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LECTURE ONE

INTRODUCTION
There is no definition that can wholly incorporate the demands placed on purchasing teams set of
skills. Situational diversities, such as strategic importance, amount spend, contribution to
profitability, supplier relationship and the recognition given to purchasing in a particular
organisation

All organisations invariably need input of goods and services from external suppliers or
providers and to this extent therefore, purchasing function plays an integral part in ensuring the
goods/services are provided to the company.

The role and contribution of purchasing has increased quite steadily over the second half of 20 th
century with interest in the activity taking place in the last few years. The reasons behind this
paradigm shift based on importance and recognition of purchasing entail:
 New management systems/concepts/philosophies
 Advanced technology: IT – internet, EDI ( processing of electronic transactions e.g.
esuppliers, e-procurement, sharing information)
 Government policies – issues of environment
 Fewer but larger suppliers
 Competition hence the need for quality
 Globalization – the integration of world economies

What is PURCHASING

• We need to have an understanding of;

• The perspective on purchasing
• The stages of purchasing development and future trends in purchasing
• Factors influencing internal and external status of purchasing

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The study of purchasing can be approached from several perspectives. Such perspective include
those of Function, process, link in the supply chain or value, relationship, discipline and
profession

Purchasing as a function

In management studies,’ function’ is often defined as a unit or a department in which people use
specialized knowledge skills and resources to perform specialized tasks. A function is also what
a resource is designed to do so e.g. the function of a pen is to make a mark. Purchasing involves
the acquiring raw materials, components, goods and services, for conversation, consumption or
resale

Purchasing as a process

A process is a set of sub processes or stages directed at achieving an output, the processes
include;

Receive requisition –solicit quotations-negotiate with suppliers-place order-receive suppliesmake

payment

Purchasing as a link in the supply chain

Purchasing a long with other activities such as production, warehousing, transportation, is one of
the links in the supply chain or a sequence of processes by which supplies are converted in to
finished products and delivered to customers

Purchasing as a relationship

Purchasing relationship may be both internal or external short term and long term. Internal
relationship includes buyers, users, cross functional teams, and team work. External relationship
with suppliers and other service providers

Purchasing as a discipline
A discipline is a branch of knowledge, an area of study, the academic content of purchasing lacks
the clearly defined focus associated with other field of study, such as mathematics, economics
and law and it draws a lot from other disciplines

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DEFINATIONS
Purchasing:
Purchasing is defined as a process of acquiring goods, services and works in return for a price.
Its the acquisition of goods or services in return for a monetary or equivalent.

1. Acquisition of inputs of goods and services from external suppliers or providers.

2. Comprises the essential activities associated with the acquisition of materials, services
andequipment used in the operation of an organization.

The major types of activities are:

1. Coordination with user departments to identify purchase needs.
2. Discussion with sales representatives.
3. Identification of potential suppliers.
4. Conducting market studies for important materials.
5. Negotiation with potential suppliers.
6. Analysis of proposals7. Selection of suppliers
8. Issuing of purchase orders.
9. Administration of contracts and resolution of related problems
10. Maintenance of a variety of purchasing records.

Firms that have seen the strategic potential inherent in the purchasing function have tended to
enhance its basic activities by expanding them and developing procurement or supply
management operations.

II. Procurement
Procurement process or concept encompasses a wider range of supply activities than those
included in the purchasing function. There is more buyer participation in related materials
activities. Procurement is the process of obtaining goods or services in any way including
borrowing, leasing and even force or pillage.

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Procurement management is the process of identifying the organisational needs which can be
met by procuring products or services outside the organisation. It involves knowing what to
procure, how much to procure, and when to procure

Specific activities in Procurement process:

1. Participation in the development of material and service requirements and their specifications.
2. Conducting materials studies and management of value analysis activities.
3. Conducting more extensive material market studies.
4. Conducting all purchasing function activities.
5. Management of supplier quality
6. Purchase of inbound transportation.
7. Management of investment recovery activities.

Hence, procurement tends to be broader and more proactive, with some focus on strategic
matters. The value adding benefits of procurement function include:
 Maintaining defect-free quality of purchased materials.
 Reducing the total cost throughout the supply chain
 Reducing the time required to bring a new product into the market
 Ensuring that the firm’s supply base provides appropriate technology affecting the firm’s
core competencies is carefully controlled when dealing with outside suppliers.
 Continuity of supply – must take all measures required to reduce the risk of supply
disruptions.

Management
Refers to the establishment and attainment of objectives. Material resources and mans’ talent are
supposed to be available. The basic material resource known as the 6 Ms include Men, Money,
Materials, Machinery, Methods and Markets are brought together to achieve the stated goals.
These resources are processed, planned, organized, co-ordinated, harmoniously related and
controlled with a view to achieving the end results.

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Management is also defined as getting things done through people. It’s a process of executive
control and organising forces, it is about employing capital efficiency so as to yield the
maximum results. It is the utilization of human talents and resources to achieve a desired result.

III. Supply Management.

Supply management is a process responsible for the development and management of a firm’s
total supply system – both the internal and external components. The major characteristic that
differentiates it from purchasing and procurement activities is that it focuses heavily on the
strategic aspects of the key elements of a firm’s supply system.

Specific activities of supply management

1. Early purchasing involvement (EPI) and early supplier involvement (ESI) in product
designand subsequent development of important items, typically through the use of cross-
functional teams.
2. Conducting all purchasing functions and procurement process activities.
3. Heavy use of cross-functional teams in supplier qualification and selection.
4. Heavy use of purchasing partnering arrangements and strategic alliances with suppliers,
todevelop close and mutually beneficial linkages with key suppliers in the value chain to
control quality costs.
5. Continuous identification of threats and opportunities in a firm’s supply environment.
6. Development of strategic, long-term acquisition plans for all major materials.
7. Monitoring of continuous improvement in the supply chain.
8. Active participation in the corporate strategic planning process.

IV. Materials management.

The grouping of management functions supporting the complete cycle of material flow, from the
purchase and internal control of production material to the planning and control of work-
inprocess, warehousing, shipping and distribution of finished product.

Specific activities of materials management:

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1. Purchasing and Supply management activities.

2. Inventory management.
3. Receiving activities.
4. Stores and Warehousing.
5. In-plant materials handling
6. Production planning, scheduling and control.
6. Transport and transportation.

V. Logistics Management
This refers to the process of strategically managing the acquisition, movement and storage of
material, parts and finished inventory through an organization and its marketing channels to fulfil
orders most cost-effectively.

Logistics does add value and can play a vital role in the organization’s profitability. However,
only by linking all logistics activities directly to the organizations strategic plan can it be useful
in supporting the organization’s strategy for achieving competitive advantage.

Procurement is thus a supporting activity in logistics which should be properly handled to enable
firm’s improve cash flow, open new territories, introduce new products etc.

The term Logistics management was used to mean combining materials i.e. the inbound side and
the outbound side with the aim of improving customer service and reduce the associated costs.
The process was developed further to encompass not only the key functions within an
organization’s own boundaries but also those functions outside that contribute to the provision of
a product to a final customer. This is known as supply chain management.

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VI. Supply Chain Management.

This is an integrative philosophy to manage the flow of a distribution channel from the supplier
to the ultimate user. A supply chain management can be likened to a well-balanced and practiced
relay team in which the entire team is co-coordinated to win the race. From this definition,
supply chain is therefore a cross-functional process for strategy definition and implementation
with total cost focus and a strong continuous improvement drive aimed at serving the
organization’s customer.

The Kenya Institute of Supply Management (KISM) defines supply chain management as
managing a series of activities and processes ranging from the source of raw material,
performing a series of value adding activities, procurement, production or conversion of the
finished product or service purchased by ultimate consumer to satisfaction.
Supply chain is that network of organizations that are involved through upstream and
downstream linkages in the different processes and activities that produce value in the form of
products and services in the hands of the ultimate customers.

It involves the following functions:

 Customer relationship management
 Customer service management
 Demand management
 Order fulfilment
 Manufacturing flow management
 Procurement
 Information facility structure.

Most supply chains are actually networks. Although the word chain is commonly used, the term
‘supply network’ or ‘supply web’ is technically more accurate. A network has been described as
a set of supply chain, which together describes the flow of goods and services from original
source to their uses. The term network is intended to imply a more strategic concept with the idea
that networks compete.
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There are nine different types of activities that companies perform in coordinating and managing
supply networks:
 Partnering
 Risk and benefit sharing
 Resource integration
 Information processing
 Knowledge capture
 Social coordination
 Decision making
 Conflict resolution  Motivation

Successful supply chain management requires a change from managing individual functions to
integrating activities into key supply chain processes. Operating an integrated supply chain
requires continuous information flow, which in turn helps create the best product flows. The
customer remains the primary focus of the process.

Concept of Supply-Chain Management

The development of supply-chain management concept is attributable to two major paradigm
shifts:
1. Change in focus on internal processes to value adding benefits.
2. Change in focus from tactical to strategic.

