PROC101B: Unit 1: Introduction - FOR PRINT

Introduction
Procurement and supply are all about buying the goods and services
that an organisation needs to enable it to operate productively, from one
or more supply sources and return a profit on its purchases for its
shareholders.

UNIT S PEC IFIC OUTC OMES AND AS S ES S MENT C R ITER IA

Unit specific outcomes & assessment criteria

Introduction

GLOS S AR Y OF TER MS

Glossary of terms

C ONTENT

Contribution to organisational success

 ↪ Sources of added value

↪ Procurement and SCM

↪ Stakeholders and stakeholder management

KEY S TEPS WHEN PR OC UR ING GOODS AND S ER VIC ES

Key steps when procuring goods and services

↪ Key stages of the sourcing process

↪ E-procurement

↪ Balancing compliance with outcomes

PR OC UR EMENT AND OR GANIS ATIONAL S TR UC TUR E

Procurement and organisational structure

↪ Corporate governance in procurement and supply

↪ Policies, procedures and strategies

↪ Procedure strategies

↪ Procurement and supply chain structures

↪ Use of IT in procurement and supply

R EQUIR EMENTS C OMPLIANC E

Requirements compliance
 ↪ Economic and industrial sectors

➜➜ Economic classification

➜➜ Industrial classification

↪ Procurement and supply chains in the public sector

↪ Procurement and supply chains in the private sector

↪ Procurement and supply chains in the third sector

S UMMAR Y

Summary
Section 1 of 25

Unit specific outcomes & assessment criteria

Unit specific outcomes

After completing this study unit, you should be able to:

Demonstrate an understanding of and discuss the added

value that can be achieved through procurement and
supply chain management.

Recognise and explain the key steps when procuring

goods or services.

Analyse and apply the key aspects of organisational

infrastructure that shape the scope of a procurement or
supply chain function.

Explain the need for compliance with requirements

when undertaking procurement activities in different
sectors.

Assessment criteria
Understand the difference between purchasing and
procurement.

Discuss the contribution purchasing and procurement

make to the company.

Explain the breakdown of organisational costs.

Explain how the five rights of procurement are used in

the value adding process.

Demonstrate an understanding of the procurement

cycle.

Discuss the importance of stakeholders in the

procurement cycle.

Discuss the importance of procurement policies and

procedures.

Describe the procurement and supply chain

organisational structures.

Distinguish between the economic and industrial

sectors.

Understand the public, private and third-party sectors.

Section 2 of 25

Introduction

Introduction
Supply is that part that transforms those goods and
services into finished products and then distributes them to
customers in the most economical way. Today procurement
has become a strategic component of the business. Good
procurement can grow a business; poor procurement can
destroy it.

Effective management of procurement will enable an

organisation to lower its operating costs by procuring
supplies, services and contracts at the best price. The best
price not necessarily being the cheapest price, a mistake
that is often made in business, especially by the
government. Proper procurement management also
enables a company to make the most of warranties or
discounts offered by suppliers from time to time.
Section 3 of 25

Glossary of terms

Compliance

The ability to act according to an order, set of rules or request

(International Compliance Association, n.d.).

Goods

A commodity or a physical, tangible item that satisfies some

human want or need, or something that people find useful or
desirable and try to acquire it.

Procurement

The sourcing and purchasing of goods and services for business

use.

Purchasing

The functional department responsible for buying the production

materials, parts, supplies and services needed by the organisation.
Sector

An area of the economy in which businesses share the same or a

related product or service. It can also be thought of as an industry
or market that shares common operating characteristics
(Investopedia, n.d.).

Services

Intangible products such as accounting, banking, cleaning,

consultancy, education, insurance, expertise, medical treatment or
transportation. Sometimes services are difficult to identify
because they are closely associated with a good, such as a
training intervention with the accompanying textbook and course
notes.

Supply

That part of the supply chain responsible for providing the

resources necessary to complete the company’s order book.

Supply chain

All the businesses and individual contributors involved in creating a

product, from raw materials to the finished product.

Supply chain management

The management of the flow of goods and services and includes
all processes that transform raw materials into final products. It
involves the active streamlining of a business's supply-side
activities to maximise customer value and gain a competitive
advantage in the marketplace.

Value

An amount, as of goods, services or money, considered to be a fair

and suitable equivalent for something else; a fair price or return.
Section 4 of 25

Contribution to organisational success

Contribution to organisational success

In the private sector, procurement is seen as a strategic
function, a function working to continuously improve the
organisation's profitability. Procurement management aims
to help a business streamline its processes, reduce raw
material and component prices and costs and identify a
supplier base that will provide better sources of supply.

Procurement adds value by reducing costs, without

compromising quality, quantity, lead-time or the delivery of
goods and services. In essence, the goal of procurement is
to achieve the best objectives and reduce the total cost in
the supply chain.

What is procurement and purchasing?

Some would argue that purchasing is procurement and
some that procurement is purchasing. Some would even
argue they are both the same but they are not. What they
both share is one common factor; they are both concerned
with the act of buying. Where they differ is in the amount of
effort made in sealing a deal.

As outlined in the Institute of Purchasing Management Handbook,

you purchase a nut and bolt, but you procure a piece of
equipment.

This implies that the buying process requires a great deal

more effort on the part of the procurement team than
would be required for many of the day-to-day purchases of
off-the-shelf component parts.

Many of us use the terms purchasing and

procurement interchangeably without giving much thought
to the difference between the two, but despite their
similarities, they do have different meanings.

Procurement

Procurement encompasses the process of selecting vendors,

establishing payment terms, strategic vetting and selection, the
negotiation of contracts and actual purchasing of goods.
Procurement is concerned with acquiring (procuring) all the
goods, services and work that is vital to an organisation.
Procurement is, essentially, the overarching or umbrella term
within which purchasing can be found.

Purchasing

The term purchasing refers to the process of ordering and

receiving goods and services. It is a subset of the wider
procurement process. Generally, purchasing refers to the process
of ordering goods such as request, approval, the creation of a
purchase order record and the receipt of goods into the company.

Most often the purchasing department is that part of the

procurement function that handles the supply chain
process.

Definitions in procurement and supply

To understand procurement and supply we need to begin

by defining a number of terms:

Added value
The value attributed to products and services as the result of a
process, such as a production process, storage or transport.

Inventory

Goods available for satisfying certain demands. Inventories may

consist of finished goods ready for sale, they may be parts or
intermediate items, they may be work-in-process, or they may be
raw materials.

Logistics

Systems and infrastructure within the supply chain which

transport and deliver goods and supplies for the value chain of a
product.

Quality

Strict and consistent adherence to measurable and verifiable

standards to achieve uniformity of output that satisfies specific
customer or user requirements.

Supply

That part of the supply chain responsible for providing the

resources necessary to complete the company’s order book.
Value for money

A utility derived from every purchase or every sum of money

spent.

Waste

Any object or process that does not add value to a product in the
eyes of the customer. Waste is often tied to special-cause
variation.

Cost

The monetary value of spend for supplies, services, labour,

products, equipment and other items purchased for use by a
business.

Breakdown of organisational costs

Costs can be divided into two categories, fixed costs and

variable costs. Each of these can then be further
subdivided into direct costs or indirect costs.

Fixed costs
Those costs that do not vary with the level of activity: Examples
would include vehicle purchases, garaging facilities and operating
equipment.

Variable costs

Those costs that vary directly with the level of operation.

Examples include direct labour, direct materials and direct
overheads.

Direct costs

Those costs that can be directly identified with a product or

service and include direct labour, direct materials and direct
expenses.

Indirect costs

Indirect costs, usually referred to as overheads, include all those

costs that cannot be identified as direct costs, and include indirect
labour, indirect materials and indirect expenses.

Stock and non-stock procurement

Another way to look at costs is to differentiate between

stock and non-stock procurement. The difference between
the two terms, stock and non-stock does not relate to
whether or not you buy and keep an item, but rather to the
way each is accounted for in the accounting system.

