Procurement Management

June 2023 Examination

Question 1: Explain various types of purchases with appropriate examples

ANS:
Introduction
When businesses have a deep comprehension of the many types of purchases consumers make,
they are better equipped to craft marketing strategies that are tailored to the wants and interests
of their target demographic. Since this is the case, companies may more easily implement
marketing strategies that are tailored to the needs and preferences of their target demographic.
This is because of the phenomenon, which is caused by customer purchases of numerous
products. A grocery shop, for example, may benefit from the practice of making numerous
purchases in a short period of time by offering its customers ongoing specials, discounts, and
customer loyalty programs that encourage them to make multiple purchases from the company
on multiple occasions. The company may quickly raise profits by taking advantage of this
situation by making multiple purchases.

A final product made by an organization is the sum of several inputs, some of which are made
inside the organisation and the rest of which are purchased from outside. Every part of a product
cannot be produced in-house by any organisation. Major categories of purchases that are handled
through procurement are as follows.

Concept and application

There are several types of purchases that individuals and businesses make depending on
their requirements and instances. Here are a few examples of different forms of purchases:

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Raw materials: Steel, coal, gasoline, cotton, wheat, and other basic components used in the
production of finished goods are all referred to as raw materials. The phrase "raw material" is
used since these products are often mined (or grown) rather than manufactured by any suppliers.
Many different types of raw materials are required by the finished goods that companies
manufacture.

Semi-finished products:  The manufacture of finished goods involves a number of extra

components in addition to raw materials. Although all of these components may theoretically be
manufactured domestically by sourcing the necessary raw materials and capital equipment, doing
so could be very unprofitable due to a lack of scale and specialization. Businesses thus purchase
these components from specialist third-party sources. Carburetors, steering systems, gearboxes,
and other parts might all fall under this group.

These products are not sold to the public as finished goods since they are manufactured to the
specifications specified by the buying organization. Some of these products may fall under the
more broad concept of "subcontracting," where a long-term collaboration with a supplier is
intended, with the supplier perhaps allocating factories and production systems to the purchasing
organization.

Finished Products: These items contain the finished goods themselves intended for resale under
the brand of the buying organization. When fully assembled items are purchased from an outside
supplier, outsourcing contracts are employed. All requirements and technologies must be
obtained from the procurement department in order for the vendor to manufacture the finished
goods. The acquisition of heating, ventilation, and air conditioning (HVAC) equipment to
provide heating and/or cooling for residential, commercial, and industrial buildings is one
example of a purchase of finished products.

Maintenance, Repair and Operating (MRO) items:  Items that are not included in the final
product but are still needed by the organization are known as maintenance, repair, and operation
(MRO) items. Office supplies, replacement machine components for capital equipment, etc. are
examples of these.

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A variety of MRO product types could be required by the organization. Given that these
commodities are low-cost items that are needed in big numbers throughout the organization, it
may be challenging for the procurement department to manage the acquisition of these
commodities in a cost-effective manner.
Items needed for production: Production support items are needed for the manufacturing process
even if they are not included into the finished product, much like MRO goods. A variety of
production support goods, such as electrodes, lubricants, packing materials, shipping materials,
etc., are purchased from outside vendors to help and maintain the manufacturing process.

Capital equipment: Unlike the other things we've discussed, capital equipment is in a class of its
own. The equipment used to produce goods is really made up of them. These are intended for
long-term use and sometimes require a sizable initial financial commitment. The acquisition of
capital equipment is inextricably linked to the concept of Return on Investment (ROI). The
Return on Investment (ROI) measures the financial gain or loss relative to the investment made.
A timeframe, such as a number of weeks, months, or years, is usually used to illustrate ROI,
which is sometimes referred to as the payback period. Recouping or recovering the initial
investment made in the piece of equipment is the primary factor in the calculation.

Services:  The Finance Department examines and decides on capital expenditures in cooperation
with the Production and Purchasing Departments. The purchase is made using a new set of
procurement processes once the products have been selected, but it still goes via the procurement
team. Some products, rather than being purchased outright, might be made available for rental.
The acquisition of capital equipment is often a one-time event, in contrast to the continuous and
recurrent costs associated with the other categories.