Supply chain management represents a relatively new way of approaching business and different
views exists regarding the process involved, the key process typically would include customer
relationship management, customer service management, demand management, order
fulfillment, manufacturing flow management, procurement and product development and
commercialization. Supply chains are essentially a series of linked suppliers and customers.
Every customer is in turn a supplier to the next downstream organization until a finished product
reaches the ultimate end user. It is important to note that the supply chain includes: a firm’s
internal function, upstream suppliers and downstream customers.

Objectives of purchasing:
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Purchasing objectives can be seen from two sides:

1) General managerial level
2) Functional or operational level

The general objectives are the five rights: that is acquiring materials of:
 The right quality
 From the right supplier
 In the right quantity
 At the right time
 At the right place
The perfection of the above purchasing rights invariably creates a desired service level necessary
for optimal supply of materials.

The functional or operational level objectives of purchasing:

A Function is a unit or department with specialized skills, knowledge and resources to perform
specialized tasks.
 To support the company operations with uninterrupted flow of materials and services
 To buy competitively-keeping abreast of the forces of supply and demand
 To buy wisely-Continual search for better values of quality, service, price relative to the
buyer’s needs
 To keep stock investment and losses at a practical minimum
 To develop effective and reliable sources of supply
 To develop good relationships with the supplier community and good continued relationship
with active suppliers
 To achieve maximum integration with other departments of the firm
 To handle the purchasing function proactively in a professional and cost effective manner.
Impact of purchasing and supplies management on organisational efficiency and
profitability:
The concept of best practices in purchasing and supply management (PSM) has become the
focus of much interest in recent years. This concept asserts that successful organizations employ
certain activities or processes in line with purchasing that bring forth a high degree of value
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creation in business transaction. The distinct effects of purchasing and supplies function involve
the following:
• Through negotiation purchasing department enables the company to have enormous direct
savings resulting to profitability in the long-run.
• Purchasing department does supplier appraisal an attribute that makes the company to deal
with the only pre-qualified suppliers who add value in return. This function brings forth some
semblance of efficiency/profitability in return.
• Purchasing department ensures that the company has supply continuity an aspect that ensures
that the production performs its work continuously. To this extent therefore the company
gains efficiency/profit in return once all the activities have been made.
• Establishment of supplier development by the purchasing department enables a company to
have the right materials hence this affects the profit margins in the long run. The issue of
efficiency is being put forth since the supplier(s) will be reliable.
• Purchasing department act as a link between the buying company and the external entities
(suppliers) hence provide any useful information for decision making thus this creates
efficiency in the business transaction.
• Purchasing department prepares proper documentation and procedures based on acquisition
of goods and services hence bring forth efficiency, fairness and transparency.
• Purchase department coordinates with accounts department to ensure suppliers are paid on
time and ensure the right quantities of goods are delivered to the company hence this brings
efficiency in the production line.
• Purchasing department carries out research in order to increase the knowledge on the market
opportunities hence make the right decisions when acquiring goods and services.
• Purchasing department initiate purchasing and supply training activities to increase
competence of its staff which in turn creates efficiency.
• Purchasing department implement proper purchasing policies and other appropriate strategic
purchase decisions which bring forth efficiency in return.
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LECTURE TWO,THREE& FOUR: PURCHASING PROCEDURES: NEED

IDENTIFICATION AND ANALYSIS THROUGH SPECIFICATIONS AND QUALITY

PURCHASING PROCEDURES
A procedure is a system of sequential steps or techniques for getting a task or a job done. They
can also be said to be formal arrangements by means of which policies linking strategies are
implemented.

Overview of Purchasing Procedure

A part from pre-purchase activities such as participation in the preparation of specifications and
budget decisions, purchasing has traditionally involved three main phases, each involving
specific documents and considerable clerical activity.

a). The identification Phase:

This involves the notification of the need to purchase by either: -
 Requisition issued by the stores or stock control or users
 Bill of materials Issued by the drawing office or production control
department or user department
 Requisitions from the user departments

b) The ordering phase: -

On the receipt of the requisition or bill of materials, the buyer will check them for accuracy,
conformity to specifications and purchase records to ensure whether the purchase is a re-buy or a
new-buy request.

If it is are-buy request, previously purchased from a satisfactory supplier at an acceptable

price, a repeat order may be issued

If however the item is a new purchase, the additional steps will be involved:
a) Enquiries will be sent to possible suppliers accompanied by additional
documentssuch as drawings, specifications etc which will enable them to quote.
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b) Quotations will be received in response to the enquiries and compared withrespect

to price, quality, delivery, tool costs etc and terms of business.
c) When quantities are substantial and quality and or delivery of great
importance,further negotiations with suppliers including an evaluation of their
capacity to undertake the order may be required.
d) A purchase order will be issued to the vendor whose quotation a mended
wherenecessary by subsequent negotiation is most acceptable.
e) An order acknowledgement should be required by the buyer to ensure that
theorder has been accepted on the terms and conditions agreed

c). The post-ordering phase

a) It may be necessary to progress the order to ensure that delivery dates are met orto
expedite delivery of over-due orders.
b) An advice note notifying that the goods have been dispatched or are ready
forcollection will be issued by the suppler
c) On receipt, goods will be checked for quantity by the storekeeper or recipient.The
inspection department will examine matters of quality or specification.
d) An invoice for the value of goods will be received from the suppler.
Thepurchasing department paying special attention to the legitimacy of any
variations from the quoted price, if satisfactory, the invoice will be passed to
accounts department for payment.
e) On completion, the order will be transferred to a complete orders file.

Assignment ONE
Research on

1. INEFFICIENCES IN TRADITIONAL PROCEDURES

2. Modern Procurement Procedures

They include; E-commerce, E-business, E- supply chain, and E procurement

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NEED IDENTIFICATION-
Every organisation has needs that must be met by outside suppliers,further more if an
organisation serves its customers with good and services , the customers needs are the driving
force of the acquision system ie its said that toyota spends 80% costs on materials.its there fore
important to identify the mojor influences of the neeeds.

Categories of Needs

i. Resale-consist of retailer, wholesalers, distributors agents traders and brokers who

break the bulk to ensure that the customers get what they want in terms of quantities
ii. Raw materials and semi processed materials-most users of raw materials are
converters such as factories and category includes commodities ,agricultural and
industrial products
iii. Parts components and packaging-assembler use parts and components produced by
their suppliers to create a finished product
iv. Maintenance ,repairs and operating supplies (MRO’s) v. Capital – vi.
Services
vii. Others-anything not covered by the above categories falls into last one. Major
requirements here are could be electricity and water.
viii.

NEED CRITERIA IN THE VALUE PROPOSITION

The management is always concerned with the value proposition for the specific needs acquired
from the supplier (what presents goood value and what is more important in terms of priority).

1. Strategic criteria
The important question to ask here is , is this a strategic requirement or not.The
commonly used measure or attribute is the financial impication or impact of the
requirement.an organisation needs to conduct an ABC analysis which which breaks down
and categorises the needs of an organisation according to their importance.
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ABC analysis: This is application to stock holding. ABC analysis shows that the high
inventory is normally represented by relative few items and vice versa. While the percentage
varies between organisations setup, the following presentation shows
a proportion of how inventory is segmented:

Category (Usage) Approximate % of inventory approximate % of

Usage value

A-High value 10% 60%

B-Moderate value 30% 30%

C-Low value 60% 10%

Category A: These are items which are small in number and high in value. They are essential to
the operation of the production such that the absence of such materials can result to breakdown
of production.

Category B: They are medium in number and have medium usage value.

Category C: They are high in number and low in usage value. The absence of such items in the
short-time cannot affect the performance of the company.

The other things used measure strategic needs include;

Risk reduction

Access to new technology

Access to new markets

Supply in tight markets

Corporate image

Revenue enhancement

Creativity and focus on the future

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2. Traditional Criteria

It involves the traditional value proposition of;

(i) Quality- it covers both functionality (does it do the job we want done) and
conformance to the specifications (does it fit the specification agreed on?).Failure to
meet the quality requirements makes the product unwanted and this has dare
consequences on the organization and its customers. Meeting quality standards is the
first and minimum demand on the supplier.
(ii) Quantity-has to be sufficient to meet the demand
(iii) Delivery-the timing of the delivery has to meet the the purchasing companies needs.it
must be as promise
(iv) Price-if the above three are meet the price is the ‘order getter’ or the ‘order qualifier’
(v) Service –may include ,design record keeping ,transportation ,storage, disposal,
installation ,training inspection ,repair and advice

3. Additional current criteria

Supply is becoming more complicated and therefore more strategies have to be
developed over and above the traditional and strategic criteria. They include;
(i) Financial –it goes beyond price to include improvement in the financial statement,
revenue enhancement, working capital, reduction in accounts receivable etc. we
look at your finances in totality.
(ii) Risk –every business decision involves risk .supply risk include;

Operational risk –interruption in the supply of goods and services

Financial risk-change in the price of

(iii) Environmental –climate change, water shortages, air pollution, all this have raised
concerns that must be addressed in all areas of the supply chain .
(iv) Innovation –this is in pursuit of controlling improvement .current suppliers are
expected to provide suggestions for value improvements and total cost and its
reduction on an ongoing basis.
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(v) Regulation compliance and transparency-CSR has become prominent in the last
and companies are supposed to behave like good corporate citizens and recognize
that they have a social responsibility in the country they operate. Political
responsibility includes the willingness to support the government rather than
oppose its operation.