Stock items

Stock items are what is normally thought of as inventory. These

items are bought, taken into inventory, appear as an asset on the
company’s balance sheet and are later withdrawn from inventory
to be used in the production process.

Non-stock items

Non-stock items are items that can be bought and sold but do not
appear in a company’s inventory database.

Direct and indirect procurement

Another way to look at procurement spend is to

differentiate between the two types of procurement, direct
procurement and indirect procurement.

Direct procurement

Direct procurement includes those items that are bought and are
used directly in the production of a company’s goods; these would
include direct materials, direct labour and direct expenses.

Indirect procurement

Indirect procurement includes those items that are bought and

used in support of a company’s goods and include indirect
materials, indirect labour and indirect expenses (overheads).

Capital and operational expenses

Capital purchases

These are the purchase of a company’s fixed assets, its plant and
equipment. The items a company purchases to keep and use for
an extended time. Fixed assets are what is used to make the
company grow. Typical of a company’s fixed assets are the plant
and equipment used in production, the buildings to house the
production and warehousing facilities and the materials handling
and materials’ transport equipment used to move goods from one
location to another.

Operational expenses

These are the costs incurred in maintaining the plant and

equipment. These costs include both the cost of running the
assets and the costs associated with depreciation. Additional
operating costs include the costs of rent, sales, administration and
distribution, and research and development.

Services procurement

Service procurement is the process of requisitioning people-based

services at a company level with an agreed-upon scope and
deliverables. A service procurement is usually accompanied by a
service level agreement (SLA). Services procurement can best be
described as the strategic outsourcing of a service to an individual
or an organisation for a specific purpose.

Maintenance repair and operating (MRO) supplies

These are the items that are bought in support of a company’s

operations, the majority of which are classified as consumables.
Section 5 of 25

↪ Sources of added value

Sources of added value

According to Michael Porter (1985) the ultimate value an
organisation creates is measured by the amount customers
are willing to pay for its products or services over and
above the cost of the organisation of carrying out all its
value-adding activities. An organisation is profitable if the
realised value to customers exceeds the cost of value
creation.

From a marketing perspective, adding value means

enhancing the offering to customers – ‘augmenting’ the
core product or service with elements that customers value
and which differentiate the organisation’s offerings in the
eyes of the customer.

The core product represents the key benefits received

directly from purchasing the product.
 The actual product is the key element of the product
that differentiates one product from another.

The augmented product may include a range of tangible

and intangible elements which add value (and often
differentiate competing products).

Order winners and qualifiers

The terms order winners and order qualifiers were coined

by Terry Hill, a professor at the London Business School,
and refer to the process of how internal operational
capabilities are converted to criteria that may lead to
competitive advantage and market success.

Professor Hill emphasised the interactions and cooperation

between operations and marketing.

Order winner

A criterion that customers use to differentiate the services or

goods of one business entity from those of another.

Oder qualifier

One or more performance dimensions on which customers expect

a minimum level of performance. Superior performance on an
order qualifier will not, by itself, give a business a competitive
advantage.

According to Hill, the operations people are responsible for

providing the order-winning and order-qualifying criteria –
identified by marketing – that enable goods or services to
win orders in the marketplace. This process starts with the
corporate strategy and ends with the criteria that keep the
business in the running, i.e., order qualifiers, or wins the
customer’s business – order winners.

Please watch the video below: https://www.youtube.com/watch?v=obN8ArDTWpc

Five rights of procurement

There are five rights which should always be considered

when making a purchase:

1. Quality

2. Quantity

3. Price

4. Place

5. Time
Total cost of acquisition and ownership

Another important cost consideration is the cost of

acquisition and the cost of ownership.

The cost of acquisition is the total cost of acquiring

something and includes the total cost of sourcing, receiving
and installing an asset. Included in this cost could be the
cost of transportation, the cost of insurance, the costs of
souring and so on. This includes:

Purchase Price: The initial cost of the asset.

Sourcing Costs: Expenses related to identifying and selecting

suppliers, including travel, communication, and negotiation.

Transportation Costs: Freight, insurance, and handling fees for

delivering the asset.

Installation Costs: Costs associated with setting up the asset,

such as labor, materials, and testing.

Additional Costs: Taxes, duties, legal fees, and any other costs
directly related to the acquisition.

TCA Calculation Example

Purchase Price: R50,000
Sourcing Costs: R2,000

Transportation Costs: R1,500

Installation Costs: R3,500

TCA = R50,000 + R2,000 + R1,500 + R3,500 = R57,000

The total cost of ownership, which is also known as the life

cycle cost, is used to analyse the total cost of owning an
asset and would include such items as the cost of
depreciation, operator training, operating cost,
maintenance, insurance, any special tooling and even the
cost of disposal.

TCO provides a holistic view of the total cost of owning an

asset over its entire lifespan. It includes:

TCA: The initial acquisition cost (as calculated above).

Operating Costs: Expenses incurred during the asset's operation,

such as energy consumption, consumables, and operator salaries.

Maintenance Costs: Costs associated with repairs, preventive

maintenance, and spare parts.

Disposal Costs: Expenses related to decommissioning, recycling,

or disposing of the asset at the end of its useful life.
TCO Calculation Example (Over 5 years)

Continuing with the machine example:

TCA: R57,000

Annual Operating Costs: R10,000

Annual Maintenance Costs: R5,000

Disposal Costs (after 5 years): R2,000

TCO (over 5 years) = R57,000 + (5 R10,000) + (5 R5,000) + R2,000 = R134,000

Importance of TCA and TCO

Understanding TCA and TCO is crucial for effective procurement and asset management.
By considering the full lifecycle costs, organizations can make more informed decisions
about:

Supplier Selection: Choosing suppliers that offer not only

competitive purchase prices but also favorable TCO.

Asset Selection: Opting for assets with lower operating and

maintenance costs, even if the initial purchase price is higher.

Maintenance Strategies: Developing proactive maintenance plans

to minimize downtime and extend the asset's lifespan.
 Disposal Planning: Evaluating options for recycling or reusing
assets to reduce disposal costs.

Please watch the video below: https://www.youtube.com/watch?v=y29obIibaHU

Section 6 of 25

↪ Procurement and SCM

Procurement and supply chain management

To get a better understanding of procurement and supply
chain management it is a good idea, to begin with a few
definitions. These will help to conceptualise the field of
procurement and supply.

Just a word of caution, there are as many definitions of a

term as there are shades of grey. But the ones chosen here
are representative and will suffice for this study guide.

View the definitions of important terms below:

Procurement

The sourcing and purchasing of goods and services for business

use.

Purchasing
The functional department responsible for buying the production
materials, parts, supplies and services needed by the organisation
to produce its goods.

Supply chain

All the businesses and individual contributors involved in creating a

product, from raw materials to the finished product.

Supply chain management

The management of the flow of goods and services and includes

all processes that transform raw materials into final products. It
involves the active streamlining of a business's supply-side
activities to maximise customer value and gain a competitive
advantage in the marketplace.

Supply chain networks

A network between a company and its suppliers to produce and

distribute a specific product to the final buyer. This network
includes different activities, people, entities, information and
resources.

Complex supply chains

 Complex supply chains do not mean complicated, but rather it
describes a condition of inter-connectedness and inter-
dependencies across a network where a change in one element
can affect other elements (Christopher, 2019).

Logistics

The overall process of managing how resources are acquired,

stored and transported to their destination.

Materials management

The process which integrates the flow of supplies into, through

and out of an organisation to achieve a level of service which
ensures that the right materials are available at the right place at
the right time in the right quantity and right quality and at the right
cost.

Can you answer the following questions?

What is procurement? Choose the 3 definitions that are CORRECT.

Procurement is the act of obtaining goods or services,

 typically for business purposes.

Procurement and supply management involve buying the

goods and services that enable an organisation to operate
in a profitable and ethical manner.

