NOTES PROCUREMENT CHAPTER 2

CHAPTER 2: PROCUREMENT PROCEDURES

Eight (8) steps of Procurement Order Cycle Standard Procedure

Procurement Order Cycle Standard Procedure

• Management in every company must understand the art of obtaining products and

services.

• The procurement cycle follows specific steps for identifying a requirement or need of

the company through the final step of the issuing the payment.

1. Identification of
requisition material

2. Determination of

possible supplier

3. Preparation of

Purchase Order (PO)

4. Following up and
expedited delivery

5. Preparation of documents

7. Receiving and
handling invoice

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6. Product storage

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8. Issuing payment

1. Identify requisition material
The company need to identify that there is need to update the inventory or stock.
Must to know it needs a new product, whether from internal or external resources.
The product may be one that needs to be reordered or it a new item for the company.
The right product is critical for a business.
Some industries have design one standard, part number, ordered the products in the past or color
and weigh to determine the specifications for the purpose to ensure the whole management and
operation can be conduct with effectively

2. Determination of supplier
The company needs to determine the sources of the product “where the product come from?”.
The company might have an approved vendor list.
If not, the business will need to search for the suppliers by using the purchase orders or
research a variety of other sources such as , magazine, internet, sale representative or promotion from friends.

The company will choose the suppliers to determine the best product which can meet the requirement
for a business

Once the supplier (one or more than) have been identified, requests for quotation, proposals,

information or tender may be advertised or direct contact may be made with the suppliers.

3. Preparations of purchase order (PO)
Before preparing the PO, the business should investigate all the relevant information to determine the
best price and terms for the products.

However, this will depends on if the company needs communities (readily available products) or
specialized materials

Normally the business will look into at least there suppliers before the make a final decision.
The PO is usually used to buy materials between a buyer and seller.
Specifically defines the price, specifications and terms and condition of the product or
service and any additional obligation.

4. Follow up and expedited delivery
The PO must be delivered via fax, mail, personally, email or other electronic means.
The recipient then acknowledge receipt of the PO.
Both parties will be keeping a copy on file for record purpose in the future.
Expedition of the PO addresses the timeliness of the service or materials delivered.
It becomes especially important if there are any delays.
The issues most often include payment dates, delivery times and work completion.

5. Preparations of document

A few types of procurement documents are needed to prepare such as:-

i. RFP

• A request for proposal is an early stage in a procurement process, issuing an invitation for

supplier, often through a bidding process, to submit a proposal on a specific commodity or
service.

ii. RFI

• A request for information is a proposal requested from potential seller or service provider to

determine what products and services are potentially available in the marketplace to meet a
buyer’s needs and to know the capability of a seller in terms of offerings and strengths of the
seller.

iii. RFQ

• A request for quotation is used when discussions with bidders are not required (mainly when

the specifications of a product or service are already known) and when price is the main or
only factor in selecting the successful bidder.

iv. Solicitations
• These are invitations of bids, requests for quotations and proposals. These may serve

as a bidding contract.

v. Offers
• This type of procurement documents are bids, proposals and quotes made by potential

suppliers to prospective clients.

vi. Contracts
• Contracts refer to the final signed agreements between clients and suppliers.

vii. Amendment / Modification
• This refers to any changes in solicitations, offers and contracts. Amendments/

Modifications have to be in the form of a written documents.

6. Product storage

At the same time, the production’s department will start their operation to produce the

products required by the customers.

After producing operation, the specific person (warehouseman) will responsible to move the

product to the warehouse for storage purpose until it needed/demanded from customers.

7. Received and handle Invoice

Once the sending company delivers the product, the recipient accepts or rejects the items.

Acceptance of the items obligates the company to pay for them.

Three documents must match when an invoice requests payment - the invoice itself, the

receiving document and the original purchase order.

The agreement of these documents provides confirmation from both the receiver and supplier.

Any discrepancies must be resolved before the recipient pays the bill.

8. Issues payment

After checking the documents presented, if there have no any discrepancy, they will issue the

payment by following the amount stated in Invoice.

Usually, payment is made in the form of cash, check, bank transfer, credit letters or other types

of electronic transfer.

In the case audits, the company must maintain proper records.

These include purchase records to verify any tax information and purchase orders to confirm

warranty information.

Purchase records reference future purchases as well.

Procurement for different types of items

a. Raw materials
Characteristics of raw material buying:-
The item is a raw and it is not a finished good.
Usually, it uses to complete the semi-finished good.
Raw material is the basic material from which a good product is manufactured or made.
The term is used to denote material that came from nature and is in an unprocessed or

minimally processed state.

b. Semi-finished product and Component
Characteristics of component buying:-
It is materials or the parts that are waiting to be made into something else. This item that

must to use to produce the product.