SPECIFICATION
Definitions
Specifications must be distinguished from standards and codes of practice. A specification has
been defined as:

 A statement of the attributes of a product or service.

 A statement of requirements

 A statement or needs to be satisfied by the procurement of external resources

A standard is a specification intended for recurrent use.

Standards differ from specifications in that, while every standard is a specification, not every
specification is a standard. The guiding principle of standardization, considered later in this
chapter, is the elimination of unnecessary variety.

Codes of practice are less specific than formal standards and provide guidance on the best
accepted practice in relation to engineering and construction and for operations such as

Importance of specification
Lysonshas suggested the following reasons for the importance of purchasing staff being
knowledgeable about specifications.

1. The primary purpose of purchasing is to contribute to the profitability of an undertaking

by obtaining the best-quality products or services in terms of fitness for use at the least
possible total cost.
2. Purchasing staff are the intermediaries between the user and the supplier. They are
therefore responsible for checking the completeness of product or service specifications.
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When negotiating with suppliers, purchasing staff must know what they are negotiating
for.
3. The satisfaction of user requirements depends on obtaining reliable suppliers.
4. Purchasing staff should be expert in the application of value analysis and the pro-vision
at the design or specification stage of innovative suggestions aimed at achieving cost
reduction without detriment to the required performance, reliability, quality and
maintainability.
5. Purchasing staff should be able to advice on whether or not any of the requirements
stated in the specification are liable to cause commercial, environmental or legal
problems.

The purpose of specifications

Both specifications and standards aim to:

• Indicate fitness for purpose or use as indicated in Table 9.1 fitness for purpose or use was
the definition of quality given by Joseph Juran. Who also stated that quality is linked to
product satisfaction and dissatisfaction, with satisfaction relating to superior performance
or features and dissatisfaction to deficiencies or defects in a product or service.

• communicate the requirements of a user or purchaser to the supplier

• compare what is actually supplied with the requirements in terms of purpose, quality and
performance stated in the specification

Provide evidence, in the event of a dispute, of what the purchaser required and what the supplier
agreed to provide.

Principles of specification writing

Purdy has identified principles that should be observed by all specification writers, these and
other principles are as follows.
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If something is not specified it is unlikely to be provided The corollary is that all requirements
should be stated in the specification before awarding the order, Suppliers will normally charge
requirements subsequently added as extras -

Every requirement increases the priceAll specifications should therefore be submitted to

rigorous value analysis considered later in this chapter).

The shorter the specification, the less time it takes to prepare itThe expenditure in staff time
devoted to the preparation of a specification can be high. This can be significantly lower when
the length of a specification and the time taken in its preparation is reduced.

The specification is equally binding on both the purchaser and the vendorOmissions, incorrect
information or imprecision in a specification can be cited by the vendor in any dispute with the
purchaser. A rule of evidence is that words are construed against the party who wrote them.
Where there is uncertainty about the meaning of a specification, the court will generally interpret
it in the vendor’s favour.

Specifications, should, so far as possible, be presented in performance terms rather than as a

detailed designthis is particularly applicable to items about which the purchaser has little expert
knowledge. where the seller sells goods in the course of a business and the buyer expressly, or by
implication, makes known to the seller any particular purpose for which the goods are being
bought, goods are of satisfactory quality if they meet the standard that a reasonable person would
regard as satisfactory, taking account of any description of the goods, the price) if relevant) and
all other relevant circumstances -

Specifications, should, whenever possible be ‘open’, not closedspecifications. Open

specifications are written so that the stated requirements can be met by more than one supplier.
By making the requirements sufficiently flexible to be met by several suppliers, competition is
encouraged and prices reduced.

Specifications must not conflict with national or international standards or health, safety or
environmental laws and regulation. National and international specifications should be
incorporated into individual specifications and identified by their numbers and titles.

Ways of specifying a product/Service

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1. Conditions in which the item or material is to be installed, used, manufactured or

stored.
2. characteristics, such as:

 Design, samples, drawings, models, preliminary tests or investigations

 Properties, such as strength, dimensions, weight, safety and so on where applicable

 Interchangeability — functional, dimensional

 Materials and their properties, including permissible variability and approved or

excluded materials.

 Requirements for a manufacturing process, such as heat treatment —this should be

specified only when critical to design considerations

 Appearance, texture, finish, including color, protection and so on

 Identification marks, operating symbols on controls, weight of items safety

indications and so on

 Method of marking.

3. Performance:

performance under specified conditions

Test methods and equipment for assessing performance, where. ho’. m whom they

are to be carried out and reference to correlation with operation criteria for

passing tests, including accuracy and interpretations of acceptance conditions

certification and/or reporting — that is, reports, test schedules or required

4. Reliability — under stipulated conditions and tests and control procedures

5. Control of quality checking for compliance with specification:

method of checking compliance production tests on raw materials,

components, subassemblies and assemblies assurance of compliance, such as by

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suppliers’ certificates or independent manufacturer/supplier instructions regarding

reject material or items instructions with regard to modification of process

Applicability of quality control to subcontractors and others.

6. Packing and protection

Specifications of packaging, including any special conditions in transit

Condition in which the item is to be supplied, such as protected, lubricant free and so
on.

Alternative methods of specifying

These include the use of brand or trade names and specifying be means of samples.

1. The use of a brand or trade names

The following are the circumstances in which descriptions by brand may be not only desirable
but necessary, such as when:

 The manufacturing process is secret or covered by a patent.

 The vendor’s manufacturing process calls for a high degree of ‘workmanship or ‘skill’
that cannot be defined exactly in a specification

 only small quantities are bought so that the preparation of specifications by the buyer is
impracticable

 Testing by the buyer is impracticable.

 the item is a component so effectively advertised as to create a preference or even a

demand for its incorporation into the finished product on the part of the ultimate
purchaser

 There is a strong preference for the branded item on the part of the design staff.

The main disadvantages of specifying branded items are as follows:

 The cost of a branded item may be higher than that of an unbranded substitute.
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 The naming of a brand effectively results in what Haslam 2’ refers to as a ‘closed

specification’, which can take the form of naming a particular brand and the manufacturer
or supplier not permitting the use of alternatives. Closed specifications are most
applicable when the need for duplication of an existing product is important or it is
desirable to maintain a low spares range. Such specifications inhibit competition but also
cut out fringe supplies that may be unable to meet the quality requirements.

2. Specification by sample

The sample can be provided either by the buyer or seller and is a useful method of specification
in relation to products such as printing or materials such as cloth. When orders are placed and the
products specified by reference to a sample previously submitted by supplier, it is important that
the sample on which the contract is based should be:

 Identified

 Labeled

 The signed and labeled samples retained by both purchaser and supplier.

Where goods are sold by sample;

 The bulk must correspond to the sample in quality

 The buyer must have a reasonable opportunity to compare the bulk with the sample.

 The goods must be free from any defect making ‘their quality unsatisfactory’ (not
merchantable), which a reasonable examination of the sample would reveal.

3. Specification by market grade

4. Specification by drawing or engineering
5. Specification by “or equal to “

Ideal characteristics of a specification

Getting the specification right is fundamentally important, since the specification determines the
price that will have to be paid. A specification should be; _ a) Clear/unambiguous
b) Concise
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c) Comprehensive (the degree will vary with specification type)

d) Correct
e) Consistent (throughout the specification and without specificity)

Unclear or incorrect specifications can result in:-

a) Disruption and delays to provision of the product or service
b) Additional costs arising from the product or service not perfuming the required task (e.g. the
Cost of rectifying the performance)

Purchasing role in preparing specification

It is often the user of the product or service that prepares the product or service specification
rather than the purchasing function. Buyers need to be aware of the common problems found in
specification that are written by people who may not be commercially aware. Such problems
add unnecessary cots or risk to the organization.

Common problems associated with specifications include:-

a) Writing specification around a particular (usually known item) item,
thuspreventing competition
b) Looking for a custom-built item when acceptable standard items are available.
c) Specifying something that does not exist in the market place, or which will
bedifficult to source.

d) Over-specifying, e.g. unnecessarily tight tolerances of extra functions, which

arenot necessary.
Purchasing function can contribute to preparation of specification by:
 -Preventing the problems identified above from occurring
 -Communicating product and specify the options based on knowledge to
the supply market.
 -Advising on the appropriate type of specification to use.
For this reason purchasing should be involved early on in the process of defining specifications
and should not simply wait to act once a user, issues a completed specification.
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QUALITY (QUALITY MANAGENT)

Quality is one of the most important issues facing organizations today. We all know quality
when we experience it, but describing and explaining it may be rather difficult. In our
everyday life, we usually take quality for granted, especially when it is regularly provided;
however, we become acutely aware when it is lacking. People often recognize the importance
of quality when we experience the frustration associated with its absence.

Given the difficulty associated with its definition, Pfeilr and Cooke(1991) described it as a
slippery concept because it has a variety of meaning and that it means different things to
different people.