Procurement most commonly refers to the formal, official

process of purchasing and obtaining materials, supplies, or
equipment, especially in the context of business or
government.

Procurement is the action or an instance of purchasing

something.

SUBMIT

Can you match the definition to the correct term?

 SUBMIT

In your own words, explain the differences between

‘procurement’ and ‘purchasing’.

Procurement encompasses the process of selecting

vendors, establishing payment terms, strategic vetting and
selection, the negotiation of contracts and actual
purchasing of goods. Procurement is concerned with
acquiring (procuring) all of the goods, services and work
that is vital to an organisation. Procurement is, essentially,
the overarching or umbrella term within which purchasing
can be found.

The term purchasing refers to the process of ordering and

receiving goods and services. It is a subset of the wider
procurement process. Generally, purchasing refers to the
process of ordering goods such as to request, approval; the
creation of a purchase order record and the receipt of
goods into the company.
Section 7 of 25

↪ Stakeholders and stakeholder management

Stakeholders and stakeholder management

Stakeholders are all those groups, units, individuals, or
organisations, (internal or external), to the organisation,
that are impacted by, or can impact, the outcomes of the
project, a service, or a company venture.

Examples of procurement stakeholders

Within procurement and supply, it is possible to classify

stakeholders into one of two broad categories, these being
internal stakeholders and external stakeholders.

Internal stakeholders

Internal stakeholders are all those that are affected by

procurement and would include the finance department, the legal
team and those in senior management
External stakeholders

External stakeholders are predominantly the suppliers but would

also include all other partners in the procurement and supply
chain.

Within the supply chain, it is possible to identify what is

known as upstream and downstream stakeholders. If we
assume the position of a manufacturer, then the
stakeholders in the supply network (suppliers and service
providers) are the downstream stakeholders, while the
stakeholders in the distribution network (distribution,
logistics, and warehousing) are the upstream stakeholders.

Examples of stakeholders for supply chain

Stakeholders in the wider supply chain are a much wider

group and include all parties from the first tier supplier base
through to the final customer.

In addition, there are stakeholders outside of the

organisation’s supply chains which would include local and
national governments. If the business is operating globally
then there would be stakeholders in other countries as
well.

Mapping stakeholders

In the area of procurement and supply, stakeholder

management is critical at each level. The primary aim of
stakeholder management is to gain knowledge
understanding and ideas from personnel, both within the
business and outside the business.

Proactive engagement with stakeholders can help to

ensure that the procurement team gains understanding,
and insights into strategic issues, cost-saving goals,
compliance, and value add.

Managing stakeholder relationships

A procurement manager neglects a stakeholder at his or

her own risk.

Such is the case with any business relationship. A strong

stakeholder relationship needs the effort to develop and
nurture. An effective procurement manager gets to know
his or her stakeholders and understands what their key
drivers are. A positive stakeholder relationship will take
time and effort to develop and sustain but it will be worth
it.

Stakeholders are known for becoming difficult if they think

their needs are being ignored or feel they are being left out
of the communication loop.

Five principles have been suggested for managing

stakeholder engagement.

1. Identify the stakeholders

It is critical in both business and procurement that the team
can identify who the key stakeholders are within the business.
By getting to know who the stakeholders are, their position,
strengths and weaknesses helps to get a clear understanding
of what they want, care for and their influence across the
organisation.

2. Engage early with stakeholders

In a procurement intervention, the earlier the procurement
team can engage with the relevant stakeholders the more
positive the outcome will be for all parties. Senior
management will have more influence than perhaps a buyer.
In the procurement environment, this is particularly true in
driving change management and transformation.
3. Listen carefully to stakeholders
It is critical and essential that the procurement teams listen
carefully to their stakeholders, so they can manage their
expectations. From a procurement perspective, listening and
understanding the views and the feedback provided by the
stakeholders helps the procurement team shape and improve
the overall operation of procurement and supply. The benefits
to be achieved include more informed decision making, a
higher level of stakeholder satisfaction, an open two-way
communication process and an improved chance of success.

4. Communicate openly with stakeholders

Open communications with stakeholders, be it through email,

regular newsletters, online or virtual presentations, video

calls, or a report summary will go a long way toward

ensuring stakeholder benefits. Open, two-way

communications help ensure greater opportunities for

stakeholders to contribute directly, help to leverage

stakeholder expertise (a vital input) and make the

communication process more effective.

5. Create early value and ensure stakeholder success

A procurement function that educates and works with

stakeholders can create value for both parties and best

practice is a natural way to this type of success.
Section 8 of 25

Key steps when procuring goods and services

Key steps when procuring goods and services

The procurement cycle is based on several activities
ranging from the understanding that there is a need for a
product or service through to the attainment of that product
or service. Several alternative models have been developed
to explain the procurement or sourcing cycle. One of the
more popular is the CIPS procurement cycle, on which the
following is based and which will be used in the
programme.

Define business need

The first step is to define the need for a good or service, which
can be a tangible need such as a material, or an intangible need
such as a service. The need can arise from either an internal or an
external customer and is usually communicated to the purchasing
team via a purchase requisition outlining the requirements.

Market analysis
Here a decision is taken on whether to make or buy the item. In
general, the decision is based on whether it is cheaper to buy it
than make it, and if it is cheaper to buy, then buy. If an item is
critical, then the decision is usually to make, if the business does
not have the technical know-how, then the decision is to buy.

Develop strategy and plan

At this stage, a plan is developed on where to source. Should the
item be sourced locally, nationally or globally? Factors that need
to be considered are whether the item is scarce or is easily
available. Although many companies are likely to find what they
need locally and will want to support local industry, global supply
sourcing should not be overlooked.

Pre-procurement market testing

During this stage, the procurement team may need to engage
with the market to determine how best to develop the
specification, especially with the cost implications. Two other
factors that may need consideration are the product’s life cycle
and the seasonality of the product.

Develop documentation and detailed specs

Stage 5 is where the procurement team will develop the
documentation that will be sent out to the supplier base. If there
is a large competitive market then the likely course of action
would be to send out an ITT (invitation to tender) and if the
opposite were true then an RFQ (request for quotation) would
perhaps be the better course of action to take.

Supplier selection
At this stage, Stage 6, the supplier is selected to provide the
goods or services being requested. If there is a current supplier
available, then this is a relatively straightforward step. If a new
supplier has to be sought, the procurement team will need to
carry out an analysis, perhaps using Carter’s 10 Cs to select the
supplier that can best meet the requirements.

Issue tender documents

The decision here is whether to use a tendering process or simply
send out a request for quotation. Tenders are often issued where
there is a large competitive market. Tendering is used in the
public sector. An RFQ is more usually used when procuring low-
value products and services.

Bid and tender evaluation and validation

During the evaluation phase, cross-functional teams are often
involved. Having other functions of the business involved in the
evaluation process will help ensure fairness in the evaluation. The
time to evaluate a tender, because of the content, often takes
much longer than the time to evaluate a quote.

Contract award and implementation

Once the successful supplier has been agreed on and the chosen
supplier has agreed to accept the contract, the contract is
signed. At the same time, all unsuccessful bidders are informed
that their tenders were unsuccessful. There is no need to provide
any explanation as to the reasons.

Warehouse receipt and logistics

At this stage cooperation with the warehouse and logistics will be
required. The procurement team will advise the warehouse of
when the new items will arrive, and that will enable them to
prepare for the receipt and make the necessary arrangements for
the storage and safekeeping of the items in the warehouse.

Contract performance and improvement

During this stage, the procurement team will set up several
performance review meetings with the supplier to review its
performance against the KPIs agreed for the contract. These
meetings will be used to address any underperformance by the
supplier during the execution of the contract and to amend the
KPI if the need arises.

Supplier relationship management

Supplier relationship management entails strategically managing

all interactions with suppliers to maximise the value of those
interactions. It means creating closer, more collaborative
relationships to realise value.
Section 9 of 25

↪ Key stages of the sourcing process

Key stages of the sourcing process

There are five key stages in the sourcing process that the
procurement team will need to take careful note of when
determining which supplier would best meet the contract
requirements.

