CHAPTER 2

Fundamentals of Project
Procurement Policy
 2.1. Policy Issues
 The term policy includes all the directives, both explicit and implied,
that decide on the aims and goals of an organization and the
appropriate means used in their accomplishment.
 Policy refers to the set of purposes, principles, and rules of action that
guide an organization.
 Rules of action refer to standard operating procedures along with any
rules and regulations.
 Policies are usually documented in writing, unwritten or informal
policies can also exist.
 Informal policies are understood over time and eventually become
part of an organization’s culture.
 The ability of the organization to develop and apply effective
purchasing policy depends partly on the perceptions of managers at
all levels.
 The manager charged with the development of a policy should
recognize that these perceptions are affected by the existing
company structure, the quality of its internal communication
system, the past experience of the company and its managers, and
the resources available.
 The development of a policy involves company-wide
considerations. These considerations differ by industry and by
company.
 What should be common, however, is the need to develop
advantages over the competition and use them effectively.
 The ability of the organization to develop and apply effective
purchasing policy will be conditioned by several factors, and there are
roles for a purchasing manager that relate to the development of
policy.

Among these are:

 Generating alternative solutions to procurement problems,
 Protecting the cost structure of the organization,
 Minimizing purchasing costs,
 Assuring long-range sources of supply, and
 Maintaining good relationships with suppliers.
 Each of these has a strategic as well as an operational facet. This
emphasizes the important point that the development of a policy
necessitates a coordinated operational response.
 It is of little use to define and develop a policy unless the day-to-day
actions of the organization are geared toward the strategic approach.
 This is a deceptively simple concept, for it is not uncommon to find
companies that purport to have policies where the behavior of
managers is contradictory to the stated approach.
 2.2. Structure of Purchasing Organization
 An essential part of policy development and selection is to devise an
organization to carry out the activities embodied in the policy.
 Classical management writers have emphasized the importance of the
activity of organizing as a key function of management.
 Whilst their views have been modified in many respects, this function is
still important and, therefore, the purchasing manager should pay close
attention to the development of the organizational structure for the
purchasing function.
 Organization is concerned with the division of work and the delegation of
authority and responsibility in such a way that the objectives of the
organization can be achieved.
 It also involves defining the duties of personnel and the relationships
between them.
 The task of developing an organization structure has become a complex
one, and there is no longer a simple prescriptive model that can be
applied in all situations.
 The business environment is now populated by a wide variety of
different types of organization. What is suitable for one organization
would not necessarily be copied by another.
 It is recommended, therefore, that an organization structure should be
tailored to the particular circumstances of the particular organization.
 Building its purchasing strategy and supporting it with the proper
organization can be a long and challenging process.
 Plus, there is no right procedure to achieve this goal.
 Each company has its own culture, own background, overall strategy, and
own global organization.
 Companies tend to prefer one purchasing organization to another
according to their geographical organization, procurement maturity,
business strategy, and other multiple factors.
Purchasing
 Purchasing is the act of acquiring a good or service and
typically involves the immediate day-to-day transactions
between sellers and buyers.
 Is typically more focused on the short-term and is more
transactional.
 It involves tasks such as ordering, receiving, and arranging
payment.
 Purchasers are often looking to get items for the best price
rather than the best overall value.
Purchasing …
 This often includes how a procurement manager goes about
ordering and paying for something.
 More focuses son price than value.
 The end goal is to arrange the organizations expenditure and
buy goods and services for the company.
 Focused on making efficient transaction, not overly concerned
with developing vendor relation.
The purchasing process involves:
 Spend requests and purchase approvals.
 Creation of a purchase order.
 Receiving and checking goods and services.
 Attaching a packing slip to a purchase.
 Passing the completed purchase to the accounts payable
team
 2.2.1 Structure of Purchasing Function in Small Organizations
 Here it is necessary to concentrate upon the organization of a centralized
purchasing function within a relatively simple, single product, single site
firm; assess the advantages of specialization and then map out the
possible range of activities that could be included.
 Having portrayed a typical structure diagrammatically, the place of the
purchasing manager within the overall management structure of the
organization will be examined.
 Benefits of a Centralized Purchasing Function
 In very small firms the scope for specialization is limited and purchasing
activities would not be sufficient to occupy a person full time.
 Once a firm employs around a hundred or above, however, it should be
possible to introduce purchasing as a specialist job.
 As the volume of work expands so the number of purchasing personnel
will grow and the opportunities for specialization within the function
increase.
 The introduction of a specialist department to handle purchasing activities
means that its members see purchasing as their major responsibility and
can develop expertise in conducting their work.
 Previously, purchasing jobs were done by other people for whom
purchasing was a major activity for which they had no particular
skills. Thus, full-time specialists can develop their abilities and use
progressive purchasing techniques to obtain better value for money.
 The department can coordinate the previously fragmented purchasing
pattern and can introduce a common system of procedures.
 Knowledge of supply markets can be built up, an efficient record
system introduced and negotiating skills can be applied.
 What may have started as a simple clerical function can become a
sophisticated independent department.
 The basic argument for the development of the centralized function
rests upon the point that efficiency in controlling the flow of inputs
to the firm is increased by the application of specialist expertise.
 The opportunities to make such improvements in efficiency can be
found in different types of organizations in all sectors of the
economy.
 Most large organizations already appreciate the advantage to be
gained by effectively controlling purchasing activities, but many
medium and small organizations have yet to reap the full rewards
because insufficient recognition has been given to this function.
 The purchasing function can make a major contribution towards the
achievement of corporate objectives in both the public and private
sectors.
 Activites in the purchasing functions

