Unit 1

Project Procurement and Supply Chain

Management
Project Procurement Management:- Includes the
processes required to acquire goods and services from
outside the performing organization to fulfil project
scope requirements .
The procurement management processes are:
 Plan Procurements
 Conduct Procurements
 Administer Procurements
Procedures are detailed outlines of a specific action to
be taken to accomplish a given task, within the guide
lines of any applicable policy.
Procurement procedure serves two fundamental
purposes a firm
 They provide the framework and the direction for
accomplishing the supply and materials
management activities effectively and efficiently.
 They provide the means for processing information
inputs from outside the department to produce
output communication needed by individuals in
other depts.’ to do their jobs in a coordinated and
timely manner.
In addition procurement procedures have the
following importance:
 They clarify tasks
 Ensure uniformity of purchasing activity
 Assign authority and responsibility at different
level of a given task
 Enhance documentation and control
Reasons for developing sound purchasing procedure
The large number of materials purchased.
The high amount of dollar/birr volume involvement.
Their essentiality for auditing purpose.
The severe consequences of unsatisfactory (poor)
performance.
Their contributions for accurate and satisfactory
performance.
The following steps constitute fairly standard
Purchasing Cycle:
 Recognize, define, and describe the need
 Transmission of the need

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  Selection of source of supply and evaluation of
suppliers (vendor analysis)
 Prepare and issue the purchase order
 Follow up and expediting the order
 Receive and inspect the material
 Audit the invoice
 Close the order
1. Recognize, define and describe the need
 Determination of what to need, when to need,
how much required etc...
 Material or service needs originate with the
organisation’s operating departments or in its
inventory control section/store.
 After recognize the need, the user department or
store department describe their needs in detail.
 The description should be detail enough to
enable the purchaser look for suppliers and
acquire the items.
2. Transmission the need
The detailed description of materials by the
user/store department transmits to purchasing
department for purchase by one of the basic
methods:
Purchase requisition- an internal document used to
communicate user department with purchasing department.
The essential information which every requisition should
contain a description of the material, quantity, and date
required; estimated unit cost; operating account to
be charged; the date; and an authorized signature
etc.... Clear & complete description of the required material
is a joint responsibility of the user and the buyer.
Question that are common during PR verification:

 Is the request approved by the concerned party?

 Are all information in the requisition clearly described?
 Is there budget for the request?
Travelling purchase Requisition:
 In the search to reduce operating expenses, some
companies have found it desirable to use a
travelling requisition for recurring requirements of
materials and standard parts.
 The travelling requisition is a requisition form used
when a particular item is must be purchased

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 frequently for a given department.
3. Investigate, evaluate and select the right
supplier
 Once the purchasing need has been specified, the
purchasing department must investigate, evaluate
and select possible suppliers of the specific goods
or services required.
 Based on the purchase requisition showing the
specifications and amount of items desired, the
purchaser will determine possible sources of supply
and analyses them.
Supplier selection process involves the following
decisions:
 Identification of potential suppliers by developing
complete list
 Determining the responsibility for supplier
selection: like use either the purchaser or cross
functional team
 Developing evaluation criteria/parameters
 Evaluation of potential suppliers
 Selection of the right supplier
Sources of supplier information: Purchasing files;
Supplier catalogues; Trade journals; Sales personnel
/representatives, Trade exhibitions, Buying company
personnel & Internet; etc…
Some of the evaluation parameters are:
 Organization structure; Manufacturing capability;
Technical skill and testing facilities; Financial
capacity; Location and infrastructure; Past
performance and after-sales service.
 The factors to be taken in to account to rate
suppliers are: location, technical capability, price,
past performance (i.e., delivery delays, quality and
percentage of rejection, reliability and cooperation.
 The following variables should be considered while
evaluating the quotations of the suppliers: Cost
factors; Delivery; Design and specification factors;
Legal factors; Vendor rating.
After developing a comprehensive list of potential
suppliers & evaluation criteria the buyer’s next steps is
request & collect the required information from each
potential supplier through different methods:
1. Request for information (RFI) - is a standard
business process whose purpose is to collect written
information about the capabilities of various

