Procurement Management and Global Sourcing

Topic 1 – Overview of Procurement and Global Sourcing

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Topic 1 – Overview of Procurement and Global Sourcing i

Contents

Contents ii

Introduction 1
Learning objectives 0

Nature and Scope of Procurement Management 0

Role of Procurement in Organisation 1

Typology of Organisational Buyers 2

Enablers of Purchasing and SCM 2

Relations with other Departments 3

Government Purchasing 3

The Evolution of Procurement 4

The Role of Procurement Managers 5

Procurement in the Future 5

Summary 6

ii Procurement Management and Global Sourcing

Introduction
Procurement (or also known as purchasing) encompasses all of the activities
in an organisation that are associated with sourcing or acquiring materials
and services. However, to define procurement broadly, “Procurement” is
the overarching function that describes the activities and processes to
acquire goods and services. Importantly, and distinct from “purchasing”,
procurement involves the activities involved in establishing fundamental
requirements, sourcing activities such as market research and vendor
evaluation and negotiation of contracts. It can also include the purchasing
activities required to order and receive goods.
The term “Purchasing”, on the other hand 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 involved in ordering
goods such as request, approval, creation of a purchase order record (a
Purchase Order or P.O.) and the receipting of good.
(reproduced from [Link]
is/definition-of-procurement-procurement-vs-purchasing/ accessed 18
November 2014)
The procurement process includes preparation and processing of
a demand as well as the end receipt and approval of payment. The above
representation is very simplistic. Along the way complications can arise,
and much more detail needs to be considered.
This course introduces the fields of Procurement Management and Global
Sourcing in the context of business to business exchange of goods and
services. It explores the central concepts of organisational procurement and
interfaces this to the other areas of an organisation. This course provides
opportunities to examine issues such as organisational procurement
process, supplier selection process, supplier management and other
strategic issues.
The course has been designed around 11 important topics as outlined in
your Course Guide and these aspects will be examined throughout this
course. However, students are also encouraged to supplement their
knowledge with other research (eg other texts, articles in various
magazines) in addition to the material provided in the accompanying
readings. You may also google-search ([Link]) with key word
procurement (or purchasing) for additional materials. One of the sites for
example is:
[Link]
MCDDVn

Topic 1 – Overview of Procurement and Global Sourcing 1

 Learning objectives
At the conclusion of this topic you should be able to:
• Map the nature and scope of procurement management
• Identify the role of procurement in organisation
• Elucidate the evolution of procurement
• Identify the role of procurement managers

Reading
Prescribed Text: Monczka, R.M., Handfield, R.B., Giunipero, L.C. and
Patterson, James L. (2014), Purchasing and Supply Chain
Management, South-Western, Cengage Learning. 6th Edition. Chapter
1

Nature and Scope of Procurement Management

Procurement in Australian context amounts to an estimated USD 600 billion
per year. Of which, private sector procurement is around USD 400 billion
and public sector procurement is around USD 200 billion. It is also widely
believed that a one dollar saving in procurement adds five dollar in the
business bottom line. Procurement can add value beyond savings,
innovation, business solutions and strategic outcomes.
In today’s environment businesses are facing severe competition in the
market place. The competition arises not only from increasing number of
world-class competitors but also due to sophisticated customer base (more
performance at a lower cost), widely available information sources, balance
of power between buyers and suppliers and companies increasing reliance
on greater outsourcing. This has necessitated companies to ensure efficient
operation both internally and externally. In achieving internal efficiency
procurement can play a vital role. In fact, procurement is now seen as the
saviour of organisations’ survival and growth as it is responsible for ensuring
supply of right materials, in right quantity, on right time, in right place,
from right source, accompanied by right service and at right price.
In view of above, procurement departments are to select best suppliers,
develop appropriate contractual mechanisms, maintain supplier relationship
and measure performance of suppliers and driving supply base
improvement. Importance of procurement in organisations’ survival is also
because of the fact that companies are striving for cost reduction,
improved material delivery, shorter cycle time, including product
development, access to product and process technology and quality
improvement. Purchased content is a significant part of the cost of goods
sold (≥ 55%) and purchased content’s impact on product and service quality.
For better results, companies are gradually moving away from traditional,

0 Procurement Management and Global Sourcing

 adversarial buyer-supplier relations to improve supply chain performance.
Therefore, in simple terms, a business will not be able to survive if it
its cost of procurement is more than the profit it makes
on selling the actual product.

