CHAPTER 2

PROCUREMENT PROCEDURES
Course Learning Outcomes 1

 Examine fundamental concept, procedure and sourcing of procurement in

logistics and supply chain area. (C3, PLO 1, CLS 1)

Assessment
 Test

Notes
C3 : Application
PLO 1 : Apply fundamental principles of logistics and supply chain management and other related area.
CLS 1 : Knowledge and Understanding
Objective of this chapter
2.1 Expose the Procurement Order Cycle Standard Procedure
2.1.1 Recognize eight steps of Procurement Order Cycle Standard
Procedure
a. requisition material
b. determine supplier
c. a purchase order
d. follow up and expedite delivery
e. document receipt of material
f. move to store room
g. receive and handle invoice
h. issue payment
Objective of this chapter
2.2 Explain procurement for different types of items
2.2.1 Compare procurement for different types of items
a.Raw materials
b.Semi-finished product and component
c.Finished Products
d.Maintenance, Repair, and Operating Items (MRO)
Objective of this chapter
2.3 Discuss the implementation of e-procurement
2.3.1 Define e-procurement
2.3.2 Identify the key development of e-procurement
2.3.3 Explain the benefits of practicing e-procurement
2.3.4 Identify risks and impacts of e-procurement
Procurement Order Cycle Standard Procedure

 A typical procurement cycle is depicted in Figure 1.

 All companies have a procurement cycle, although it may not be adding value; therefore, we shall show how

to ensure that the procurement cycle can add value by evaluating the added value potential at each phase of

the cycle.
Procurement Order Cycle Standard Procedure
Requisition
Material

Issue 1 Determine
Payment Supplier

8 2

Received
A Purchase
and Handle
Order
Invoice

7 3

Follow Up &
Move to
5 Expedite
Store Room
Delivery
Document
6 Receipt of 4
Material
Procurement Order Cycle Standard Procedure
Requisition Material
 The procurement process starts
with the need to obtain goods or
services from an outsourced
company.
 These goods or services can be
internal or external .
 This stage, therefore, involves
assessing the needs of each
department and setting a budget.
 For example, if a clothing
manufacturer were starting out,
they’d use this stage to outline how
many and what type of embroidery
machines they’d need.
1 2
Determine Supplier
 Next, the procurement
department needs to
investigate vendors,
request quotes for the
item needed, and then
select a vendor.
 This is an important part
of the process because
reputation, cost, speed of
service, and dependability
all need to be investigated
before making a final
decision.
A Purchase Order
 After the purchase request has been
approved, the finance department will issue a
purchase order to the vendor.
⮚A PO is a legal offer to purchase. once
accepted by the supplier ,it becomes legal
contract for delivery of the goods according to
the terms and condition specified in the
purchase agreement.
 Example, required a machine upgrade, they
would need to obtain internal approval. If
approved, the internal team will prepare a
purchase order, including a description of the
new machine, pricing, and any other relevant
details. Once approved, the finance team will
share the purchase order with the supplier
who’ll begin to prepare the order and organize
payment details. 3
Procurement Order Cycle Standard Procedure
Follow Up & Expedite Delivery
⮚The purchase order must be
delivered, usually by electronic
means. fax, mail, personally or other.
⮚The receipt then a acknowledges
receipt of the purchase order.
⮚The supplier responsible for delivering
the items ordered on time.
⮚The purchasing department is
responsible for ensuring that supplies
do deliver on time.
4 5
Document Receipt of Material Move to Store Room
 At this stage of the process, it’s  When the goods are received the
common for businesses to make a receiving department inspects the
record of when the order arrived as goods to ensure that the correct
well as double-checking the order ones have been sent, are in the
contents. right quantity, and the bill of lading
is supplied by the carrier.
 If something is missing, this is the
opportunity to contact the supplier
and rectify the problem to reduce
potential downtime.
 In case you find something lacking,
it should be notified to the supplier
at this point.
6
Procurement Order Cycle Standard Procedure

Received and Handle Invoice Issue Payment

 The invoice is reviewed for

⮚When a supplier gets a purchase
accuracy against the purchase
order, they will send an invoice. The
order, invoice, and other
invoice includes the agreed-upon
documentation.
pricing and payment instructions.
 0
 Depending on the terms
⮚The invoice will include specifics of established for the supplier and the
the payment time permitted. With approval of the reviewing party,
some companies offering a credit payment is issued (usually within
notice, you get time to pay if you can't 30, 60, or 90 days).
complete the order at the time it's
placed.

