NOTES PROCUREMENT CHAPTER 1

DPL50083
PROCUREMENT IN LOGISTICS AND SUPPLY CHAIN

CHAPTER 1:
INTRODUCTION TO
PROCUREMENT

Definition of Procurement

• Management control point where all

significant purchases are monitored
for the right authorization of the right
item, at the right price, quality, and
quantity, from the right supplier at
the right terms, and at the right time.

Objectives of Procurement Department

Maintain the quality and value of

the firm’s products.

Minimize cash tied-up in inventory

Maintain the flow of inputs to
maintain the flow of outputs.

Strengthen the firm’s
competitive position

Roles of Procurement Department

Developing purchasing

strategies

Understand the supply

market.

Buying policies and

procedures.

Obtaining and
selecting offers.

Appraising and short

listing suppliers.

Negotiating and cost saving

Expediting deliveries.

Monthly reports and

records.

Disposal of scrap.

Payment terms and INCOTERMS
(International Commercial Terms)

Managing contracts
and supplier development programs

Procurement general process/procedures

Procurement general process/procedures

Procurement general process/procedures (Cont..)

Procurement general process/procedures

Procurement general process/procedures

Identify Purchase Requisitions Form

What is a Purchase Requisition
Form?

• Purchase Requisition Form is a document generated internally to notify the purchasing department of items it needs to order.


• It need to be filled up and submitted before the Purchase Order issued.

Example: Purchase Requisition Form

Identify Purchase Orders

What is a Purchase Order (PO)?

• It is commercial document and the first
official letter issued by the buyer to the seller.

• When PO accepted by the seller, it becomes a contract binding on both parties

• The PO normally indicates the good description, quantities, agreed price, discount rate, payment term, date of performance or shipment (estimate), other associated terms and conditions and identifies a specific seller.

Example: Purchase Order Form

Identify Purchase Requisitions Form

What is a Purchase Records?

Maintain the proper records

Importance to maintain records

• Good records to monitor the progress
of your business

• Records can show whether your
business s improving, which items are selling,
using when auditor checking or what changes you need to make.

• Recordkeeping is the act of keeping track of the history of a person's or organization's activities, generally by creating and storing consistent,
formal records.

Techniques of procurement

Blanket orders

A blanket purchase order (BPO) is a long-term agreement between an organization and supplier to
deliver goods or services with a set price on a recurring basis over a specified time period.

If your business makes multiple payments for the same goods or services, issuing a blanket
purchase order with the details, such as price and delivery schedule, already specified is an efficient
way to reduce time spent and processing delays.

Blanket orders are suitable for buying maintenance, repair & operating (MRO) supplies and
office supplies.

Definition of MRO

MRO (Maintenance, repair and operating supply) items are used in production and plant
maintenance and can be items such as maintenance supplies, spare parts and
consumables used in the production process.

These items can be either valuated or non-valuated and depending on the value of the
items, no physical inventory is performed.

Example: Oils, Lubricant, Gloves, Safety Equipment, Cleaning Product, Compressor.

Advantages of blanket purchase orders?

1)Blanket order can avoid the customer with holding large inventories.

2)Avoids the administrative expense of processing frequent purchase orders.

3)Favouring discount pricing through large volume commitments.

4)It develops longer term and improved buyer-supplier relationship.

Example: Blanket Order

Sources: https://erpnext.com/blog/procurement/blanket-orders

Electronic Data Interchange in Procurement

• Electronic Data Interchange (EDI) is the computer to computer exchange of routine business data
between trading partners in standard data formats.

• Four (4) key concepts about EDI:-

1. Computer to computer

EDI replaces postal mail, fax and email.

 While email is also an electronic approach, the document exchange via email must be handled by
people rather than computers.

Having people involved shows down the processing of the documents and also introduces errors.

Instead, EDI documents can flow straight through to the appropriate application on
the receiver’s computer (e.g. the Order Management System) and processing can
begin immediately.

2. Routing business data
 EDI is used for routine business documents like Purchase Orders and Invoice.
 It is not used for non-routine business documents like complicated contracts or information meant
for humans to read and analyse.

3. Standard data formats
 Since EDI documents must be processed by computers rather than humans, a standard format must be
used so that the computer will be able to read and understand the documents.

 A standard format describes what each piece of information is and in what format
(e.g. integer, decimal,mmddyy)

 Without a standard format, each company would send documents using its company specific
format and much as an English-speaking person probably doesn’t understand Japanese, the
receiver’s computer system doesn’t understand the company-specific format of the sender’s format.

4. Business partner
 The exchange of EDI documents is typically between two different companies, referred to as business partners or trading partners

 For example, Company A may buy goods from Company B.
 Company A sends orders to Company B.
 Company A and Company B are business partners.

Benefits of EDI

1. Speed
The EDI system can lead the data move directly out of one computer system and into another
with little delay.

2. Accuracy
Through EDI, the errors are reduced because data is not being re-keying. Error rates from entering
data are between 0.5% - 3%. On large volumes of transactions, the possibility for the introduction
of errors in enormous.

3. Simplicity
EDI standards specify how data will be formatted and where it can be found.

4. Security
It much less likely to lose information transmitted through EDI than information sent via mail. EDI
can be accessed only by authorized users, and then there are audits trails and archives of data.
EDI data cannot be easily changed by authorized users.

• The usage of EDI in procurement process

• The usage of EDI in procurement process

Just In Time Procurement

• “Just-in-time” (JIT) procurement means ordering goods from a supplier when they are needed, just before they run out. This is possible if the goods are delivered quickly.

• Companies employ this inventory strategy to increase efficiency and decrease waste by receiving goods only as they need them for the production process, which reduces inventory costs. This method requires producers to forecast demand accurately

Characteristics of Just in Time (JIT) concept in Procurement process

1. Type of sourcing

In JIT purchasing, materials and parts are usually bought from a single source, as opposed to
purchasing from multiple sources under traditional purchasing activities.

2. Close relationship with supplier

Dealing with fewer suppliers for a particular item or items contributed to establishing a long-term,
stable and satisfactory relationship between a supplier and buyer.

3. Material quality

Under JIT purchasing, achieving product quality through a long-term contract at a fair price
receives the highest priority. When materials and parts are purchased in small lots and exact
quantities, clearly, their quality receives more importance since defective materials and parts
cause interruptions in production.

4. Supplier Evaluation method

IT purchasing emphasizes supplier evaluation based on product quality, delivery performance and
price. Supplying defective items is not tolerated.

5. Purchased quantities

In JIT organizations, products are produced in small lot sizes when needed, and in turn, materials
and parts are frequently delivered in small lots.

6. Rapidly order

Under the JIT system, the average monthly frequency of deliveries increases to 6.9 from 2.8 under
traditional purchasing.