CHAPTER 1

INTRODUCTION TO PROCUREMENT
Course Learning Outcomes 1
 Examine fundamental concept, procedure and sourcing of procurement in
logistics and supply chain area. (C3, PLO 1, CLS 1)

Assessment
 Quiz 1

Notes
C3 : Application
PLO 1 : Apply fundamental principles of logistics and supply chain management and other related area.
CLS 1 : Knowledge and Understanding
Objective of this chapter

1.1 Explain concept of procurement

 Explain procurement
 Identify objectives and roles of procurement
 Identify purchase requisitions, forms and records

1.2 Apply techniques of procurement

 Identify blanket orders
 Explain the use of Electronic Data Interchange in procurement
 Define Just In Time purchasing
 Definition of Procurement

1’st : Procurement is the business management function that ensures identification, sourcing, access and
management of the external resources that an organisation needs or may need to fulfil its strategic objectives.

2’nd : Procurement exists to explore supply market opportunities and to implement resourcing strategies that
deliver the best possible supply outcome to the organisation, its stakeholders and customers.

3’rd : Procurement applies the science and art of external resource and supply management through a body of
knowledge interpreted by competent practitioners and professionals.

4’th : Management control point where all significant purchased 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
What is the differences between Procurement vs Purchasing?
Procurement Purchasing

Refers to the process of receiving goods and services from an Activities related to the buying of goods and services from an
external supplier external supplier
Includes everything that happens before, during and after Only details how to the goods and services are bought
receiving the goods and services
An internal process used in production environment An external process used primarily in wholesale environments

The item’s value is more important than the cost The item’s cost is frequently more important than its value

The process aims to identify and fulfil specific needs Limited only to the activity of buying the goods and services

The process includes identifying needs, sourcing and closing The process includes ordering the goods or services,
contracts expediting and fulfilling payment
Proactively identifies and fulfils needs A reaction to internal needs

Focuses on building long term relationships with vendors Focuses on the transaction rather than the creation of a
relationship with the vendor
 The Objectives of a Procurement
Department

1. Maintain the quality and the value of the firm’s products.

2. Minimize cash tied-up in inventory.

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

4. Strengthen the firm’s competitive position.

 Role of Procurement Department

• Support Operational Requirements.

• Manage the Procurement Process and the Supply Base Efficiently and Effectively.

• Identify opportunities where the procurement team adds true value:-

-Review of specifications or statement of work

- Evaluation and selection of suppliers

• Manage its internal operations efficiently and effectively.

• Support Organizational Goals and Objectives.
 Activities of Procurement Department
Developing
Understand the Buying policies and Obtaining and
purchasing
supply market procedures selecting offers
strategies

Appraising and
Monthly reports and Expediting Negotiating and cost
short listing
records deliveries saving
suppliers

Payment terms and Managing contracts

INCORTERMS and supplier
(International development
Commercial Terms) programs
 Purchases Requisition

 Purchase requisition are documents used when team members need to make a purchase on behalf of
their organization.

 A purchase requisition is an official order used to inform department managers or purchasing officers
about a decision to make a purchase. This induce the purchasing department to start the purchasing
process. The finance team will also use this document to coordinate reporting procedures with the
accounting department as well.
 What is Purchases Requisition Form?

 A purchase requisition form is an internal document that employees use to request the purchase of

a specific item.

 The employee describes the product and why it is needed.

 The purchase requisition form is submitted to the purchase department for approval which is the

first step in creating an effective audit trail for purchasing.

 Once the purchase requisition is approved by the relevant department, a purchase order is issued

to the vendor of the requested goods or services.

 Contents of a Purchase Requisition Form

 Purchase requisition forms generally require the following information:

a) Name and department of the requestor

b) The date of request

c) The products or services requested

d) Item description, quantity, and price

e) Reason for purchase

f) Legal name of the supplier

 Steps Involved in the Purchase Requisition
Workflow
Submission of
Requirement for goods Approval from
purchase requisition Stocktaking
or services department manager
form

Screening by Approval from Generation of Receipt of goods or

purchasing department purchasing department purchase order services

Three-way matching Invoice payment

 Contents of a Purchase Requisition Form

 Purchase requisition forms generally require the following information:

a) Name and department of the requestor

b) The date of request

c) The products or services requested

d) Item description, quantity, and price

e) Reason for purchase

f) Legal name of the supplier

 Example
Purchase
Requisition Form
 What is Purchase Order ?
 After a purchase requisition is made (and the purchase is approved), the purchasing department will
generate a purchase order that they will send to the vendor.

 The original P.O. is sent to the vendor and two copies of the P.O. are sent to the requisitioning department.

 This legally-binding document outlines exactly what the organization intends to purchase.

