Meeting No.
Procurement Management
Sheila B. Angel-Gaspar, LCB
The evolution of purchasing
through to procurement
Procurement represents a stage in the evolution of
civilised human relationships as it enables a desired
object to be obtained by trading rather than conquest,
plunder or confiscation. It is a very ancient activity. A
cuneiform clay tablet excavated at Ras Shamra,
northern Syria, dated about 2800 BC, carries an
inscription that, roughly translated, reads:
HST to deliver 50 jars of fragrant smooth oil each 15 days
after [a starting date] and during the reign of AS. In return
he will be paid 600 small weight in grain. This order will
continue indefinitely until the purchaser or his son
removes his consent.
Period 1: The early years
(1850–1900)
Charles Babbage’s book on the economy of
machinery and manufacturers
- published in 1832, referred to the
importance of the procurement function.
- a ‘materials man’ responsible for several
different functions.
- a central officer responsible for operating
mines was ‘a materials man who selects,
purchases, receives, and delivers all
articles required’.
Period 1: The early years
After the 1850s:
(1850–1900)
- By 1866, the Pennsylvania Railroad
had given the procurement function
departmental status, under the title of
Supplying Department.
- The procurement function was
such a major contributor to the
performance of the organisation
that the chief procurement
manager had top managerial
status.
Period 1: The early years
In 1887: (1850–1900)
“The Handling of Railway Supplies – Their Purchase and
Disposition”
- The first book exclusively written about the
procurement function
- Written bythe comptroller of Chicago and North Western
Railroad
- Issues tackled:
- Need for technical expertise in procurement agents
- The need to centralise the procurement department
under one individual
- Selection of personnel to fill the position of
procurement agent
Period 2: Growth of procurement
fundamentals (1900–1939)
Procurement gained importance during the First World War because of its role
in obtaining vital war materials.
Harold T. Lewis, a respected procurement professional during the 1930s
through the 1950s, noted that there was considerable doubt about the
existence of any general recognition of procurement as being important to a
company.
Period 3: The war years
(1940–1946)
The emphasis on obtaining required (and scarce) materials during the war
influenced a growth in procurement interest.
1933 - only 9 colleges offered courses related to procurement
1945 - the number of colleges offering courses related to procurement
increased to 49
The membership of the National Association of Procurement Agents increased
from: 3,400 in 1934
5,500 in 1940
9,400 in 1945.
Period 4: The quiet years
(1947–mid-1960s
Articles began appearing during this period describing the
practices of various companies using staff members to collect
analyse and present data for procurement decisions.
Ford Motor Company was one of the first private organisations
to establish a commodity research department to provide
short-term commodity information.
Ford also created a purchase analysis department to give
buyers assistance on product and price analysis.
Period 5: Materials management
comes of age (mid-1960s–late 1970s)
Procurement managers emphasised multiple sourcing through competitive bid pricing
and rarely viewed the supplier as a value-added partner.
Price competition was the major factor determining supply contracts.
The procurement strategies and behaviours that evolved over the last half-century were
inadequate when the severe economic recession of the early 1980s and the emergence
of foreign global competitors occurred.
Period 6: The global era (late 1970s–1999)
The global era, and its effect on the importance, structure and behaviour of procurement,
have already proved different from other historical periods. These differences include the
following:
■ Never in our industry history had competition become so intense so quickly.
■ Global firms increasingly captured world market share from domestic US companies,
and emphasised different strategies, organisational structures and management
techniques compared with their American counterparts
■ The spread and rate of technology change during this period was unprecedented,
with product lifecycles becoming shorter.
■ The ability to coordinate worldwide procurement activity by using international data
networks and the World Wide Web (via Intranets) emerged.
Managers began to view supply chain management as a way to satisfy intense cost and other
improvement pressures
Period 7: Integrated supply chain
management (beyond 2000)
Supplier relationships are gradually shifting from an adversarial approach to a more
cooperative approach with selected suppliers
The activities that the modern procurement organisation must undertake require a
different mindset than that traditionally adopted.
-Supplier development
-partnering
- supplier-design involvement
- the use of full-service suppliers
- lifecycle costing
- long-term supplier contracts and relationships
- strategic cost management
- integrated Internet linkages and shared databases
Establishing Procurement
Methods
The Procurement Department through the procurement professional has a
fiduciary obligation to ensure that goods and services are acquired in
accordance with the best interests of the organization.
-through negotiations (bargaining)
- through some form of competitive bidding process
- or a combination of both.
Procurement Negotiations
Competitive Bidding
-Competition
- Value
-Savings
-Requirements
-Contract
-Time
-Corrections and Clarifications
Buyer Beware of Competitive Bidding Traps
Example: when the supplier realizes that the specifications will
require further change after the bid is awarded. This is often the
result of improperly designed products or an ill-conceived
Statement of Work
The supplier makes the original quote at below cost and reasonable market
prices. However, the inevitable changes are then quoted on a substantially higher
basis than would ordinarily be justified (since there will be no other bidders at that
point), and thus the supplier can recover the difference and earn a handsome
premium as well
Procurement Strategy Examples
Procurement Negotiations
Reverse Auction
It is called a “reverse” auction because the roles of buyer and seller are
reversed, requiring the suppliers to bid down the price, and the lowest price,
rather than the highest price, wins the bid.
The RA provides an electronic marketplace where prequalified
suppliers can bid on a buyer’s requirements in real time instead of through a
delayed process and, most importantly, can determine their position in the
overall bidding process so that they can improve their bids as they deem
appropriate.
Internal Cost-Related Analysis
Tools
Tools and methods used internally to track the performance of the
Procurement Department relative to the nature of the organization’s costs
Costs are categorized and defined both in terms of their method of
calculation and their relationship to the organization’s balance sheet.