In simple terms quality can be defined through the voice of the customer.It can be said that a
product is of satisfactory quality if it satisfies the customer’s needs. A customer will buy a
product if it meets his minimum expectation; therefore, quality refers to ability of a product or
service to constituently meet or even exceed customer needs and expectations. Quality means
getting value for your money; getting what you pay for. Thus customers’ satisfaction is the
main criteria for determining whether a product possesses the required quality or not

Many authors have attempted to define quality, a sample for which is given below:
• Meeting the needs of the customer, both present and future (E. Deming, 1986)
• Quality is conformance to requirements. (Crosby, 1979)
• Quality is fitness for use. (Juran, 1988)
• The totality of features and characteristics of a product or a service that bear on its
ability to satisfy stated or implied needs. (ISO 9000, 1988).
• The quality of product or service is the fitness of the product or service for meeting
or exceeding its intended use as required opby the customer (Mitra, 2000).
• The quality of a product is the minimum loss imparted by the production of product
to agiven society from the time the product is shipped (Taguchi, 1986)
• The American Society for Quality and Control defines quality as a subjective term
for which each person has his or her own definition. In technical usage, quality can
have two meanings; 1) The characteristic of a product or service that bear on its
 lOMoARcPSD|7662077

ability to satisfy stated or implied needs and 2) a product or service free of

deficiencies.

Several aspects clearly stand out in this definition

a) Customer determination – It is only customers who can decide if and how well a product
or service meets his other needs, requirement and needs.
b) Actual experience – The customer will judge the quality of a product or a service based
on actual experience either during purchase or after.
c) Requirements – Aspects of the product or service required by the customer may be stated
or unstated, conscious or merely sensed. The product or service must fit the requirements;
hence, quality is about measuring up to predetermined standards and meeting hose
standards time and time again
d) Technically Operational – Aspects of the product or service may be clearly identified in
words by the customer.
e) Entirely Subjective – Aspects of the product or service may be interpreted in the
customer’s personal feeling.
Therefore, organizations producing goods and services must define and meet the customers’
reasonable explicit anticipated needs, requirements and expectations even as they change over
time, hence quality refers to the degree to which a specific product satisfies a particular customer
or the degree to which it conforms to a design specifications or the distinguishing feature of a
product’s taste, color, appearance, etc it means getting value for your money; getting what you
pay for.

The importance of Quality

Quality is strategic factor that works through virtuous cycle to enhance a company’s sustainable
competitiveness as illustrated in figure 1.1 in the present time, every company is interested in
product’s quality because of the following reasons:-
• It increases customer satisfaction
• It enhances profitability – improved quality increases demand for the products or
services which enables the firm to charge high prices for the value differentiation
that it offers.
 lOMoARcPSD|7662077

• It lowers costs – process improvements have a direct bearing on costs because

defects are not free, rather someone is pad to make them, resources are used and
opportunities for making saleable product are lost.
• It increases productivity: - Quality improvement results in fewer delays, mistakes
and reworks which may result in increase in net output.

• It enhances competitiveness
• It enhances staff morale- Poor quality is demoralizing for staff because they spend
time coping with complaints and are frustrated when nothing seems to be done to
relieve them.
• It increases flexibility in meeting the changing needs of the market.
• It improves customer service and delivery times.

Cost of quality
It is therefore important for management to recognize the different way that the quality of the
firm’s product and services can affect the organization. Some of the ways in which poor quality
affects organizations include.

• Loss of business which may be occasioned by increased critics, or controls by the

government or pressure from activist groups. Studies have shown that while a
satisfied customer is likely to tell a few people about their experiences, a dissatisfied
customer will tell an average of nine others. It is also important to note that people
rarely company directly to the company for poor quality but more often switch to a
competing product causing loss of business.
• Liability ;- Organizations incur heavy liabilities occasioned by damages or injuries
due to faulty designs or poor workmanships, for instance, a surgeon may be held
liable for negligence during a patient’s operation. Liability for poor quality has been
well established in the courts of law.

• Reduced productivity – Productivity and quality are closely related. Poor quality
affects productivity because defective products have to be reworked, similarly, poor
 lOMoARcPSD|7662077

quality in tools and machines may lead to injures and defective output, which must
be reworked or scraped thereby reducing the amount of usable output.
Eight dimensions of quality:

1) Performance: The product’s operating characteristics

2) Reliability: The probability of a product surviving over a specified period of time under
stated conditions of use.

3) Serviceability: the speed, accessibility and ease of repairing the item or having it repaired.
4) Conformance: The degree to which delivered products meet the pre-determined standards.
5) Durability: Measures the projected use available from the product over its intended operating
cycle before it deteriorates.
6) Features: ‘The bells and whistles’ or secondary characteristics which supplement the product
the product’s basic functioning.
7) Aesthetics: personal judgments of how a product looks, feels, sounds, tastes or smells.
8) Perceived quality: Closely identified with the reputation of the producer. Like aesthetic, it is
a personal evaluation.

TOTAL QUALITY MANAGEMENT (TQM)

Total quality management is defined as a way of managing an organization so that every job,
process is carried out right the fast time and every time.
This means that each stage of manufacture or service is total i.e. 100% correct before it
proceeds.
TQM can also be defined as: an integrative management concept of continually improving
the quality of delivered goods and services through the participation of all levels and
functions of the organization .we can analyze the 3 words in the TQM as follows:-
1. TOTAL – means that it is made up of the whole
2. QUALITY – Is the degree of excellence a product/ service provides
3. MANAGEMENT – is the act/ art/ manner of handling (planning, controlling,
organizing, directing) therefore TQM is the act of managing the whole to achieve
excellence.
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BASIC TQM CONCEPT

The basic concept of TQM outlines an excellent way to run an organization and these are:- 1. A
committed and involved management to provide long term top to bottom organizational support.
• Management must participate in the quality programmes
• A quality council must be established to develop a clear vision, set long term goals and
direct the programme.
• Managers participate in quality improvement terms and also act as coaches to teams
1. An un-waveing focus on the customers both internal of external – the key to an effective
TQM programme is its focus on its customers, to excel start with is by satisfying internal
customers.
2. Effective involvement & utilization of the entire workforce – TQ is an organizational
wide challenges i.e everyone’s responsibility. All employees must be trained in TQM,
statistical process control and other appropriate quality improvement skills so that they
can effectively participate in profit teams. (for the teams to be successful)
3. Continuous improvement of the business and productions process – There must be a
continuous strive to improve all business and production processes. There should be
quality improvemen such as:-
- on time delivery
- order entry efficiency - Billing error rate
- Customer satisfaction
- Scrap reduction
- Supplier management
4. Treating suppliers as partners – A partnering relationship rather than an adversary
onemust be developed.
5. Establish performance measures for the process, such as percent non conforming,
absenteeism, customer satisfaction etc should be determined for each functionary area.

FACTORS THAT HAVE CONTRIBUTED TO DEVELOPMENT OF TQM

1. Globally competition for sales, profit, jobs and funds in both the private and public
sectors leading to both the concept of (world class manufacturing/ Global leaders) with
 lOMoARcPSD|7662077

emphasize on using manufacturing to gain competitive edge by improving customer’s

services.

2. JIT, delivery and other similar strategies based on the philosophy of zero defects i.e
it’scheaper to design and built quality in to a product than attempt to ensure Quality by
wears of inspector done.
3. The Japanese quality procedures such as (kaizen- an ending improvement) and poka
Yoke ( full proofing) have also contributed to development of TQM
4. Quality philosophies associated with interrelating reported experts ( writing have mainly
contributed to development) e.g. Juran, demmungs is E. & D.V targerbaum
BENEFITS OF TQM
1. Improved customer satisfaction
2. enhanced quality of goods and services
3. reduced waste
4. Improved productivity – ( an organization is able to achieve much more)
5. reduced products development time
6. Increased flexibility in meeting market demands.
7. Improved customer service of delivery term
8. Better utilization of human resources

CRITICISM OF TQM
1. Overzealous advocate of TQM may focus attention on quality over other priorities which
may be important – this leads to negligence of other aspects of what customers may want.
2. It creates a cumbersome bureaucracy of council, committee and documentation relating
to quality i.e creates a long chain.
3. It delegates the determination of quality to quality respects because TQM is a
complicated entity beyond the comprehension of the average employee hence personnel
have to be trained on quality issues to participate in improving of quality.
4. Some workers and unions regard TQM as management by stress and away of
deunionizing work places – this trend can be reversed by involving everybody in
management issues
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LECTURE SIX AND: SOURCING AND MANAGEMENT OF SUPPLIERS

SOURCING
This is the process of identifying, selecting, and developing suppliers.
Sourcing can be done at; strategic, operational and tactical levels of management
Tactical and operational sourcing is concerned with lower level decisions relating to;
• High profit
• Low risk
• Buying of non-critical items
• Adaptive decisions on how and where specific supply requirements are to be sourced.
Strategic sourcing is concerned with top level long term decisions relating to:
• High profit
• High risk supply items
• Low profit-high supply risk items
• Formulation of long-term purchasing policies
• Defining supplier base
• Partnership sourcing
• Reciprocal sourcing
• Intra-company trading
• Globalization
• Purchase of capital items
• Environmental and ethical issues

The sourcing process

The sourcing process involves;

 Identification or re-evaluation of a need

 Defining or re-evaluation of user’s requirement

 Deciding to buy or make the product in-house

 Identifying the type of purchase

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 Conduct market analysis

 Identify possible suppliers

 Pre-screen the possible suppliers

 Evaluation of the remaining supply base

 Choose suppliers

 Supplier delivering the product/offering the service

 Post purchase/make performance evaluation

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

Sources of data include;

 Field research
 Secondary data from national, and international institutions; businesses, NGOs, etc

Areas of sourcing information

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Areas of sourcing information include;

 Analysis of the market conditions

 Directives (reference by other firms)

 E-sourcing

 Locating supplier sources

 Supplier assessment and performance rating

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 should be undertaken where: o Suppliers is not

certified e.g. not iso 9000:2000 certified o In purchase of high risk-

high profit item o Purchase of non-standard item o Expenditure on

capital item o Fro the purpose of supplier development o When

entering a JIT arrangement o When contemplating joining supplier’s

association o When engaging in global sourcing o When

establishing e-procurement with long-term strategic supplier o When

negotiating outsourcing contracts o Before agreeing to subcontract o

When negotiating service level agreements.