 Purchase order requires certain information:-

1. Name of the purchasing office
2. Items to be purchased
3. Payment terms
4. Invoicing instructions
5. Ship to address
6. Purchase order number
 Example
Purchase Order
Form
 Purchase Requisition Vs Purchase Order
Feature Purchase Requisition Purchase Order

What is it? Request for purchase Confirmation of an order

Who create it? Any employee Purchasing department or HOD

When is it sent? When an employee sees a demand for goods or When an order needs to be placed for goods
services and/or services

Who receives it? Head of department and/or purchasing Vendor

department

What info does it Date requisition is created, Requisition number, Date PO is created, PO number, Name of buyer,
contain? Name of employee making requisition, Description of items or service being purchased,
Description of items needed, Number of items Number of items and price, Payment terms,
and price– Suggested vendor information. Billing and shipping addresses and Delivery date
 What is Blanket Order ?
 A blanket purchase order also known as a standing purchase order is a long-term contract between an
organization and a supplier to supply products or services at a fixed price regularly for a certain amount of
time.

 A blanket purchase order, a long-term contract with a specific supplier, helps businesses efficiently order the
same shipment of goods from a single vendor at regular intervals.

 Such an order greatly simplifies logistics and planning for both companies, as multiple invoices can be
categorized under a single blanket PO.

 The result is less invoice processing time and a more consistent delivery schedule.

 For example, a construction company with regular scheduled work must order the same raw materials every
so often, or an office building might need cleaning services every few weeks.
 What’s Included in a Blanket Purchase Order?
 A BPO must naturally define several contract terms:-

I) Product quality and quantity

II) The fixed price of the shipments

III) The contract periods in which the bulk purchases are made (i.e. start and end dates)

IV) The preferred method of invoicing and payment

V) Specified time and location of delivery

VI) A cancellation policy

 When used a Blanket Purchase Order?
 Blanket purchase orders should only be used in the following situations:

1) When large amounts of the same goods or services are required over a long period, usually a year.
2) When the unit cost is well-defined and specific information may be provided.
3) When a single client can fulfill the contract’s requirements for the whole duration of the contract.
4) When you purchase in bulk, you may take advantage of better contract conditions, including bulk discounts.
5) Stocking risk and expenditures are reduced when supplies are staggered.

Never be used for orders if the pricing is

uncertain, the product quality is suspect, or
the seller is untrustworthy.
 Pros and Cons Blanket Purchase Order

Pros Cons

Lower Administrative Costs Falling Market Value

Minimize Processing Time Ensuring Order Accuracy

Consolidated Purchasing Petty frauds

Consistent Pricing It requires flexible internal control

Potential Savings Poor vendor performances

Difficult to determine and forecast the quantity

 Blanket Purchase Order Process Flow

Contract request
Department create BPO create and sent to
reviewed and
contract request supplier
approved

Department received
Supplier create and
invoice and
Invoice paid send invoice basing
procurement
on BPO
information

Repeating invoicing,
receiving and payment
until zero balance on BPO
 Blanket Purchase Order Process Flow
Step 1: The very first step is to set up the order based on what the company’s departments need and plan. Before
deciding the order type, it is also important to consider whether it should be a blanket order or a standard order.

Step 2: The next step is to get the order request reviewed and approved. You are only obtaining approval to
spend up to that amount of money with a blanket order, and you may not end up spending the entire amount.
Sometimes, you may go over your estimate in some circumstances, in which case the amount will need to be
changed later.

Step 3: After the request has been approved and BPO is created. It is sent to your vendor for checking and
finalization.

Step 4: Vendor then creates an invoice in advance or after each delivery based on the agreement between two
parties.

Step 5: Company receive an invoice and match the receiving information.

Step 6: Then the company makes payment based on the invoice.

The vendor will keep invoicing for the next delivery and get paid until the BPO finishes.
 Electronic Data Interchange (EDI)

 The Electronic Data Exchange or EDI is a technology that helps trading organizations and partners get more
done faster by speeding up logistics timelines and eliminating manual errors through business to business
communication automation.

 EDI allows organizations that produce, ship, purchase, and sell goods or provide services such as retailers,
manufacturers, insurers, health care providers, airlines and more.

 EDI is an automated computer-to-computer exchange of standard electronic business documents that occurs
between business partners over a standardized and secure connection.

 With computer to computer communications, there is no need to rely on manual options such as email, facts,
and postal mail. Documents move directly from the sender’s computer application to the receiver’s computer
application.

 For example, a buyer can send over a purchase order and the supplier will automatically send over an invoice.
 Electronic Data Interchange (EDI) in Procurement

 EDI is the electronic exchange of business information—purchase orders, invoices, bills of lading, inventory
data, and various types of confirmations—between organizations or trading partners in standardized formats.

 EDI also is used within individual organizations to transfer data between different divisions or departments,
such as finance, purchasing, and shipping.

