Procurement Management

Q-1 Explain what is Ethics in Procurement & why it is important? You are a Procurement
Head of Consumer Product organization, explain any 4 ISM Standards & link with mention
industry scenario
A-1 Ethics: Ethics or moral philosophy is a brunch of philosophy the “involves
systematizing, defending and recommending concepts of rights and wrong behaviour”. At
its simplest. Ethics is a system of moral principles. Ethics is concerned with what is good for
individuals and society and is also described as moral philosophy. The term is derived from
the Greek word efforts which can mean custom, habit, character or disposition. The three
major types of ethics are deontological, teleological and virtual- based.
Procurement: Procurement is the process of buying and goods, works and services to satisfy
the identified needs. Procurement is the process of finding and agreeing of terms, and
acquiring goods, services or works from external sources, often via a tendering or
competitive bidding process. Procurement generally involves making buying decisions under
conditions of scarcity.
Ethics in procurement: Ethical procurement refers to a wide range of issues that can impact
the ethical and sustainability goals of a business. It is the duty of the procurement department
of the organization to foster and promote the ethical procurement practices and share their
experiences with other departments of the organization. Examples of include the monitoring
of unethical or illegal supplier business procedures and practices that can impact your
organization’s procurement efficiency and reputation. For example, may cost the business
heavy fines and lasting reputational damage. Ethical procurement outlines a company’s code
of conduct and commitment to social, environmental and legal ethics, and it requires a
thorough understanding of your company’s social responsibility, societal obligations and
expectations. Its successful implementation requires the adoption of a practical approach to
eliminate unethical practices from procurement. The ground rules for good ethics in
procurement are simple enough. Practice integrity, avoid conflicts of interest and personal
enrichment, treat suppliers equally and fairly and comply with legal and other obligations.
Importance of ethnic in procurement: In procurement you purchase goods and services for
company you work for, therefore it is very important that you purchase in the best interest pf
company, quality and price wise. There is the common practice that sometimes people with
the lower ethical values do purchase goods and services which are not in the best interest of
the company and in turn do take bribes and undercover money from suppliers,
Therefore, it is very important that the purchasing people have high ethical values. They
should not compromise on quality for their personal interest. In procurement also, it pays to
be honest because this help build up a good name and a good name is one to be trusted. Trust
is at the root of successful dealings because it allows the building man/woman flexibility and
security.
Maintain a high standard of ethics in state procurement is critical to obtaining the best
possible outcome for the public. Employing a high standard of ethics benefits the consuming
public in a variety of ways:
  Provides good stewardship of public funds to act in the public’s best interest.
 Increases competition and innovation
 Enhances transparency of transactions
Ethics and ethical behaviour can be defined as:
 A principal of right or good conduct or a body of such principal.
 A system of moral principles or values
 A code of conduct
Principles and strategies for ethical procurement:
Establish ethical standards. A simple and concise list of ethical standards should be in place
to serve as self-policing guidelines for all of those who are part of a jurisdiction’s
procurement process. The list should including:
 Being independent
 Acting only in the public interest
 Remaining a trustee of the public’s money
 Following the law
 Striving for market efficiency
 Take nothing ever
 Not socializing with vendors
 Maintaining confidentially

Every procurement official should take ownership and be responsible for knowing and
abiding by all applicable law and regulations, as well as any code of ethics governing their
agency or department. Other strategies for dealing with ethnical situation include:
 Reporting suspicious behaviour
 Managing integrity through contracts
 Promoting transparency within the procurement process.
ISM standard: ISM standard is short form of “Institute for Supply Management”. The
Institute for Supply Management was founded in 1915 as the National Association of
Purchasing Agents. The organization operated as such until 2002 when it officially
changed its name to the ISM. It is the largest organization that serves members of the
supply management and the purchasing industries. It provides certification, development,
education and researching for the supply management and purchasing industries.
Institute for Supply Management (ISM) is the largest non for profit professional supply
management organization in the world. ISM has also developed a professional code of
ethics for the purchase and supple professionals. This document is formally known as the
Principles and Standards of ethical supply management conduct.
There are three major principles:
1. Integrity in your decisions and actions
2. Value for your employers
 3. Loyalty to your profession

There are ten standards :

1. Impropriety
2. Conflict of interest
3. Influence
4. Responsibilities to the employer
5. Supplier and customer relationship
6. Sustainability and social responsibility
7. Confidential and propriety information
8. Reciprocity
9. Applicable laws, regulations, and trade
10. Professional competence
The points are as defined below.

1. Perceived Impropriety

Prevent the intent and appearance of unethical or compromising conduct in relationships,

actions, and communications.

2. Conflicts of Interest

Ensure that any personal, business, or other activity does not conflict with the lawful interests
of your employer.

