There are organizations those who manufacture products (or services) in bulk and then send their finish goods into the market. To manufacture goods in huge quantity, the companies usually want materials, accessories, and equipments etc that are used for the production process. Most of the companies don’t have these raw materials. So what they do is get these goods from the recognized suppliers, those who can get the company with their desired goods, in quantity wanted and in time. So what companies do they contract suppliers and get the raw materials.
As discussed in the introduction paragraph that companies do when they need raw materials for production. So this process of purchasing the raw materials and related goods is called Procurement or Acquisition. Thus, procurement in basic terms can be called as the process of purchasing of raw materials for the process of production. The procurement can be direct and indirect. The Direct includes the acquiring of products, and Indirect includes services, maintenance of the acquired goods. So managing and handling the procurement related issues is called Procurement Management.
As we know that organizations, especially the manufacturing firms, follow the concept of Supply Chain Management, which includes the raw materials required for manufacturing till it finally get available for the consumers. Most of authors, take procurement as the first phase of the Supply chain. Most of the firms have dedicated procurement departments, which deals with procurement related issues and post-procurement activities. The most basic task of procurement is to ensure that manufacturing department gets supplies on time and in described quantity.
The timing of supplies is an important issue because the materials must reach production on time, JIT and it all reduces the cost of inventory. The procurement department also needs to make relationship with the suppliers. In many firms, there are many suppliers, providing with different materials. These suppliers might have their own suppliers as well. So procurement management also include the maintaining relationship with suppliers and their tiers.
The procurement process constitute of the related activates that are used in the process of acquiring the goods. The procurement process is somewhat similar for organization, i.e. military, natural resource manufacturing firms etc. However, the complexity of the process might be different depending upon the size of the firm. A well established firms need to give emphasis on the procurement process, and there are objectives that are the procurement department needs to ensure. First of the company, need to see weather the quantity and quality of the materials are according to described requirements.
The department needs to check that are materials are good shape, are meeting the technical aspect, and according to quality requirements. The second objective is to check time schedule. As already discussed earlier, the aim to receive goods before the schedule deadline. Most of the firms get supplies before the time, but in process the quality of goods are compromised. So it is better to deliver on time, and in good quality. And the last objective, and often considered as the most, is the cost issue. In this process, the main aim to have least cost, but that should meet the previous requirements of quality, technical aspects, time etc. It is not necessary that firm go for cheapest supplies. The cost can go high, if the goods supplied are of good nature.
Now as we have discussed the criteria that procurement department needs to keep in mind when checking the supplies. Now, let us go through the steps that firms follow when they select the suppliers, from which they acquire supplies. To explain this process, I would select a firm, for which we would select the suppliers. The firm is have chosen is manufacturer of clothes, especially T-shirts. Following is the steps that are:
The first step is identifying the goods (or services) that are required for manufacturing of the product. For this, the firm needs to define the materials required, along with description, which covers all the above-discussed objectives. For instance, in case of T-shirts, the major material that has to procure would be cloth. I would also have to tell the material required, i.e. cotton, polyester, silk etc. Then the quantity of material also has to define and similarly, the estimated cost that my firm is willing to pay. This step is also referred as evaluating the tenders.
The second is to select the suppliers that are meeting the requirements, described in the first step. Then the suppliers are required to submit their Request for Proposals (RFP). The procurement department analyzes the proposals (RFP’s) of the major suppliers and asks them for their Request for Quotations (RFQ’s). So what our firm would so here is find the bidders that clearing the requirements that we have asked for.
The third step is to ask for the qualified suppliers to prepare their bid proposal. The procurement department will analyze the proposal of candidates. The suppliers to do this activity are given time by the firm. In case of our, we the department will go though their cost along with the requirements. Actually, the firm starts that auctioning process.
The fourth and often considered as the main step is which evaluate the final bidders that are offering supplies at the most reasonable price. The firm looks at their past reputation and records. The process is often complex in nature, as firm also need to view the quality of the supplies. In this process, the firm selects the final supplier.
Once the firm has selected the final suppliers, the step of making contract with the supplier comes. In this process, the firm needs to go for final agreement with the firm and all issues are discuss. A formal document as a proof is signed among the firms, which is according to contract act. The time period of the contract is also discussed in this phase. The mode of payment is also settled.
The final step is the formal closing of contract. The closing of contract require the some activities to fulfill. We can say that when exchange of supplies and payment is made, the formal closing of contract place. In case of firm, the contract closes out when that we receive all materials i.e. clothes and payment of the material is made. Both the parties need to sort of issues. But in worst case, if issues go unsettled, any party can take the other party to court and solve this in legal way.
There are activities that are related to post-procurement period i.e. once the purchase has been done, the activities such as maintenance, repairing and operating services (MRO’s) take place. These activities are related to indirect procurement. For instance, we have agreed with our suppliers to provide us with MRO’s, and now evaluating their performance we have an option of renewal of the same suppliers, if we are satisfied with their performance.
The procurement management is considered as one of the main phase of firm’s supply chain management, which is responsible with the goods used for manufactures. Thus, we may call procurement as heart of supply chain management. The firms need to emphasis on procurement policies and try to adapt to new technologies that are helping them managing procurement activities.
- Quentin Fleming (2003) Project Procurement Management: Contracting, Subcontracting, Teaming. Fmc Press;
- Fred, C.P.M. Sollish, John, C.P.M. Semanik (2007) The Procurement and Supply Manager’s Desk Reference. Wiley;