Subcontracting services is another common practice among businesses. Cafeteria management,

HVAC and electrical system repairs, transportation, security, housekeeping, engineering, food
service, and more could be included, as well as more specialized services like design contracts,
software testing, software package implementation, data entry, etc.

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Transportation and logistics: Logistics and transportation are specialized services that are often
outsourced to external vendors. Both incoming and outgoing material flows must be managed. In
return for long-term contracts with the organization, numerous logistics and transportation
companies may provide these services.

Conclusion
In conclusion, there is a wide variety of products and services available for acquiring the items
and services that businesses want. The sorts of items you may purchase in this area have
previously been covered.

Companies may also find it difficult to maintain their customers' loyalty and convince them to
buy more products. That way, local businesses have a fighting chance against their online rivals,
for which they may also need support. This is particularly true in markets with fierce
competition, when consumers have many options from which to choose the goods or services
that best meet their requirements. Companies must constantly assess and alter their advertising
strategies in order to keep up with changing customer preferences, foster long-term client
relationships, and generate trust and credibility in the products and services they provide.

Question 2:  Discuss the process of strategic sourcing with suitable examples.

ANS:
Introduction
A manufacturing company is looking for a dealer to provide the raw materials used in the
production of its finished items. The supplier's abilities and performance have been evaluated by
the employer via market research. After examining the dealer's finances, contracts, and
performance, the company has decided on a supplier and is currently in talks with them on
pricing, delivery dates, and quality criteria. After all of the details have been ironed out, the
company will put the dealer link into action by drafting service level agreements and monitoring
the supplier closely to ensure its performance is up to par. By employing strategic sourcing, the

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employer may streamline its procurement process, reduce risk, and save costs without sacrificing
the quality of its supplier network.

A strategic sourcing strategy and procurement system work together to locate, evaluate, and
choose suppliers that can provide the most competitive pricing for a firm. What follows is a
comprehensive analysis of this methodology, which is known as "strategic sourcing."

Concept and application

The strategic sourcing process may be used for all sorts of goods, although the focus will be
mostly on the third and fourth categories. Fred Sollish defines strategic sourcing as "an
organization's procurement and supply management process used to locate, develop, qualify, and
employ suppliers" (Sollish, 2011) in order to maximize the value of a company's goods and
services.

Strategic sourcing, which includes locating, evaluating, and working with suppliers, may help a
firm meet its requirements and objectives. The strategic sourcing process comprises steps that
assist businesses in assessing their procurement needs, locating capable suppliers, analyzing their
skills, negotiating favourable terms and conditions, and maintaining ongoing supplier
relationships. Steps in the strategic sourcing process are as follows:
Process:
 Conduct Spend Analysis
 Evaluate Supplier Market
 Develop a Sourcing Strategy
 Identify Potential Suppliers
 Negotiate with Suppliers
 Enter into Contract/ Agreement
 Pre-qualify Suppliers
 Evaluate and Select Suppliers
 Manage Supplier Relationship

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1. Assess Business Needs and Goals: The first step in strategic sourcing is to evaluate the
company's procurement requirements, identify its goals and objectives, and decide on the
products and services required to fulfill those goals and objectives. This entails looking at things
like the company's finances, customer service standards, turnaround times, and other conditions
that are particular to the business.

2. Identify potential suppliers:   Finding capacity providers who can meet the company's needs
is the next step after identifying possible suppliers. This entails doing market research, assessing
dealer competence and performance, and developing a listing of prospective providers.

3. Evaluate supplier capabilities:   After creating a listing of supplier providers, the next step is
to assess their abilities to ensure they meet the company's requirements. The process of doing
one's "due diligence" is researching, reviewing, and evaluating the dealer's finances, contracts,
and performance.

