FACULTY OF BUSINESS SCIENCES

DEPARTMENT OF SUPPLY CHAIN, INSURANCE & AND RISK SCIENCES

MODULE: MSCM703 Procurement Theory

MODE OF ENTRY: HARARE WEEKEND CLASS

LEVEL: 1.2

PROGRAMME: MASTER OF COMMERCE IN SUPPLY CHAIN MANAGEMENT

STUDENT NAME: REG NO

JOEL GWATSVAIRA R121014G

LECTURER: Mr Mahwine

QUESTION

An organisation can select and make use of various procurement methods when acquiring goods
and services. Outline any four such methods and discuss challenges associated with each
method.
Definition of Terms

Procurement

Refers to activities that are involved in obtaining goods and services that are required by a
company to support its operations focusing on getting the best value from goods and services for
business profitability. The procurement process include sourcing items, negotiating terms,
purchasing, expediting, receiving, inspecting and record keeping. Procurement ensures that an
organisation identify reliable and committed suppliers that can meet its business needs at a
reasonable allowing an organisation to meet the procurement rights without wasting money and
time.

Goods

Good means tangible items of any kind or description, including raw materials, products and
equipment and things in solid, liquid or gaseous form and electricity and services incidental to
the supply of the goods, where the value of the services does not exceed that of the goods
themselves. These items drives profit and continuous growth in revenue and procurement of
goods establish long term, collaborative supplier relationships.

Services

Services means a procurement requirement that is performed through a consultancy or non-

consultancy service. Involves procuring and managing the contingent workforce and consulting
services for example software installation and subscriptions, legal and auditing services. It
usually maintain a once relationship with suppliers.

Methods of Procurement

Manthonsi and Twala (2012) states that procurement method is the overall process of acquisition
of goods and services needed for its operations. Procurement method can be defined as a
comprehensive organisational system that assigns specific responsibilities to people and
organisations that can meet the procurement requirements of an organisation. It is significant that
procurement method is a determined during the need identification stage the procuring entity has
to decide on the procurement method to adopt according to the delivery dates of goods, when
they want the services rendered and completion date of works. Early decision on which method
to use is significant to the procurement process as it can affect the lead time and avoids late
deliveries and frustrations due to poor planning. There are various methods that are used by
organizations when procuring goods and service and they include single sourcing, competitive
bidding, request for quotation, restricted bidding, two- stage bidding among others.

Request for Quotation

It is when a procuring entity ask its vendors to estimate the cost for the supply of goods and
services and the vendor will provide detailed information with regards to the procurement
requirement. This method is usually used when procuring small value items, routine items and
readily available items such as stationery and refreshments. Request for quotation is obtained
from three competitive suppliers after a written request for quotation document is sent to
suppliers. The supplier who meet the procurement requirement metrics is awarded the contract
and is confirmed by a purchase order. In the case of public procurement request for quotation is
used when the price of a procurement requirement for goods is above ten thousand united states
dollars and does not exceed hundred thousand united states dollars, in case of services the value
of the procurement requirement should be above five thousand and does not exceed two hundred
thousand united states dollars.

The challenges that comes with adoption of request for quotations is that they are less
competitive as the procuring entity has a choice of suppliers from whom they request for
quotations.

Request for quotations can be abused as a result of breaking requirements into smaller sizes just
to apply this method of procurement. Only a few firms will be sent the requests even if goods or
services are required in greater numbers.

It gives clear instructions on the conduct of the procurement process, there is no need to
advertise publicly in the gazette or national newspaper. Most organisations make use of three
quotations to make its evaluation which is time saving and requires less paperwork.
The number of quotations received is limited to the number requested so the selection process is
greatly reduced. Moreso, the time frame for the whole process is shortened as there is no need to
prepare solicitation documents nor advertising the requirements.

Competitive Bidding/ Open Tendering

It is a method whereby a procuring entity release an invitation to tender (ITT) that allows
supplier who meet the requirements to respond with how they intend to fulfil the contract and
persuade the procuring entity that they are the most suitable suppliers. The invitation to bids is
done publicly through the gazette and national newspaper allowing all members of the public to
bid if they are able to meet the criteria. Bidding documents are made available upon payment of
a non- refundable fee and there is a period of twenty days if bids are solicited from national
bidders. The procurement entity has a tender box where suppliers deposits their bid documents,
when the bidding period is over the bid documents are opened in presence of the suppliers that
submitted their bids for transparency reasons. Evaluation is done by a procurement committee
and is done in accordance with a set criteria highlighted in the bidding document and the
awarded supplier is published before the contract is signed allowing other suppliers to challenge
if there is need to.

The one credible complaint about the open procedure is that, as all applicants that meet the
purchaser’s minimum standards must be invited to bid, large numbers of bids must be sought for
some contracts, which can be expensive for both purchasers and suppliers.

This method of procurement is time consuming as there is need to open bids submitted and
evaluate all the tenders to obtain the one that meet all the required standard at the same time
some supplier who does not meet the set standards maybe chancers and submit their bids which
prove to be a waste of time to open such bids.
Further, considering this is a procedures based method a lot of procurement experts feel that this
method is not very suitable for large or complex acquisitions due to the intense focus on the
output process instead of stringent obedience to standards.

