Principles OF Procurement AND Supply Managemen 1 PDF

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PRINCIPLES OF PROCUREMENT AND SUPPLY MANAGEMENT CPSM 511 Relationship to occupational standards 1.0 Introduction to procurement and supply - Definition of terms used procurement and supply - The scope of procurement and supply - Principles of procurement o Accountability o Competitive supply o Consistency o Effectiveness o Efficiency o Fair dealing o Integration o Integrity o Informed decision making o Legality o Responsiveness o Transparency 2.0 Evolution of Procurement and Supply - Globalization of procurement and supply - Role of information technology in procurement and supply - Factors contributing to evolution of procurement and supply - The future of procurement and supply 3.0 Importance of Procurement and Supply - The role of procurement and supply function - The cost reduction and efficiency in procurement and supply - Impact of procurement and supply - The importance of sustainability of supplies in an organization - The need of budget professionals in supply chain - The practice and benefit of procurement and supply function in an organization 4.0 Objectives of Procurement - the rights of procurement - the concept of value for money - the total cost of ownership - practice of the rights of procurement 5.0 Categorization of Procurement - Categorization of procurement - The importance of categorization of procurement

- Direct and Indirect procurement - Stock and Non-stock procurement - Capital and operational expenditure - Segmentation of external expenditure - Practice and Discussion of different categorization of procurement 6.0 Procurement Process - The need for structured procurement process - Process of planning for the procurement requirements- goods, services & works - Purchase requisitioning - Developing specification and contractual terms - Process of supplier’s selection and contract award - Order placement, blanket orders frameworks and call off orders - Delivery of goods services and works - Payment of suppliers - Contract/Supplier management - Disposal of surplus, excess or obsolete stock items - Practice and Discussion of procurement process 7.0 Emerging Issues and Trends in Procurement and Supply - emerging issues and trends in procurement and supply - challenges and opportunities posed by emerging trends and issues in procurement and supply - coping with and adapting to emerging issues and trends in procurement and supply - practice and discussion of challenges posed by emerging trends and issues in procurement and supply

Recommended Resources 1. Baily, P., et al (2015) Procurement, Principles and Management (11th ed.) Harlow England financial times press, Pearson educational ltd. 2. Benton, W.C., (2010) Purchasing and Supply Chain Management (2nd ed.) New Delhi India Tata McGraw-Hill. 3. Crocker, B., Jessop, D. and Morrison, A. (2012), Inbound logistics Management: Storage and Supply of Materials for the Modern Supply Chain (7th ed.) Upper saddle River new jersey Pearson education ltd. 4. Leeders, M. et al (2015) Purchasing and Supply Management (15th ed.) new Delhi India Tata McGraw-Hill. 5. Lysons, K. and Farrington, B., (2016) Purchasing and Supply Chain Management (9th ed.) upper saddle River New Jersey, Pearson Higher education ltd.

1.0 INTRODUCTION TO PROCUREMENT AND SUPPLY Definition of terms used procurement and supply 1. Procurement Procurement is the process of purchasing supplies, services and works from another external organization (in simple terms, doing the shopping). Procurement can range from contracting for a large service to purchasing items for the office. Procurement concept or process encompasses a wider range of supply activities than those included in the purchasing function. There is more buyer participation in related materials activities. These activities include; -

Participation in the in the development of materials and service requirement and their specification Conducting materials studies and management of value analysis activities Conducting more extensive materials market studies conducting all purchasing function activities l

It is the process of identifying and obtaining goods and services. it includes sourcing, purchasing and covers all activities from identifying potential suppliers through to delivery from supplier to users or beneficiary. Procurement thus tends to be broader and more proactive with some focus on strategic matters. The procurement function has value adding benefits which include; -

Maintaining defect-free quality of purchased materials. Reducing the total cost throughout the supply chain. Reducing the time required to bring a new product into the market. Ensuring that the firm’s supply base provides appropriate technology affecting the firm’s core competencies ids carefully controlled when dealing with outside suppliers. Continuity of supply which takes all measures required to reduce the risk of supply disruptions.

2. Purchasing function Purchasing is the acquisition of inputs of goods and services from external suppliers or providers. It comprises of the essential activities associated with the acquisition of materials, services and equipment used in the operation of and organization. The main activities of the purchasing function involve; -

Coordination of user departments to identify purchase needs Discussion with sales representative Identification with potential suppliers

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Conducting market studies for important materials Negotiating with potential suppliers Analysis of proposals Selection of suppliers Issuing purchase orders Administration of contracts and resolution of related problems Maintenance of a variety of purchasing records

