LOG 214: PROCUREMENT PRINCIPLES

CPSP-(MBA-PSM) MEM’BWANA KOMBO

Department of Business Studies
Mzumbe University - DCC
TOPIC FOUR: RIGHT TIME DECISION.
(LEAD TIME AND TIME COMPRESSION)
Objectives of this topic.

• Right time to buy or to deliver?

• What is the cost of time?

• What are the implications of NOT-RIGHT time buying and delivery?

• To insist the importance of responsiveness to customer needs.

• To explain the importance of lead-time variability.

INFLUENCING FACTORS FOR RIGHT TIME
PROCUREMENT
• Availability

• Market conditions

• Competition

• Procurement policies

• Customer demand
INFLUENCING FACTORS FOR RIGHT TIME
DELIVERY

• Supply lead time (from ‘initial need’ to ‘available

for use’)

• Organizational requirements

• Customer demand
COMPONENT PARTS OF LEAD TIMES

Lead time Lead-time stage Steps, by time

Pre-order • User need • Analyzing status to determining need
planning. • User requisition to order
• Need to order to date of order
requisition
Procurement • Order preparation • Order requisition to order release date
• Order • Order release to date of confirmation
confirmation
Supplier All the stages here Confirmation to order dispatched date
are in production and
warehouse lead time

Production Preparation and Date of order receipt to date of

manufacture manufacturer
COMPONENT PARTS OF LEAD TIMES
Lead time Lead-time stage
Warehouse Supplying from stock
Transit Transporting
Receiving Receiving and
inspection
Payment Payment processing
Steps, by time
Date goods arrived to date of
order receipts.
Date dispatched to date order
received.
Date order received to date
available for issue/use.
Date invoice received to date
payment made.
SUPPLY LEAD TIME

• The supply lead time is actually the total of all the above lead times, excluding the payment lead
time.

• It is different from supplier lead time

• Includes all lead times

• It is the ‘true’ lead time

DEALING WITH LEAD TIMES

• How can we minimize each type of lead time we

have seen above?
• What is/are the implication(s) for minimizing
lead time?
LEAD TIME VARIABILITY

• Why should lead times vary?

• It should not be taken as an average

• Good to have it in a realistic RANGE (3 – 6 days)

• Variability represents UNCERTAINTY

• Leads to holding SAFETY stock

• TOTAL LT in RANGE is a result of VARIABILITY

DEALING/WAYS OF REDUCING LEAD TIME
VARIABILITY

1. Demand LTV
• Predictable known orders size

• Predictable order times

• Data accuracy on what customers want

DEALING/WAYS OF REDUCING LEAD TIME
VARIABILITY

2. Supply LTV

• Predictable known LT

• Get correct quantity first time

• Get correct quality first time

• Data accuracy on what is supplied/price.

EXPEDITING

• Required to ensure timely delivery

• Does it add value to the organization?

REDUCTION IN EXPEDITING

• Lead times are known and accepted

• Mutual interest exists between buyer and seller
• Information is shared by buyer and seller
• Specification are not frequently altered
• Delivery required is specified properly
• Specifications are clear, understood by seller and fall within seller’s technical capability.
• Capacity and capability of suppliers is checked pre-contract.
TOPIC FIVE: RIGHT SOURCE DECISIONS

• Products and services should come from right suppliers.

• Procurement should also ensure delivery to the right place.

• BUT, is it about a good supplier or a good procurement

personnel?
WHAT IS SOURCING?

• This is the process of identifying, selecting, and developing suppliers.

• Much more than simply picking a supplier or contractor.
• Involves continuing relationships with both existing and potential
suppliers.
• It requires supply market research.
• Identify sources, their capabilities, market trends, and long term supply
prospects.
ATTRIBUTES OF A GOOD SUPPLIER

• Delivers on time.
• Provides consistent quality.
• Gives a good price.
• Provides good service back-up.
• Is responsive to our needs.
• Keeps promises.
 THE SOURCING PROCESS

Strategic sourcing is a complicated process involving a number of interrelated tasks. Not

surprisingly, a number of models of the strategic process have been devised.
• Stage 1: Identify or re-evaluate needs:
• In some instances, needs must be re-evaluated because they have changed.
• Stage 2: Define or evaluate user’s requirements.
• Stage 3: Decide on whether to make or buy.
THE SOURCING PROCESS CONTINUED;

• Stage 4: Identify type of purchase.