 A wide variety of arrangements can be found concerning the activities that

should be included under the control of the purchasing manager.
 The most effective pattern is one in which the purchasing manager is given
authority for all those activities which lead to the supply of goods and
services to user departments. Such a range might include:
Categories of goods purchased:
 With reference to basic categories of goods purchased by an organization
we can point out that the area of authority concerning this range varies in
different organizations.
 In manufacturing companies, the purchase of industrial materials is
regarded as the major area of expenditure to be controlled, but many
purchasing managers have no control over the purchase of plant and
equipment at all.
 In manufacturing companies, the purchase of industrial materials is
regarded as the major area of expenditure to be controlled, but many
purchasing managers have no control over the purchase of plant and
equipment at all.
 In spite of this difference in delegation of authority, the arguments in favor
of the application of specialist purchasing skills are relevant to all
purchases. It follows that the purchasing department should be given
responsibility for purchasing all bought out goods that are required.
 This does not mean that other departments should be excluded from the
decision-making process, but that the purchasing department should
contribute its commercial expertise to this process to complement the
technical skills of the other departments.
 A purchasing research team should also be attached to the buying area to
provide information to the buyers, which may include cost analysis.
 Progressing or expediting/speed up:
 An essential phase in the purchasing process, for the more important
needs at least, is the progressing activity, to ensure that goods arrive at
the desired time.
 The organizational problem here revolves around whether buyers
should also progress the orders they have placed or whether a specialist
or specialist team should be formed to carry out these duties.
 The division of work between buying and progressing sections allows
each to develop its own particular skills for the different activities.
 The buyer can concentrate attention on market analysis and contract
negotiation and the expeditor can build up contacts and persuasive skills
to obtain deliveries from suppliers.
 Having to do the progressing work helps to discipline the buyer in
selecting reliable suppliers.
 The expedite order process helps buyers and other purchasers to ensure
that required goods arrive at the appointed date in the agreed quality at
the agreed location.
 Expediting is the application of pressure on suppliers to get them to
either meet the original delivery promise or to deliver ahead of schedule.
After a Purchase Order has been issued to a supplier, the purchaser may
wish to follow-up or expedite the order.
 Expediting is a concept in purchasing and project management for
securing the quality and timely delivery of goods and components. The
procurement department or an external expeditor controls the progress of
manufacturing at the supplier concerning quality, packing, conformity
with standards and set timelines.
 Stores and stock control, including goods receiving:
 It can be argued that there are advantages to be gained by grouping stores and
stock control activities under the control of the purchasing manager.
 The achievement of the objective of lowest cost of supply implies that both
purchasing and stock control considerations are relevant in deciding how
many and when to purchase goods required to re-provision the stores.
 It is easier to develop an integrated system of procedures and exchanges of
information in a unified purchasing organization than it is to develop them in
two separate departments.
 Goods receiving activities complete the purchasing cycle and transfer the
purchases to user departments or, more frequently, to the stores. These, too,
should be integrated into the purchasing organization.
 It can be seen from the foregoing information that the structure of the
purchasing department can be varied to give an assortment of different
configurations.
2.2.2 The Position of Purchasing Management in the Organization
 Where there is an integrated organization or a significant purchasing team, a
case can be made out for the purchasing manager or director of purchasing to
have a high position within the management structure.
 This allows the manager and his or her department to give full weight to
commercial aspects of purchasing decisions.
 If the purchasing manager is subordinate to the production manager, there is a
danger that too much importance will be attached to technical matters.
 As an independent department, the supplies department can make its full
contribution towards the achievement of corporate objectives.
 It can be argued, therefore, that the purchasing manager should be a member of
the senior management team, with a direct reporting responsibility to the
general manager.
 The purchasing manager may also be a member of the board of directors.
 The position of the purchasing manager within the organization
hierarchy is an important determinant of the impact that the department
can have.
 A high position and high status enables an effective, progressive
approach to purchasing work to be implemented.
 Support from the general manager helps to increase recognition for the
function and to encourage good horizontal relationships with other
departments.
 In the 21st century we should have more purchasing managers at board
level.
 2.2.3 Structure of the Purchasing Function in Complex Organization
 The emergence of large multi-product, multisite organizations, and