3. Issues of Influence

Avoid behaviors or actions that may negatively influence, or appear to influence, supply
management decisions.

4. Responsibilities to Your Employer

Uphold fiduciary and other responsibilities using reasonable care and granted authority to
deliver value to your employer.

5. Supplier and Customer Relationships

Promote positive supplier and customer relationships.

6. Sustainability and Social Responsibility

Champion social responsibility and sustainability practices in supply management.

7. Confidential and Proprietary Information

Protect confidential and proprietary information.

8. Reciprocity
Avoid improper reciprocal agreements.

9. Applicable Laws, Regulations, and Trade Agreements

Know and obey the letter and spirit of laws, regulations, and trade agreements applicable to
supply management.

10. Professional Competence

Develop skills, expand knowledge, and conduct business that demonstrates competence and
promotes the supply management profession.

Q- 2. You are part of Pharma Company who has grown immensely during Covid times.
Your company is planning to set up two more plants for manufacturing of vaccinations.
As Procurement Manager help them to evaluate between leasing or buying two factory
premises. Please support your answer with reasoning & mention advantages of selected
option?
A-2 Leasing: - Leasing is the process by which a firm can obtain the use of certain fixed
assets for which it must make a series of contractual, periodic, tax-deductible payments.
A lease is an implied or written agreement specifying the conditions under which a lessor
accepts to let out a property to be used by a lessee. The agreement promises the lessee use
of the property for an agreed length of time while the owner is assured consistent
payment over the agreed period. In order to avoid making huge capital expenditure
upfront, organizations may decide to lease the equipment. In the case of leasing, the
purchase cost of the equipment is not paid-up front, but in the form of rentals over the life
of the equipment.
Two types of lease are:
1. Financial Lease: - A lease is a finance lease if it transfers substantially all the risks
and reward incident to ownership. This type of lease which is for a long period
provides for the use of asset during the primary lease period which devotes almost the
entire life of the asset. The lessor assumes the role of a financier and hence services
of repairs, maintenance etc. are not provided by him. The legal title is retained by the
lessor who has no option to terminate the lease agreement. The principal and interest
of the lessor is recouped by him during the desired playback period in the form of
lease rentals. The finance lease is also called capital lease is a loan in disguise.

2. Operating lease: - A lease is a operating lease if it does not transfer substantially all
the risks and rewards incident to ownership. In this type of lease, the lessor who bears
the cost of insurance, machinery, maintenance, repair costs, etc. is unable to realize
the full cost of equipment and other incidental charges during the initial period of
lease. The lessee uses the asset for a specified time. The lessor bears the risk of
obsolescence and incidental risks. Either party to the lease may termite the lease after
giving due notice of the same since the asset may be leased out to other willing leases.
Buying: - Buying is an arrangement whereby the seller transfers the ownership of the vehicle
to the buyer in exchange for an adequate money consideration. The risk and rewards attached
to the ownership are also transferred, with the transfer of title.
Difference between leasing and buying:-
Comparison Buying Leasing
Meaning The term buying refers to Leasing is an arrangement
purchase the asset by paying wherein the owner of the
the price for it. asset permits another person
to use the asset for recurring
payment.
Parties involve Seller and buyer Lessor and lessee
Cost Cost of owing the asset Cost of using the asset
Transfer Buyer has the right to Lessee has no right to
transfer or sell the asset. transfer or sell the asset to
any other party.
Consideration Can be paid in lump sum or Can be paid through lease
in equated monthly rentals.
instalment for a fixed
period.
Repair and maintenance Responsibility of buyer Depends on the lease type
Listed as Property or equipment Operating cost
Balance sheet Shown in the asset side, as Depends on the lease type
non-current asset.
Tax treatment Deducted overtime as asset Deducted in the current tax
depreciate year
Example Buying a laser printer Buying toner for printer

As we are not aware for how ling the covid will continue and many competitors will be
working on same project for manufacturing vaccine. So looking at long terms Leasing
seems to be best option as these factories might need upgradation or not be used after
covid ends or new use will be required for the vaccine. Also cost of leasing will be less as
compared to cost of buying.