Define needs and develop specification

The aim here is to ensure the quality standards are met and
reduce the need for continual requotes due to there being
insufficient information being supplied by the supplier, or the
supplier is misinterpreting the requirements. A clearly defined
need and specification will save a great deal of time during the
selection process.

Develop contract documentation

A well-developed set of contract documentation will ensure
potential suppliers are fully briefed on the terms and conditions of
the contract. This will assist the procurement team in eliminating
at an early stage the potential suppliers that are unable to meet
the technical requirements of the contract.

Supplier selection
Adopting an ethical approach to supplier selection will disqualify
suppliers who are unable to satisfy the supplier selection process
in terms of such things as financial stability, lead times, quality
standards and do not conform to the buying company’s
standards of ethics. Careful supplier selection will also reduce the
degree of risk to which the buying company would be exposed.

Contract award
Stage 4, contract award, ensures that supplies are scored against
several weighted criteria, and the award goes to the supplier that
achieves the best overall weighting that meets the contract
requirements. Using a weighted selection process eliminates the
‘halo effect’ of awarding a contract on a single criterion without
considering all the contract requirements.

Contract/supplier management
This is an important key stage in the sourcing process as it is
used to develop a working relationship with the supplier, which in
turn will increase the likelihood of innovation, change
management where necessary and heighten the degree of trust
between the parties to the contract.
Section 10 of 25

↪ E-procurement

E-Procurement
Electronic systems can be very effectively used during the
supplier selection process. Just keep in mind that the letter
‘e’ simply means that the process is electronic as opposed
to manual.

From a conceptual perspective, e-procurement is a very

simple concept and can be used with great effect during
the tendering process. E-procurement has been shown to
reduce costs considerably during the supplier sourcing
process, while at the same time ensuring that the inputs
meet all the required technical and other specifications.

There are two components to the e-procurement process:

E-requisitioning
E-requisitioning refers to the purchase of goods and services
needed by the buying company’s end-user.

E-sourcing

E-sourcing, sometimes referred to as electronic sourcing,

describes the use of web-based systems to collect and compare
information about several suppliers to help the buyer select a
preferred provider.

E-sourcing

E-sourcing, also known as e-procurement and supplier

exchange, is the business-to-business (B2B) or business-
to-consumer (B2C) or business-to-government (B2G)
purchase and sale of supplies, work, and services using the
Internet as well as other information and networking
systems, such as electronic data interchange (EDI) and
enterprise resource planning (ERP).

There are several components to e-souring.

E-catalogues
An electronic catalogue (e-catalogue) is a web resource that
provides information on products and services offered and sold by
a vendor and supports online ordering and payment capabilities
(Lysons and Farrington, 2006).

E-ordering

E-ordering is the electronic application, ordering, and receiving of

products and services by the employees of an organisation, within
the frameworks created in the tactical purchasing process (B-
CAPP, n.d.). An employee can search for a product or service in
the ordering catalogue system that matches his/her needs.

E-invoicing

Electronic invoicing, also known as e-invoicing, refers to the

exchange of an invoice document between the supplier and the
buyer with an integrated electronic format. It is used as an
umbrella term to describe any method by which an invoice is
electronically presented to a customer for payment (Planergy,
n.d.).

E-payment

An electronic payment is a digital transaction between two

parties. E-payment types include ACH, wire and bank transfers,
cards, digital wallets, mobile payments and more (Stampli, n.d.).
Companies have a variety of ways that they can pay their vendor
bills these days.

From a procurement point of view, the major advantages of

using e-sourcing, according to Murphy (n.d.), include:

Automation and streamlining of business processes

Ability to achieve improved transparency of, and access

to, all spend data

Improved collaboration, analysis and decision-making

through centralised data management

A reduction in waste, inefficiencies, unauthorised

spending and human error

Connect all electronic applications, including the

company’s enterprise resource planning (ERP) software,
accounting processes, and customer resource
management (CRM) solutions, to create a cohesive
software environment driven by a shared efficiency

Create and manage a global supply chain with optimal

performance and strong vendor relationships built
through strategic sourcing
 Redefine the role of procurement as a source of value
and cost savings created through actionable insights
and process optimisation.

Reverse and E-auctions

A reverse auction is a type of auction in which sellers bid

for the prices at which they are willing to sell their products
and services.

A reverse auction is where the role of the buyer and seller

are reversed. In such a case there is one buyer and
possibly many sellers.

In a regular auction, a seller puts up an item and buyers

place their bids until the close of the auction, at which time
the item goes to the bidder offering the highest price.

In a reverse auction, the buyer puts up a request for a

required good or service. Sellers then place bids for the
amount they are willing to be paid for the good or service,
and at the end of the auction the seller with the lowest
amount wins. Here the amount of the bid decreases until
only one bidder is left.
There are several advantages and disadvantages to the use
of reverse auctions.

Advantages of reverse Disadvantages of reverse

auctions auctions

The provision of open

Difficult to pinpoint any
communication between
substantial benefit to the
buyers and sellers as
buyers or sellers adopting
everyone can see each
this method of bidding.
other’s actions in real-time.

The World Wide Web

Reverse auctions should not
eliminates geographical
be seen as being appropriate
constraints, allowing bidders
for all types of products and
to compete from anywhere
services.
around the globe.

There is a possibility of a
It is easy and quick to
supplier making a lower profit
compare bids among the
than might be made using
bidders (potential suppliers)
other forms of bidding.

Everything can be done There is often a lack of total

online eliminating the need to knowledge about the
have face-to-face meetings requirements of what
and visit potential supplier potential suppliers are
premises. bidding.
 Advantages of reverse Disadvantages of reverse
auctions auctions

Non-constraints on the size

of the business bidding for
the contract.

Procure to Pay (P2P)

Also known as purchase-to-pay and P2P, procure-to-pay is

the process of requisitioning, purchasing, receiving, paying
for and accounting for goods and services, covering the
entire process from point of order right through to payment.
P2P is a coordinated and integrated process taken to fulfill
a requirement for goods and services promptly at a
reasonable price.
Procure to pay involves several sequential stages as can be
seen from the figure above. The process starts with the
identification of a need and follows through to the payment
of the supplier for the goods and services provided.
Section 11 of 25

↪ Balancing compliance with outcomes

Balancing compliance with outcomes

Compliance simply means doing what you are supposed to
do.

Procurement compliance requires formulating, following,

and enforcing the necessary processes for company spend
management. Simply put, it is ensuring that all spending
flows through company-approved policy and maverick
spending is not occurring.

The compliance process is there to help ensure

consistency, transparency, and commitment across the
procurement department. A compliance policy will instruct
buyers on what actions are needed to ensure tenders are
evaluated in the same way. This helps reduce the risk by
providing guidelines in the decision-making process. In
addition, it helps the buying company save time and
money, which in turn makes the buyers more productive.

It will advise the buying team on how to conduct

themselves when dealing with suppliers while representing
the organisation and indeed the procurement profession.
Compliance during achieving outcomes will assist the
buyers in identifying the types of suppliers they should
engage with and those that they should avoid based on
their ethics, corporate social responsibility, and
sustainability.

Some of the factors that may be considered during the

process include such things as credit scores and credit
ratings, the market in which the buying organisation trades,
and the supplier’s company culture.
 Compliance process

Achieving compliance with processes contributes

considerably to achieving outcomes in many ways as
shown in the figure above.

When those in procurement comply with these processes

then they will add value to the procurement process and
the company. Unfortunately, not complying with the
processes will only lead to the procurement department
and the company gaining a reputation for unethical
behaviour, working with questionable suppliers, shortages,
and damage to a company’s reputation. In the extreme, this
practice could also lead to legal action being taken against
the business.
What is the first step in the procurement cycle?

Market analysis

Define the need or define the business need

Market testing

Develop documentation

SUBMIT

During this phase, the procurement manager decides if the item can be sourced
locally, nationally or globally.