Purchasing – is the specific function associated with the actual buying of goods and services from suppliers. Sourcing – is identifying and working with appropriate suppliers 3. Supply Management Supply management is the process responsible for the development and management of a firm’s total supply system- both internal and external components. It focuses on strategic aspects of key elements of the firms supply system. Specific activities of supply management include; Early Purchasing Involvement (EPI ) and Early Supplier Involvement (ESI) in product design and subsequent development of important items typically through the use of cross functional teams. - Conducting all purchasing function and procurement process activities. - Heavy use of cross functional teams in supply qualification and selection. - Heavy use of purchasing partnering arrangements and strategic alliances with suppliers to develop close and mutually beneficial linkages with key suppliers in the value chain to control quality costs. - Continuous identification of threats and opportunities in the firms supply environment - Development of strategic long term acquisition plans for all major materials - Monitoring of continuous improvements in the supply chain - Active participation in the corporate strategic planning process. 4. Supply chain Management -

Supply Chain management is an integrative philosophy to manage the flow of a distribution channel from the supplier to the ultimate user. represents a relatively a new way of approaching business and different views exist regarding the process involved the key process typically involve customer relationship, customer service demand management order fulfilment manufacturing flow management, procurement and product development and commercialization. Supply chains are essentially a series of linked suppliers and customers every customer is in turn a supplier to the next downstream organization until finished product reaches the ultimate end user. It is a cross functional process for strategy definition and implementation with total cost focus and strong continuous improvement drive at serving organizations’ customers Kenya Institute of Supply Management(KISM) defines it as managing a series of activities and processes ranging from the source of raw materials performing a series of value addition activities procurement production and conversion of the finished product or service purchased by the ultimate consumer to satisfaction. It involves the following functions

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Customer relationship management Customer service management Demand management Order fulfilment Manufacturing flow management Procurement Information facility structure

5. Materials Management This is grouping of management functions supporting the complex cycle of materials flow from purchase and internal controls of production materials to the planning and control of work-inprocess, warehousing shipping, and distribution of finished product. It involves;          6.

Unloading goods at inward stores Loading onto internal transport Movement for storing Movement from store to place of use Movement between work stations Movement to and from finished stores Movement to and from dispatch department Loading on to external transport Logistics Management

This refers to the process of strategically managing the acquisition, movement and storage of materials parts and finished inventory through an organization and its marketing channels to fulfil orders most cost effectively. logistics adds value and plays a vital role in the organization’s profitability by linking all logistic activities directly to organizations strategic plan useful in achieving organization competitive advantage. Procurement is thus a supporting activity in logistics which should be handled properly to improve cash flow open new territories introduce new product etc. Logistic management means combining inbound side and outbound side materials with the aim of improving customer service and reduce associated costs and encompasses key functions within organizations own boundaries and those outside that contribute to the provision of a product to final customer. The Scope of Procurement and Supply Procurement is the act of obtaining goods and services, which involve preparation and processing of a demand as well as the end receipt and approval of payment. The scope of public procurement ranges from the purchase of routine supplies or services, to formal tendering and

placing contracts for large infrastructure projects by a wide and diverse range of contracting authorities. The scope of procurement and supply involve; -

Purchase planning Standards determination Specification development Supplier research and selection value analysis Financing Price negotiation Making the purchase Supply contract administration Inventory control and stores Disposal and other related functions

Process of Procurement Successive stages in the procurement cycle including planning, choice of procedure, measures to solicit offers from bidders, examination and evaluation of such offers, award of contract and contract management. The normal process for public sector procurement involves the following steps: a) b) c) d) e)

notification of opportunities for tendering; prequalification where appropriate; invitation to tender and issuance of tender documents; receipt of tenders, evaluation of tenders and contract award; and contract administration.

The extent of the process and specific procedures to be followed for each step will depend on the method of tendering that is used. When you are bidding for a public sector contract, you will go through a clearly set out process, which follows a set timescale. Depending on the complexity and value and scope of the contract, different processes may be followed in order to identify a preferred supplier. The following steps guide the process of procurement; Step 1: Needs Recognition The preliminary step in a procurement process is recognizing the need for a product. Be it a brand new order or a recurring purchase, needs are analyzed and the availability is doublechecked before creating a request for purchase. Step 2: Purchase Requisition Typically, a procurement process starts with a purchase requisition. The requester sends a request for procurement (paper form, electronic, or phone) to the purchasing department.

Step 3: Review of Request The purchase request is then reviewed by the procurement/finance team. Approved requests become POs, while rejected requests are sent back to the requester with the reason for rejection. All these can be handled with a simple purchase order app Step 4: Budget Approval In enterprises, once the procurement team raises a PO, it is forwarded to the accounting department to receive budget approval.