Q-3.a. Oftenly we hear debate that Purchase Requisition is whose responsibility? What do
you think? Explain Purchase requisition and its types. Why PR is one of the critical steps
of P2P cycle?
A-3a. Purchase Requisitions:- Purchaser requisitions are documents used when term
member need to make a purchase on behalf of their organization. A purchase requisition
is as formal document that is used when an employee needs to purchase or order
something on behalf of their organization. This document informs the department
managers or purchasing staff of the decision so the purchasing department can start the
process of purchasing the requested products or services. The financial department will
also use the purchase requisition to coordinate reporting. A purchase requisition is a
 document that as employee within your organization creates to request a purchase of
goods or services. When you fill out a purchase requisition, you are not yet purchasing
anything. You are merely beginning the process of a purchase by asking for internal
pefrmission.
A purchase requisition is an official order used to in from department managers or
purchasing officers about a decision to make a purchase. The financial team will also use
this document to coordinate reporting procedures with the accounting department as well.
The importance of a purchase requisition in for an organization
In any organization, there is always the need for supplies or materials and equipment.
These may be office supplies, consumables, machines and other equipment. When
organizations allow departmental managers to place orders directly with suppliers, it’s all
too common for fraud to occur. An organization will develop a procurement team, who
create time to placing order with vendors on behalf of other departments.
Most importantly, the purchasing team will follow a purchase requisition workflow. This
reduces the risk to fraud and creates an adult trail between these departments so that each
person involved in purchase can be made accountable.
The purchasing requisition types are:
 Standard purchase order: Standard purchase requisition form from internal
users by an employee to purchased goods and services on behalf of their firm.
These purchases may be for business operation (such as office supplies),
inventory, or manufacturing inputs.
 Subcontracting: The material to be produced by the vendor can be orders as a
subcontract item in a purchase requisition, purchase order, or scheduling
agreement. Each subcontract item has one or more sub-items that contain the
individual components the vendor needs to perform the subcontract work or
value-added service.
 Bill Of Materials (BOMS): A bill of materials (BOM) is a list of raw materials,
components, assemblies, parts etc, and its related quantities to produce a product.
BOM alone is not enough to lead into quantification for purchase order (PO).
This requires Purchase Requisition (PR) as well.
Accordingly, to process a department manager will fill out a purchase requisition to indicate
which materials are needed and in what quantity. They may even suggest the vendor where
the material should be purchased. It will be sent to the purchasing department, who will then
go through the request and approve it, alter it, deny it. A purchase requisition form is an
internal document used by an employee to purchase goods or services on behalf of their firm.
These purchases may be for business operations (such as office supplier), inventory, or
manufacturing inputs.
Procure to Pay (P2P )Cycle:- The procure to pay process is how an organization procures
the goods and services it needs to do business. Also known as purchase to pay and P2P,
procure to pay is the process of requisition, purchasing, receiving, paying for and accounting
for goods and services, covering the entire process from point of order right through to
payment. The business process cycle that starts from identification of material requirements
(based on production planning schedules) to procuring materials to final payment to vendors
is termed as Procure -to-pay (P2P) cycle. It is the procurement process cycle that involves
purchase processes from several departments, such as material, purchase, stores and accounts
payables. All the steps involved in the P2P cycle or procurement process cycle:
1. Identify material requirement: - The P2P cycle starts with the identification of
materials to be purchase. Identify the requirement for goods and services from all
business units. Hence, the first step of the procurement process entails identifying
and consolidating the requirements of all business units in an organization.
2. Issues purchase requisition and review requirements: - The need for procurement
of material from external suppliers/vendors is identified, the purchase requisition form
is created , indicating the detailed specifications of material to be procured. The form
may be created manually in the ERP purchase module by those internal departments
which required the material.
3. Identify potential suppliers and float RFx: - The procurement manager is now
required to identify potential suppliers who can manufacture and/or supply the
required raw material or component parts. For standard routine items required for
every product manufactured, the company usually has a supplier base with long term
commitment. For new products, the procurement manager may float a Request for
Information (RFI) to gather market intelligence data.
4. Evaluate and select suppliers:- Supplier selection is the process by which firms
identify, evaluate, and contract with suppliers. The main objective of supplier
selection process is to reduce purchase risk, maximize overall value to the purchaser,
and develop closeness and long-term relationships between buyers and suppliers.
Suppliers should be assessed based on their timing, service, product quality, and
contract compliance. This will help for future reference when the organization needs
to re-order products
5. Negotiate with suppliers for the best terms:- For purchase requisition for one-off
items or when new vendors are being identified for routine items, it is necessary to
negotiate with suppliers for the best terms and conditions. Other than price, delivery,
quality etc are some important factors to be considered while negotiating with
suppliers for the best terms.
6. Establish contract with selected suppliers/generate purchase:- A supplier contract
or supplier agreement is a pact between a business and a supplier for the delivery of
the agreed products or services. It is a legal document which you can use as the basis
for measuring the supplier's performance. Details of the service provided, expected
standards, timings, responsibilities of both parties, legal compliance requirements,
payment/credit terms, monitoring and dispute resolution guidance, confidentiality and
non-disclosure agreements and clear guidelines on termination.
7. Received materials and perform related procedures like the issues of goods
receipt notes etc.:- The procedure required for receiving goods includes: • identifying
goods for the retail store. checking goods ordered for the retail store. confirming the
dispatch of goods. receiving goods with order and invoice. Goods receipt
processing time. The time between the delivery or production of a product and its
availability as stock on hand. Goods issue processing time. The time between the
withdrawal of a product from warehouse stock on hand and its transportation.
 8. Match the PO and the make payment to the suppliers:- The accounts payables
department ensures that the payment is made to the supplier only for the goods
received against a valid PO. This is the done by the matching the invoice with both
the GRN copy received and the PO copy.
9. Manage the contract over its lifetime:- This step ensures that the performance of
the supplier is as per the purchase agreement. A supplier’s performance is evaluated
for long-term relationship.

