The Procurement Process

Key Definitions
Routine buy: Acquiring a known product from a known supplier (identical to straight rebuy).
Purchase order requisition: Description of internal customer requirements for goods and/or
services needed from suppliers, which serves as the basis for the purchase order.
Competitive bidding: A buyer asks for bids from different suppliers, creating a level playing
field (identical to tender).
Functional specification: Describes the functionality which the product must have for the
user.
Outsourcing: The company divests itself of the resources to fulfill a particular activity to
another company, to focus more effectively on its own competence. The difference with
subcontracting is the divestment of assets, infrastructure, people, and competencies.
Purchase (order) specification: Relates to all specifications needed to select the right
supplier including quality specifications, logistics specifications, maintenance specifications,
legal and environmental requirements, and a target budget.
Bidders' long list: Includes those suppliers that meet the buyer's prequalification criteria and
that will be requested to submit a first proposal.
Request for information (RFI): Suppliers are invited to submit general information that may
help them to qualify for a potential tender.
Request for proposal (RFP): Suppliers are invited to submit a proposal which meets the
requirements as laid down in the request for proposal. An RFP is used when the request
requires specialized capability or expertise, or where the product or service being requested
does not yet exist.
Request for quotation (RFQ): Suppliers are invited to submit a detailed bid (or 'price quote')
which meets the requirements as laid down in the request for quotation against the lowest
possible price (identical to request for tender).
Tender: A buyer asks for bids from different suppliers, creating one level playing field
(identical to competitive bidding).
Bidders' short list: Includes those suppliers that meet the buyer's prequalification criteria and
who will be requested to submit a detailed bid.
Total cost of ownership (TCO): Relates to the total costs that the company will incur over the
lifetime of the product that is being purchased.
Multiple sourcing: A company within a certain category buys from multiple suppliers.
Acceptance test: A technical test performed at either the supplier's site, the buyer's site or
both, to check whether the equipment that is bought by the buyer meets their functional and
technical requirements.
General terms of purchase: Standard legal and commercial conditions that will apply to every
purchase order issued by the buyer.
Purchase order confirmation: A document that is used by the supplier in which they agree to
perform according to the buyer's purchase order.
Battle of forms: Disputes that may arise over whether supplier or buyer general terms and
conditions will apply to a commercial transaction.

The Procurement Process Steps

The procurement process model differentiates between key stages. These steps need to be
conducted with great care. If one of the steps is not effectively organized, it may cause problems
in the next step and eventually may lead to supplier delivery issues and, hence, cause
discontinuities in the company's operational processes.

Step 1: Specification Phase

Requirement Determination: Determine the requirements for the product or service.
Make-or-Buy Decision: Decide which products/activities will be produced internally and which
will be outsourced.
Specification Types:
Functional Specification: Describes the functionality required for the user. Focuses on
what the product should do.
Technical Specification: Describes the technical properties and characteristics of the
product and activities. Focuses on how the product should be made/delivered.
Purchase (Order) Specification Components:
Quality specifications
Logistics specifications
Maintenance specification
Legal and environmental requirements
Target budget
Scope-of-Work Description: Used in construction work and civil projects to record purchase
order specifications.
Sign-Off Procedures: Formal approval of the specification by procurement or potential
suppliers to prevent misunderstandings and reduce costs of technical changes.

Step 2: Supplier Selection and Assessment

Process:

1. Preliminary qualification of suppliers and creating a bidders' list.

2. Preparation of the request for quotation and analysis of bids.
3. Selection of the supplier.

Prequalification Requirements: Based on the purchase order specification.

Bidders' Long List: Initial list of suppliers that may be able to do the job, often based on
excellent vendor rating scores.
Request for Information (RFI): Sent to long-listed suppliers to gather information on prior
projects, experience, and other qualifications. May involve supplier visits or audits.
Approved Vendors Lists: Used by large companies to select suppliers for the long list.
Bidders' Short List: Reduced list of the most promising suppliers.
Request for Proposal (RFP) / Request for Quotation (RFQ): Sent to short-listed suppliers,
inviting them to submit bids.
Tendering Process: Formal or informal, open or closed.
Open tender: No prequalification.
Closed tender: Limited to preselected suppliers.
Supply Market Research: Needed when there are not enough approved suppliers.
Evaluation:
Preliminary technical and commercial evaluation of quotations.
Weighing technical, logistical, quality, financial, and legal aspects.
Consideration of Total Cost of Ownership (TCO).
 Ranking schemes.
Supplier selection proposal.
Risk Analysis: Performed for strategic and critical suppliers.
Dual/Multiple Sourcing: Assigning the work to two or more suppliers.
Rejection Notification: Informing unsuccessful suppliers of the reasons for rejection.