Suppliers can be located by checking a wide range of information sources- websites ,yellow
pages ,purchase research services ,purchasing records ,exhibitions ,trade journals ,trade
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associations ,informal exchange of information ,and sales people, problems with on-line sources
include too much time spent in searching for information ; low data quality ; data
duplication ;outdated data and the power and flexibility of available search methods.

EVALUATION OF SUPPLIER PERFORMANCE

Supplier should be evaluated from perspectives of:

a. Finance This can be on the basis of; value of capital assets, profitability, scale of
borrowing and ration; of debts to assets; possibility of takeover or merger; number of
major customers; and sufficiency of capital.

b. Production capacity and facilities e.g. machinery, plants /equipments /tools, maximum
productive capacity; utilization ;proportion of capacity utilized by major
customers ;capacity to utilized for if business is awarded by purchaser ;systems used for
capacity planning ;range ,state, adequacy and machinery used ; plant layout ;house
keeping approaches adopted by supplier –CAD;CAM or FMS ;innovation and design –
reputation for design and innovation ;design and research facilities ;Qualification of
R&D and design staff ;willingness to participate in collaborative projects.

c. Human resources – staff strength in each department ; staff

utilization ;qualifications ;empowerment and team work ;trade union membership ;effects
industrial disputes ;staff turnover ;customer focus by staff.

d. Quality –quality approval; TQM; inspection and testing materials statistical controls;
evaluation of quality; guarantee on elimination of the need to inspect incoming JIT
deliveries.

e. Performance –similar projects undertaken; current project; distinctive features of

projects; innovations to be introduced; referees.

f. Environmental and ethical considerations –responsibility for environmental

management ;sustainable sources of materials ;life cycle cost of suppliers product;
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facilities for waste minimization ;energy savings provided by the suppliers

product ,ethical policy ;guidelines and procedures provided for the confidentiality of
information provided by a customer; guidelines on receipt of gifts and
hospitality ;principles on conflicts of interest.

g. Information Technology e.g. Ownership of a website ;information provided in the

website ;business activities processed electronically ;ways used to reduce or eliminate
paper transactions ;shorten order cycles ;reduce inventory ;provide real time information
on product availability and inventory and integrate its supply chain.
Approved suppliers may be graded into partnership; preferred, approved; confirmed and
one off categories.

Reasons for evaluating supplier performance

They include:
• The need to improve supplier performance;
• Determine retaining or removing a supplier from an approved list;
• Making decision about where to place specific order;
• Suppliers have incentive for continuous improvement;
• Determine how to distribute for an item among several suppliers to better manage risk.

SUPPLIER BASE
Supplier base relates to the number, range, location and characteristics of the vendors that
supply the purchaser .They may be broad, lean, narrow, single sourced, local national,
international, diversified or specialized, they can relate to a family of related products and
suppliers or the totality of vendors with whom a purchaser does business.
Factors influencing the supply base
They include:
• The core competencies of the enterprise,
• Make buy, outsourcing and subcontracting decisions
• Single, multiple and partnership decisions
• Tie ring, international and global sourcing
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• Counter trade intercompany trading and reciprocal trade

• Risk aspects, especially in relation to ensuring continuity of supply
• Miscellaneous factor such as the social responsibilities of a large company to local
industry or support of small company.

Supplier base optimization or rationalization is the determination of approximate number of

suppliers a purchaser will do business.
Optimization at controlling costs and elimination of suppliers who do not meet purchaser’s
performance requirements.

Supplier base rationalization results in savings in:

• Administrative costs partnerships and supplier associations
• Improved standardization
• Elimination reduction in unplanned purchases  Lower total production costs. Possible
risks of a reduced supplier base These risks include:
 Overdependence on a single supplier
 Danger of supply disruption supplier’s suppliers:
 Loss of suppliers’ goodwill;
 Reduced competition
 Failure to seek new or more competitive suppliers.
PROCUREMENT DECISIONS AND POLICIES
1.OUTSOURCING - MAKE OR BUY DECISION
Definition
Outsourcing is a management strategy where by major noncore functions are transferred to
specialist, efficient, external providers.
Outsourcing has been focused by many industrial manufacturers, firms considers outsourcing
everything from procurement function to production & manufacturing.
Executive are focused on stock value and huge pressure is placed on organization to increase
profits is by reducing costs through outsourcing.
OUTSOURCING BENEFITS & RISKS
Throughout the 1990s strategic i.e out sourcing the manufacturing of key components was used
as a tool to rapidly cut costs, some of the motivations for outsourcing are;
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1. Economic of scale
An important objective in outsourcing is to reduce manufacturing costs through the aggregation
of orders from different buyers indeed; the aggregation allows suppliers to take advantage of
economics of scale both in purchasing and in manufacturing.
2. Risk pooling
Outsourcing allows buyers /the firm to transfer demand uncertainty risks to the major contact
equipment manufacturer(s) .one advantages that the manufacturer is that they aggregate demand
from many buying companies and thus reduce uncertainty thus can reduce components inventory
levels while maintaining or even increasing service level.
3. Reduce capital investment.
Another important objective in outsourcing is to transfer not only demand uncertainty to the
equipment manufacturer but also capital investment of course the equipment manufacturer can
make this investment because it is implicitly shared between many of the equipment
manufacturers’ customers. 4. Focus on core competency
By carefully choosing what to outsource, the buyer is able to focus on its core strength i.e the
specific talent, skills and knowledge set that differentiate the company from its competitors and
give it an advantage in the eyes of the customer e.g Nike Company focuses on innovation,
marketing, distribution and sales not on manufacturing
5. Increased flexibility
Flexibility has three main issues;
a) The ability to better react to changes in customer demand
b) The ability to use the suppliers technical knowledge accelerate product developmentcycle
time
c) The ability to gain access to new technologies and innovation
These are critical issues in industry where technology changes are very frequent e.g where
products have a short –life- cycle like in fashion products.

Other benefits of outsourcing include

 Freeing management time
 Reduced staff costs;
 Cost certainty
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 Reduced staff management problems

 Improved consistency of service
These benefits outsourcing come with new and considerable risks consider how IBM benefited
was hurt by outsourcing.

Illustration;
When IBM decided to enter the personal computer (PC) marked in that 1981 ,the company did
not have the infrastructure in place to design and build a PC rather that the time to develop these
capabilities ,the company outsourced almost all major components of the PC e.g.
microprocessors was designed and built by Intel and the operating system (software was
provided by Microsoft. IBM was able to get these computers to the market within 15 months of
starting the design by tapping into the exercise and resources of these companies .
Within 3yrs, IBM had replaced Apple as the number one supplier of PC and had a market share
of over 40%

However, the down side to IBMs strategy soon became clear as competitors such as Compaq
were able to enter the market by using the same suppliers as IBM .By the end of 1995 ,IBM’s
market share had fallen to less than 8% behind market leader Compaq.

IBM examples reveal two main risks associated without sourcing

1. Loss of competitive knowledge
Outsourcing critical components to suppliers may open up opportunities for competitors (as in
the IBM PC) similarly outsourcing implies that companies lose their ability to introduce new
designs based on their own agendas rather than the suppliers’ agenda.
Outsourcing of the main manufacturing components from suppliers may prevent the
development of new insight, innovations and solutions that typical requires cross-functional team
work.
2. Conflicting objectives supplier and buyer usually have different and conflicting
objectives .For instance increased flexibility is a key objective of the buyer when outsourcing
the manufacturing of various components .This implies an inability to better match supply and
demand by adjusting production rates as needed .Unfortunately, this objective is in direct
 lOMoARcPSD|7662077

conflict with the suppliers objectives of long term, firm and stable commitment from the
buyer.
Indeed, this is an issue to the supplier because unlike the buyer their profit margin is small and
they there focus on cost reduction rather than flexibility .Similarly product design issues are
affected by the conflicting objectives of suppliers and buyer. Again buyer insisting on flexibility
would like to solve the design problem as fast as possible whereas suppliers focus on cost
reduction that typically implies slow responsiveness to design change.