3.b. What are various types of Pricing Contracts; why they are used? Explain types, sub types
and difference between them in terms of responsibility of buyer or seller.
A-3b Pricing:- Price is the value to a product or services. Price is the amount of
consideration to be paid or given to a supplier for an articles, goods and services, or for
something desired, offered or purchase. The needs of the consumers can be converted into
demand only if the consumer has the willingness and the capacity to buy the product.
Contract: Contract is a binding agreement between two or more persons or parties. A
contract means the total legal obligation which results from the parties agreement as affected
by this act and any other applicable rules of law. Contracts allow us to customize or
individualize our legal obligations and rights relative to the other contracting party, but our
legal obligations to those who are not part of the contract are not altered.
Pricing od contracts:- A contract price is a total amount that is agreed upon by two parties
where the project owner or client, known as the principal, pays the contractors when they
complete the terms of the contract. A contract price is the for the goods and services to be
received in contract.
Contract price, defined as the price of a contract which is paid to a contractor upon
completion, is used any time a contract exists. Due to the fact that the contract is an
agreement to complete a certain type and amount of work, the contract prices is fully paid to
contractor when they have completed the job which has been agreed upon. Generally,
contract price includes adown payment, may include a few continuing payments, and ends
with a final amount paid to close the contract.
Two types of pricing contracts:-
1. Fixed price contracts
2. Cost reimbursement cost
Fixed price contracts: - A fixed price contract, also known as a lump sum contract, is an
agreement between a vendor or seller and a client that stipulates goods and services that will
be provided and the price that will be paid for them. A fixed price contract is a type of
contract in project management wherein the payment does not depend on the resources or the
time spent. It involves setting fixed price for the product, service or result defined in the
contract.
There are different types of fixed price are:-
a) Firm Fixed price: - In this type of contract price is not subjected to any adjustment.
The changes may related to contract change or defective prices. In this contract the
profit or loss is borne by supplier only.
b) Fixed price with incentive: - Fixed price with incentive contracts use a formula to
determine profit. A fixed price incentive contract uses the final negotiate price and
compares it to the target price to adjust the profit on the project.
c) Fixed price with economic price adjustment: - Fixed price with economic price
adjustment afford the contractor with a bit of an insurance policy. The price can be
adjusted up or down according to contract specific contingencies outside of the
contractor’s control.
d) Fixed price with price re-determination: - This contract provides for price re-
determination when costs are expected to change over the contract period. The
specific time for determination will be part of contract clauses.
e) Fixed price, level of effort: - Fixed price, level of effort contracts required the
contractor to provide a specified level of effort (labor) for a specified period. The
Government pays a stipulated price for this work.
Cost reimbursement cost: - Cost reimbursement contracts, also called cost-plus
contracts, are often used for research projects, construction, and other undertakings that
will require the purchase of materials. Because the cost of these materials is known when
the contract is written, the contracting party agrees to reimburse the contractor for the full
cost of materials. The contractor will also be paid a fee on top of the materials cost.
These contracts sometimes include clauses that offer financial incentives when the
contractor exceeds performance targets or schedules or decrease costs. Various types of
cost reimbursement contracts are discussed as below:-
a) Cost plus fixed fee:- A cost plus fixed fee contract is a cost reimbursement
contract that provides for payment to the contractor of a negotiated fee that is
fixed at the inception of the contracted. The fixed fee does not vary with actual
cost but may be adjust a result of changes in the work to be performed under the
contract. This contract type permits contracting for efforts that might otherwise
present too great a risk to contractors, but it provides the contractor only a
minimum incentive to control costs.
b) Cost plus incentive fee: - A cost plus incentive fee contract is a cost
reimbursement contract that provides for an initially negotiated fee to be adjusted
later by a formula based on the relationship of total allowable costs to total target
costs. This type of contract is used to motivate an effective performance of the
project and include a target cost.
c) Cost plus award fee:- A cost plus awardee fee contract is a cost reimbursement
contract that provides for a fee consisting of:
 A base amount (which may be zero) fixed at the inception of the contract
and
 An award amount based upon a judgemental evaluation by the
Government, sufficient to provide motivation for excellence in contract
performance.
The difference for Pricing contract for seller and buyers are already mentioned in above
point. The main difference is change in cost beard by seller or Buyer according to the
type of contract.