Principles OF Procurementjkuat Notes PDF

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DEPARTMENT OF PROCUREMENT AND LOGISTICS SEMESTER: SEPTEMBER -DECEMBER 2017 COURSE CODE: HPS 2101 COURSE TITLE: PRINCIPLES OF PROCUREMENT LECTURER : BENMOFFAT KIMATHI KINYUA TIME/DAYS: FRIDAY From 1300-1600 CREDIT: 45 HOURS Venue: CLB 103 CONTACT: 0723116709 E-mail [email protected]

Purpose of the Course The purpose of this course is to equip learners with knowledge and skills in procurement of goods, works or services for the organisation. Learning outcomes By the end of this course the learners should be able; 1. Identify the effect of purchasing and supply chain management on the competitive success and profitability of organizations 2. Assess the increasingly strategic nature of purchasing, especially the fact that purchasing is much more than simply buying goods and services 3. Evaluate cutting- edge technology used to run efficient purchasing departments 4. Explain the ethical, contractual, and legal issues faced by purchasing and supply chain professionals COURSE DESCRIPTION Procurement scope and objectives: Definition of Procurement, historical, development of purchasing and supply, objectives of procurement, supply chain concept: Procurement cycle: Purchasing procedures: Identifying, describing and transmitting the need: Quality management in procurement: defining quality, economics of quality, quality circles, value analysis, value engineering: Sourcing and Selection of suppliers: attributes of a good supplier, types of sourcing, sourcing decision, sourcing process, supplier evaluation, buying internationally other aspects of sourcing :Preparation and issuing of purchase orders; follow ups; Procurement policies and decisions: Procurement Methods: Procurement negotiations: preparations ,stages of negotiations ,strategies of negotiations, negotiation mix: Controlling performance; measuring purchasing performance, bench marking ,other indicators of performance: Ethical issues in Procurement:

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COURSE OUTLINE WEEK

LECTURE TITLE

Lecture 1

INTRODUCTION & OVERVIEW OF PROCURMENT

SUB-TITLE i.

Procurement scope and objectives: Definition of Procurement,purchasing Historical development of supply chain concept:

ii. iii.

iv. Lecture 2 3and PROCUREMENT 4 PROCEDURES

i. ii. iii. iv.

v.

Procurement cycle: Purchasing procedures: Identifying, describing and transmitting the need: Quality management in procurement: defining quality, dimensions of quality, advantages &disadvantages quality, quality circles, value analysis,

CAT Lecture 5

PROCUREMENT METHODS AND THE PURCHASING ORGANIZATION

(i) (ii)

Lecture 6 , 7 &8

SOURCING AND MANAGEMENT OF SUPPLIER

i)

Lecture 9

NEGOTIATIONS

Lecture 10

RELATIONSHIP MANAGEMENT

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(iii)

Procurement methods The types of purchasing organizations Decentralized vs centralized

Sourcing and Selection of suppliers: ii) attributes of a good supplier iii) types of sourcing, iv) sourcing process v) supplier evaluation, vi) Preparation and issuing of purchase orders; follow ups; vii) Value analysis and engineering i. Aspects of negotiation ii. Reasons for negotiations iii. Negotiation cycle iv. Agreements leading to successful negotiations v. Purchasing services vi. Thinking like a purchasing manager i. ii. iii.

Definition of relationships. Drivers of relationship management Types of relationships

iv. v. Lecture 11

PURCHASING DECISIONS

Lecture 12

ETHICS AND PROFFESSIONAL STANDARDS IN PROCUREMENT

Lecture 13 and Performance 14 measurement and bench marking

Supplier preferencing model Buyer preferencing model

i) ii)

Outsourcing Make or buy decisions iii) Reasons/importance for buying internationally other aspects of sourcing i. Code of conduct ii. Professional ethics in organizations iii. Organizational ethics and their relationship to the purchasing function iv. Review questions/cases i) Controlling performance ii) measuring purchasing performance, iii) bench marking ,other indicators of performance:

Teaching methodologies Lectures, Class discussions, Group activities, Case studies Instruction materials/equipment LCD Projector, Whiteboard, Textbooks Course Assessment Continuous Assessment 30% Examination 70% Course Textbooks 1. Lysons, K. (2012). Purchasing and Supply Chain Management (8th Edition). Financial Times – Prentice Hall. ISBN – 10: 0273723685; ISBN-13: 978-0273723684 2. Bailey, P., Farmer, D., and Jessop. (1998). Purchasing Principles and Management (8th Ed.). London: Pitman Publishing 10:007112230, 007112238 3. Donald W. & David N. B, (1996). Purchasing and Supply Management (6th Edition). Pitman Publishing.978-0070370890 Course Reference Textbooks 1. Feasons (1992). Purchasing and Materials Management. Pitman Publishers London.12:978-0256103342 2. Morrison, Alex (1991). Storage and Supply of Materials. Pitman Publishers London. Course Journals 1. International Journal of Procurement Management (IJPM) 2. Journal of public procurement ISIN: B003UTICRI 3. Journal of Purchasing and Supply Management 1873-6505 Course Reference Journals 1. Journal of Public Budgeting, Accounting & Financial Management 1096-3367 2. International Journal of Business and Social Science 3. European Journal of ePractice 3|Page