Role of Procurement in Organisation

Procurement has several roles in an organization. It is one of the core
functions (to perform specialised tasks) of business. Some other functions of
business are Business Development, Finance, Human Resource Management,
Conversion (production), Distribution and Research and Development.
In almost all organisations have formal process (to achieve an output) of
sequential steps that are to be followed to achieve procurement goals. This
process is also referred as a value chain. (Ref
[Link] A set of specialized
skills are needed to accomplish the task of organisational procurement,
therefore, it has now become an important business-discipline (knowledge
based) and following this it is increasingly recognised as a profession
(requires demonstrable skills and knowledge).
Procurement is also considered as the linking pin between supply chain
members. Each member of a supply chain is directly linked with its supplier
(as customer) and each of its customers is also directly linked with the
organisation (buyer). Therefore, success of a supply chain substantially
depends on collective efficiency in procurement functions of each member.
Purchasing is a mmainly transactional and the activities include:
• Ordering or calling off supplies/services
• Expediting
• Maintaining inventory
• Receipt and storage of supplies
• Arranging payment
However, it usually does not include strategic activities related to Supplier
Management such as:
• Strategic bottleneck and leverage items
• Make/buy/outsourcing
• Sourcing and appraising suppliers
• Rationalising supplier base
• Supplier development
• Early supplier involvement
• Negotiation
• Supplier relationships
• Capital equipment purchasing
• Benchmarking
• Monitoring supplier performance

Topic 1 – Overview of Procurement and Global Sourcing 1

 • Ethical and environmental issues
Therefore, the term procurement refers to combination of transactional
(purchasing) and strategic activities (supplier management).

Typology of Organisational Buyers

• Industrial/producer organisations: These organisations purchase of goods
and services for some tangible production and commercially significant
purpose. Examples of these organisations are manufacturers: {primary
(extractive)} producers- agriculture, forestry, fishing, horticulture, and
mining.
• Intermediate organisations: Purchase of goods and services for resale or for
facilitating the resale of other goods in the industrial or ultimate
consumer markets. Examples of this type of organisations are distributors,
dealers, wholesalers, retailers, banks, hotels and service traders.
• Government/public sector organisations: Government is the single largest
buyer in any economy. Purchase of goods and services for resale or use by
organisations providing a service, often tangible and not always
commercially significant at national, regional and local level. Examples of
these are central and local government, organisation providing public
utilities.
• Other institutions: Purchase of goods and services for institutions that buy
independently on their own behalf. Examples are schools, colleges,
hospitals and voluntary organisations.

Enablers of Purchasing and SCM

• Human Resources: View the supply chain holistically, Manage critical
relationships, Understand the business model, Engage in fact-based
decision making, Practice advanced cost management, Understand
electronic business systems.
• Organizational Design: Centrally-led supply teams, Executive responsibility
for coordination purchasing and supply chain activities, Collocation of
supply personnel with internal customers, Cross-functional teams to
manage supply chain processes, Supply strategy coordination and review
sessions between business units, Executive buyer-supplier council to
coordinate with suppliers.
• Information Technology: Demand planning, Order commitment, scheduling,
and production management, Distribution and transportation planning,
Material replenishment, Reverse auctions, Electronic data interchange.
• Measurement: Use data from visible sources, Quantify what creates value,
Use goals that change over time, Rely on benchmarking to establish
performance targets, Link to business goals and objectives, Feature
efficiency and effectiveness measures, Assign ownership and
accountability.