7 8
Procurement for Different Types of Items
No Type of Purchase Description Example

1
Raw Material
2 All items purchased from a supplier required to support Components, subassemblies,
Semi-finished products and
components
3 Finished products
4 Maintenance, repair, and
operating items (MRO)
5 Production support items
Items with a lack of processing by the supplier into a Petroleum, coal, lumber, copper,
newly formed product. Often these raw materials are zinc, gold, and silver
not of equal quality and are purchased by “grade.”
an organization’s final that are production. assemblies, subsystems, and
systems (seat assembly, steering
assembly, doors, and posts)
Products for internal use or products that require no Furniture, computers, cars, and
major processing before resale to the end customer. carts
Items that do not go directly into an organization’s Spare parts, office and cleaning
product but are required to run the business. supplies
Materials required for packaging and shipping. Tape, bags, inserts, and shrink-
wrap
Procurement for Different Types of Items
No Type of Purchase Description Example

6 Services Services required to support the facility or the Customer support, temporary
business. labor, facilities, and legal
7 Capital equipment Assets intended to be used for more than one year. Machinery, computer systems,
and material-handling equipment
8 Transportation and third-party A specialized type of service buying to manage Rail, truck, ocean, 3PL, and
purchasing inbound and outbound material flows. multimodal
Procurement for Different Types of Items
Raw Materials
Characteristics of RM buying:
• The item is a raw and it is
not a finish good.
• Uses to complete the semi
– Finish goods
• Raw Material is the basic
material form which a
good product is
manufactured or made.
• The term is used to denote
material that came from
nature and is in an
unprocessed or minimally
processed state.
Component
Characteristics of component
buying:
• Material or parts that are
waiting to be made into
something else. ( this item
that must use to produce
the product)
• Also known as semi –
Finish goods.
• It uses to be part of a
complete good
• Without component – the
product will not be a
product and can’t produce
because the product will
not complete as well.
Work in progress Consumables product
Characteristics of WIP: Characteristics of CP:
• It also know as a WORK- • The consumable means
IN- PROCESS (WIP) or in goods that people
process inventory. purchase regularly
• It is a materials and because they are quickly
components that have used and need to be
begun their transformation replaced often.
to finish goods. • The goods that can be
used by end costumer. It is
known as completed good.
• This kind of stuff will finish
after using and it can’t be
reprocessed anymore.
• Consumables are
products that consumers
buy recurrently.
Why We Focus on E-procurement

Improved global connectivity and the adoption of

technology have greatly increased the volume of
business conducted via the Internet. With the impact
from the covid-19 pandemic, virtually every business
that can be conducted remotely is now online.

This includes supply chain transactions, as both

buyers and sellers embrace electronic procurement or
e-procurement. E-procurement is shown to increase
productivity and transparency while reducing costs.
What is E-procurement ?

E-procurement is “the centralised management of a

company's procurement and supply chain using an
electronic platform”. The “e” stands for “electronic”. It is
also sometimes known as supplier exchange.

E-procurement is the process of buying and selling

supplies and services over the Internet. It differs from e-
commerce in that it makes use of a supplier’s closed
system typically available only to registered users.

E-procurement, also known as electronic procurement or

supplier exchange, is the purchase and sale of supplies,
equipment, works, and services through a web interface
or other networked system.
What Are The Main Functions of E-Procurement?

1 Automates processes to free up resources and reduce errors.

2 Improves communication between stakeholders and partners to streamline the

procurement cycle.