It also known as semi-finished good and / or finished good.
It uses to be part of a complete good.
Basically, without the component, the product will not be a product and can’t produce

because the product will not complete as well.

c. Work in progress

Characteristics of work in progress:-

It also known as a work-in-progress (WIP) or in process inventory.

It is a materials and components that have begun their transformation to finish goods.

d. Consumables product

Characteristics of consumables product:-

The consumable means good that people purchase regularly because they are quickly

used and need to be replaced often.

The goods that can be used by end costumer. It is known as completed good.

This kind of stuff will finish after using and it can’t be reprocessed anymore.

Consumables are products that consumers buy recurrently.

Example of Procurement Items:-

Raw materials

“Timber”

“Rubber”

“Metal”

“Nylon”

“Cotton”

“Silica Sand”

Example of Procurement Items:-

Component

“Tyre”

“Car windscreen”

“Car light bulb”

“Car bumper”

“Steering”

“Car cushion”

Example of Procurement Items:-

Consumable products

“Tissue paper”

“Engine oil”

“Car wash cleanser”

“Perfume”

“Mineral water”

“Gasoline”

Implementation of e-Procurement

Definition of e-Procurement
• e-Procurement is the business to business (B2B) purchasing of goods and services through the Internet.
• The e-Procurement system allows users to submit their purchase requisition to the purchasing department

electronically and enables buyers to transmit purchase orders to supplier over the internet, fax or mail.

• “According to the Chartered Institute of Procurement and Supply (CIPS), they defined as e-Procurement is

using the Internet to operate the transactional aspects of requisitioning, authorizing, ordering, receipting
and payment processes for the required services and products”.

Key development of e-Procurement
Business efficiency/globalization/competition advantages
Need to meet government target
More accurate and secure in supplier-management & communication
Slicker, more streamlined processes and purchasing
Best value in term service, product and price
Savings opportunities gained through strategic sourcing
Reduction in processing cost (Saving available from prompt payment)
Increase customer satisfaction

Benefits of practicing e-Procurement

a. Cost saving
• Reducing costs in term of lower prices of goods and services since more suppliers can be

contacted, reduced inventory costs due to the ability to purchase on a more frequent basis, fewer
buyers, lower administration cost, elimination of the need for pre-printed purchase requisition
forms and faster order fulfillment.

• e-Procurement also eliminates paperwork, rework and errors.

b. Time savings
• e-Procurement is more efficient when (a) selecting and maintaining a list of potential suppliers,

(b) processing request for quotation and purchase orders and (c) making repeat purchase.

• Individual buyers can create preferred supplier lists for each category of products and services.

c. Accuracy
• The system eliminates double-key inputs, enhance the accuracy of communications between

buyers and suppliers, more up-to-date information on suppliers and allow users to assess their
options before preparing a purchase requisition.

d. Track ability

• The system allows submitter and buyers to track each purchase requisition electronically through

the process – form submission to approval and finally conversation to a purchase order.

e. Benefits to the suppliers

• Benefits include lower barrier to entry and transaction costs, access to more buyers and the

ability to instantly adjust to market conditions, thus making e-procurement attractive to most
suppliers.

f. Using technology

• e-Procurement advantages can only be fully realized when the systems and processes to manage

it are in place.

• Software tools are needed to create the standards procurement documentation: electronic

request for information (e-RFI), request for proposal (e-RFP) and request for quotation (e-RFQ).

• These are proven methods to source goods and make the framework agreements that offer the

best prices.

Challenges in e-Procurement

An inability to integrate with existing ERP and Procurement systems
• To minimize some of these hassles, companies that have successfully implemented P2P (Procure to

Pay) solutions have found that cloud solutions often allow companies to reduce the time and effort
associated with on premise installation.

• Because of these on demand solutions are hosted and maintained as a service, the costs associated

with software upgrades has been reduced, or even it was eliminated.

• However, this is not all the SaaS (Software as a Service) solutions address the ERP integration

demands, it is important to consider solutions that have standardize integration adapters allowing for
efficient integration projects.

An inability to on board and support a large number of suppliers
• Some of the systems will unable to connect to and on-board your entire supplier when you found

that a huge of number of suppliers were accessed to your portal in the same time.

• This situation has been hindering the related department and their supplier to do any integration or

business deal through the portal.

• It will cause the management and operation activity of the company cannot conduct with

effectiveness and efficiency.

• Therefore, the company’s decider should find out a solution which it can take over the burden of

determining which of your suppliers should be enabled via web portal versus direct integration.

Complex and unintuitive user interface

• As far as P2P systems are concerned, it is critical for professional users that the UI (user

interface) be similar to other corporate systems that they are integrating with.

• Some of the applications are hard to navigate, making it difficult to find their preferred

vendor and product/service in need, the desired product/service is not in the system or
price does not represent the negotiated or best value price, or the approval process is too
complicated and lengthy.

• Lastly, the chances are that end-user adoption will be minimal because of the

inconvenience services provided.