2 Procurement Management and Global Sourcing

Relations with other Departments
The Purchasing Department has dealings with most other departments or
sections of an organisation, amongst its own departmental personnel (ie
internal relationships), and externally, with suppliers.
By building excellent working relationships, overall company performance is
likely to increase because people will be prepared to “go the second mile”
to help you beyond that usually required when you have difficulties or need
their help in special circumstances. If you are “easy to deal with” (meaning
pleasant, cooperative, efficient), others will be pleased to assist. Personal
relationships are very important in business.
Do not interpret this to mean that you should “give in” to others, or not
negotiate effectively! The negotiation process is critical for a purchasing
manager since of a managers time is spent communicating either internally
or externally to determine requirements, specifications, prices and delivery
terms to name just a few elements.
Departments with which Purchasing has contact could include:
• Production
• Quality
• Engineering
• Maintenance
• Accounts/Finance
• Logistics
• Materials Management
• Transport/Distribution/Warehouse
• Sales
• Marketing
• Product Development/Research and Development
• Canteen/social club
• Senior Management/Corporate office
• International divisions of the company
It’s almost a matter of what department does the Purchasing area NOT have
contact with, because it needs to liaise with nearly everyone!

Government Purchasing
Purchasing on behalf of governments, whether they are national, state, or
municipal government, can involve additional or different considerations
than those involved when purchasing on behalf of privately‐owned
companies. Although the basic processes are the same, the volumes and
budgets are usually much larger. Broader society, environmental and
industrial objectives must be taken into account since government
departments have complex constituencies. Government tender documents
are usually very complex and sophisticated. It is worth accessing
Topic 1 – Overview of Procurement and Global Sourcing 3
 government department web sites and examining their tendering processes
and documentation.
Some of the considerations in Government Purchasing are:

• Budgets are usually allocated annually, and money is expected to be spent

within certain timeframes (sometimes nominated within certain quarters
of the year);
• There is an expectation that budgets will be adhered to (the money
budgeted will be spent, no more, no less);
• If budgets are “underspent”, there may be a last‐minute rush to spend
money while it’s available (which sometimes impacts on the quality of
decision making);
• If budgets are “overspent”, a budget allocation from elsewhere in the
government will be necessary (if it is available);
• Budgets are subject to government decisions (often political, and can
involve major changes from year to year, mostly involving reductions, but
sometimes involving increases);
• Rules, guidelines and policies are established and must be followed;
• The approval process for purchasing may be prolonged due to the extent of
authorisations needed;
• The process is likely to require extensive documentation;
• Several quotations are usually required, reports then prepared on the
quotation outcomes, and recommendations made;
• Extra justification is usually required if the lowest quote is not the one
recommended;
• Some government policies require that suppliers be certified to ISO
standards;
• Tendering is a frequently‐used process, where suppliers are invited to
prepare submissions for particular projects or items;
• There may be a strict code of ethics for government employees which must
be adhered to, in addition to other procedures;
• Governments are using taxpayers’ money, therefore politicians are often
interested in the way in which purchasing or tendering processes are
undertaken (mainly for large items or projects); questions are sometimes
asked in Parliament or elsewhere.

The Evolution of Procurement

According to Reck and Long (1988) procurement has gone through stages of
evolution:
Stage 1 (Product centered): Concerned with the five rights that concentrate
exclusively upon the purchasing of tangible products and outcome
dimensions.
Stage 2 (Process centered): Moves beyond a concern with outcomes and
begins to measure the process through which the outcome is delivered.

4 Procurement Management and Global Sourcing

 Stage 3 (Relational): Process and relationally focused, expanded to include
purchaser-supplier relationships.
Stage 4 (Performance centered): Focused on best product management
methods. Employs an integrated methodology to manage relationships,
processes and outcomes.
However, according Brandyberry (2012) last three decades has seen
purchasing evolution to a procurement revolution. Changes include,
according to Brandyberry (2012) from a much simpler regionalised supply
base into complex global supply chains. He asserts that five areas that have
driven the transformation from purchasing to procurement. These are (i)
value to the organisation, (ii) skills development (iii) technology, (iii) best
practice adoption and (v) organisational design.

