Procurement in Industrial Management BPT 3133 Introduction to

Procurement in Industrial Management BPT 3133 Introduction to Procurement

Chapter Outline • Nature of Procurement • Development of Purchasing and Supply Strategies • Knowledge of Supply Markets • Purchasing Decisions and Business Strategy • The Legal Aspects of Purchasing

Learning Objectives • Understand the nature of procurement • Understand the legal aspects of purchasing • Identify purchasing and supply chain as a procurement activity

Nature of Procurement What is Procurement? A process of obtaining services, supplies and equipments in conformity with applicable law and regulations. The acquisition of appropriate goods or services at the best possible total cost of ownership. The term has wider meaning and it covers all purchasing activities whose purpose is to give buyer the best value for money.

Nature of Procurement Customer Cycle • Occurs at the customer/retailer interface. • Includes all processes directly involved in receiving and filling the customer’s orders. Replenishment Cycle • Occurs at the/distributor interface. • Includes all processes involved in replenishing retailer inventory. • To meet future demand. Manufacturing Cycle • Occurs at the distributor/manufacturer interfaces. • Includes all processes involved in replenishing distributor inventory. Procurement Cycle • Occurs at the manufacturer/supplier interface. • Includes all necessary processes to ensure that all materials are available for manufacturing.

Nature of Procurement Types of Purchases: 1. Commodities/Raw materials – petroleum, gas oil, rubber, copper, gold, cotton, soybeans, grains etc. 2. Semi finished Products and Components – single part number components, subassemblies, subsystems etc. 3. Finished Products – outsourced all production capability and capacity 4. Maintenance, Repair and Operating Items 5. Production Support Items – pallets, tape, bags etc. 6. Services – consultants, machine repair, courier etc. 7. Capital Equipment – furniture, machinery etc. 8. Transportation and Third-Party Purchasing

Nature of Procurement can be broadly categorized into: Strategic Procurement Non-strategic Procurement Routine Procurement

Nature of Procurement Strategic Procurement Includes those goods that are essential to the achievement of key outputs/objectives of the procuring party Characteristics of strategic procurement: • Contracts are high value and efficient planning is required • Specifications of goods are complex and refined • Strict adherence to quality and timeline is essential • Selection of the right source is the key to success of a contract • Competitive vendor selection to get value for money • Sharing risks between parties

Nature of Procurement Non-Strategic Procurement Includes goods that are not especially critical to the achievement of the key objectives of procuring party Characteristics of non-strategic procurement: • Procurement activities are not multifaceted • Specifications of goods are not very complex • Source selection process is relatively simple • Value of procurement may not very high

Nature of Procurement Routine Procurement Includes purchase of low value goods Administrative cost can reduced by: ü Streamlining the ordering and payment procedures ü Greater use of electronic commerce ü Workable arrangement with supplier for specific good at agreed price

Nature of Procurement Principles of Good Procurement Principle hallmarks of proficient public procurement include: -Value for money (VFM) -Competition -Efficiency -Economy -Effectiveness -Ethic -Accountability -Transparency -Documentation -Disclosure -Fairness -Dealing with complaints

Development of Purchasing 30 years ago Today • Concerned with buying supplies at the lowest price. Activity was essentially clerical. Reactive • Little involvement with supplier • Purchasing and supply become strategically involved – organization seen purchasing as strategic advantage • Closely involved with suppliers and other activities concerned more with true ownership cost than price 15 years ago The future • Still concerned with lowest price but aware of other factors affecting price (quality & delivery) • More involvement with suppliers and other internal functions • Application of leadingedge concepts throughout the supply chain • Value addition displaces cost reduction as primary role • Potential of developing technology realized • Total customer focus

Development of Purchasing A four-stage purchasing development model : Passive Independent Supportive Integrative (Source: Reck and Long, 1988)

Development of Purchasing Passive Definition The purchasing function has no strategic direction and primarily reacts to the requests and other functions Characteristics • High proportion of purchaser’s time is spent on quick-fix and routine operations • Purchasing function and individual performance are based on efficiency measures • Little inter-functional communication takes place because of purchasing low visibility • Supplier selection is based on price and availability

Development of Purchasing Independent Definition The purchasing function adopts the latest purchasing techniques and practices, but its strategic direction is independent of firm’s competitive strategy Characteristics • Performance is primarily based on cost reduction and efficiency measures • Co-ordination links are established between purchasing and technical disciplines • Top management recognizes the importance of professional development • Top management recognizes the opportunities in purchasing for contributing to profitability