Market analysis
Develop strategy and plan

Pre-procurement market testing

SUBMIT
Section 12 of 25

Procurement and organisational structure

Procurement and organisational structure

A question facing every business in the 21st century is
should our organisation be centralised or decentralised?

Many organisations, both private and third-party, struggle

with building the right organisation structure for their
procurement organisation. While there are definite
advantages for individual business units, a decentralised
structure can create an environment where leverage and
synergy are lost and category knowledge is not captured.

Conversely, when an organisation centralises all its

procurement, it can miss key local, geographic market
opportunities and sub optimises individual business unit
requirements, creating dissatisfaction among stakeholders
(Adapted from Zycus 2021).
Section 13 of 25

↪ Corporate governance in procurement and

supply

Corporate governance in procurement and supply

Corporate governance is the system of rules, practices, and
processes by which a company is directed and controlled.
Here are a few explanations of corporate governance:

Corporate governance refers to how companies are

governed and for what purpose. It identifies who has
power and accountability and who makes decisions
(Chartered Governance Institute UK & Ireland, n.d.).

Corporate governance refers to the organisational

structure and the people within that structure.
Corporate governance identifies who has the authority
within the company and the level of decision-making
assigned to each position.

Corporate governance can be described as a ‘tool kit’

that enables the board and management to deal more
effectively with the challenges associated with
successfully running the business. It ensures that a
business has an effective decision-making process and
 control mechanism in place so that the interests of all
stakeholders are equitably balanced.

Corporate governance enables organisations to achieve their

goals, make formal decisions, control risks and assuring
compliance.

The key elements of corporate governance are shown in

the figure below.
Stakeholders within the business include all those that
have an interest in the company’s success, and surprisingly
enough, also include those that are opposed to the
business succeeding. Typical of the stakeholders in a
business are the:

shareholders,

employees,

suppliers,

customers,

local community,

environmental groups,

and many more.

Governance at a corporate level will include the processes

through which the company’s objectives are set and
pursued in the context of social regularity and the market
environment. Governance examines the practices and
procedures that ensure that the company is being run in a
way that enables it to achieve its objectives, while at the
same time ensuring that the stakeholders have the
confidence that the trust they have in the business is well-
founded.
Good ethical decision-making builds a sustainable business
enabling the business to obtain long-term value more
effectively with the resources at its disposal.

Conflict of interest

Within the business environment, a conflict of interest can

arise when what is in an employee’s best interest does not
fully align with what is in the best interest of one or more of
his/her colleagues, or the organisation.

An example in procurement could be when a buyer accepts

a bribe to place a contract with a particular supply source.
Another could be hiring an unqualified relative to provide a
service. Another could be starting your own business,
which is similar to the one you are employed by.

It is possible to consider two types of conflict of interest:

Gaining insight

Actual conflict of interest: An actual conflict of interest involves a

direct conflict between an employee’s current duties and
responsibilities within the organisation they are employed and
their existing private interests.
Potential conflict of interest

A potential conflict of interest arises where an employee has

private interests that could at some future time conflict with their
roles and responsibilities in the company.

Potential conflicts of interest need to be disclosed and

addressed at the earliest possible moment. So, if an
employee believes that there could be, or is, a conflict of
interest then early action to address the COI is important to
ensure the company’s code of ethics is not breached.

Ethics in procurement

Understanding ethics and exercising good ethical

behaviour are vitally important areas within the
procurement and supply profession, and the procurement
professional should always disclose any potential conflict of
interest and follow the advice given by a person in
authority.

Some of the ethical concepts and principles that relate to

the procurement process include the following:
Confidentiality

The ethical principle of confidentiality requires that information

shared by a supplier with a buyer in the course of a contract is not
shared with others. At times a company may have employees sign
a confidentiality agreement as part of their terms of employment.

Due diligence

Exercising due diligence can assist in minimising risks in a

contract. Duties should be undertaken with the utmost care to
ensure company regulations and standards are being adhered to
while avoiding taking any shortcuts.

Fairness

This requires showing consideration and impartiality in all stages

of the procurement process giving equal opportunity to all bidders
to a contract and showing no bias (positive or negative) to one or
more suppliers.

Integrity

Integrity translates to reliability in the contract process and the

actions by the procurement department. All stakeholders in a
contract need to have the assurance that they can rely on any
information provided both formally and informally.

Loyalty and respect

Purchasing agents will conduct themselves in line with the

organisation's rules, acting in the company’s best interest and not
allowing outside influences into any decision-making process.

Transparency

All information related to procurement processes should be made

available to all parties directly or indirectly involved.
Section 14 of 25

↪ Policies, procedures and strategies

Policies, procedures and strategies

Policies and procedures outline the day-to-day operations
of each business function and act as guidelines for the
efficient and effective operation of business activities.
Policies and procedures are established and implemented
by top management; this is often done in consultation with
those responsible for the operation of each business
function.

Policies are broad guidelines, philosophies, or principles

that the management of a company determines and
establishes in support of its organisational goals. A
company will follow these policies in seeking its goals.

A procurement policy sets the limits within which the

procurement teams must operate, along with the
responsibilities and authority delegated to each position.
Policies are then further broken down into a series of
procedures and work instructions.

Procedures refer to a detailed written description for each

of the activities carried out in the procurement department.
Procedures are the methods – jointly agreed between
senior management and procurement personnel – for the
instructions and rules (guidelines) on how procurement is
to be operated.

Procedures contain all the standing instructions – together

with a copy of specimen forms and lists – of the duties and
responsibilities for each procurement activity.

The procurement policy establishes the procedures for the

business that is to be adopted for the procurement of all
goods and services required by a contract. The policy is
used to ensure that all the goods and services procured are
obtained at the most cost-effective price, and per the
required specifications, quality, and delivery schedule.

The procurement policy governs the procurement of goods,

works, and services (both non-consulting services and
consulting services) required for a contract.
A well-structured procurement policy will assist
procurement in ensuring the business can buy its goods
and services efficiently and effectively and obtain value for
money from its suppliers. Efficient procurement actions can
save money and make an important contribution to
profitability. In addition, it will assist purchasing in tracking
and recording competitive bids and provide guidance on
the steps to be taken when a conflict of interest arises.

Need for Procurement Policies and Procedures

The purpose of the ISO Procurement Policy and Procedures

(Procurement Policy) is to structure ISO's purchasing
processes and sourcing strategies to ensure that the
services and goods we acquire are the results of
transparent, objective, time and cost-effective decision
making and risk management.

According to the International Organisation for

Standardisation (2022), Procuring quality goods and
services from reliable and well-established suppliers
include:

Effective negotiations with the suppliers to obtain

quantity discounts
Locating, evaluating and developing economic and
supply sources for the group through an elaborate
vendor prequalification

Continuous investigations of new suppliers and market

price trends of goods and services the business
continuously requires

Procuring prudently by emphasising competition and

selection of suppliers whose offers conform to the terms
and conditions as well as the technical requirements
and specifications stated on purchase requisitions

Management of stock inventory to provide the best

service to users

Minimising the value of stock held to avoid tying funds

unnecessarily

Providing timely information to the user department and

the management on procurement status
Section 15 of 25

↪ Procedure strategies

Procurement strategies
A procurement strategy is a long-term plan (five years or
so) to cost-effectively acquire the necessary goods and
services from a few key suppliers who can deliver quality
goods, in the requested quantity, at the right price, at the
specified time.

There is no fixed number of items that should be included

in a procurement strategy, but many authors have
suggested the following:

Consolidate the supplier base,

establish predictive and analytical capabilities in

procurement,

incorporate procurement into the company’s innovation

system,

invest in the right supply chain talent,

manage supplier risk,

 simplify the supply chain,

take advantage of outsourcing opportunities.

