the PPDA ACT 2003 and as amended in 2014.

GUIDING QUESTIONS

1. Distinguish between capital and revenue procurements

2. Explain the factors considered when buying capital equipments

3. Explain the negotiation process as a concept in business operations

4. Give the major qualities of a good Negotiator

5. Distinguish between adversarial and partnership approaches to
negotiation in procurement.
6. Clearly explain the strategic sourcing process
7. Discus the attributes of a good supplier
8. Discuss the major sources of information that potential buying firms
use to access potential suppliers
9. Distinguish between “purchasing” and “procurement”.

10. Examine the factors for the acceleration and Development of

procurement
11. Discuss the Documentation used in Procurement, clearly stating
the specific documents required at each phase

12. Show the responsibilities of the procurement function in any

organization of your choice.
13. Define out sourcing

Lecture note by Mr. Denis N. Page 146

 14. What factors drive organizations into taking up the out sourcing
decision
15. Outline the challenges that may result out of out sourcing

Lecture note by Mr. Denis N. Page 147