The open procedure is not suitable for contracts where the costs of bidding and assessment of
bids are high unless there are only a few suppliers in the market. Thus, whereas using the open
procedure should ensure that a purchaser is safe from subsequent attack, it may be preferable to
opt for less open procedures, bearing the burden of justifying the restricted invitation.

However, the advantage of the open procedure is that it is unbiased and consistent with technical
specifications and granted to the least-cost supplier. This procurement method is open and fair to
all suppliers who meet the criteria and enhances competition among suppliers and brings out the
best quality of goods and services at a fairly reasonable cost. The lowest price offered in the open
bidding will naturally be lower on average due to the higher number of bidders thereby
emphasizing on value for money..

Restricted Bidding

It is also known as selective tendering, where suppliers that are invited by the procuring entity
can submit their tenders. Suppliers are selected from a standing list which is a list of qualified
bidders according to the Public Procurement and Disposal of Public Assets Act in case of public
sector procurement. To create a standing list the procuring organisation shall determine the
general requirements necessary for potential bidders to demonstrate for the purposes of
enrolment, the requirements to include those prescribed in the Act. It is used in circumstances
where the good, works or services are only available to a limited suppliers, used also when there
is urgent need of the goods, works or services where time to go through the competitive bidding
process will be impossible.

The invitation to tender is not published publicly it is directed to selected supplier only and the
process that follows is similar to that of competitive bidding. This then limits the level of
competition among suppliers and increasing the chances of getting low quality goods and
services at higher prices.

The other challenge of restricted bidding is that there is a level of bias with closed tenders that
can make them inappropriate as there is a high chance of missing out on good suppliers by
targeting only a few selected suppliers.

Nonetheless, this method ensures that the procuring entity’s requirements are met and satisfied
more effectively thereby increasing their quality of work and ability to satisfy end users. Since
there is a restricted number of bids there are lower costs because of evaluating fewer tenders on
behalf of the procuring entity, this can be cheaper and less time is spent analyzing them and
deciding their suitability.

There is more flexibility on the procuring entity by allowing for a shorter procedure and
evaluating fewer bids. There is a high chance to embark on more substantial communication and
a more collaborative approach leading to better deals for both sides and a long term relationship.

Direct Procurement

This procurement method characterizes a buying entity with only one source of supply for a
particular good or service. It may be the result of a deliberate choice by the buyer, perhaps
because of the high cost of the item or its strategic importance to the end product. Alternatively it
may occur because the final customer has explicitly required the firm to work with a particular
sub-supplier’s product in the completed product. For example, many customers of personal
computers demand the Windows Operating System, thereby forcing manufacturers to source
exclusively from Microsoft. This procurement method is used in acquiring goods, works and
services that are only supplied by a single source for instance electricity that can be supplied by
Zimbabwe Electricity Supply Authority and there is no reasonable alternative or substitute.
When using this method additional requirements to the goods or services supplied have to be
procured from the same supplier for compatibility, standardization and continuity.

The challenges of this sourcing method is that firstly there is only one source of supply, which
could put the buyer in a position of weakness if the relationship is not managed properly, i.e. the
buyer becomes overly reliant or dependent on the supplier. Alternatively, if the supply source
were to cease doing business suddenly, the customer would be highly exposed in the
marketplace.

Secondly, if the buyer is ‘locked’ into a sole sourcing relationship with the supplier, this may
restrict the buyer’s flexibility to acquire new technologies or innovations that exist within the
wider network. This could mean that the buyer’s market position and therefore the firm’s
competitiveness is jeopardized. It is important to remember that the market dynamics that is
competitive-dynamic or uncompetitive-stable will influence the optimal buying sourcing
configuration.

While single sourcing may appear to have negative connotations, there are advantages to
managing this type of relationship. The procuring entity and suppliers working in a single-
sourced scenario often find it easier to exchange ideas on knowledge exchange for new product
development, have a clear understanding of cost structures moving towards cost transparency
and look for ways to redesign or enhance the product and processes. These relationships tend to
be much more long term in focus, allowing firms to spend time focusing on the development of
the relationship.

Having regard to the above said, it is shown that each procurement method comes along with
challenges and benefits inherent to their structure and way of conducting. It is therefore difficult
to give a clear cut answer as to which method ids better thus a flexible approach is to use a
method which is suitable for the procurement required in accordance with the guidelines and
regulations which govern the procurement of an organisation.
References

1. Ahmad, I. (2020). Procurement Management.

2. Arrowsmith, S., Faustino, P.B., AND Heuninckx, B. (2013). “EU Public Procurement
Law: An Introduction’ The EU Asia Inter University Network for Teaching and Research
I Public Procurement Regulation).
3. Baily, P., Farmer, P. and Crocker, B. (2015) Procurement Principles and Management.
Pearson, 11th Edition.
4. Best, R. (2020). https://www.statssta.com/topics/3797/cominsustry-in-the-uk/:
5. Gordon, S.R. (2018) Supplier Evaluation and Performance Excellence. J.ROSS
Publishing.
6. Greenhalgh, B. and Squires, G. (2011). Introduction to Building Procurement.
7. Hackett, M. and Statham, G., (2016). The Auqa Group Guide to Procurement, Tendering
and Contract Administration. John Willey and Sons.
8. Solish, F. and Semank, J. (2012), The Procurement and Supply Manager’s Desk
Reference. Willey, 2nd Edition.