Approved by.................................................. Date..................................... stamp

LECTURE ONE

INTRODUCTION There is no definition that can wholly incorporate the demands placed on purchasing teams set of skills. Situational diversities, such as strategic importance, amount spend, contribution to profitability, supplier relationship and the recognition given to purchasing in a particular organisation

All organisations invariably need input of goods and services from external suppliers or providers and to this extent therefore, purchasing function plays an integral part in ensuring the goods/services are provided to the company. The role and contribution of purchasing has increased quite steadily over the second half of 20 th century with interest in the activity taking place in the last few years. The reasons behind this paradigm shift based on importance and recognition of purchasing entail:  New management systems/concepts/philosophies  Advanced technology: IT – internet, EDI ( processing of electronic transactions e.g. esuppliers, e-procurement, sharing information)  Government policies – issues of environment  Fewer but larger suppliers  Competition hence the need for quality  Globalization – the integration of world economies What is PURCHASING 

We need to have an understanding of;



The perspective on purchasing



The stages of purchasing development and future trends in purchasing

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

Factors influencing internal and external status of purchasing

The study of purchasing can be approached from several perspectives. Such perspective include those of Function, process, link in the supply chain or value, relationship, discipline and profession Purchasing as a function In management studies,’ function’ is often defined as a unit or a department in which people use specialized knowledge skills and resources to perform specialized tasks. A function is also what a resource is designed to do so e.g. the function of a pen is to make a mark. Purchasing involves the acquiring raw materials, components, goods and services, for conversation, consumption or resale Purchasing as a process A process is a set of sub processes or stages directed at achieving an output, the processes include; Receive requisition –solicit quotations-negotiate with suppliers-place order-receive suppliesmake payment Purchasing as a link in the supply chain Purchasing a long with other activities such as production, warehousing, transportation, is one of the links in the supply chain or a sequence of processes by which supplies are converted in to finished products and delivered to customers Purchasing as a relationship Purchasing relationship may be both internal or external short term and long term. Internal relationship includes buyers, users, cross functional teams, and team work. External relationship with suppliers and other service providers Purchasing as a discipline

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A discipline is a branch of knowledge, an area of study, the academic content of purchasing lacks the clearly defined focus associated with other field of study, such as mathematics, economics and law and it draws a lot from other disciplines

DEFINATIONS Purchasing: Purchasing is defined as a process of acquiring goods, services and works in return for a price. Its the acquisition of goods or services in return for a monetary or equivalent.

1. Acquisition of inputs of goods and services from external suppliers or providers. 2. Comprises the essential activities associated with the acquisition of materials, services and equipment used in the operation of an organization.

The major types of activities are: 1. Coordination with user departments to identify purchase needs. 2. Discussion with sales representatives. 3. Identification of potential suppliers. 4. Conducting market studies for important materials. 5. Negotiation with potential suppliers. 6. Analysis of proposals 7. Selection of suppliers 8. Issuing of purchase orders. 9. Administration of contracts and resolution of related problems 10. Maintenance of a variety of purchasing records.

Firms that have seen the strategic potential inherent in the purchasing function have tended to enhance its basic activities by expanding them and developing procurement or supply management operations.

II. Procurement 6|Page

Procurement process or concept encompasses a wider range of supply activities than those included in the purchasing function. There is more buyer participation in related materials activities. Procurement is the process of obtaining goods or services in any way including borrowing, leasing and even force or pillage.

Procurement management is the process of identifying the organisational needs which can be met by procuring products or services outside the organisation. It involves knowing what to procure, how much to procure, and when to procure

Specific activities in Procurement process: 1. Participation in the development of material and service requirements and their specifications. 2. Conducting materials studies and management of value analysis activities. 3. Conducting more extensive material market studies. 4. Conducting all purchasing function activities. 5. Management of supplier quality 6. Purchase of inbound transportation. 7. Management of investment recovery activities.

Hence, procurement tends to be broader and more proactive, with some focus on strategic matters. The value adding benefits of procurement function 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 is carefully controlled when dealing with outside suppliers.



Continuity of supply – must take all measures required to reduce the risk of supply disruptions.

Management Refers to the establishment and attainment of objectives. Material resources and mans’ talent are supposed to be available. The basic material resource known as the 6 Ms include Men, Money, 7|Page

Materials, Machinery, Methods and Markets are brought together to achieve the stated goals. These resources are processed, planned, organized, co-ordinated, harmoniously related and controlled with a view to achieving the end results.