3 Provides a single platform for all procurement activity, giving stakeholders and
managers a centralized platform for managing and auditing.

4 Offers real-time updates for vendors, management, stakeholders, and partners, as well
as the chance to curate and store procurement data.

5 Allows for streamlined negotiation between multiple partners and stakeholders.

Key Development of E-procurement

1 Type of spending (Direct and Indirect)

2 Contract Purchase vs. Spot Purchase

3 Vendor Recruitment

4 Access to Larger B2B Forums

5 Electronic Auction
Key Development of E-procurement
Type of spending (Direct and Indirect) Contract Purchase vs. Spot Purchase

 Companies buy a great range of goods and services  Companies uses contracts to lock in favourable
from paper to computers to electricity to flour to steel. pricing or ensure a steady supply of goods.
 These goods can be categorized as INDIRECT or  Spot purchases occur when a company has a
DIRECT goods.
specific, immediate need and wants to fill it at the
 Indirect goods and services are ordinary, commodity lowest possible price.
supplies like paper, airline tickets and cleaning services–
things that virtually every company.
 Companies purchase from HORIZONTAL( Exp- Xerox,
Office Max or Travelocity …)
 Direct goods, in contrast, are raw materials, parts and
components used as inputs into processes that finished
products.
 Every industry relies on a different set of direct goods,
and buyers obtain them from industry- specific or
VERTICAL vendors.
Key Development of E-procurement
Vendor Recruitment
 A company should not underestimate the time and
effort involved in recruiting vendors.
 Many vendors are barraged with requests to join
various competing platforms.
 The less expense, effort custom work involved in
joining a platform, the more likely a vendor will
actually do so.
Access to Larger B2B Forums
 Choosing e- pro platform that is compatible with,
and can seamlessly connect, to other B2B
platforms, marketplaces and exchanges, a
company can take advantage of favourable
buying opportunities while retaining the benefits of
its custom e-pro platform.
 Larger service providers will typically sponsor a
variety of B2B commerce platforms both private
and public.
Key Development of E-procurement
Electronic Auction

- Buyer use the internet to share communications,

providing both buyers and suppliers with visibility of
bid status in real time and allowing an instant
response .An auctions allows for a bid on price
and/or quantitative attributes such as delivery
charge, quantity discount and quality required. E-
auctions should be considered as a tool in buyer’s
e-sourcing toolkit.
- Renew existing contracts or offer consolidated
spend opportunities.
- They can used to negotiate significant spot
purchase and to receive pricing on frequently
tendered communications or service.
Benefits of Practicing E-procurement
• E-procurement eliminates paperwork, rework and errors.

Reducing costs • Costs can be reduced by leveraging volume, having structured supplier
relationships and by using system improvements to reduce external
spend while improving quality and supplier performance

• Centralized tracking of transactions enables full reporting on requisitions,

items purchased, orders processes and payments made.
Visibility of spend
• E-procurement advantages extend to ensuring compliance with existing
and established contracts.

• Internal customers can obtain the items they want from a catalogue of
approved items through an on-line requisition and ordering system.
Increases Productivity
• Procurement staff can be released from processing orders and handling
low value transactions to concentrate on strategic sourcing and improving
supplier relationships.
Benefits of Practicing E-procurement
• Standardized approval processes and formal workflows ensure that the correct level of
authorization is applied to each transaction and that spend is directed to draw off existing
contracts.
Controls • Compliance to policy is improved as users can quickly locate products and services from
preferred suppliers and are unable to create maverick purchases.

• E-procurement advantages can only be fully realized when the systems and processes to
manage it are in place. Software tools are needed to create the standard procurement
Using technology documentation: electronic requests for information (e-RFI), requests for proposal (e-RFP) and
requests for quotation (e-RFQ).

