The Procurement Process

Dr. M. Ramkumar
Assistant Professor
Indian Institute of Management Raipur
Learning objectives

• The major differences between organizational and

consumer buying behaviour.
• The key elements of the procurement process.
• The various roles in a buying decision-making unit.
• The involvement of the procurement department in
the acquisition of various goods and services.
• How to model organizational buying behaviour.
 Organizational buying behavior

• Professional procurement: Professional buyers with education and

experience who know their tasks and responsibilities.
• Derived demand: Developments in industrial markets are often related to
changes in the end-user markets, upstream in the value chain.
• Inelastic, fluctuating demand: Due to the derived demand, price-elasticity in
industrial markets is frequently lower than in consumer markets.
• Geographical concentration: Many business-to-business markets are
geographically concentrated (e.g. Silicon Valley).
• Large order quantities and large amounts of money involved: Business-to-
business transactions often involve large quantities of goods and services.
• Limited number of customers (Buyer power): Industrial suppliers often only
supply a few companies compared to companies that deliver directly to
consumers.
Organizational buying behavior
 Managing supplier relationships

Business-to-business marketing, and professional procurement, require active

management of relationships within complex organizational networks
 Models of industrial buying behaviour

Variables that affect the buying process:

• Characteristics of the product
• Strategic importance of the purchase
• Sums of money involved in the purchases
• Characteristics of the supply market
• Degree of risk related to the purchase
• Role of the procurement department in the organization
• Degree to which purchased products affect existing
routines in the organization.
According to Fisher (1970) the
procurement decision-making
process is primarily
determined by two aspects:
product complexity and
commercial uncertainty.

If these two aspects are

combined, statements can be
made about what disciplines
will be involved in the
decision-making process.
 Decision-making units (DMU)

• DMU relates to all those individuals and groups who

participate in the procurement decision-making process,
who share some common goals and the risks arising from
the decisions (identical to buying centre). These might
include:
• Users
• Influencers
• Buyers
• Decision-makers
• Gatekeepers (people who control the flow of information from
the supplier towards the other members of the DMU and vice
versa).
The procurement process
 Aspects of the linear procurement process
model

• Alignment with business needs: Business needs and requirements are the input for
the linear procurement process model.
• Process approach: The various steps in the linear model are closely connected, and the
quality of the output of the preceding steps determines to a large extent the quality of the
subsequent steps.

• Defining the interfaces: The output of each phase has to be clearly defined, preferably
with a document.

• Determining responsibilities: Procurement is considered to be a cross-functional

responsibility. Therefore, the tasks, responsibilities and authority of the parties involved
should be clearly indicated in each phase.

• Combining different skills, different types of knowledge and expertise: The key
question is how to combine the different types of knowledge, skills and expertise in such
way that all parties involved arrive at an optimal solution for the company.
Procurement situations

Three types of procurement situations:

New task situation
• Completely new product from unknown suppliers
• High uncertainty regarding outcome
• (e.g. acquisition of capital goods)

Modified rebuy
• New product from known supplier
• Existing product, new supplier
• Moderate uncertainty regarding outcome

Straight rebuy
• Known product from known supplier
• Low uncertainty regarding outcome
• (e.g. consumable items like MRO)
Examples of procurement situations
The specification phase

Purchase order specification

contains Functional specifications
Technical specifications

• Quality specifications
• Logistics specification
• Maintenance specification
• Legal and environmental requirements
• Target budget.
 Supplier selection and assessment

The selection step contains several separate steps:

1) Preliminary qualification of suppliers and drawing up bidders list

2) Request preparation for quotation and analysis of the bids
3) Supplier selection.
 Supplier selection and assessment