• The three types of purchases – from least amount of time and complexity to most amount of time
and complexity – are:
1. Straight rebuy or routine purchase.
2. A modified rebuy, which requires a change to an existing supplier or input.
3. A new buy, which results from a new user need.
• Stage 5: Conduct market analysis: A source of supply can operate in a purely competitive market
(many suppliers), an oligopolistic market (a few large suppliers) or a monopolistic market (one
supplier).
THE SOURCING PROCESS INVOLVES;

• Stage 6: Identify possible suppliers: This may include suppliers that the purchaser has
not previously used.
• Stage 7: pre-screen possible suppliers: This process will reduce the number of suppliers
to those that can meet the purchaser’s demands.
• Stage 8: Evaluate the remaining supply base: This activity is often accomplished by
means of competitive bidding.
THE SOURCING PROCESS INVOLVES;

Stage 9: choose supplier: The choice of supplier determines the relationships that will exist between
the Purchasing and supplier organizations and how the relationship will be structured and
implemented. It will also determine how relationships with non-selected suppliers will be maintained.
Stage 10: Deliver product / make performance service
• The completion of this activity also begins the generation of performance data to be used for the
next activity.
Stage 11: Post purchaser/make performance evaluation
• The supplier’s performance must be evaluated to determine how well the purchaser’s needs have
been met. This will provide data for future sourcing.
MARKET ANALYSIS

Analysis of the market is mostly a strategic activity which is necessitated by the need for;
• Forecasting firm’s requirements
• Price trend in the market
• Effects of material costs on financial returns
• Determining availability of alternative source of material/service
• Guidance on security of supply sources
• Provide information on social, political, economic and technological factors that may affect the
supply.
SOURCES OF DATA FOR MARKET ANALYSIS

Supplier appraisal can be undertaken by a combination of the following:

• Desk research using published or unpublished data already in existence e.g. company’s
reports, balanced sheet, strike records etc
• Field research to obtain further data of a prospective supplier by a visit to their working
environment.
AREAS OF SOURCING INFORMATION

Areas of sourcing information include;

• Analysis of the market conditions
• Directives (reference by other firms)
• E-sourcing
• Locating supplier sources
• Online trade directories
• Websites
• yellow pages
• Exhibitions
• trade journals
SUPPLIER APPPRAISAL

• To appraise is to examine, assess, or evaluate someone or something in-order to ascertain or judge their ability,
quality, success or needs.
• Supplier appraisal may arise when a prospective vendor applies to be placed on the buyer’s approved list or in the
course of negotiation when the buyer wishes to assure him/herself that a supplier can meet requirements reliably.
Supplier appraisal can be a time consuming and costly activity.
Supplier appraisal should be undertaken where:
• Suppliers is not certified e.g. not iso 9000:2000 certified
• In purchase of high risk-high profit item
• Purchase of non-standard item
• Expenditure on capital item
SUPPLIER APPRAISAL SHOULD BE UNDERTAKEN
WHERE:

• For the purpose of supplier development

• When entering a JIT arrangement
• When contemplating joining supplier’s association
• When engaging in global sourcing
• When establishing e-procurement with long-term strategic supplier
• When negotiating outsourcing contracts
• Before agreeing to subcontract
• When negotiating service level agreements.
WHAT SHOULD BE APPRAISED?

• Supplier’s appraisal is situational. What to appraise is related to the requirements of the particular
purchaser. All appraisals should however, evaluate potential suppliers from the following perspectives:
1. FINANCE:
2. PRODUCTION CAPACITY:
3. HUMAN RESOURCES:
4. QUALITY:
5. PERFORMANCE:
6. ENVIRONMENTAL AND ETHICAL FACTORS:
7. INFORMATION TECHNOLOGY:
BUILDING LONG-TERM RELATIONSHIPS WITH SUPPLIERS:

• Building relationship with suppliers is becoming an explicit part of the procurement strategy for both
small and big companies.
• Challenges like globalization, rapid product development, advances in production technologies, cost
reduction, bubbling issues like trimming supply base, just-in-time, mass customization, lean
manufacturing, core competence-based on make or buy procurement strategies have led procurement
managers to think radically in a different way to deal with future procurement strategies.
• Establishing long-term relationships with capable suppliers and working closely with them over time to
achieve high levels of quality and productivity involves communicating intentions and expectations
clearly, defining measures of success, obtaining regular feedback, and implementing corrective action
plans to improve performance.
THE DISTINCT SUCCESS FACTORS FOR BUYER-
SUPPLIER RELATIONSHIP ENCOMPASS:
• Attitude.
• Commitments.
• Trust.
• Communication.
• Coordination.
• Motivation.
• Conflict management.
• Participation.
• Culture change and most importantly continuous improvement.
PROCUREMENT RELATIONSHIP CAN BE EXPRESSED IN THE
FOLLOWING WAYS:

1. Partnership sourcing
2. Reciprocal trading
3. Counter trade
4. Intra company trading
5. Sub-contracting
SUPPLIER SOURCING POLICIES:

• A policy is a statement that describes in a very general terms intended course of action.
• Policies serve as general guidelines in making operating decisions that channel actions
towards achievement of objectives.
• Policies act as reference point for purchasing function, provide direction in the execution
of various purchasing task, act as the authority base for all activities done in an
organisation and policies also enable the management to control the use of resources.
THE DISTINCT POLICIES IN LINE WITH
SUPPLIER SOURCING ENTAIL:
• Make or buy.
• Single/multiple sourcing.
• E-sourcing.
• Outsourcing.
• Sub-contacting.
• Lean supply.
• Partnership sourcing.
• Co-destiny and co-makership and
• most importantly Supplier development policies.
MAKE-OR –BUY DECISION:

• Make-or –Buy Decision: Make-or-buy decisions compare the cost of producing a

component or providing a service internally with the cost of purchasing the component or
service from an external supplier. The fast changing competitive environment demands
greater flexibility and capability to deal with environmental changes and uncertainty.
This involves not only focusing on financial or marketing strategies but it may demand
careful analysis of all functional strategies. Many companies are focusing only on what
they are good at and outsource the rest.
FACTORS FAVOURING BUY DECISION:

Some of the circumstances and pressures favouring buy decision are:

1. Spread of financial risk between the purchaser and vendor.
2. Ability to control quality when purchased from outside.
3. Availability of vendor’s specialist expertise, machinery and or/patents.
4. Quantities required too small for economic production.
5. Avoidance of costs of specialist machinery or labour.
6. Reduction in inventory.
7. When technologies are changing rapidly it becomes difficult for companies to keep pace with the needed
infrastructure.
FACTORS FAVOURING MAKE DECISION:

Some of the circumstances and pressures favouring make decision are:

1. Greater purchasing power with larger orders of a particular material.
2. Potential lead time reduction.
3. Possibility of scrap utilization.
4. Cost of work is known in advance.
5. Large overhead recovery base.
6. Ability to manage resources.
7. Maintenance of company’s secrecy.
 SINGLE/MULTIPLE SOURCING:
• Single sourcing:
• Single sourcing of an item means that the company adopts the practise of purchasing all its
requirements for an item or service from one supplier although a number of suppliers may have
the capability to supply. In sole sourcing, only one supplier supplies all the goods.
• Multiple sourcing:
• Multiple sourcing of item(s) means that the company adopts the practise of purchasing all its
requirements from various suppliers in the market. The objective of multiple sourcing is to
maximise benefit on prices and services. In situations of multiple sourcing, both buyers and
suppliers feel a high level of uncertainty and therefore there are multiple controls to ensure
successful transaction.
• E-sourcing:
• E-sourcing is a suite of collaborative, web-based tools that enable procurement professionals and
suppliers to conduct the strategic activities within the procurement lifecycle over the internet.
These strategic activities including requirements and specification definition, tendering and
supplier selection, and contract award and management are designed to deliver value for money
procurement solutions to the public sector. E-sourcing helps to encourage consistency with policy
and best practice and increase sourcing and contract management efficiency and effectiveness.
• Outsourcing:
• Is the strategic use of resources to perform activities handled by internal staff and their resources.
It is a management strategy by which an organisation out sources major non-core functions to
specialised, efficient service providers. The basic objective is normally cost reduction and
concentration on core activities.
• Sub-contracting
• Sub-contracting entail means of augmenting limited resources and skills while enabling the
contractor to concentrate on their main area of expertise. Sub-contracting relieves the main
contractor of some duties and therefore being in a position to concentrate on supervision. Also
sub-contracting reduces cost on the part of main contractor as well as attracting highly qualified
and experienced experts to do the job.
• Lean supply
• This is the state of business in which there is dynamic competition and collaboration of equals in
the supply chain, aimed at adding value at minimum total cost, while maximizing end customer
service and product quality. In this policy the purchaser seeks to minimize the number of
suppliers.
• This is done because of the following reasons:
• Promote high standards and quality.
• Enable development of good buyer-supplier development.
• Promote accountability.
• Aid the implementation of quality management systems etc.
Lean supply chain management is considered by businesses who want to streamline their processes
by eliminating waste and non-value added activities
• Partnership sourcing:
• This is the commitment to both customers and suppliers, regardless of size, to a long-term
relationship based on clear, mutually agreed objectives to strive for world class capability.
• Partnering aims to transform short-term adversarial customer/supplier relationships focussed on
the use of purchasing power to secure lower prices and improved delivery into long term
cooperation based on mutual trust in which quality, innovation and shared values compliment
price-competitiveness.
CO-DESTINY AND CO-MAKER SHIP:

• Co-destiny is where:
• The future of all the participating organisations depends to a greater or lesser extent on
the success of a partnership relationship in which each organisation has made an
investment.
• Co-makership may be defined as close cooperation between the buyer and seller
organisations in respect of product development, manufacture or supply.
• Also co-makership can be defined as working together so that each party benefits more
from collaboration than working independently.
SUPPLIER DEVELOPMENT POLICIES:

• This is any activity that a buying firm undertakes to improve a supplier’s performance and
capabilities to meet the buying firm’s supply needs.
• Supplier development is accomplished by: instigating competition among suppliers, working
directly with suppliers through training and other activities, assessing supplier’s operations and
also providing incentives to improve performance. Supplier development in world class firms is
proactive and it focuses on helping suppliers retain the learning that occurs in the development
process to help them improve their own systems. Supplier development requires that both firm
commit financial, capital and personnel resources to work; share timely and sensitive information
and create an effective means of measuring performance and progress.
SUPPLIER ASSESSMENT METHODS

• There are two main approaches used in selecting suppliers:

1. Supplier appraisal – used to select potential / new suppliers
2. Vendor rating – used to assess already performing suppliers
• Supplier appraisal
• This is the assessment of the potential suppliers so as to be used as on of the company’s suppliers.
• Vendor Rating
• It is the assessment of already performing suppliers so as to improve their performance or replace
them.
THERE ARE TWO TECHNIQUES USED IN VENDOR RATING:

1. Subjective supplier rating method.

2. Objective supplier rating method.
• Subjective supplier rating method:
• A purchasing officer is appointed to observe on how well or badly the suppliers are performing and then judge each
supplier. It is subjective because different individuals have different value judgments.
• Objective supplier rating method:
• Marks are allotted to each of the factors that determine a good supplier each time a supplier performs. These factors
include: Right price, right time, right quality, right quantity, service given to the buyer, cost reduction effort, management
capability.
• The marks are the compiled at the end of a given period and used to come up with a conclusion in respect to each supplier.
• Early supplier involvement (ESI)

• ESI is an approach in supply management to bring the expertise and collaborative synergy of
suppliers into the design process. ESI seeks to find “win – win” opportunities in developing
alternatives and improvements to materials, services, technology, specifications and tolerances,
standards, order quantities and lead time, processes, packaging, transportation, redesigns,
assembly changes, design cycle time, and inventory reductions. Today, early supplier involvement
(ESI) is an important accepted way of life at many proactive firms and a requirement for world
class supply management.
TOPIC SIX: PRICE AND TOTAL COST OF
OWNERSHIP (TCO).
• Price is the amount of money for which something is bought or sold.
• Pricing is the process of determining what a company will receive in exchange for its products.
• Pricing Theories:

Theory of price is a micro economic principle that uses the concept of supply and demand to
determine the appropriate price point for a good or service.
• The goal is to achieve the equilibrium where the quantity of the goods or services provided
match the Dd of the corresponding market and its ability to acquire the good or service.
• The concept allows for price adjustments as market conditions change.
FACTORS AFFECTING PRICING DECISIONS:

1. Competition and other market conditions.(price mechanism)

2. Value as perceived by customers.
3. Cost of production.
4. Strategic consideration.
TYPE OF MARKET AND THEIR
CHARACTERISTICS.
MARKET TYPE CONDITIONS
Monopoly One supplier.
Duopoly Two suppliers.
Monopolistic Competition • Many suppliers.
• Differentiated product.
• Freedom of exit and entry.
• Imperfect knowledge.
Perfect competition • Many suppliers.
• Identical product.
• No barriers to entry.
• Complete information.
TYPE OF MARKET AND THEIR
CHARACTERISTICS.
MARKET TYPE CONDITIONS

Monopsony • One buyer.