marketing strategies that can alter product as they seek growth; they have,
therefore, moved away from the relatively simple situation of operating
one production site to manufacture one product line.
 Thus, some have diversified into other product areas on one or more sites
and others have duplicated production facilities by opening
establishments in different geographical locations.
 Policy decisions that have brought about these transformations have also
influenced the development and adoption of different organizational
structures to cope with the added complexity.
 We have also seen the emergence of huge multinational conglomerates,
in which international differences magnify the problems of geographical
dispersion.
 One of the major organizational innovations of the 20th century has been
the introduction of the multidivisional structure.
 In the simple organization, the basic breakdown of tasks was achieved by
splitting work up according to the main functional activities but in the
multidivisional organization function tasks are grouped around different
product lines.
 Thus, in the complex organization, several quasi-independent organizations
are created and each has a reporting relationship to a central headquarters
organization.
 Each product organization might be a separate limited company, with as
headquarters a holding company. In others, each division and the head
office may all be part of the same legal entity.
 opportunities for central coordination are greater in situations when
organizations are manufacturing the same product or offering the same
service at multiple locations.
 Production technology, marketing problems, and purchasing problems
are similar and there is potential for more centralized control of
operations.
 In this multilevel situation, therefore, more power and more activity will
be located at headquarters. Indeed, some of the functions can be located
solely at head office.
2.2.3.1 Alternative Structures for the Purchasing Function in Complex
Organization
 There are three possible solutions to the problem of organizing the purchasing
function in complex organizations. The three solutions are as follows:
 Complete centralization: one central purchasing department controls the
purchasing of all supplies for various scattered units or factories.
 Complete decentralization: each separate unit or factory has its own
purchasing department and is responsible for obtaining its own requirements.
 Multilevel structure: each unit has its own purchasing department, but a
central purchasing department has some powers to coordinate the activities of
the local departments.
 Advantages of Centralization:
 The advantages to be gained from the establishment of one central purchasing
department are as follows:
 The central department can negotiate cheaper prices on the basis of total
consumption from the Economies of bulk buying of items.
 Avoidance of “competitive” buying by individual departments of materials
in short supply.
 Savings in operating costs: a reduction in administrative costs can be made.
 Opportunities for development of greater knowledge about products
because buyers can specialize in a narrower range of commodities which
can be handled more expertly.
 Development of common procedures, forms, standards, and specifications.
 Allows for centralized record-keeping of orders and inventory.
 Allows for more comprehensive control and optimization of inventory.
 Provides a known, centralized contact for suppliers, which can lead to cost and time
savings.
 Simpler relationship with suppliers as a result of direct contact.
 Enhanced importance of the supplies department and higher position of the supplies
manager in management hierarchy.
 Efficient teamwork and collaboration in the purchasing department.
 Development of improved support services made possible (e.g., purchasing research
and statistical information services, etc ).
 More scope for purchasing strategy and contribution to corporate plans.
 Centralization of stock control can reduce overall stock levels through greater
flexibility and establishment of strategic reserves (i.e., flow of stocks between
factories to meet shortages).
 More scope for manpower planning in the function and development of training
programmes.
Disadvantages of Centralization
 Wrong Buying is Possible
 Sometimes happens to buy out of contracts.
 Delays in the delivery of goods and services to end-users.
 High cost of internal transport.
 Non-availability of materials for production in time.
 Greater risk of obsolescence.
 Inefficiency as operation may grow too big or complex to run.
 Misunderstanding of local requirements.
 Advantages of Decentralization
The main advantages are as follows:
 Closer coordination with local organization and buyers can build up close
contacts with other departments.
 Buyer is in direct touch with the problems where they arise and can handle
emergencies more easily than a distant office.
 Local buyers are better informed about local markets that may offer
possibilities to a local customer which could not be offered on a national
basis.
 Clear responsibility of buyers to local management.
 Local plants may need a different range of products, and thus a local buyer
may have a more specialized knowledge of these.
 Less cost of internal transport.
 Timely availability of materials for each departments..
 Lower chance of obsolescence.
Disadvantages of Decentralisation
 More finance required.
 More clerical work.
 Duplicate purchase of materials
 High cost of insurance, etc
 Differences between Centralized Purchase & Decentralized Purchase
Centralized Purchase Decentralized Purchase
Control on buying is exercised effectively Effective control is not possible.