Supplier consolidation occurs when the procurement

department reduces the number of suppliers within a
particular supply market. Procurement will focus on the
most innovative suppliers, those that can meet the
conditions of the contracts in the most efficient way. The
aim is to reduce supply chain costs and improve supply
chain efficiency.

Predictive analytics is a branch of advanced analytics. It is

used by the procurement department to make predictions
about unknown future events. There are many techniques
employed during predictive analytics to analyse current
data to make predictions about the future, including
machine learning, artificial intelligence, and statistical
modeling.

Innovation is the process that the purchasing department,

in conjunction with the other business functions will use to
conceptualise new products, existing products, processes,
systems, and ideas.
Job analysis is a useful approach to defining the roles and
responsibilities of the procurement team. Using job analysis
as a tool helps to obtain and retain the level of talent in the
procurement department, essential to its success.

Supply chain risk management (SCRM) can be used by the

procurement team to identify, assess and mitigate the risks
the organisation could experience in its supply chains.
Implementing a global supply chain risk management
strategy enables a company to operate more effectively,
reduce its operating costs and heighten the level of
customer service.

The aim of simplifying a company’s supply chains is to make

the processes of supplying a product to a customer less
complex and easier to operate. A supply chain can be made
more effective by adopting the 3Ss:

specialise,

simplify and

standardise.

By outsourcing a company’s non-core activities, a company

can direct its efforts to those activities that add value to the
process, reduce operating costs and enable the company
to become more innovative.

Accountability in procurement

Accountability in procurement refers to the procurement

team being responsible for their actions within the
reporting structure. This means that all members of the
procurement department are responsible for the actions
and decisions they take about the procurement function
and the resulting outcomes.

Effective accountability encourages the team to be efficient

and effective and ethically use the resources under their
control.

An organogram below is used to present a visual

representation of an organisation's structure. The company
often has one overall organogram, with each function
developing its organogram to depict the reporting
structures and roles, responsibilities and level of
accountability in the department.
Organograms should be structured using job titles, not
individual’s names. This will avoid the need to update the
organogram every time an individual moves within the
department.

Reporting in procurement

Effective reporting in procurement enables a company to

demonstrate how its procurement activities deliver value
for money. Further, it enables demonstrating how it
contributes to the realisation of its broader goals and
objectives. A report produced at a point in time provides
the business with a snapshot of how effective the actions
of the procurement department and those within it are in
achieving the procurement strategies.

Reports communicate information that has been compiled

as a result of operations and analysis of data and issues.
Reports can cover a wide range of topics but usually focus
on transmitting information with a clear purpose, to a
specific audience, i.e. procurement. Typical of what
procurement will report on include:

Budget variances,

changes in legislation,

contracts due for renewal,

cost reductions,

new suppliers,

supplier delivery performance,

supplier quality.

Each of the above can be used to convey information,

analyse an issue or problem in procurement and provide a
recommended course of action.
Section 16 of 25

↪ Procurement and supply chain structures

Procurement and supply chain structures

There is a range of procurement and supply chain
structures including:

Centralised purchasing

A central purchasing department is responsible for all strategic

and tactical purchasing decisions within the whole business.

Consortiums

A purchasing consortium (cooperative purchasing) or (group

purchasing) is a mechanism by which multiple organisations with
similar purchasing needs come together to consolidate and better
leverage their buying power and achieve more favourable terms
and pricing from their suppliers.

Cross-functional sourcing teams

With this approach contracting is done centrally by a commodity
team. However, all operational purchasing activities are
decentralised.

Decentralised purchasing

With decentralised purchasing, each business unit is responsible

for all purchasing decisions made within the business unit.

Centralised/decentralised purchasing

With this approach both corporate purchasing and business unit

purchasing exist next to each other dividing responsibilities and
activities among themselves.

Hybrid structures

A hybrid procurement operating structure is a procurement

structure that combines a centralised procurement base with
decentralised teams of buyers to achieve a balance between the
economies of scale and customer service at the customer level.

Lead buyer structures

With this structure, a senior buyer is responsible for purchasing,

inbound logistics, material and parts availability for production,
inventory management, customs clearance and purchasing
reporting.

Pooling structures

A pooling structure is a combination of the previous three

structures, aimed at combining common requirements across
operating units.

Outsourcing

Procurement outsourcing is the transfer of specified key

procurement activities relating to sourcing and supplier
management to an external (third party) provider. One of
the principal aims of outsourcing is to reduce costs and add
specialist skill sets to the business.

Outsourcing allows business and procurement solutions to

be handled by the relevant subject matter experts. It will
also enable the experts to focus on their specialities. They
will no longer be distracted by tracking down the best
suppliers, comparing costs, generating purchase orders and
carrying out all the other mundane activities associated
with the day-to-day operations of purchasing and
procurement.

Customer service and value for money

Customer value is the perception of what a product or

service is worth to a customer versus the possible
alternatives. Customer value can be seen as the difference
between a customer's perceived benefits and perceived
costs. Customer value has six parameters.

Cost
Cost is a factor that is always considered in the way a customer
perceives value. If the experience is good, the cost was worth it.
If the experience is bad, the cost was not worth it.

Lead time
It is true to some extent that if a customer wants something bad
enough, he or she will be prepared to wait for it. This is
particularly true with custom-designed goods. But instant
gratification is also a powerful component of customer value.

Marketing
Individuals can be influenced by the way a company markets its
products. The advertising strategy that a company employs can
influence the level of customer value placed on a product or
service.

Previous experience
This is the moment of truth aspect. A customer will perceive value
from a supplier based on past purchases from the same source
and the level of positive interaction during the transaction.

Quality
From a customer’s perspective quality relates to whether the
product does what the supplier says it should do, and the level of
satisfaction a customer gets from buying the product. This is
often expressed as the customer’s perception of excellence.

Services
An important factor in customer value is the level of after-sales
service that accompanies a purchase. The warranty, service plan,
or other service agreement that goes with the purchase are all
important service factors.
Section 17 of 25

↪ Use of IT in procurement and supply

Use of IT in procurement and supply

The inclusion of technology in the field of procurement, as
with many other business functions aims to ease some of
the more difficult aspects of the process. Information
technology assists in reducing common problems, tracking
data, and generally making it easier for procurement teams
to make their purchases and track each order’s progress.

Information systems are integral and essential to the

correct operation of procurement and supply. Technology
plays a major role in the use and transfer of information
within the supply chain.

There are three commonly used management information

tools used in business:

1. databases and database management,

2. decision support systems,

 3. management information systems.

Databases and database management systems are used to

capture and store data in a structured format so that the
information can be shared between users for a variety of
applications. Database systems allow for the rapid search
and retrieval of information.

A decision support system (DSS) is a computerised program

used to support determinations, judgements and courses of
action in an organisation or a business.

Management information systems (MIS) are a set of

integrated systems for recording, storing, and analysing a
wide range of data to aid in the management decision-
making process.

Having strong information technology (IT) systems is vital

to every organisation currently, where information is
indispensable to the decision-making processes. Without
an effective IT system, stakeholders, managers, suppliers,
customers and employees will not be able to communicate
effectively and be ‘on the same page. This can result in a
lot of confusion, misinformation and expensive wrong
courses of action being taken.

Many information technology systems are available to

assist the procurement department. Five of the more
frequently used include:

1. Enterprise resource planning (ERP),

2. manufacturing resource planning and control (MRPII),

3. inventory management systems,

4. intranets and Internets,

5. Procure to Pay (P2P).

Section 18 of 25

Requirements compliance

Requirements compliance
A business can be seen as a legal entity that is structured
to make and sell goods or provide a service. Some
businesses are for-profit organisations and others are not-
for-profit organisations. How a business is structured
affects how that business is run, how it is taxed and how
profits are distributed. The actual business structure can
also affect the personal liability of the owners of that
business.
Section 19 of 25

↪ Economic and industrial sectors

We can divide organisations into two

broad categories namely economic and
industrial organisations

Economic and industrial sectors

We can divide organisations into two broad categories,
economic and industrial as shown in the figure below:
Public sector
Public sector companies exist to provide essential services to the
community.