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 suppliers.
2. Request for proposal (RFP)- It is a formal
invitation from an organization to a supplier to
submit an offer.
3. Request for quotation (RFQ)- It is a standard
business process whose purpose is to invite
suppliers into a bidding process to bid on specific
product/service.
4. Proforma - a price quotation form to be filled and
issued by the supplier in response to RFQ as a sign of
willingness to deliver requested items.
4. Preparation of purchase order(PO)
 It is a legal document or contract for purchasing
goods by one party from another at a certain
price.
 Once a supplier has been selected the
purchasing department prepares and issues a
serially numbered PO.
 A PO is a legally binding document that
indicates the firm’s commitment to purchase
items listed in the PO under the terms and
conditions of the price quote or proforma
invoice.
 The PO or contract must include detailed
information on quantities, prices, delivery-dates,
points of delivery, quality and discounts, in
order to ensure a satisfactory contract.
 At least six copies of purchase order are
prepared by the purchase section and each copy
is separately signed by the purchase officer.
 Out these copies, one copy each is sent to store-
keeper, supplier, accounts section, inspection
department and to the department placing the
requisition and one copy is retained by the
purchase department for record.
5. Acknowledgment and Follow up of the order
 No purchase “contract” exists until the seller
“accepts” the buyer’s offer.
 Purchasing bears full responsibility for and order
until the material is received and accepted.
 When there is a reasonable chance that the
supplier may not stay on schedule important
orders with critical delivery date should receive
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 active follow-up attention.
 There may be a need to speed up (expedite) or
even delay (de-expedite) delivery if the buyers
timing requirements under go unexpected
changes.
 The purchasing department must follow up
orders before the delivery date and if orders
have not been received, ascertain the expected
delivery date.
 Suppliers must be routinely reminded,
telephonically or in writing, that the orders must
be delivered on time or kept informed if they will
be late.
 The purchasing department must also ascertain
the cause of the delay, and notify the suppliers
that they have not complied with the terms of
the purchasing order.
6. Receipt and Inspection of Goods
 Receiving section is a central place where all
incoming supplies are received, checked and
inspected before storage or use.
 When the supplier ships the materials ordered,
they are received, inspected and stored.
 When the supplier ships material, supplier sends
the materials along with different documents
such as invoice and packaging slip.
 Packaging slip itemizes and describes the
contents of the shipment.
A typical receiving procedure from outside supplier
consists the following steps:
 Unloading and checking the shipment: - packed
stocks are checked for external damage.
 Unpacking and inspecting the stock: - The store
keeper checks the material received against the
packing slip and against the copy of purchase order
to verify whether the correct items are received. .
 Completion of the receipt for articles or property: -
After inspection and satisfaction that the materials
are in good condition the inspector shall prepare
note for acceptance.
Only the materials which shall be accepted by the
inspection are to be received into the store by
issuing model 19(receipt for articles or property
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 received).

7. Invoice the audit and Payment

 The accounts and finance effects the payment
by checking the receiving report against the
purchase order.
 By comparing the invoice with the purchase
order and receiving report, the firm verifies
that the supplier’s bill is priced correctly and
that covers the proper quantity of acceptable
material.
 Methods of payment such as payment to the
bank and letter of credit (LC)
8. Close the order and Maintenance of Records
 Closing the order simply entails a consolidation
of all documents and correspondence relevant
to the order; the completed order is then filed in
the closed-order file.
 It is a prudent practice to keep all documents of
the purchase process for future reference.
 The records should be filed under the PO number
and kept in chronological order for ease of
reference.
Strategic roles of procurement
O Purchasing _as a clerical or low-level managerial
activity charged with responsibility:
 To execute and process orders initiated
elsewhere in the organization.
O The role _lowest possible purchase price from a
supplier.
O This traditional view of purchasing has changed
substantially in the past two decades.
O The modem focus _relationships between buyers
and sellers _ elevated purchasing to a higher,
strategic level activity.
O This strategic role Purchasing to procurement
The increasing importance of procurement can
be traced to several factors:
 the recognition of the substantial dollar volume
of purchases
 The potential dollar savings from a strategic
approach to managing the activity.
1. Continuous Supply

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 O Stock-outs of supplies can shut down a
production plant and result in extreme cost.
O Downtime due to production stoppage: operating
costs and results in an inability to provide
finished goods for delivery to customers.
2. Minimize Inventory Investment
O Maintaining inventory is expensive_ opportunity
cost.
O One goal is to maintain supply continuity with the
minimum inventory investment possible.
O Balancing the costs of carrying excessive
materials against the possibility of a production
stoppage
3. Quality Improvement
O The quality of finished goods and services is
obviously dependent upon the quality of the
materials and parts used in producing those
items.
O Quality improvement through procurement also
has substantial implications for cost in an
organization.
O If defective materials are the cause of poor-
quality finished products, the costs of scrap and
rework in the production process go up.
4. Supplier Development
O Successful procurement depends on locating or
developing suppliers, analyzing their
capabilities, and selecting and working with
those suppliers to achieve continuous
improvement.“
O Developing good supply relationships with firms
that are committed to the buying organization's
success is critical in supplier development.
5. Lowest Total Cost of Ownership
O Total Cost of Ownership (TCO)_ the main
focus of contemporary procurement strategy
than traditional purchasing price which is only
one part of the total cost equation.
O “Service costs and life cycle costs must also be
considered.
Procurement as organizational buying
Consumer or Organizational Products---Why was

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the product purchased ?