Economy in large scale purchase is possible Large scale benefits are not available.

Better terms on purchase are possible. Bargaining power is very low.

Purchasing skill is available from the purchaser or purchasing

Skills of the purchasing officer are high.
officer are lower.

Purchasing specialization is obtained. Purchasing specialization is not obtained.

Uniformity in purchase is followed. There is a lot of difference in purchase.

Standard materials are purchased. Quality of the material is questionable.

Less finance is enough. More finance is required.

Need of less storage space. Need of more storage space.
 Centralized Purchase Decentralized Purchase

It is easy to regulate purchase policy. Regulation of purchase policy is difficult.

Establishment cost is high. Establishment cost is low.

Delay in purchase is possible. Purchase of materials is very quick.

Internal transport cost is incurred. There is no internal transport cost.

Advantage of local market cannot be obtained. Advantage of local market can be enjoyed.

There is a misunderstanding between production center There is no such misunderstanding since the concerned
and purchase department. department purchases the materials.

There is a chance for favoritism in purchase. There is no favoritism in purchase.

There is a blocking of working capital. There is no blocking of working capital.

 Summary of the chapter
 Understanding policies and procedures is essential for understanding how organizations
operate and work.
 Policy is based on the idea that guidelines are documented and applicable to all the
internal and external relations of an organization.
 A policy prescribes methods of accomplishment in terms broad enough for decision
makers to exercise discretion while allowing employees to render judgment on an issue.
 Well formulated policies and procedures support efficient, effective, and consistent project
procurement operations. On the other hand, policies and procedures that are out of date,
require unnecessary actions, or do not address current issues or topics will not support
effective purchasing operations.
 As projects become expand their global sourcing activity, they are increasingly revisiting
their procurement policies and procedures, to ensure that they are keeping up with the
rapid set of changes their professional associates are facing in their work lives.
End of chapter two!