Private sector
Private sector companies exist to make a profit for their
shareholders.

Third party sector

Third sector (not-for-profit) companies that are not in business
to make a profit, although profit is needed for them to exist, are
there to do good for the country.

Primary sector
The primary sector provides the raw materials. Metals and coal
have to be mined, oil drilled from the ground, rubber tapped from
trees, foodstuffs farmed, and fish trawled. This is the 3F1M
(farming, fishing, forestry and mining). The primary sector is also
referred to as the extraction industry.

Secondary sector
This sector is the manufacturing and assembly process, which
involves converting raw materials into components, components
into subassemblies, subassemblies into assemblies, and then into
finished goods. The secondary sector is structured as fabrication,
assembly and packaging.

Tertiary sector
The tertiary sector is at the far end of the supply chain and
encompasses the commercial services that support the
production and distribution process. This sector also supplies
services such as insurance, transportation, advertising,
warehousing, schooling, public administration and health care.

Economic classification Industrial classification

Within the economic There are three sectors in

classification, we have three which a business enterprise
sub-classifications of can operate. These are
business namely the public, known as industrial sectors
 Economic classification Industrial classification

private and third party and form a chain of suppliers,

sector. which in its entirety provides
customers with finished
goods and services.
Section 20 of 25

➜➜ Economic classification

We can divide organisations into two

broad categories namely economic and
industrial organisations

00:07

Listen to the voice-over by clicking on the ► button

Economic classification

1. Public sector companies

The composition of the public sector varies from country to

country, but in most countries, the public sector includes
such services as the police, military, public roads, public
transport, basic education and healthcare for its citizens.

Public sector companies are that part of the economy

tasked with providing basic government services.

A public sector company might provide services such as

street lighting services, which benefit all of society rather
than just the individual who uses the service, (as would be
the case with public education). The public sector also
provides services that encourage equal opportunity for its
citizens.

The legal status of public sector companies varies from

being a part of the government into parastatals with the
state as a major shareholder. There is no standard definition
of a government-owned corporation (GOC) or state-owned
enterprise (SOE), although the two terms can be used
interchangeably.

The defining characteristics are that each has a distinct

legal form and each is established to operate in commercial
affairs. While they may also have public policy objectives,
GOCs should be differentiated from other forms of
government agencies or state entities established to
pursue purely non-financial objectives.

Public sector companies owned by the government of the

country, are primarily funded by taxes, operate in the
tertiary sector, and include such things as health,
education, policing and housing.

2. Private sector companies

Most business activity is undertaken within the private

sector.

Private sector companies include all those businesses

that are set up by individuals or groups of individuals.

The types of business to be found in the private sector can

vary considerably. Some are small retailers having a single
owner and others are the large multinational companies
employing several hundred – perhaps thousands – of
people.

Businesses vary according to the legal form they adopt and

their ownership. In general, private sector businesses can
be clustered into two broad categories:
Incorporated businesses

An incorporated business has a separate legal identity from its

owners. This means the business can be sued, can be taken over,
or can be liquidated – often without affecting any of the owners
personally. Incorporated business can trade either as a private
limited company (Ltd) or a public limited company (PLC).

Unincorporated businesses

These are businesses where there is no legal difference between

the owners and the business itself. Everything is carried out in the
name of the owner or owners. These businesses tend to be small,
owned by one person a sole trader, or at most a few partners who
form and operate as a partnership.

3. Third sector (not-for-profit) companies

All the money earned by or donated to a not-for-profit

organisation is used in pursuing the organisation's
objectives and keeping it running.

The third sector (not-for-profit) is those organisations

that do not earn profits for their owners.
Not-for-profit organisations exist to serve society. Many
have religious, educational, welfare, or charitable purposes.
The income from donations and subscriptions and grants
are used to sustain the organisation.

In a non-profit organisation, income is not distributed to the

group's members, directors, or officers. There are also non-
profit corporations known as non-stock corporations.

Examples of such organisations include UNICEF and

the American Red Cross. On the other hand, not-for-profit
organisations focus on smaller group activities within the
society or community, and they focus on areas such as
religion, education, science and public safety.
Section 21 of 25

➜➜ Industrial classification

Industrial classification
There are three sectors in which a business enterprise can
operate. These are known as industrial sectors and form a
chain of suppliers, which in its entirety provides customers
with finished goods and services. This chain of suppliers,
better known as a supply chain, is shown in the figure
below.
1. Primary Sector

The primary sector provides the raw materials. Metals and

coal have to be mined, oil drilled from the ground, rubber
tapped from trees, foodstuffs farmed, and fish trawled. This
is the 3F1M (farming, fishing, forestry and mining). The
primary sector is also referred to as the extraction industry.
2. Secondary Sector

This sector is the manufacturing and assembly process,

which involves converting raw materials into components,
components into subassemblies, subassemblies into
assemblies, and then into finished goods. The secondary
sector is structured as fabrication, assembly and packaging.

3. Tertiary Sector

The tertiary sector is at the far end of the supply chain and
encompasses the commercial services that support the
production and distribution process. This sector also
supplies services such as insurance, transportation,
advertising, warehousing, schooling, public administration
and health care.
Section 22 of 25

↪ Procurement and supply chains in the public

sector

Procurement and supply chains in the public sector

The primary objective of governments and other public
sector entities is to deliver goods and services to the
country, rather than to generate profit, as is the case with
private sector companies. The size of the public sector is
determined by such factors as the size of the country’s
economy and political ideology. This in turn affects the
goods and services it provides.

Public sector procurement is the function whereby public

sector organisations acquire goods, services, and
construction from suppliers in the local and international
markets. Public service procurement is subject to the
general principles of fairness, equitability, transparency,
competitiveness and cost-effectiveness.

Open procedure
The open procedure is the fastest and simplest route to awarding
a contract in the public sector. However, this method allows no
opportunity for negotiating the terms of the contract. This
approach is advertised and is open to anybody, and hence
anybody can apply to receive the contract. One of the drawbacks
to this approach is that where there are many potential suppliers
and this leaves the public service with a great deal of work to do
as each bid has to be read and evaluated.

Restricted procedure

The restricted approach is similar to the open approach in

attracting potential suppliers, but unlike the open approach which
is a one-stage approach to awarding a contract, the restricted
procedure is a two-stage approach. With this approach, there is a
pre-qualification phase, the intention of which is to arrive at a
shortlist of potential suppliers that meet the requirements of the
pre-qualification audit.

Competitive dialogue

This procedure should be used when there soliciting suppliers for

highly complex outcome-based contracts. With this method
dialogue with the supplier base is often an option, as in many
cases the suppliers have knowledge and expertise not possessed
by the public service.
Competitive procedure with negotiations

Competitive procedure with negotiations, sometimes referred to

as CPM, can be very useful when it is not possible to buy
something off the shelf because the requirement is unique.

Procurement policy notes

Procurement policy notes are a set of notes which are used
to provide guidance on best practices for public service
procurement. The procurement policy notes set out
information and guidance when contracting in terms of the
procurement of goods and services in the public sector.

Suppliers wishing to do business with the government of

their country should make themselves familiar with the
contents of the document.

Value for money concept

Within the public sector value for money on a procurement

contract is measured on three criteria:

Economy
The economy is based on maximising the resources used, through
the application of lean technique, which translates into doing more
with less. The economy is money-based.

Efficiency

Efficiency is the relationship between the goods and services

produced and the resources used to produce the goods and
services. Efficiency is time-based.

Effectiveness

Effectiveness is a measure of the extent to which the objectives

are achieved and the relationship between what was intended and
what was achieved.
Section 23 of 25

↪ Procurement and supply chains in the private

sector

Procurement and supply chains in the private sector

Private sector companies are owned by individuals or
enterprises and are funded by the revenues generated from
the sale of goods or services produced or offered by those
companies. In addition, the business can be funded through
debt (money borrowed from one or more sources) and
investment.