4. Negotiate terms and conditions:  The next step, after finding and vetting a trustworthy
supplier, is to negotiate terms and conditions that work for both parties. Negotiating prices, fee
schedules, shipping dates, quality requirements, and other pertinent terms are all part of this
process.

5. Implement and manage supplier Relationships:  The last step, once the terms and situations
have been negotiated, is to enforce and deal with the supplier relationships. Carrier-level
agreements must be drafted, provider performance must be tracked, and any conflicts must be
resolved.

Right here is an instance of a strategic sourcing process for a manufacturing company:  

A company-wide requirements assessment is the initial step in strategic sourcing. At this point,
you should decide whether any further products or services are required for the next step. To find
areas where new products or services can be of benefit, this involves examining the company's
operations.

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Finding possible suppliers and determining the capabilities of these capacity bearers is the next
step after doing market research. This entails collecting data about service providers, such as
their reliability, cost, return time, location, and the quality of the products or services they
provide.

Sourcing is the process that follows extensive market research. This plan outlines the most
effective way to get the required products or services. This necessitates deciding on the best
sourcing approach, such as competitive bidding, negotiation, or single-source procurement.

Finding prospective suppliers who meet the company's goals and requirements is the next step
after formulating a sourcing strategy. This happens after the process of determining the
capability suppliers. In order to do this, you must first contact capacity providers to request data
or quotations, and then examine the information provided.

The next step is to evaluate the proposals that have been filed by providers and contrast them
with the one-of-a-kind gifts we have received from other suppliers. This entails, among other
things, evaluating the expertise of the company, the quality of its products or services, price, and
turnaround time.

After evaluating potential suppliers, the next step is to negotiate the terms and conditions of the
purchase. Costs, delivery times, and other details of the contract may all be negotiated in this
way. The selection of suppliers comes after this step. When negotiations are complete, the
company will choose the provider that best satisfies its demands.

Contract execution and management are the last steps in strategic sourcing. This step also
involves managing contracts with various suppliers.

Conclusion

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Due of the high volume of raw materials it must acquire, a large manufacturing company is one
kind of business that might benefit from using strategic sourcing. Procurement at our company
always starts with a thorough analysis of the needs of the business and the results of market
research, as described above. In response to the findings of this study, they devise a sourcing
strategy and locate viable supplier alternatives. By determining which ability company offers the
most effective solutions to their difficulties, they start the contracting procedure. The next step is
for them to evaluate those offers and negotiate the situations. The procurement team keeps an
eye on the supplier's performance and manages the settlement to ensure the company receives the
most for its money. Strategic sourcing is a mechanism for expanding a company's supplier base
and increasing its value offering while decreasing expenses. The objective is to provide the best
products and services at the lowest cost. Strategic sourcing deviates from conventional
purchasing in that it aims to construct supply pathways that will result in the lowest total cost
over time, rather than just finding the supplier with the lowest price.

Question 3. a: Explain various online catalogues of e-marketplaces

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Introduction
Consumers and sellers may do business online using an E-marketplace, which is an electronic
platform. It is possible to classify e-marketplaces as either public or private. To promote
electronic buying and selling amongst exchange members, a public E-marketplace is run by an
electronic intermediary corporation that is neither a buyer nor a seller. On the other hand, a
private E-marketplace is created and run by private investors and welcomes both consumers and
sellers to do online commerce on its platform. It's possible that the private exchange's managing
business is also one of the buyers or sellers.

Concept and application

Catalogues are a convenient way to buy materials and other resources online. These catalogues
contain products that may be purchased online from certain suppliers. Prices and any relevant
bulk discounts are listed in online catalogues as well. For the purpose of purchasing goods from

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approved suppliers, these catalogues may be accessed through the approved intranet of the
procurement organization. On the basis of supplier catalogues and an internal inventory system,
these catalogues may be developed, maintained, and updated by the purchasing organization for
E-procurement processes. On the other hand, the E-procurement system may simply include a
link to the supplier-managed catalogues elsewhere on the web.