Step 5: Quotation Requests Once the budget is approved, the procurement team forwards several requests for quotation (RFQ) to vendors with the intention to receive and compare bids to shortlist the perfect vendor. Step 6: Negotiation & Contract Once a vendor is selected, the contract negotiation and signing are completed, and the purchase order is then forwarded to the vendor. A legally binding contract activates right after a vendor accepts a PO and acknowledges it. Step 7: Receive Goods/Services The vendor delivers the promised goods/services within the stipulated timeline. After receiving them, the purchaser examines the order and notifies the vendor of any issues with the received items. Step 8: Three-Way Matching At this step, three documents purchase orders, packaging slips (that arrive with the order), and vendor invoices are lined up and reconciled to pinpoint discrepancies and ensure that the transaction is accurate. Discrepancies should be addressed once they are discovered. Step 9: Invoice Approval Payment Once three-way matching is complete, the invoice is approved and forwarded to payment processing depending on organizational norms. Step 10: Record Keeping After the payment process, buyers make a record of it for bookkeeping and auditing. All appropriate documents right from purchase requests to approved invoices are stored in a centralized location. The Principles of Procurement 1. Accountability

This principle holds that being accountable is being responsible for your actions and decisions and having an obligation to report and answer to a designated oversight entity on the consequences of those actions and decisions. 2. Competitive supply This principle holds that procurement process should not be manipulated to give preference to any particular firm(s) or individual(s). Competition leads to reasonable price quality and growth in economy. Competition provides the contracting authority with the best opportunity to achieve value for money. All qualified firms or individuals should be allowed to participate by submitting bids and/or proposals on requirements for which they are qualified. The procurement requirements should be widely disseminated 3. Consistency This principle holds that suppliers should, all things being equal, be able to expect the same general procurement policy and rules across the public sector. There should be consistency in procuring goods using same policies and rules and not to change according to circumstance. 4. Effectiveness This principle holds that Procurement bodies should meet commercial, regulatory and socio – economic goals of government in a balanced manner appropriate to the procurement requirement. The procurement process should be done in the right way using right process to achieve the expected objectives of the process. 5. Efficiency This principle holds that Procurement processes should be carried out in the right manner with the right process and as cost effective as possible. 6. Fair dealing This principle holds that Suppliers should be treated fairly and without unfair discrimination including protection of commercial confidentiality where required. Public bodies should not impose unnecessary burdens or constraints on suppliers or potential suppliers. Contracting authorities must be able to justify their decisions should they be challenged. 7. Integration Procurement policy should pay due regard to other economic and social policies for integration since they don’t work in isolation rather than cut across them. The greatest value for money is likely to be achieved by collaborating with others with similar requirements and aggregating these to increase leverage in the market and reduce procurement costs. Take care however not to reduce the number of viable suppliers to an extent that the market becomes stagnated and innovation is lost. 8. Integrity

There should be no corruption or collusion with suppliers or any other person to defeat the procurement system. Contracts should be based on the purchasing organisation’s terms and conditions. You are very unlikely to get better value for money by using the provider’s terms and conditions. 9. Informed decision making Public bodies need base decisions on accurate information and to monitor requirements to ensure that they are being met. Consider social and environmental issues relevant to the procurement, taking account of the cost of any measures you intend to take. 10. Legality Procurement process must conform to country’s legal requirement and other laws government acquisition of goods services or equipment. Make sure you understand when you and the provider are committed to a contract and what you are agreeing to. 11. Responsiveness Procurement bodies should endeavor to meet aspirations, expectations and needs of the community served by the procurement. Aim for significant improvements in value for money and work with providers to achieve these. Avoid stifling innovative ideas during the tendering and contract management processes. Outcome-based specifications, open-minded evaluations, incentives, and trusting working relationships will help. 12. Transparency Procurement firms should ensure that there is openness and clarity on procurement policy and its delivery.

TOPIC 2: EVOLUTION OF PROCUREMENT AND SUPPLY

Globalization of procurement and supply Today different nations of the world have become closer than ever witnessed in the human history. This has created a platform where all manner of goods ranging from food stuff to electronics to other manufactured goods are being traded across country borders (Geiersbach, 2010). In fact, the speed at which the volume of goods, services and investments are being transferred across national borders has increased rapidly over the past few decades. Globalization is the process by which business enterprises develop, procure and spread products technology, information and jobs across international borders, cultures and influence. Geiersbach (2010) call this globalization and attributes the rapid movement of goods and services across national borders to a number of factors. 1. The revolutionary changes in technologies which have provided the mechanisms that propel the growth of international business. 2. Intensification of competition at both domestic and international levels which has driven firms to look beyond their domestic markets for new opportunities. 3. Progressive removal of barriers to trade and capital movements which has stimulated greater flows of exports, imports and foreign direct investment (FDI). 4. Non availability of products and services locally Nyanchoka and Namusonge (2014) contend that those who cannot adapt to the global forces sooner or later lose their relevance and struggle to survive but those who adjust and change as the globalization proceeds convert global opportunities into strategies that strengthens and makes them continuously relevant dealing with the threats from the environment more effectively. Evolution of Procurement and Supply Throughout history, the need to acquire goods and materials through a formal transaction process is well documented. The relevance of procurement in this process can be traced back to the early 1800’s when “Materials Men” were used to handle acquisitions. The relevance of procurement began to grow incrementally in the late 1800’s with the advent of various procurement concepts. The publication of procurement principles in the early 1900’s combined with material and product shortages after the second world war accelerated the relevance of procurement further. However, the perception of procurement as a relevant and strategic ...