Development of Purchasing Supportive Definition The purchasing function supports the firm’s competitive strategy by adopting purchasing techniques and practices which strengthen the firm’s competitive position Characteristics • Purchasers are included in sales proposal teams • Supplier are considered a resource which is carefully selected and motivated • People are considered a resource with emphasis on experience, motivation and attitude • Markets, products and suppliers are continuously monitored analyzed

Development of Purchasing Integrative Definition Purchasing strategy is fully integrated into firm’s competitive strategy & constitutes part of an integrated effort among functional peers to formulate & implement a strategic plan Characteristics • Cross-functional training of purchasing professionals/executives is made available • Permanent lines of communication are established among other functional areas • Professional development focuses on strategic elements of the competitive strategy • Purchasing performance is measured in terms of contributions to the firm’s success

Knowledge of Supply Markets Market structure - identifies how a market is made up in terms of: • • • The number of firms in the industry The nature of the product produced The degree of monopoly power each firm has The degree to which the firm can influence price Profit levels Firms’ behaviour – pricing strategies, output levels and non-price competition • The extent of barriers to entry • The impact on efficiency

Knowledge of Supply Markets Pure Monopoly Perfect Competition Monopolistic Competition Oligopoly Duopoly Monopoly The further right on the scale, the greater the degree of monopoly power exercised by the firm.

Knowledge of Market Structure Perfect Competition One extreme of the market structure spectrum Characteristics: § Large numbers of firms § Products are homogenous (identical) – consumer has no reason to express a preference for any firm § Freedom of entry and exit into and out of the industry § Firms are price takers – have no control over the price they charge for their product § Each producer supplies a very small proportion of total industry output § Consumer and producers have a perfect knowledge about the market

Knowledge of Market Structure Imperfect Competition / Monopolistic Where the conditions of perfect competition do not hold, ‘imperfect competition’ will exist Characteristics: § Large number of firms in the industry § May have come element of control over price due to the fact that they are able to differentiate their product in some way from their rivals § Entry and exit from the industry is relatively easy – few barriers to enter and exit § Consumer and producer knowledge are imperfect

Knowledge of Market Structure Oligopoly Competition between the few - may be a large number of firm on the industry but the industry is dominated by a small number of very large producers Characteristics: § Price maybe stable across the industry § Potential for collusion § Behavior of firms affected by what they believe their rivals might do § Good could be homogenous or highly differentiated § High barriers to enter

Knowledge of Market Structure Duopoly Market structure where the industry is dominated by two large producers Characteristics: § Collusion may be a possible feature § Price leadership by the larger of the two firms may exist § Highly interdependent

Knowledge of Market Structure Monopoly Where only one producer exists in the industry; one firm dominates the market Characteristics: § Price – could be deemed too high, price discrimination is possible § Efficiency – could be inefficient due to lack of competition § Innovation – could be high because of the promise high profitability § Collusion is possible to maintain the monopoly power

Business Strategy – game plan for the future, mapping out the future for the organization. Organization’s sense of purpose and direction. Developing a strategy, organization need to consider: What are the target objectives? How are the target objectives to be achieved? Strategy covers: Moves and approaches, new actions, innovation, choosing among alternatives and doing the right thing at the right times.

Business Strategy Level of Strategy Within an Organization CORPORATE All-embracing, linking the business together BUSINESS Concerned with broad issues, such as how to compete in different market OPERATIONAL Concerned with functional activities such as marketing, purchasing, production or finance

Business Strategy Factors influence the choice of a strategy: ü The position of the business in its supply chain ü The number of effective sources in the company’s supply market ü The pace of technological development (supply and end market) ü The volatility of the supply and/or end markets ü The degree of government involvement in the marketplace ü The ability of the buying company to manage a strategy

Business Strategy Effective Supply-Market Strategies Based on analysis, weighing up probabilities, defining strategies and planning their implementation in detail: a) analyze the supply chain to find key advantage or threats exist b) understanding the potential impact of strategic intervention upon supply market c) alternative routes – select the most beneficial d) predicting the outcomes with reasonable accuracy e) convincing colleagues within business of the benefits

The Legal Aspect of Purchasing Public Procurement in Malaysia • Financial Procedure Act 1957 • Government Contract Act 1949 • Treasury Instruction • Treasury Circular Letters Apply to procurement by all federal and state governments and semi-governmental agencies but not state-owned enterprises • Open tendering is used for procurement above RM 200, 000 • Closed tendering for procurement between RM 50, 000 to RM 200, 000 • Direct purchasing for procurement below RM 50, 000

Summary • Nature of procurement can be categorized into 3 : strategic, non-strategic and routine • Purchasing and supply chain management recognized as an area for reducing cost and adding value. • 4 stage purchasing development model : passive, independent, supportive and integrative • Appropriately developed supply chain management enable purchasing make operational, tactical, and strategic improvement in the area.