Other risks may include:

 Problems of flexibility
 Overdependence on suppliers
 High staff turnover
 Poor project management skills
 Lack of commitment to the client or industry
 Shallow expertise
 Insufficient documentation
 Lack of control over larger suppliers
 Poor staff training
 Complacency
 Overtime divergent interest of the customer
 Product cultural mismatches between customer and provider organizations.

Outsourcing is a management strategy by which major non –core functions are transferred to
specialists ,efficient ,external providers .Activities not outsourced include resource intensive
(high labor or capital costs ); relatively discrete ;require specialist competencies ;characterized
by fluctuating work patterns in loading and throughput ;subject to quickly changing markets ,for
which it is costly to recruit ,expensive investment.

In outsourcing manufacturing, the following decisions need to be made:

A) Strategic make or buy decisions on what products to make; what investment to
makemachines and labor to make the products; ability to development new product and
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processes as the knowledge and skills gained by manufacturing in house may be critical for
future applications and the selection of suppliers as they may need to be involved in design and
production process

B) Tactical make or buy decisions which deal with the issue of a temporary imbalance
ofmanufacturing capacity-fall or rise in demand
C) Component makes or buy decisions –made at the design stage and relate to whether a
certaincomponent should be made or bought

REASONS FOR OUTSOURCING

Reasons for outsourcing are classified into two .

1. Dependency on capacity
In this case the firm has the knowledge and the skills required to produce the components but for
various reasons, decoded to outsource due to lack of manufacturing capacity e.g. materials, space
transport facilities etc.

2. Dependency on knowledge
In this type of dependency, the company does not have resources skills and knowledge required
to produce the components and outsources in order to have access to these capabilities.

FACTORS TO CONSIDER IN MAKE OR BUY DECISION

1. Nature of the product; bulky perishable
2. Awareness of new technology
3. Market conditions; changes in world market, economic and market conditions
4. Firms’ financial structure
5. Mgt of make or buy portfolio
6. Length of scheme –short term or long term relationship with suppliers
7. Personnel to be involved
8. Procedures to analyze situation and develop solutions
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MAKE OR BUY DECISIONS

The make-or-buy decision is the act of making a strategic choice between producing an item
internally (in-house) or buying it externally (from an outside supplier). Make-or-buy decisions
usually arise when a firm that has developed a product or part or significantly modified a product
or part—is having trouble with current suppliers, or has diminishing capacity or changing
demand.
Make or buy decisions compare the cost of producing a component or providing a service
internally with the cost of purchasing a component or a service from an external supplier. Three
levels of make or buy have been identified which are linked to overall organization strategy.
1. Strategic make of buy: - This is undertaken by top management level and seeks to: -
Determine the shape and capability of the organization’s manufacturing operations by
influencing:
a) What products to make
b) What investment to make in machines and labor
c) Ability to develop new products and processes
d) Profitability, risk and flexibility
-Provide the framework for short- term tactical and component decisions

2. Tactical make or buy: The tactical decisions are taken by middle level managers and
deals with the issue of temporary imbalance of manufacturing capacity. It considers the
acquisition of additional machine, tools and other resources in order to manufacture internally
what would otherwise been bought or the divestment of minor resources in order to source
externally

3. Component make or buy decisions are made ideally at the design stage and relate to
whether a particular component of the product should be made in house or bought-in.

Reasons for make or buy decision

Possible reasons are:
1. Deterioration in supplier’s quality performance
2. Delivery failure or poor service by exiting source
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3. Large price increase

4. Volume changes: much large or smaller quantity requirements for item concerned.
5. Pressure to reduce costs
6. Desire to concentrate internal resources on areas of special competence
7. Need for design secrecy
8. Import substitution

Others include:-
9. To gain access to world class capabilities
10. Reduction in staff management problems
11 Reduced capital requirements
12 To improve organizational focus
13 To increase flexibility
The supply market should be researched to discover changes, which may have occurred to
evaluate comparative production costs and other factors relevant to the decision. Factors in
favor of making
- Chance to use up idle capacity and resources
- Potential lead time reduction
- Possibility of scrap utilization
- Greater purchasing power with larger orders of a particular material
- Exchange rate risks
- Cost of work is known in advance
- Ability to manage resources
- Commercial and contractual advantages
- Maintaining secrecy
- Worries over stability and continuing viability of suppliers are eliminated
Factors in favor of buying
 Quantities required too small for economic production
 Avoidance of costs of specialist machinery or labor
 Reduction in inventory
 Spread of financial risk between supplier and purchaser
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 Ability to control quality when purchased from outside

 Availability of vendors specialist expertise, machinery etc.

PARTNERSHIP SOURCING

Partnership sourcing has been defined as ‘a commitment by both customer and suppliers
regardless of size to a long-term relationship on clear mutually agreed objectives to strive for
world-class capability and competitiveness.
Reasons for seeking partnerships can include improvements in:
-Design, Quality, Delivery and completion times, Production costs, operating
costs , Stock levels, Cash flow, Skill and resource availability etc.

Advantages of partnership sourcing

Partnership sourcing would lead to:
1. Emphasis on co-operation between purchaser and supplier
2. Consideration of total acquisition costs. Lowest price is never the sole buyer consideration.
3. Long-term business relationships with the involvement of the supplier at the earliest possible
stage
4. Emphasis on quality assurance based on total quality management
5. Emphasis on single sourcing although is not of necessity it will however reduce the supplier
base
6. Emphasis on mutual trust between purchaser and supplier

Problems of partnership sourcing

a) Termination of relationships has to be undertaken over a period of time through an
agreedseparation plan
b) Inequitable Business shares i.e. possible domination by the customer or over-dependence
onthe supplier.
c) Lack of confidentiality – where prospective partners are also suppliers to competitors
d) Requires regular review of competitiveness through regular meetings
e) Attitudes – traditional adversarial buyers and sales people will require retraining to adjust
tothe new philosophy
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SOURCING INTERNATIONALLY International

procurement/global sourcing:
Global sourcing refers to the integration and co-ordination of procurement requirements across
the worldwide business units of a single firm. It also implies that a particular organisation has
adopted a single sourcing strategy for its worldwide business units and that this strategy is aimed
at providing a competitive advantage to business units on a global scale.
Reasons for sourcing internationally:
 Competitiveness of overseas sources e.g. lower prices, improved deliveries, better quality etc
 Need for manufacturing flexibility
 Stringent quality standards
 Ever changing technology
 The buyer may prefer to buy from foreign source which offers products which have features
which are not available domestically.
 Insufficient domestic capacity to meet demand to ensure continuity of suppliers owing to
shortages or strikes
 Reciprocal trading and counter trade owing to policy reasons Difficulties in buying from
abroad:
 Currency difficulties is experienced- fluctuations
 Legal difficulties incase of a dispute
 Delays in delivery
 Time required for negotiation is greatly increased
 Too much documentation e.g. bills of lading, certificate of origin customs entry form etc
 Import duties, procedures and insurance
 Communication problems
Benefits of international/global sourcing:
 Better prices
 Higher world class quality
 Counter-trade
 Improved customer service
 Improved competition position
 Increased availability of suitable suppliers
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Factors to consider when planning international purchasing:

The following factors generally hamper planning for international purchasing:
1) International risks: These risks relate to:
(a) Financial factors such as currency uncertainty, financial policy uncertainty and
financialeffect of economic performance
(b) Economic factors such as performers of economic indicators etc
(c) Political factors such as radical changes in government composition or policies
(d) Operational environmental factors such as the legal structure of the country of export,
therules and procedures governing international trade.
2) Logistical barriers: Long distances mean increased transport costs and long delivery times,
hampering the supplier in rendering a service
3) Customs regulations and duties: Import duties can disrupt prepared cost estimates at very
short notice, political motives in the importing country can hamper purchases on specific
foreign markets etc
4) Nationalism: Local source preference is a factor that influences the development of an
international purchasing policy and strategy.
GLOBALIZATION DRIVERS/FACTORS:
Both external and internal factors will create the favorable conditions for development of
strategy and resource allocation on a global basis. These factors can be briefly reviewed under
the following headings:
i) Market factors: Marketing factors dictates the performance of businesses across the
globe. Business operators therefore need to establish the basic marketing modalities
which can bring forth a high degree of success in their respective business venture.
Distinct marketing issues to be addressed entail: common customer needs, global
customers, global market channels and also transferable marketing attributes. One
reason given for the similarities in customer’s demand is a level of purchasing power that
translates into higher diffusion rates for certain products. Similarly developed
infrastructures lead to attractive markets for other products. At the same time, channels of
distribution are becoming more global; i.e. a growing number of retailers are now
showing great flexibility in their strategies for entering new geographic markets.
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ii) Cost Factors: Avoiding cost inefficiencies and duplication of effort are two of the most
powerful globalization drivers. A single country approach may not be large enough for
the local business to achieve all possible economics of scale and scope as well as
synergies, especially given the dramatic changes in the market place. The cost factors
which ought to be addressed entail: global scale of economies, sourcing efficiencies,
factor of production differences, high product development costs and rapidly changing
technology.

iii) Environmental Factors: Today government barriers have fallen dramatically in the last
years to further facilitate globalization of markets and the activities of marketers within
them. For instance, the forces pushing towards a pan European market are very powerful.
The increasing wealth and mobility of European consumers (favoured by the related
immigration controls), the accelerating flow of information across borders and the
publicity surrounding the integration itself all promote globalization. Also the resulting
removal of physical, fiscal and technical barriers is indicative of the changes that are
taking place around the world on a greater scale. At the same time, rapid technological
evolution is contributing to the process. New global players are taking advantage of
today’s more open trading regions and newer technologies. Newer companies with sales
between 200 million to 1 billion dollars are able to serve the world from a handful of
manufacturing bases compared to having to build a plant in every country as the
established MNEs once had to do.
iv) Competitive Factors: Many industries are already dominated by global competitors that
are trying to take advantage of the market, cost and environmental factors. To remain
competitive the competitors may have to be the first to do something or be able to match
or preempt competitors’ moves. Products are now introduced, upgraded and distributed at
rates unimaginable a decade ago. Without a global network, a marketer may run the risk
of seeing carefully researched ideas picked off by other global players.