1.0 Development of e-Procurement

1.1 Types of spending (Direct and Indirect)
• Indirect goods and services are ordinary commodity supplies like paper, airline tickets and cleaning

service, things that virtually every company buys.

• Direct goods in contrast are raw materials, parts and component used as inputs into processes that create

finished product.

• Companies may want to start their e-procurement effort with indirect goods. Their standard nature, and

the relative openness of these horizontal vendors to B2B solutions makes them more straightforward to
include.

1.2 Contract purchase vs Spot purchase
• Companies use contract to lock in favorable pricing or ensure a steady supply of goods. These contracts

are usually heavily negotiated, tend to be long-term and signal a closer relationship between buyer and
vendor.

• Spot purchase occur when a company has a specific, immediate need and wants to fill it at lowest possible

price. Relationship between buyer and vendor matter little in this situation.

• Because companies have closer, long-term relationships with their contract vendors and tend to make

high volume purchases under those contracts, contract vendors may be willing to be early adopters of the
company’s e-procurement platform.

• Companies may be able to fulfill their spot purchases by using their e-procurement platform to connect to

a larger B2B marketplace, populated by many vendors and sponsored by their service provider.

1.3 Vendor recruitment
• The features of the e-procurement platform that a company chooses and the qualities of the service provider, are crucial to the

vendor recruitment effort.

• First, the service provider should make it cost-effective for the vendor to join. Built-in tools should limit the amount of effort involved

in setting up a catalog and the platform should require a minimal amount of custom work on the part of the vendor.

• Second, the service provider should be willing to assist a company in its recruitment efforts by supplying targeted marketing services

and programs and by offering extensive customer service and support.

1.4 Access to larger B2B forums
• By choosing an e-procurement platform that is compatible with and can seamlessly connect to other B2B platform, marketplaces

and exchanges a company can take advantage of favorable buying opportunities while retaining the benefits of its custom
e-procurement platform.

• Larger service providers will typically sponsor a variety of B2B commerce platforms, both private and public and will allow

participants in one forum to interact with others to the extent desired.

1.5 Electronic Auctions (e-auctions)
• E-auctions initiated by the buyer use the internet to share communications, providing both buyers and suppliers with visibility of bid

status in real time and allowing an instant response.

• An auctions allows for a bid on price and/or quantities attributes such as delivery charge, quantity discount and quality required.
• E-auctions should be considered as a tool in the buyer’s e-sourcing toolkit.
• They can use to renew existing contracts or offer consolidated spend opportunities. Also can be used to negotiate significant spot

purchases and to receive pricing on frequently tendered communications or service.

1.6 Features of an e-Procurement Platform

Research

The ability to browse vendor catalogs, perform keyword searches for product and service and apply filters
for vendor location, diversity status, etc.

Manage vendors

The ability to access real-time vendor product information, select vendors form contract or even public lists
and analyze transaction data for vendor performance.

Create authorizations/approval routing

The ability to specify user/departmental authorizations, spending limits and access rights that mirror
existing workflow and route approvals and documentation to managers for approval.

Request quotes and bids

The ability to request quotes, solicit bids from one or several vendors simultaneously, view multiple
responses based on characteristics such as quantity or price and negotiate pricing.

Make purchases

The ability to generate POs (including line item POs) on command or automatically for
recurring purchases, send POs to vendors electronically and request order confirmation.

Check order status

The ability to check the status of all open orders and requisition.

Handle receivables

The ability to match received merchandise to the corresponding PO for reporting of partial
orders, refusals and damaged goods.

Important sell-side capabilities attract vendors

Manage buyers
The ability to monitor purchase, analyze buying patterns and document PO history from initial request
to final payment.

Manage catalogs
The ability to create and/or import product catalogs and to maintain them on an ongoing basis using
platform tools.

Promote products and services
The ability to respond to advertise or promote special offers.

Promote to quotes and bids
The ability to respond to quotes and bids and negotiate pricing.

.
Accept orders
The ability to accepts POs and track them through payment.

1.8 Purchaser and Vendor Preparations

From the purchaser perspective:-

• Determine procurement strategy - the types of goods to be sourced, contract versus spot buys and

vendor recruitment plan.

• Determine purchasing policies - authorization, approvals, access rights, spending limits.

• Determine financial settlement and logistics needs - payment, shipping, receiving.

• Determine integration needs between e-procurement platform and back end systems.

From a vendor’s perspective:-

• Put products and services online - create an electronic catalog.

• Determine sales term - pricing, discounts, contract buyer terms.

• Determine financial settlement and logistics - invoicing, payment terms, shipping.

• Determine promotion plans- advertising and sales.

• Determine integration needs between e-procurement platform and back office systems.

• Example e-Procurement System/Website:-

“e-Procurement Website of Malaysia Government”

“e-Procurement System used by PETRONAS”