There can be three types of catalogues as listed below:  

1. Simple catalogues: Simple catalogues, like those for stationery, provide a list of items, each
with its own description and price. The percentage of total E-marketplace sales attributable to
these catalogues is 60%.

2. Goods and services catalogues:  Products and services catalogues include high-priced items
like desktop PCs and so need for extensive and precise descriptions. Thirty percent of all E-
marketplace sales come from these catalogues.

3. Contract-driven catalogues:  These catalogues contain items based on supplier contracts that

have previously been formed via procurement procedures. About 10% of all E-marketplace sales
come from these catalogues.

You can tell the difference between catalogues that are managed by the supplier, the buyer, or a
third party by looking at who is in charge of the catalog's content management. The content and
the configuration application are hosted by the supplier in the case of managed catalogues. The
content is developed and approved by the purchasing organization for internal employee usage in
the case of buyer-managed catalogues.

Numerous E-procurement system manufacturers, like Ariba and Commerce One, provide
software programs that allow firms to collect catalogues from their suppliers and add own
content.

Third-party catalogues are developed by a separate business for the benefit of consumers and
suppliers. They may contain data from a variety of suppliers who are prepared to utilize the
portal.

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A typical online catalogue will contain the name of the products, the product hierarchy, the
product description, the product price, and the relevant supplier and internal item codes. For end-
users to have access to the required goods and services, such catalogues may contain several
hundred items per supplier and must be developed, approved, and updated. Catalogue content
management describes this method.

Conclusion

By using a proper online directory of e-marketplaces, PQR Inc. may simplify its e-sourcing
approach. This, in turn, helps them save money and boost output. They may be designed to
simplify and standardize the procurement process for use by businesses of all sizes.

Question 3. b: Explain the process of online auctions

ANS:
Introduction
E-sourcing may also take the form of online sales, in which businesses compete in real-time
bidding to win contracts to provide a customer with the products or services they need.
Paperwork of many types may also take the shape of e-sourcing. An online sales process may
consist of the following steps:

Concept and application

The E-procurement ecosystem relies heavily on online auctions. The organization that wants to
buy anything makes a "Request for Quote" (RFQ) and encourages potential suppliers to submit
bids in online auctions. Then, an auction is conducted to choose the bidder with the lowest price.

The auction continues until either the allotted time for bidding has passed or the seller decides
they are not willing to accept any lower bids. In an online auction, bidding starts at a high price
and gradually decreases until the lowest bidder wins. The vast number of sellers expected to
participate in the auction process will likely drive the price down.

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All sellers in a regular online auction can see the prices, but they are unaware of their
competitors. In a different kind of online auction called a "rank online auction," sellers are
simply made aware of their relative position and not the prices of their competitors.

By adopting online auctions, several businesses have significantly reduced their procurement
expenses. The involvement of sellers from all around the globe has sometimes been seen in
online auctions.

The steps involved in online auction are given below:  

1. The procurement organization uses an online auction to decide the purchase of

commodities.
2. Suppliers' involvement in the auction process is evaluated and approved. Only verified
sellers should be allowed to participate in online auctions. Market research may be
conducted by website hosting in order to locate potential sellers.
3. There will be a bidding process, and suppliers are encouraged to participate.
4. The organization that wants to buy anything makes an e-RFX, or electronic request for
quote, and submits it to all the pre-approved suppliers.
5. The auction rules and location are communicated to the suppliers in advance of the
bidding.
6. the bidding process begins promptly at the designated time and lasts for a period of time
between thirty minutes and one hour. Bids placed by other competitors may be visible, or
the auction may be over. But throughout the bidding process, the identities of the
suppliers remain hidden.
7. The corporation reviews the auction bids and awards the contract to the selected supplier,
who need not have the lowest price. Providers are selected using a combination of
scientific rating and other criteria.

Conclusion

Online auctions provide a variety of benefits over more conventional forms of procurement,
including more competition, more and lower prices, and a faster time to complete the
procurement process. To ensure that they may be conducted in an honest and transparent manner,

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and that the demands of the buyer are addressed, they must, however, be properly organized and
monitored.

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