Management is also defined as getting things done through people. It’s a process of executive control and organising forces, it is about employing capital efficiency so as to yield the maximum results. It is the utilization of human talents and resources to achieve a desired result.

III. Supply Management. Supply management is a process responsible for the development and management of a firm’s total supply system – both the internal and external components. The major characteristic that differentiates it from purchasing and procurement activities is that it focuses heavily on the strategic aspects of the key elements of a firm’s supply system.

Specific activities of supply management 1. 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. 2. Conducting all purchasing functions and procurement process activities. 3. Heavy use of cross-functional teams in supplier qualification and selection. 4. 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. 5. Continuous identification of threats and opportunities in a firm’s supply environment. 6. Development of strategic, long-term acquisition plans for all major materials. 7. Monitoring of continuous improvement in the supply chain. 8. Active participation in the corporate strategic planning process.

IV. Materials management.

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The grouping of management functions supporting the complete cycle of material flow, from the purchase and internal control of production material to the planning and control of work-inprocess, warehousing, shipping and distribution of finished product.

Specific activities of materials management: 1. Purchasing and Supply management activities. 2. Inventory management. 3. Receiving activities. 4. Stores and Warehousing. 5. In-plant materials handling 6. Production planning, scheduling and control. 6. Transport and transportation.

V. Logistics Management This refers to the process of strategically managing the acquisition, movement and storage of material, parts and finished inventory through an organization and its marketing channels to fulfil orders most cost-effectively.

Logistics does add value and can play a vital role in the organization’s profitability. However, only by linking all logistics activities directly to the organizations strategic plan can it be useful in supporting the organization’s strategy for achieving competitive advantage.

Procurement is thus a supporting activity in logistics which should be properly handled to enable firm’s improve cash flow, open new territories, introduce new products etc.

The term Logistics management was used to mean combining materials i.e. the inbound side and the outbound side with the aim of improving customer service and reduce the associated costs. The process was developed further to encompass not only the key functions within an organization’s own boundaries but also those functions outside that contribute to the provision of a product to a final customer. This is known as supply chain management.

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VI. Supply Chain Management. This is an integrative philosophy to manage the flow of a distribution channel from the supplier to the ultimate user. A supply chain management can be likened to a well-balanced and practiced relay team in which the entire team is co-coordinated to win the race. From this definition, supply chain is therefore a cross-functional process for strategy definition and implementation with total cost focus and a strong continuous improvement drive aimed at serving the organization’s customer.

The Kenya Institute of Supply Management (KISM) defines supply chain management as managing a series of activities and processes ranging from the source of raw material, performing a series of value adding activities, procurement, production or conversion of the finished product or service purchased by ultimate consumer to satisfaction. Supply chain is that 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 customers.

It involves the following functions: 

Customer relationship management



Customer service management



Demand management



Order fulfilment



Manufacturing flow management



Procurement



Information facility structure.

Most supply chains are actually networks. Although the word chain is commonly used, the term ‘supply network’ or ‘supply web’ is technically more accurate. A network has been described as a set of supply chain, which together describes the flow of goods and services from original source to their uses. The term network is intended to imply a more strategic concept with the idea that networks compete.

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There are nine different types of activities that companies perform in coordinating and managing supply networks: 

Partnering



Risk and benefit sharing



Resource integration



Information processing



Knowledge capture



Social coordination



Decision making



Conflict resolution



Motivation

Successful supply chain management requires a change from managing individual functions to integrating activities into key supply chain processes. Operating an integrated supply chain requires continuous information flow, which in turn helps create the best product flows. The customer remains the primary focus of the process.

Concept of Supply-Chain Management The development of supply-chain management concept is attributable to two major paradigm shifts: 1. Change in focus on internal processes to value adding benefits. 2. Change in focus from tactical to strategic.

Supply chain management represents a relatively new way of approaching business and different views exists regarding the process involved, the key process typically would include customer relationship management, customer service management, demand management, order fulfillment, 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 a finished product reaches the ultimate end user. It is important to note that the supply chain includes: a firm’s internal function, upstream suppliers and downstream customers. 11 | P a g e

Objectives of purchasing: Purchasing objectives can be seen from two sides: 1) General managerial level 2) Functional or operational level

The general objectives are the five rights: that is acquiring materials of:  The right quality  From the right supplier  In the right quantity  At the right time  At the right place The perfection of the above purchasing rights invariably creates a desired service level necessary for optimal supply of materials.

The functional or operational level objectives of purchasing: A Function is a unit or department with specialized skills, knowledge and resources to perform specialized tasks.  To support the company operations with uninterrupted flow of materials and services  To buy com...