• Many suppliers.
Oligopoly • Few firms.
• Either homogeneous/differentiated products.
• Interdependence of firms- policies of one firm
affect the other firm.
• Substantial barriers to entry.
• Price rigidity. Eg. Auto industry & cigarette
company.
• Oligopoly firms may collude (act as a
monopoly) and earn positive profits.
PRODUCT LIFE CYCLE AND PRICING.

• All products tend to go through a five-phase cycle of development: Introduction, Growth,

Maturity, Saturation and Decline.
• Pricing policy can vary dramatically depending on where in the product life cycle a
product has reached.
• Product Life Cycle Stages Explanations,
• The product life cycle has been clearly defined stages, each with its own characteristics
that mean different things for business that are trying to manage the life cycle of their
particular products.
• Introduction Stage – This stage of the cycle could be the most expensive for a company
launching a new product. The size of the market for the product is small, which means sales are
low, although they will be increasing.
• On the other hand, the cost of things like research and development, consumer testing, and the
marketing needed to launch the product can be very high, especially if it’s a competitive sector.
• Growth Stage – The growth stage is typically characterized by a strong growth in sales and
profits, and because the company can start to benefit from economies of scale in production, the
profit margins, as well as the overall amount of profit, will increase.
• This makes it possible for businesses to invest more money in the promotional activity to
maximize the potential of this growth stage.
• Maturity Stage – During the maturity stage, the product is established and the aim for the
manufacturer is now to maintain the market share they have built up. This is probably the most
competitive time for most products and businesses need to invest wisely in any marketing they
undertake.
• They also need to consider any product modifications or improvements to the production process
which might give them a competitive advantage.
• Decline Stage – Eventually, the market for a product will start to shrink, and this is what’s known
as the decline stage. This shrinkage could be due to the market becoming saturated (i.e. all the
customers who will buy the product have already purchased it), or because the consumers are
switching to a different type of product.
• While this decline may be inevitable, it may still be possible for companies to make some profit
by switching to less-expensive production methods and cheaper markets.
PRICING TECHNIQUES/TOOLS:

1. COST PLUS PRICING.

• This is a very common method of determining the selling price of products.
• The selling price is found out by adding a certain percentage mark-up to the average
variable cost.
• This method ignores the influence of demand on price.
• It helps fixing a fair price.
• Cost is considered as the main factor influencing price.
PRICING TECHNIQUES CONTINUED:

2. MARGINAL COST PRICING.

• This method is usually adopted when the product is introduced in a new market.
• Here fixed costs are ignored and prices are fixed on the basis of marginal cost.
• Only those costs that are directly attributable to product are taken.
• As marginal cost does not take account of full cost it is only a short-run phenomenon.
PRICING TECHNIQUES CONTINUED:

3. GOING-RATE PRICING.
• The Going-Rate Pricing is a method adopted by the firms where in the product is priced
as per rates prevailing in the market especially on par with the competitors.
4. PRODUCT LINE PRICING.
• A product line is a group of products produced by a firm that are related either as
substitutes and complements.
• The products may be physically distinct or may be physically the same but sold under
different demand conditions which give the seller a chance to charge different prices.
PRICING TECHNIQUES CONTINUED:

5. PRICE SKIMMING.
• When a new product is introduced in the market, the firm fixes a price much higher than
the cost of production in absence of the competitors.
• The consumers are ready to pay a high price to enjoy the pleasure of being the first users
of the product.
• After a certain time, it will gain a huge profit as well as new competitors too, so after
squeezing the enthusiastic buyers, goes on reducing the price step-by-step so that it can
reach the various sections of consumers who are willing to buy it at lower prices.
PRICING TECHNIQUES CONTINUED:

6. PENETRATION PRICING.
• The price fixed is relatively a low one.
• This pricing is adopted when the new product faces a strong competition from the
existing substitute products.
• The new firm has to penetrate the market and achieve an acceptance for its product, so it
will charge only a very low price initially, hoping to charge a normal price later when it is
established in the market.
• The penetration price sometimes below the cost of production.
VARIOUS PRICING TERMS:

• Total Cost of Ownership, is an assessment of all costs, both direct and indirect involved
with an item over its whole useful life.
• Most frequently, TCO is used at the beginning of the purchase process to evaluate which
is the most cost cost-effective choice.
• The costs of owning, operating and maintaining a system. TCO includes the up-front cost
of equipment plus installation, training, support, upgrading and repairs.
PRICE ANALYSIS AND COST ANALYSIS.

• Cost and price analysis are two different approaches to making decisions on the
appropriate value of products or services prior to purchase. These types of analyses are
used by the government agencies as well as private businesses and consumers to evaluate
contract work or goods being considered.
• Price analysis: is the method for evaluating similar products.
• Is a review, analysis or examination of the price proposed by a supplier and an assessment
or evaluation as to whether or not it is fair and reasonable.
• Cost analysis: is a more complicated approach.
• Is a useful technique for keeping prices realistic in the absence of effective competition.
• A cost analysis should include a review of itemized services and products against their separate
costs.
• Is often used when price analysis is not feasible, like when there is no alternative solution for your
project.
TYPES OF CONTRACTS AND THEIR CONDITIONS
FOR USE AS PER GN NO.446 SECT. 313 - 318.
1. FIXED PRICE (LUMP SUM ) CONTRACT.
• 313.-(1) The fixed price contracts, otherwise referred to in this Part as “lump sum contracts”
shall be used mainly for assignments in which the content and the duration of the services and
the required output of the consultants are clearly defined.
• (2) The lump sum contracts may be used for simple planning and feasibility studies,
environment studies, detailed design of standard or common structures, preparation of data
processing systems, and so forth.
• (3) Payments shall be linked to outputs (deliverables), such as reports, drawings, bill of
quantities, bidding documents, and software programs.
2. TIME BASED CONTRACT.
• 314.-(1) Time based contracts shall be used when it is difficult to define the scope and the length of
services, either because the services are related to activities by others for which the completion
period may vary, or because the input of the consultants required to attain the objectives of the
assignment is difficult to assess.
• (2) The contracts under sub regulation (1) may be used for complex studies, supervision of
construction, advisory services, and most training assignments and payments are based on agreed
hourly, daily, weekly, or monthly rates for staff (who are normally named in the contract) and on
reimbursable items using actual expenses and, or agreed unit prices and the rates for staff
include salary, social costs, overhead, fee or profit, and, where appropriate, special allowances.
• (3) Such contracts shall include a maximum amount of total payments to be made to the
consultants and the ceiling amount should include a contingency allowance for unforeseen work
and duration, and provision for price adjustments, where appropriate.
3. RETAINER AND SUCCESS FEE CONTRACT.
• 315.-(1) Retainer and success fee contracts may be used where consultants such as, banks or
financial firms, are required for preparation of companies for sale or merger of firms, notably in
privatization operations.

• (2) The remuneration of the consultant may include a retainer and a success fee, the latter being
normally expressed as a percentage of the sale price of the assets.
4. PERCENTAGE CONTRACT.
• 316.-(1) The percentage based contracts may be used where it is appropriate to relate the fee paid
directly to the estimated or actual cost of the contract.
• (2) The percentage based contract shall clearly define the total cost from which the percentage is
to be calculated and the consultant or service provider shall be required to indicate his cost as a
percentage of the total cost of the assignment.
• (3) The use of such a contract is recommended only if it is based on a fixed target cost and
covers precisely defined services
5. INDEFINITE DELIVERY CONTRACT (price agreement).
• 317.-(1) The indefinite delivery contracts-
• (a) shall be used where a procuring entity needs to have "on call" specialized services to
provide advice on a particular activity, the extent and timing of which cannot be defined in
advance.
• (b) may be used to retain "advisors" for implementation of complex projects
expert adjudicators for dispute resolution panels, institutional reforms,
procurement advice, technical troubleshooting, and so forth, normally for a period of a
year or more.
• (2) The procuring entity and the firm shall agree on the unit rates to be paid for the experts, and
payments are made on the basis of the time actually used.
6. RUNNING CONTRACTS.
• 318.-(1) A running contract shall be used for contracts in which continuity of expert service
is desirable, such as financial auditing, procurement agency contracts and inspection agency.
• (2) The procuring entity and the firm shall agree on the unit rates to be paid for the experts, and
payments shall be made on the basis of the time actually used.
• (3) The use of running contacts shall be subject to approval of the Authority.
TOPIC SEVEN. INTEGRATED DECISIONS.