Market presence may be necessary to execute global strategies and to prevent others from
having undue advantage in unchallenged markets. Caterpillar faced mounting global
competition from Komatsu but found out that strengthening its products and operations
was not good enough to meet the challenges. Though Japan was a small part of the world
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market, as a secure home base (no serious competitors) it generated 80% of Komatsu’s
cash flow. To put a check on its major global competitor’s market share and cash flow,
caterpillar formed a heavy equipment joint venture with Matsushita to serve the Japanese
market.
GLOBALIZATION DIMENSIONS.
Decisions have to be made on how best to capitalize on the condition set by the factors
driving globalization. Decisions will have to be made of five key areas highlighted
below.
i) Market participation: The conventional wisdom of globalization requires a presence in
all of the major markets in the world. Market may not be attractive in this right but may
have some other business significance such as being the home market of the most
demanding customers (there by aiding in product development) or being the home market
of a significant competitor (a preemptive rationale).
ii) Product Offering: Globalization is not equal to standardization except in the case of the
core products or the technology used to produce the product.
The component used in a personal computer may to a large extent be standard, with the
localization needed only in terms of the peripherals. Product standardization may result
in significant cost savings upstream.
iii) Marketing approach:No where is the need for local touch as critical as in the execution
of the marketing programme. Uniformity is sought especially in elements that are
strategic (e.g. positioning) in nature, whereas care is taken to localize necessary tactical
elements (e.g. distribution). This approach has been called globalization.
iv) Location of value added Activities: Globalization strives at cost reductions by pooling
production costs within a system. Rather than duplicating activities in multiple or even all
country organizations, a firm concentrates its activities close to the market on where
factor costs are at the minimum. The quest for cost savings and improved transportation
methods has allowed some marketers to concentrate customer service activities rather
than having them present in all country markets.
v) Competitive moves: A company with regional or global presence will not have to
respond to competitive moves only in the market where it is being attached. A firm may
be attached in its profits sanctuary to drain its resources or its position in its home market
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may be challenged. When Fuji began to eat at Kodak’s market share in the United States
in the mid 80s, Kodak responded by drastically increasing its advertising in Japan and
created a new subsidiary to deal strictly with that market. Cross subsidization or the use
of resources accumulated in one part of the world to fight a competitive battle in another
may be the competitive advantage needed for the longer term. Also one major market lost
may mean losses in others resulting in a domino effect.

PROCUREMENT NEGOTIATIONS

Definition and objective of negotiation

Negotiation refers to the process of conferring, discussing or bargaining to reach an agreement in

business transactions.

This makes negotiation a process of planning, reviewing and analyzing used by both buyers and
sellers to reach acceptable agreement or compromise. Thus, in purchasing negotiation must be
used only as decision making process for it to achieve its full value. In successful negotiations,
both sides win something – i.e. it is a win – win negotiation approach.

Objectives of negotiation for procurement.

To obtain the quality specified.

To obtain a fair and reasonable price.

To get the supplier to perform the contract on time. The delivery date schedule for quantity and
quality specified should be realistic. It is important that buyers negotiate delivery schedules
which suppliers can realistically meet without endangering the other requirements of the
purchase.

To exert control over the manner in which the contract is performed – deficiencies in supplier
performance can seriously affect and in some cases completely disrupt the operations of the
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buyers firm. Hence, need for buyers to negotiate for controls which will assure compliance with
the quality, quantity, delivery and service terms of the contract. Control has been found to be
effective in areas such as: Man hours of effort; levels of scientific talent; special test equipment
requirements; the amounts and types of work to be subcontracted; progress reports.

To persuade the supplier to give maximum cooperation to the buyer’s company – reward those
suppliers who perform well with future orders. Good suppliers also expect courtesy, pleasant
working relations, timely payment and cooperation from their customers.

To develop a sound and continuing relationship with competent suppliers: Buyers must maintain
a proper balance between their concern for a supplier’s immediate interest and long-run
performance.

To create a long-term partnership with a highly qualified supplier.

Styles and approaches of negotiation

These can be classified as adversarial and partnership

Adversarial negotiation: Also referred to as disruptive or win – lose negotiation approach.

Parties have competing goals

Involves use of threats

In case of deadlock, negotiation is terminated

The approach is rigid

The attitude is that of we must win, they must lose.

Partnership negotiation: Also referred to as win- win negotiation.

Common goals emphasized upon.

Negotiation is friendly and based on openness

In case of a deadlock, negotiation results to further problem solving

The approach is flexible

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The attitude is we both must win.

Adversarial negotiation. Collaborative negotiation

 The emphasis is on competing to attain  The emphasis is on ascertaining goals

goals at the adversary’s expense held in common with the other party
 Strategy is based on secrecy, retention  Strategy is based on openness, sharing
of information and low level of trust in of information and high level of trust in
the perceived adversary. the perceived partner.

 The desired outcomes of the  The desired outcomes of the negotiation

negotiation are often misrepresented so are made known so that there are no
that the adversary does not know what hidden agendas and issues are clearly
the opponent really requires the understood. Each party is concerned for
outcome of the negotiation to be. There and has empathy with the other.
is little concern for a empathy with the
other party.

 Strategies are unpredictable, based on  Strategies are predictable. While

various negotiating ploys designed flexible, such strategies are aimed at
ploys designed to outmaneuver or reaching an agreement acceptable to the
throw the other other party.

 Parties use threats, bluffs and  Parties refrain from threats and so,
ultimatums with the aim of keeping the which are seen as counterproductive to
adversary on the defensive. the rational solution of perceived
problems.

 There is an inflexible adherence to a  The approach is essentially friendly and

fixed position that may be defended by non-aggressive – we are in this
together. This involves downplaying
both rational and irrational arguments. hostility and giving credit to
Essentially, the approach is destructive. constructive contributions made by
either party to the negotiations.
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 The unhealthy extreme of an adverbial  The healthy extreme of the partnership

approach is reached when it is assumed approach is reached when it is assumed
that movement towards one’s own goal that whatever is good for the other party
is facilitated by blocking measures that to the negotiations.
prevent the other party from attaining
the goal.

 The key attitude is that of “we win, you  The key attitude is how can the
lose’ respective goals of each party be
achieved so that both win?

 If an impasse occurs, the negotiation  If an attitude occurs, this is regarded as

may be broken off a further problem to be solved, possibly
by the intention of higher management
or an internal or external mediator or
arbitral.

Negotiation Cycle

This shows the cyclical nature of events in the process of negotiation – i.e.

Get the facts

Determine the bargaining strengths

Set objectives

Plan strategies / Tactics

Negotiate

Review performance.

Determining bargaining strengths:

Buyer bargaining strength

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When suppliers are many

When there are alternative solutions, suppliers or substitutes – i.e. BATNA (Best alternative to a
negotiated agreement)

Cash payment
When you are prepared or have done good research.

When the need is not urgent.

Supplier bargaining strength

In the case of a monopolistic situations

When the need is urgent

When the quantity needed is large

When the product to be supplied is unique.

Negotiation strategies, Techniques and ploys

Strategies / Tactics

The order in which issues will be negotiated

Whether to speak first or allow the opponent to open the negotiation

What concessions to make should the need arise?

The timing of the concession

Issues to be linked e.g. price and quality

What will be the opponent’s reaction to each tactic?

What tactics the opponent is likely to adopt and how these can be countered.

Techniques

Use of questioning techniques

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Using diversions to ease tensions e.g. going for a walk, tea break or making a joke.

Using positive statements.

Being a good listener and watching body language

Having adequate supplier background information.

Ploys / Arm-twisting /lies

Ploys are used to gain advantage over the other party. However, the other party can use counter
ploys. Ploys can also ruin long term relationships and should not be relied on in negotiations –
e.g. offering two choices of which one is so bad that you have to choose the second; Setting
unrealistic deadline to pressurize the other party in making a quick decision.

Phases / Stages of negotiation

Preparation stage:

Activities performed during the preparation stage include:

Gathering facts about suppliers

Setting objectives

Determining bargaining strengths

Planning strategies

Preparing for alternative courses of action

Choosing the negotiating team

Choosing the venue

Introduction Stage
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Involves setting agenda, rules and procedures and creating a conducive environment.