4 KEY CONCEPT about EDI:

1. COMPUTER to computer
2. Routing business data
3. Standards data formats
4. Business partner
 EDI Process in Procurement Workflows
 The buyer’s procurement system, which uses EDI, auto-generates and sends an EDI-formatted PO when
inventory reaches a pre-specification level.

 In minutes the vendor’s sales order system, using EDI software, receives the EDI PO.

 The supplier’s system automatically notifies their shipping department to send goods.

 Once the goods are packed and ready to ship, the shipping system generates and Advanced Ship Notices
(ASN) to send to the buyer’s receiving department.

 The vendor’s ERP system then generates an EDI invoice to transmit to the buyer’s account payable system.
The entire EDI process can be completed in an hour.
 Traditional Process in Procurement Workflows

 The buyer either receives a notification in his or her system to place an order or after querying the inventory,
determines he needs to place an order.

 The buyer enters data onto the screen of a purchasing system to create the PO, prints and mails it or email it to the
vendor.

 The vendor receives the PO, either days later or via email (along with a long list of other communication) and manually
enters in into the sales order system.

 The vendor prints an invoice and encloses it with the shipment and/or sends it separately by mail or email.

 The buyer manually enters the invoice into the accounts payable system.
 Benefits of EDI in Procurement
1. Speed
-system can lead the data move directly out of one computer system and into another with little delay.

2. Accuracy
-The errors are reduced because data is not being re-keying.

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

4. Security
- Less likely to lose information transmitted through EDI.
- Accessed only by authorized users, and then there are audits trails and archives of data.
 Benefits of EDI in Procurement
5. Instant Exchange of Documents / Real-time Transactions.
• Information can be exchanged and transactions executed in real-time between trading partners,
eliminating redundant, time-consuming, and error-prone tasks from the equation.

6. Real-time Updates Ensure Peak Inventory Management

• EDI has established a reputation for helping companies maintain optimal inventory levels, which ensures
they can meet immediate demand as well as optimize stock levels for the future.

7. Reduced Waste = “Greener” Business Practices

• EDI offers an eco-friendly alternative to outdated paper-based processes that generate so much waste
into the environment. Trees are saved and the planet rejoices.
 Just-In-Time

Definition 1: 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.

Definition 2: JIT define as all materials and products become available at the very moment when they are
needed in the production process, not sooner and not later, but exactly on time and in exactly the right
quantity
 JIT Purchasing is Directed Toward the Reduction

• Waste (that is present at incoming inspection, excess inventory and poor quality)
• Delay
• To reduce all Non-value-added activities
• Elimination of In plant inventory
• Elimination of In transit inventory
• Quality & reliability improvement

JIT REDUCTION IN….

• Wastage
• Storage space
• Number of suppliers
 JIT Approach in Procurement Activity

Procurement activity JIT approach

Supplier selection Often one local supplier; total cost is central.

Placing the order Multi-year contract; deliveries called as needed.

Change of orders Delivery time and specifications fixed, quantities are adjusted within predetermined

margins if necessary.

Follow-up of orders Few delivery problems thanks to sound agreements; quality and delivery problems

are not tolerated.

Incoming inspection Initial sample inspections; later, no inspections necessary.

Supplier assessment Deviations are not accepted; price is fixed based on open calculation.

Invoicing Invoices are collected and settled on a monthly basis.

 Traditional Approach in Procurement Activity

Procurement activity Traditional approach

Supplier selection Minimum of two suppliers; price is central

Placing the order Annual contract; deliveries called as needed

Change of orders Delivery time and specifications often changed at the last moment

Follow-up of orders Many phone calls to solve delivery problems

Incoming inspection Inspection of quality and quantities of most deliveries

Qualitative assessment; delivery deviations of sometimes up to 10%

Supplier assessment
are tolerated

Invoicing Payment per order

 Characteristics JIT Concept in Procurement Process

• Type of sourcing
– materials & parts are usually bought from a single source. opposed to purchasing from multiple sources under traditional
purchasing activities.
• Close relationship with supplier
- dealing with fewer supplier for particular time contributed to establishing a long term, stable & satisfactory relationship.
• Material quality
-achieving product quality through a long – term contract at a fair price receives the highest priority.
• Supplier evaluation method
- supplier evaluation based on product quality, delivery performance and price. supplying defective items is not tolerated.
• Purchased quantities
- products are produced in small lot sizes when needed, and in turn materials and parts are frequently delivered in small lots.
• Rapidly order
- the average monthly frequency of deliveries increases to 6.9 from 2.8 under traditional purchasing.
 Procurement General Process/Procedures

Selection of possible Determination of

Recognition of need Description of need
sources of supply price and availability

Review and
Processing
communicate with Follow up or
discrepancies and Placing the order
supplier at regular expediting the order
rejection
intervals

Closing complete Maintenance of

orders records and files