Step 3: Negotiation and Contracting

Contract Development: Drawing up a contract with the selected supplier.
Price and Delivery Terms:
Fixed price preferred, arrived at through competitive bidding or negotiation.
Clear definition of financial obligations.
Consideration of optional prices for spare parts and service rates (especially for
manufacturing equipment).
Handling currency risks when buying from foreign suppliers (e.g., contracting in the same
currency, currency exchange change clauses, hedging).
Terms of Payment:
Payment after receiving goods/services (e.g., 30, 60, 90, or 120 days).
Milestone payments for capital goods or installations.
Payment based on supplier performance (performance bond).
Advance payments covered by a bank guarantee or concern guarantee.
Agreement on transfer of ownership.
Penalty Clauses and Warranty Conditions:
Supplier guarantees regarding quality, compliance, and suitability.
Agreement on the legal system governing the contract.
Performance guarantees for investment goods.
Corrective measures and cost recovery for unmet performance.
Right to refuse the product if performance is significantly below standard or if legal
requirements are not met.
Warranty period (typically 12 months).
Supplier's responsibility for maintenance and spare parts during the product's lifespan.
Other Arrangements:
Insurance and safety regulations.
Transfer of rights and obligations.
Contracting out to third parties.
Specific terms of delivery.
General Terms of Purchase: Buyers should strive to prescribe their company's general terms
of purchase. The "battle of forms" can occur if the supplier rejects the buyer's terms.
Incoterms: Standardized trade terms used in international trade.

Step 4: The Ordering Process

Order Placement: Placing the order after terms and conditions are agreed upon. Sometimes
the contract is the purchase order.
Framework Agreements: For routine buys, buyers may negotiate a call-off agreement
covering materials/products for a longer period. Purchase orders are then placed against
this agreement.
Purchase Order Initiation: Initiated electronically through a purchase order requisition or
materials requisition.
 MRP Systems: Generate requisitions for production and inventory items when inventories are
below minimum levels.
Manual Requisitions: Purchase requisitions can be initiated manually using forms.
Purchase Order Information: Includes order number, product description, unit price, number
of units, delivery time/date, delivery address, and invoicing address.
Order Lines: A purchase order may contain multiple order lines for different products.
Delivery Documents and Invoices: Data on the purchase order must be reflected on the
supplier's delivery documents and invoice.
Confirmation: The supplier is usually requested to send a confirmation for each purchase
order received.
Vendor Rating System: Purchase order, delivery documents, and invoices form the input for
the buyer's vendor rating system.

Step 5: The Expediting Process

Purpose: Monitoring and accelerating the delivery of purchased goods.
Overdue List: Used to track late deliveries.
Types of Expediting:
Exception Expediting: Reacting to notifications from internal customers about late
deliveries. Not recommended.
Routine Status Check: Contacting the supplier shortly before delivery to confirm the
delivery date.
Advanced Status Check: Regularly checking progress with critical suppliers and parts,
using the supplier's work schedule.
Field Expediting: Sending an inspector to the supplier's production site for costly and high-
risk contracts.
Acceptance Testing: Ensuring that delivered products/equipment meet requirements.
Acceptance test at the supplier's site.
Acceptance test at the user's site.
Acceptance test during initial operation.

Step 6: Follow-Up and Evaluation

Post-Delivery Activities:
Settling warranty claims and penalty clauses.
Administering excess and minor work.
Updating and archiving procurement and supplier files.
Finalizing supplier and project evaluations.
Excess Work: Must be reported in advance and approved by the buyer.
Maintenance Activities: Evaluating the supplier's service, maintenance, and spare parts
supply.
Supplier Performance Documentation:
Tracking quality and delivery records, competitiveness, and innovativeness.
Adjusting the vendor rating.
Reporting information to management and the supplier.
Continuous Improvement: Using evaluation data to assemble bidders' shortlists for future
projects and contracts.
Supplier Base Reduction: Concentrating business among suppliers with proven capabilities.