• Procurement under Different Sectors.

Read and answer these questions.

• Public vs. Private Procurement: What’s the difference?
• Show their differences
• What type of procurement guidelines do they use

• What is procurement Systems? What type of procurement systems used in public and private
organization?
 PROCUREMENT SERVICES

• Services are all those activities that are intangible and imply an interaction to be realized between service
provider and consumer.
• Characteristics of services;
• An activity or process.
• Intangible.
• Service is produced and consumed simultaneously.
• Customer participate in the production.
• Heterogenous.
• Perishable- cannot be stored for future use.
TYPES OF SERVICES.

1. Personal, eg. Technical editing, translation, appraisals.

2. Professional, eg. Mgt and consultants, legal services, medical services, insurance
services.
3. Support, eg. Administrative, financial, information mgt, procurement and logistics
services, waste mgt.
4. Personnel, eg. Recruitment selection, training and development, welfare services.
5. Construction, eg. Building repair, alteration, restoration, maintenance services.
THE PURCHASING PROCESS OF SERVICES

• This normally involves six steps.

Step 1. determine the appropriate process for procuring the service.

Step 2. Prepare a statement of work.
Step 3. List the statement of work as the basis of a request for proposals(RFP) or quotations
(RFQ).
Step 4. Obtain quotations or tenders from potentials suppliers.
Step 5. Evaluate quotations or tenders.
Step 6. Notification and issue of contract.
PROCUREMENT OF CAPITAL EQUIPMENT

• Industrial products may be subdivided into;

1. Capital equipment items.
2. Production materials.

Capital equipment may be defined as one of the subclasses of the fixed asset category and
includes industrial and office machinery and tools, transportation equipment, furniture and
fixtures and others.
FACTORS TO BE CONSIDERED WHEN BUYING
CAPITAL EQUIPMENT.
1. Purpose; check the prime purpose of the equipment?
2. Flexibility; how versatile is the equipment? Can it be used for purposes other than those for which
it is primarily being acquired?
3. Spares; cost and ease of availability.
4. Standardisation; is the equipment standardised with any already installed, thus reducing the cost
of holding spares?
5. Compatibility and existing equipment.
6. Life; this usually refers to the period before the equipment will have to be written off due to
depreciation or obsolescence.
FACTORS TO BE CONSIDERED WHEN BUYING
CAPITAL EQUIPMENT CONTINUED.
7. Reliability; breakdown means greater costs, loss of goodwill due to delayed deliveries and possibly a high
investment in spares.
8. Durability; is the equipment sufficiently robust for its intended use?
9. Product quality; defective output proportionately increases the cost per unit of output.
10. Cost of operation; cost of fuel, power and maintenance.
11. Cost of installation; does the price include the cost of installation, commissioning and training of
operators?
12. Cost of maintenance;
13. Miscellaneous; include appearance, space requirements, safety, quietness of operation.
VALUE CHAIN

• Value chain is a linear map of the way in which value is

added by means of a process from raw materials to finished
delivered product.
• Value chain models have been developed by Michael Porter.
• Porter’s value chain.
PORTER’S VALUE CHAIN MODEL
PRIMARY ACTIVITIES
1. Inbound logistics (raw materials, handling and
warehousing)
2. Operations (machining, assembling, testing)
3. Outbound logistics ( warehousing and
distribution of finished products)
4. Marketing and sales (advertising, promotion,
pricing, relationship)
5. Service (installation, repairs, spares)
SUPPORT ACTIVITIES
1. Firm infrastructure ( general management,
accounting, finance, strategic planning, IT
system)
2. Human resource management ( recruiting,
training, development)
3. Technology development (research and
development, product and process improvement)
4. Procurement ( purchasing of raw materials,
machines, suppliers)