• Many companies have discovered the power of just-in-time inventory management, and e-
Just-in-Time procurement helps to make this powerful strategy possible.
Inventory
• The process of sourcing materials and supplies online helps to facilitate the supplier
Management relationships that drive just-in-time inventory management.
Benefits of Practicing E-procurement
• E-procurement also allows businesses and business owners to better maintain data and
more easily manage their relationship with suppliers.
Better Buying Power • This information can help businesses negotiate better volume discounts and more effectively
leverage their buying power.

• Digital transactions save money, thanks to lower costs of labor and fully automated
Financial savings processes. Over time, these savings per transaction add up to constitute significant financial
gains for a business.

• By using a single, automated platform for the main steps of procurement, businesses
eliminate unnecessary administrative and manual tasks, thereby improving efficiency and
Streamlined workflow reducing error.
• Teams save time and are able to focus on more complex or higher added value tasks.
Benefits of Practicing E-procurement
• Electronic paperwork is streamlined and thus easier to check for errors—there’s no messy
printing to get in the way either. Along with this, past orders are more easily referenced,
Reduced Errors meaning there’s a greater chance that your company can compare orders to ensure new
ones are correct.

• E-procurement is both time-saving and efficient. As the electronic handling of tasks supports
Increased Transaction and simplifies the purchasing process, transaction speed is increased.
Speed • Relationships with suppliers, procurement cycle times speed up. The e-procurement process
eliminates unnecessary activities, allowing you to focus on more valuable tasks.

• When you have various departments making procurement decisions, there can be differences
Standardized Buying in what and how they purchase. Conducting purchasing electronically makes it easier for
every department to conform to company procurement standards.
Risks and Impacts of E-procurement
Organizational Risks Failure to Achieve Real Cost Reductions

⮚The cost savings that are gained through e- ⮚There is a risk that the return on investment (ROI)
procurement are a better use of time and resources. from introducing e-procurement may be lower than
⮚This means employees need to be transferred to a that forecast and the introduction of the e-
different department or location or made redundant. procurement system may not pay for itself.

⮚The manager will need to be prepared to explain the

benefits of the new system to the company and deal
with the resistance caused by the threat of
redeployment or redundancies.
⮚There is an additional risk that the originators of the e-
procurement become empowered throughout the Culture Shock
business.
⮚They may purchase their items directly rather than ⮚Difficulties related to obtaining both literal and
using the purchasing department, which is known as figurative investment in digital transformation due to a
maverick purchasing. This type of purchasing often lack of information perceived limitations of the
happens when the items are not necessary or have a software itself, or a corporate culture reluctant to
high cost. move beyond traditional models of procurement
processing.
Risks and Impacts of E-procurement
Micromanagement Not Ideal for Direct Materials

⮚E-procurement software tools offer features for
detailed data analytics and classification.
⮚However, the danger is you can get carried
away by the multiple customization options.
There may be a high number of fields which can
be confusing and could reduce the platform’s
reporting efficiency.
⮚E-procurement works best for purchasing
catalogue-based indirect materials such as
office supplies.
⮚However, e-procurement may not be ideal when
purchasing direct services and materials.
Therefore, it would not be advisable to use it for
negotiating purchases that are part of large and
expensive deals.

Supplier On boarding Problems

⮚Older vendors may struggle to understand new online procurement software systems.
⮚Small businesses can have a hard time updating catalogues and other info with the platform.
⮚Therefore, it is important to select tech-savvy suppliers to fully benefit from e-procurement
What Are The Major E-Procurement Tools?

Electronic data interchange system

An electronic data interchange (EDI) is used to
exchange data and information between electronic
devices. Messages and information from partner
companies are transmitted and stored via EDI,
streamlining invoicing and order logistics.

Internet applications and platforms

Businesses implement a variety of eProcurement tools and
web platforms to facilitate day-to-day working, including
eSourcing, eTendering, eAuctioning, and eOrdering tools.
Email is also used predominantly, as well as XML-based
data transfer.

E-ordering and purchasing tools

Major tools relating to product purchasing include a web-
based ERP and digital mechanisms for eAuctions.