Article by Benson Mmari
Procurement
Procurement
This 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 procurement process includes preparation and processing of a demand as well as the end receipt and approval of payment.
It often involves planning, standards determination, specifications development, supplier research and selection, value analysis, financing, price negotiation, making the purchase, supply contract administration, inventory control and stores, and disposals and other related functions.
The procurement process can be divided into five steps.
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1. Define the business need
You need to understand what the fundamental business requirement is. At this point, it is important to understand the difference between a requirement and a solution.
For example, the business requirement is to source some software to help to get information published on the company intranet. An item of software to publish information on the company intranet is a solution – not a requirement. The requirement is to be able to publish information on the intranet. It may be that an outsourced solution is a better option.
2. Develop the Procurement Strategy
Depending on the scale of your project, there could be a very wide range of potential solutions and approaches to your business need and a number of ways of researching the market and selecting a supplier.
3. Supplier Selection and Evaluation
After researching the market and establishing your procurement approach, you need to evaluate the solutions available. This may involve a formal tender process or an on-line auction. You criteria for comparing different solutions and suppliers are critical. Weight the key criteria heavily and don’t attach too much importance to aspects that will have little impact on the solution.
4. Negotiation and award
Even when you have selected a supplier it is important that detailed negotiations are undertaken. This is not just about price. Think in terms of Total Cost of Ownership. A cheap product is not so cheap if the carriage costs are huge or if the maintenance contract is onerous.
Consider carefully the process by which the goods or services will be ordered and approved; how they will be delivered and returned if necessary; how the invoice process will work and on what terms payment will be made. Considering the whole Purchase to Pay process (P2P) at the outset can reduce costs and risk significantly.
5. Induction and Integration
No goods or services should be ordered of delivered until the contract is signed, but this is not the end. It is vital that the supplier is properly launched integrated. The P2P process needs to be in place and need to be understood on both the buy-side and the supplier side. Any service levels that have been agreed need to be measured and KPIs put in place. Regular reviews should be established.
Stages in the Procurement Process
Step 1: Need Recognition – This is a seemingly obvious step, but one that needs to be mentioned. A business owner (or procurement department) must recognize a product is needed in order to purchase it. That product can be either a brand new item, or one that is being re-ordered.
Step 2: Specific Need – Does your industry have specific requirements for various products. If that is the case in your industry, be sure you are up-to-date on those requirements and order accordingly.
Step 3: Source/Examine Supplier Options – Every business needs to determine where to get their goods. Some companies have an approved vendor’s list (this is a recommended practice) while others are still trying to determine who the best suppliers are. Once a supplier is chosen, companies should stick with that relationship and try to establish preferred pricing.
Step 4: Price and Terms – Once a supplier is chosen, companies should stick with that relationship and try to establish preferred pricing and specific terms (i.e. delivery).
Step 5: Purchase Order – The purchase order is used the formal contract used to buy the product. The purchase order outlines the price, specifications and terms and conditions of the product or service and any other additional obligations.
Step 6: Delivery – The transfer of the purchase order via email, mail or fax (email is highly recommended).
Step 7: Expediting – This stage addresses the timeliness of the service or materials delivered. Delays, for many businesses, are important. The purchase order will have expected delivery date information.
Step 8: Receipt and inspection – Once delivered, the receiving company inspect and, subsequently, accepts or rejects the product. Rejection is almost always due to a damaged product.
Step 9: Invoice Approval and Payment – At this stage, three documents must match when the seller wants payment – the invoice, the receiving document (attached to the product) and the original purchase order. This is known as three-way matching. If there is a discrepancy, it must be resolved before payment is made.
Step 10: Record Keeping – The receiving (buying) company must keep good records. This means saving all relevant documents for every completed purchase.
PROCUREMENT PROCEDURES
Every organization that purchases goods or services has standard procurement procedures, the methods they use to acquire those things.
These procedures cover all aspects of the procurement cycle, including the selection of the supplier, contract negotiations, order placement and payment. All firms have procurement procedures, and they are used to control spending activity, ensure appropriate approvals are in place and reduce the risk of overpayment. Procurement or purchasing activity encompasses all spending activity, excluding payroll, and often represents more than 50 percent of all expenditures.
1. Selection of Suppliers to be invited to Tender
When procuring equipment and materials, will select suitable suppliers of the item to be purchased from among registered suppliers. As a rule, tenders will be by competitive bidding between selected suppliers. However, in certain cases, a specific supplier may be designated based on patent rights held by that supplier, compatibility with the existing facilities, whether they are the sole supplier of a given item, or similar situations.
2. Request For and Submission of Tenders
A request for tenders indicating the conditions of the tender, contract conditions, and tender specifications will be provided to potential suppliers who will be invited to submit tender proposals.
Financial and technical proposals must be submitted by the specified date. In addition to the proposal made in accordance with the tender specification, alternative proposals containing additional cost-saving options other than as specified by organization in the tender specification may be submitted provided that such alternatives meet the performance and function requirements as specified in the tender specification.
3. Technical Evaluation
In principle, technical proposals will be evaluated prior to the opening of the financial proposal in order to confirm that the technical proposal conforms with the conditions and requirements set forth by HEPCO. During the evaluation, HEPCO may request that the technical proposal be supplemented or amended. In cases where such changes could result in a change in the bid price, the supplier will be asked to submit such price adjustment and explanation.
4. Negotiation and Award of Contract
We negotiate over the contract price and other conditions with the most advantageous tenderer to HEPCO among those tenderers which meet the specified technical condition and requirement.
We will show the tenderer our standard contract conditions and reach to an agreement after negotiation.
5. Delivery, Inspections, and Payment
Products are to be delivered as agreed to in the contract. HEPCO reserves the right to claim liquidated damages if delivery is delayed beyond the specified delivery deadline.
HEPCO will inspect all products delivered by the supplier to ensure that they meet the requirements and conditions stipulated by HEPCO. Products which pass such inspections will be accepted. When necessary, inspections may also be carried out during the production process.
In principle, payment will be made the month following acceptance of the product. However, other payment methods may be considered based on mutual discussions in cases where a long time period is required for production or where other special circumstances exist.
6. Other
Proprietary information obtained during the course of any transaction shall be subject to strict confidentiality on the part of both HEPCO and the supplier concerned. Such information shall not be disclosed to any third party unless otherwise specifically authorized in writing.