• Summarizing the prequalification requirements, based on the order

specification.
• Assembling the initial bidders (long) list that indicates which suppliers may
probably do the job.
• Sending out the request for information (RFI), collecting further references
and information, visiting the supplier leading to the approved vendor list.
• Deciding on the supplier shortlist (three to five prospective suppliers).
• Sending out the request for proposal (RFP) or request for quotation (RFQ).
After receiving the quotations, the procurement department will make a
preliminary technical and commercial evaluation.
• Risk analysis for critical suppliers and purchase parts.
• The process ends with a supplier selection proposal:
• Decision to select certain supplier
• Underlying ranking schemes
• Underlying quotations.
 Negotiation and contracting

• After the supplier has been selected – a contract

needs to be drawn up.
• The contract may refer to specific terms and
conditions:
• Industry differences
• Specific commercial and legal terms and condition will vary
per contract (e.g. Procurement policy, market situation)
• This limits the use of standard purchase contracts.
 Prices and terms of delivery

• Competitive bidding/negotiation used to arrive at

a fixed price which is acceptable to both the buyer
and supplier.
• Financial obligations are defined unequivocally.
• Supplier should accept all risks.
• Fixed price is best for cost control and budget
management.
Terms of payment

• Preferred method of payment = performance bond.

• Advance payments should be covered by bank
guarantee where supplier agrees to fulfil their
obligations.
• Milestone payments are sometimes used when
installations or capital goods are purchased.
 Penalty, warranty and other arrangements

• A sound purchasing contract includes agreement on:

• Penalty clauses
• Warranty conditions
• (if applicable) Systems responsibility.

• Other arrangements may include:

• General terms of purchase
• Insurance and safety regulations
• Transfer of rights and obligations
• Contracting out to third parties
• Terms of delivery.
The ordering process
• After the terms and conditions of the contract have
been agreed, the order can be placed.
• Generally, a purchase order will include an order
number, a concise description of the product, unit
price, number of units required, expected delivery time
or date, delivery address and invoicing address.
• Usually, the supplier is requested to send an order
confirmation for each order received.
The expediting process
Three types of expediting:
• Exception expediting: Buyer only takes action when the organization sends
out signals of material shortages.
• Routine status check: Preventing materials supply and quality problems – a
few days before the promised delivery, the buyer contacts the supplier to
confirm the delivery date.
• Advanced status check: For critical purchase parts – a detailed production
plan will be handed over to the buyer, and during the process the buyer will
carry out periodic checks.
• Field expediting: For critical purchase parts – field inspector periodically
inspects on site whether supplier is on schedule (e.g. military projects).
Follow up and evaluation

The buyer’s role continues after the new product has

been taken into production or the installation has
been put into operation.
• Compares invoice with the original order
• Solves delivery issues
• Supplier assessment:
 Keeps track of supplier’s quality, delivery record, competitiveness
and innovativeness.
 Major bottlenecks and problems (I)

• Supplier or brand specifications: Specifications worked out

in detail by the user are sometimes written for the
capabilities of specific suppliers.
• Inadequate supplier selection: Failure to check the
supplier's (bank) references, can produce unpleasant
surprises like bankruptcy.
• Personal relationships: Purchase orders are placed with
suppliers with whom the user has a friendly relationship.
As a result, such suppliers may not be as competitive.
• Contracts are too general: Incomplete, drafted up by the
supplier or not present at all.
 Major bottlenecks and problems (II)

• Too much emphasis on price: Especially when buying

capital equipment, buying decisions need to be based
upon total-cost-of-ownership (TCO) rather than on price
only.
• Poor administrative processes: Putting a sound
administrative system in place could lead to significant
savings.
• Problems in delivery phase: Overdue or incomplete
delivery, or quality problems can put the continuity of the
business process in danger.
• Suppliers are not systematically assessed: This results in
unprofessional suppliers and repeating problems.
Summary

• Buying behaviour of organizations differs significantly

from consumer buying behaviour.
• Procurement department involvement is highest during
the operational stages of the procurement process.
• A linear procurement process shows that effective
procurement decision-making requires a stepwise
cross-functional approach.
• Procurement process models offer organizations a tool
for structuring their procurement processes and ideally
each phase of the process should result in a
documentation of the decisions.