Discussion stage / Debating stage

Avoid interruptions
Avoid arguments

Avoid destructive debates

Regularly summarize issues to avoid later confusion

Watch and interpret body language.

IV. Bargaining Stage

It involves setting terms on which to settle – e.g. price reduction by so much percent will result
in order increase by so much percent.

Ploys can appropriately be used at this stage.

V .Agreement stage / Conclusion of negotiations

It is important to record full details of the negotiation .The minutes of the meeting can be used to
serve this purpose.

VI. Post – Negotiation Stage:

It involves making a draft document which should be sent to the other party for approval.

Ensure that there is commitment of all relevant employees in order to make the agreement work

Prepare official contract based on draft agreement

Evaluate the performance.

Elements of an effective negotiation

a) Substance issues are satisfactorily resolved

b) Working relationship are preserved or even enhanced

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c) The negotiation produces a wise agreement – i.e. one that is satisfactory to both sides.

d) The negotiation is efficient – i.e. it is no more time consuming or costly than necessary
e) The negotiation is harmonious – i.e. it fosters rather than inhibit good
interpersonalrelationships.
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ETHICS AND PROFFESSIONAL STANDARDS

Definition of Ethics

Ethics is concerned with the ‘’Moral principles and values, which govern our beliefs, actions and
decisions’’.

Ethical code of contact

An ethical code of contact in an organization is the first step against unethical behavior. The
policy document on ethical behavior should contain information such as the policy on the
acceptance of gifts, meals and pleasure trips, dealing with sales representatives, handling
quotations and tenders, dealing with confidential information etc.
The ethical code of contact and policy should be made known to every purchaser, managers and
members of staff.

The importance of Ethics

Business people, managers and individuals are not as concerned about ethical conduct in any
other area of the enterprise as much as they are in purchasing and supply. The reasons for this are
as follows: -
1. Purchasers have power over large sums of money ie the greatest outflow of funds from
the enterprise is through purchasing.
2. Purchasers have the greatest say in terms of which supplier will receive the order.
3. Sound ethical conduct in dealing with suppliers is essential to the creation of long-term
relationships and the establishment of supplier goodwill.
4. Purchasing staffs are more exposed to the temptation to act unethically than most other
employees.
5. Temptations influences the purchaser’s objectivity and rational thinking
6. It is impossible to claim professional status for purchasing without reference to a
consideration of its ethical aspects.

The Benefits of Ethical Code

The advantages of ethical code are that it:-
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1. Provides guidance to the company’s values cultural substance and style in managers
andemployees.
2. Signals expectations of proper conduct to suppliers and customers.
3. Pre-empts legal proceedings
4. Nurtures a business environment of open communication
5. Provides a basis for working together by treating each other with respect
6. Sets boundaries as to what constitutes ethical behavior as determined by organizational
andprofessional values.
7. Provides a guideline as to what is right and wrong in a given situation to be judged on
aconsistent basis

Corporate Ethics:
Cooperate ethics are statements issued by the companies and other organizations describing their
general value systems and providing information guidelines for decision making consistent with
those principles.

Principles and guidelines in ethical behavior

Persons undertaking procurement function should always seek to uphold and enhance the
standing of the purchasing and supply profession and will always act professionally and
selflessly by:
a) Maintaining the highest possible standard of integrity in all their business relationships.
b) Reject any business practice, which might reasonably be deemed improper, and
neverusing their authority for personal gain
c) Enhance the proficiency and stature of the profession by acquiring current
technicalknowledge and the highest standard of ethical behavior
d) Forster the highest possible standards of professional competence amongst those
forwhom they are responsible.
e) Optimize the use of resources, which they influence and for which they are responsible
toprovide the maximum benefit to their employing organization.
f) Comply both with the letter and the spirit of :-
 -The law of the country in which they practice
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 -Institute guidance on professional practice

 -Contractual obligations Guidance
In applying the above principles members should follow the guidance set out below:
1. Declaration of interest: -Any personal interest which may affect or be seen by others to
affect a members impartiality should be declared
2. Confidentiality and accuracy of information: -Confidentiality of information received
in the course of duty should be respected and should never be used for personal gain. It
should be honest and clear.
3. Competition: - arrangements, which might in the long-term prevent the effective
operation of fair competition, should be avoided.
4. Business Gifts: Business gifts, other than items of very small intrinsic value such as
business dairies or calenderers, should not be accepted.
5. Hospitality: - the frequency and scale of hospitality accepted should be managed openly
and with care and should not be greater than the member’s employer is able to
reciprocate.
6. Honest and openness
7. Conflict of interest
8. Payments
9. Green procurement…………………..

INSTITUTIONAL AND GOVERNMENT PURCHASING

Any comparison between government, institutional, and private sector purchasing practices must
take into account a number of critical factors, including sources of funds, oversight, and ancillary
purposes to be attained. While it is entirely proper to conclude that each has the primary goal of
satisfaction of a particular organizational need, the means by which that goal is reached can vary
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significantly. Some of the critical issues surrounding each of the above organizational types are
listed for discussion below.

Budgeting, source of funds are different from commercial buying:

o Taxes o Grants o
Donations

Objectives of buying are other than profit:

o Provide services
o Maintain facilities
o Other?
Savings are equally important - a dollar saved is:

• One more dollar to spend

• One less dollar to collect from taxpayers
Specifications: Broad spectrum of items are purchased

Potential for conflicts of interest are great due to diverse affiliations of various employees

Back door selling in some institutions is difficult to control:

o Educational
Institutions o
Hospitals
Benefactors can cause problems regarding reciprocity, i.e. expectation of special treatment, for
charitable institutions such as schools and hospitals.

Organization and staffing considerations-

Same as for commercial world, ie:

o Qualified personnel
o Appropriate organizational level o Degree of
centralization
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Politics plays an important role in both public and private institutional purchasing.

Public: Elected officials

Taxpayers

Private: Benefactors

Trustees

Economies-

Some institutions have formed purchasing co-ops or consortiums:

o Educational and Institutional co-op.

o Hospital Bureau o Joint ventures for mutual use

GOVERNMENT PURCHASING:

Deals with Public funds

• Requires:
o Stewardship
o Avoiding conflicts of interest and o influence peddling
by elected officials Government Purchasing/Acquisition used to achieve
certain

"Socio-Economic" and “Diversity” Goals such as:

• Small Business Programs

• Minority-Disadvantaged Business Promotion
• Small-Disadvantaged Business Promotion
• Contracts in Labor Surplus areas
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In summary, Government/Industry purchasing has similar goals and objectives; however, the
tools and processes within each of their domains are often materially different. Government is
susceptible to laws and political (Congressional) influence. Taxpayers have the right to do
business with their government so competition is essential. The bottom line for industry is profit.
For the government, it is stewardship and conforming to the will of the citizens

Purchasing and fraud

Purchasing is a function that is particularly vulnerable to fraud, although it also involves anyone
in direct contact with suppliers, including engineers, sales and computer staff

Examples of supplier’s related fraud

1. Buyer/supplier collusion leading to approval for payment of fictitious claims.
2. Presentation of false invoices – typically the offender will set up a fictitious company
withimpressive stationery and invoice the purchase for goods not supplied
3. Re- presentation of genuine invoice that have not been cancelled at the time the initial
chequewas signed.
4. Abstraction of tenders or arranging for the lowest tender to come from a desired source.
5. Omission of credit notes for goods returned to the supplier
6. Premature scrapping of asset is in return for a ‘kickback’ from a scrap dealer
7. Computer-based frauds, which takes advantages of inadequate controls or
limitedunderstanding of information technology on the part of senior management.

Prevention of fraud
Fraud prevention will depend on: -
Sound internal control
- Internal and external auditing and
- The detection of ‘give-away-signs’.
INTERNAL AND EXTERNAL CONTROLS
Such controls include the following; -
1. Ensure a separation between recording and custodian duties.
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2. Only specified employees should have the power to requisition goods, and only to
anauthorized limit
3. Conversely, the requisitioning department can act, as a check on the purchasing since
everyorder placed should be trace-able to a requisition
4. Goods inwards should be received in specially designated areas. The receipt of all
goodsshould be recorded. Goods received notes should be serially numbered 5. A sample of
invoices presented should be examined on a random basis
6. The main internal controls in respect to computers should be classified to ensure that
thewhole of the original data relevant to any application is accurately processed.
7. Increase the difficulties of a person who plans to perpetuate a fraud by not having all
therelevant matters under their control.

The above controls can be supplemented by

1. External audits and
2. Independent examination of the books, accounts and vouchers of a
business an audit may include a physical verification of assets such as inventory and
the auditors may also make recommendations, which can render the company less
susceptible to fraud. Give-away signs of fraud
The giveaway signs of corruption once detected can assist managers to implement measures that
can reduce corruption incidence.
Give away signs of fraud may include the following; 1.
Unfolded invoices that have to come through the
post
2. Too many orders to one suppler other than those where single sourcing arrangements
apply.
3. Loss of supporting documentation
4. Sudden unexplained affluence
5. Unwillingness of employee to:
 -Go to annual leave
 -Accept transfer or
 -Be promoted to other work