The Role of Procurement Managers

As mentioned earlier, procurement managers need certain specialised skills
to accomplish the tasks of procurement. The most successful procurement
managers are usually critical thinkers who can relate the outside business
environment with the internal environment of his/her company.
Generally, people who supervise procurement processes are quite
confident, and they are able to stand up for themselves and the decisions
they make. This trait lets them come off to their workers as focused but
reasonable, and it keeps others who deal with the company from thinking
they can take advantage of the business. At the same time, they are willing
to hear out others because they understand that a different perspective
might produce a more efficient method or deal (ref
[Link] The
procurement managers are also in need to be careful about policy
compliance, coordination, supervising staff and so on. The procurement
managers also need to play an advisory role to the organisation.
You may visit [Link]
as-trusted-advisor-to-management or similar sites to extend your
understanding on the role of procurement manger.

Procurement in the Future

In the future, procurement is expected to increase in strategic importance,
automated tactical activities, master contracts, electronic purchasing,
strategic purchasing competency centres, shared supply chain resources,
profit contribution and changed emphasis on individual skills. In order to
respond to these changes, organisations have to emphasise on total quality
management (TQM), total cycle time reduction, long-range planning,
Supplier relationship engineering, strategic cost management, performance
accountability, professional flexibility and development, service
excellence, corporate social responsibility.

Topic 1 – Overview of Procurement and Global Sourcing 5

Summary
The topic presents an overview of organisational procurement. In today’s
organisations procurement plays a very important role that assists
organisations to survive as well as grow. Procurement as a function of
business links the internal capacity of an organisation with its outside
environment with a view to achieve overall organisation goals. It has to
work with all other functions of business as well as other organisations,
especially the suppliers. While the basics of procurement is same or similar,
government procurement, compared with non-government procurement,
needs additional requirements. The organisation procurement in the
today’s context is much more complex from the days when purchasing was
focussed on buying only or on the transaction only. Therefore, members of
procurement now require professional skills to accomplish the activities
related to procurement.
In the next topic, we will cover the Procurement Process, Policy and
Procedure.

References
Handfield, R. B., Monczka, R. M., Giunipero, L. C and Patterson,
James L. (2011), Sourcing and Supply Chain Management, Cengage
Learning, Fifth Edition (International Version).
Monczka, R M., Handfield, R. B., Giunipero, L. C and Patterson,
James L. (2011), Purchasing and Supply Chain Management, South-
Western, Cengage Learning, Fifth Edition.
Perlman, Kalman I. (1992), Handbook of Purchasing and
Materials Management, Probus Publishing Company.
Quayle, M., & Quayle, S. (2000). The impact of strategic procurement
in the UK further and higher education sectors. The International
Journal of Public Sector Management, (13(2).
[Link]
.1108/09513550010346008
Brandyberry, G. (2012). Reflecting on 35 years of procurement
transformation. Pharmaceutical Technology Europe, 24(7), 37-38.
[Link]
[Link]/[Link]?direct=true&db=bth&AN=78041618&site=ehost-
live&scope=site

Online Discussion Activity

The Board of Directors of a large company decided that the company
needs a 20% increase in profit margin next year. Each manager has
been requested to suggest the possible ways to achieve this target.
Assume that you are one of the managers of that company. Suggest
the best way from your point of view to achieve this target of 20%
increase in profit. Justify your answer with arguments - assume that
you are competing with other managers.

6 Procurement Management and Global Sourcing

Web resources
[Link]
ml#ixzz3FXMCDDVn
[Link]
[Link]
[Link]
[Link]
trusted-advisor-to-management

Topic 1 – Overview of Procurement and Global Sourcing 7