Characteristics of Organizational Buying

Organizational buying decision-making process

Eight stage model of the organizational buying
process--depending upon the nature of the purchasing
situation.
 Problem recognition/need
 Determine product dimensions and quantity
 Precise description of product characteristics
 Search and qualification of potential sources
 Acquisition and analysis of proposals
 Evaluation of proposals and supplier selection
 Selection of an order routine
 Performance feedback and evaluation
The evolution of purchasing through to
procurement
Purchasing has evolved from a clerical buying
activity into a strategic business function that makes
significant contribution to the competitive position of
companies

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 Procurement Purchasing

Activities related to acquiring Functions associated with

goods and services Buying goods & services
Steps that happen before, Straightforward process of
during, and after purchase purchasing commodities
Used in a production Used in a wholesale environ-
environment (internal ment (external process)
process)
Puts more importance on Tends to focus more on the
an item’s value than its cost item’s price than its value
Refers to a set of tasks that Refers to the specific task of
spot and fulfil needs committing expenditure
Includes need recognition, Includes ordering, expediting,
sourcing, and contract and payment fulfilment
closure
Follows a proactive approach Follows a reactive approach
to spot and fulfil needs To satisfy internal needs
Relational–focuses on Transactional–focuses on
creating long-term vendor transactions than vendor
relationships relationships
Global Sourcing
• Global sourcing occurs when buyers purchase
goods and services from sellers located
anywhere in the world.
Global sourcing related factors that must be
controlled can be summarized as follows:
• Material costs: Price, tooling, transaction, and
other costs related to the actual product or
service delivered.
• Transportation costs: Transportation, freight
charge, consolidation, transfer fee, pickup and
delivery.
• Inventory holding costs: Warehousing, taxes,
insurance, depreciation, shrinkage, obsolescence,

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 and other costs associated with maintaining
inventories, including the cost of money or
opportunity costs.
• Cross-border taxes, tariffs, and duty costs: The sum
of duties, shipping, insurance and other fees and
taxes for door-to-door delivery.
• Supply and operational performance: The cost of
noncompliance or underperformance, which, if not
managed properly, can offset any price variance
gains attained by shifting to an offshore source.
• Supply and operational risks: Including geopolitical
factors, such as changes in country leadership;
tariff and policy changes; and instability caused by
war and/or terrorism or natural disasters (e.g.,
typhoons, earthquakes) all of which may disrupt
supply lines.
Global Sourcing Challenge

• Low Visibility: Global sourcing processes

introduce distance, time zone, cultural and
language barriers that combine to reduce visibility
into offshore operations.
• Difficult Communication: Suppliers, logistics
providers, manufacturers and other members of
the chain may have different expectations on how,
where and when to communicate information, and
at what level of detail.
Security Issues: brand owners must develop
greater visibility into order and logistics related
processes across their extended supply chain.
Dimensions of Global Sourcing
• Costs: multi-modal freight charges, broker fees,
taxes, and insurance in global sourcing that are not
part of domestic transactions.
• Laws: Laws applied in global contracts between
buyers and suppliers can be chosen from the law of
the buyer’s country, the law of the supplier’s
country, or one applicable under an agreement
accepted by both countries.
• Currency: Supply chain members should agree on
a currency to use.
• Lead Time: Large geographical distances in global
context make lead time to be longer than for

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 domestic ones.

Language and Culture

• Transportation: While domestic sourcing usually
involves one shipping mode, global sourcing
involves multi-modal transportation, combined air,
water, and ground transportation to get goods from
initial suppliers to the ultimate consumers.
• Payment Methods: Global sourcing often
involves payment using international letter of
credits which requires the involvement of both the
buyer’s and supplier’s banks.
Project procurement management
 Procurement Planning- Begins at the start of a
new project includes the make or buys analysis,
and ends with a published Procurement
Management Plan.
 Solicitation Planning: Starts implementation of
the Procurement Management Plan, and ends with
a solicitation document typically called the Request
for Proposal (RFP).
 Proposal Solicitation: Takes the RFP, and solicits
formal proposals from sellers.
 Source Selection: Evaluates seller proposals, and
ends with the issuance of a contract award to a
seller.
 Contract administration: Manages seller
performance, and manages changes to seller
authorized scope.
Contract closeout: Settles all open contractual issues
and closes out each procurement

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