As mentioned earlier, the primary goal of the private sector

is to make a profit. Profit here is not making lots of money;
profit is having a bigger business at the end of the year
than you had at the beginning of the year. A second
objective is to provide a service to the community in which
the company is operating.

Private sector companies operate in one of the three

industrial sectors, primary, secondary or tertiary. The
primary sector operates within the extraction industries,
farming, fishing, forestry and mining (known as 3F1M).
Businesses in the secondary sector are the manufacturing
and processing industries, whereas the tertiary sector
contains the distribution, retail, companies and service
companies.

The figure below shows the different business structures

which make up the private sector.

Incorporated Businesse
Incorporated businesses (companies) range from being small to
being very large; some with many thousands of shareholders,
some with only a few. One common feature is that they all have a
separate legal identity from their owners. This means the
business can own assets, form contracts, employ people, sue and
be sued in its own right. Incorporated businesses can be grouped
into two main categorie namely private limited companies and
public limited companies.

Sole Proprietor
A business that legally has no separate existence from its owner.
Income and losses are taxed on the individual’s income tax return.
The sole proprietorship is the simplest form of business under
which one can operate a business. The sole proprietorship is not
a legal entity. It simply refers to a person who owns the business
and is personally responsible for its debts. A sole proprietorship
can operate under the name of its owner, or it can do business
under a fictitious name, such as Uncle Bill’s Garden Services.

Partnership
A partnership is a business that has more than one owner. The
owners are the partners. The joint owners share responsibility for
running the business; they also share the profits (and the losses)
of the business. Partnerships can be found in professional
services, i.e., accountants, doctors, estate agents, solicitors and
training providers.
After sole proprietors, partnerships are the most common type of
business formation in the private sector.

Private limited company

A private limited company, abbreviated (LTD), is a type of
privately held small business entity. This type of business entity
limits owner liability to their shareholders, limits the number of
shareholders and restricts shareholders from publicly trading
shares.

Public limited company

A public limited company is a business that is managed by a
company’s directors and owned by its shareholders. A public
limited company can offer shares to the public thereby increasing
its wealth.

The major feature of incorporated business ownership is that

owners have limited liability. If an incorporated business has
debts, the owners can only lose the money they have invested in
the business. They cannot be forced to use their own money to
pay business debts – like sole proprietors and partners.

The capital of an incorporated business is divided into shares.

Each member or shareholder owns a specified number of shares.
The sharehol
Corporate Social Responsibility (CSR)

There is a big drive toward corporate social responsibility in

the private sector today, and this is likely to grow
substantially shortly.

Corporate social responsibility is all about understanding

the world around us. With CSR can be found the three Ps,
people, profit and the planet. The aim is to balance the
three. When a company engages in social responsibility it
means it is operating in ways that enhance society and the
environment, instead of contributing negatively to them.

By practising CSR companies become conscious of the

impact that they are having on society around them,
including the economic, social and environmental factors.
Unfortunately, today not all companies contribute
wholeheartedly toward CSR. Some companies talk a lot,
but still have their focus on profit above all else.

Corporate social responsibility (CSR) can be described as

a self-regulating business model that helps a company be
socially accountable – to itself, its stakeholders and the
public.

Private Sector Procurement

Regulations relating to private sector procurement are

certainly not as strict as those imposed on public sector
companies. However, they still have the aim of promoting
good business practices within the field of procurement
and supply.

The distinguishing factor between procurement regulations

in the public sector and the private sector is that in the
private sector companies tend to set their own rules and
regulations (policies and procedures) for the procurement
of goods and services. However, likely, they will all be set
around a set code of conduct which will include ethical
conduct, standards of practice, integrity, transparency,
sustainability and environmental awareness.

Regulations and Standards

There is a range of regulations and standards that

companies are expected to adhere to, most of which are
enforceable by law. The table below highlights some of
these.

Regulation/Standard Purpose

Set labour standards, develop

International Labour policies, and devise programmes
Organization (ILO) promoting decent work for all women
and men.

Ensure safe and healthy working

Occupational Safety conditions for workers by setting and
and Health Act enforcing standards and by providing
(OSHA) training, outreach, education and
assistance

International
Organization for A formula that describes the best way
Standardization of doing something
(ISO)

Ensures that consumers and

businesses have the confidence and
Consumer Rights Act understanding of what occurs when a
consumer receives a faulty good or a
product or service not fit for purpose

Employment and Law applied to such matters as

Labour Laws employment, remuneration,
Regulation/Standard Purpose

conditions of work, trade unions and

industrial relations

Maps out a framework that a

Environmental
company or organisation can follow
Management System
to set up an effective environmental
(ISO 14001)
management system
Section 24 of 25

↪ Procurement and supply chains in the third

sector

Procurement and supply chains in the third sector

The third sector, the not-for-profit organisations (NPOs) are
those organisations that are operated by corporations,
trusts and associations. They are funded by donations and
subscriptions and fall into the tertiary sector. Any surplus
that is made from their funding is used to support their
goals.

The purpose of a third sector company is to support and

promote social, economic, professional or cultural
objectives. Examples in this category include cooperatives,
housing associations, professional bodies and charities.

The objectives of a third sector organisation will vary

depending on the type of organisation.
 A charity organisation such as Hospice raises money to
support the various Hospice clinics. A professional body
will raise money to engage stakeholders and ensure the
continuity of their organisation.

A cooperative aims to offer its members cost savings on

a wide variety of products by buying at competitive
prices that they can pass on to their members.

Impact on procurement
The purchase of goods and services for an NPO is
necessary for the smooth operation of the organisation.
Organisations will have internal controls that aim at
ensuring the supply of goods and services are handled by
individuals with the requisite skills, in evaluating what is
required and how to obtain the best value for the spend.

In many countries, NPOs are regulated by the government

which aims to ensure no wrongdoings. The regulating body
will ensure that the NPOs act correctly in their procurement
policies by providing a set of guidelines.

Not-for-profit organisations are required to provide a set of

accounts showing their activities each year. Failure to do
this could result in penalties and even removal.
NPOs may not have an official set of procurement
regulations and policies that they are required to work to,
but that does not mean that they should not exercise good
practice and judgement at all times. Each transaction needs
to be fully documented to ensure transparency and
compliance.

The table below suggests some similarities and differences

between the private sector and third sector procurement
practices.

Similarities with Private Differences from Private

Sector Sector

Suppliers may offer

Aim to achieve the best value something for nothing or
for money reduced prices because they
want to help the cause

Benchmark to ensure fair Gifts and hospitality are

pricing allowed

Carry out supply chain

management

Conduct ethical procurement

 Similarities with Private Differences from Private
Sector Sector

Promote sustainability
Section 25 of 25

Summary

Summary
We can conclude this session by recapping the main
differences between the three economic sectors.

Public sector companies

Public sector companies are owned and administered by

the government and are funded by taxes and levies.

Public sector companies provide a range of services for

the general public.

Public sector companies are administered by the

government and do not have shareholders.

Job security in the public sector is more secure than in

other sectors, and government employees are
guaranteed a pension at their retirement.

Public sector procurement is more strict than private-

sector procurement.
Private sector companies

Private sector companies are owned by investors and

the shareholders of the company; they can be
incorporated or unincorporated.

Private sector companies are financed by investments,

loans or revenues generated from the goods and
services they produce.

Shares are permitted with private sector companies,

either by the owners in private companies or the
general public with public companies.

Private sector companies are owned and managed by

the owners, or they appoint managers to manage the
business on their behalf.

Employment in the private sector is competitive but

there is no finite job security.

Private sector companies provide a wide range of

benefits for their employees.

Third sector companies

Third sector companies are not owned but are operated

by the trustees.

Funding for third sector companies comes primarily from

donations, subscriptions and levies.
Third sector companies are not permitted to offer shares
either to their management or the general public.

The purpose of a third sector company is to promote

and support social, environmental, professional and
cultural objectives.