Procurement

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Procurement is the act of acquiring, buying goods, services or works from an external source. It is favourable that the goods, services or works are appropriate and that they are procured at the best possible cost to meet the needs of the acquirer in terms of quality and quantity, time, and location.^[1] Corporations and public bodies often define processes intended to promote fair and open competition for their business while minimizing exposure to fraud and collusion.

Overview

Almost all purchasing decisions include factors such as delivery and handling, marginal benefit, and price fluctuations. Procurement generally involves making buying decisions under conditions of scarcity. If good data is available, it is good practice to make use of economic analysis methods such as cost-benefit analysis or cost-utility analysis.

An important distinction should be made between analyses without risk and those with risk. Where risk is involved, either in the costs or the benefits, the concept of expected value may be employed.

Based on the consumption purposes of the acquired goods and services, procurement activities are often split into two distinct categories. The first category being direct, production-related procurement and the second being indirect, non-production-related procurement.

Direct procurement occurs in manufacturing settings only. It encompasses all items that are part of finished products, such as raw material, components and parts. Direct procurement, which is the focus in supply chain management, directly affects the production process of manufacturing firms. In contrast, Indirect procurement activities concern “operating resources” that a company purchases to enable its operations. It comprises a wide variety of goods and services, from standardized low value items like office supplies and machine lubricants to complex and costly products and services;^[2][3] like heavy equipment and consulting services.

Topics

Procurement vs. acquisition

The US Defense Acquisition University (DAU) defines procurement as the act of buying goods and services for the government.^[4]

DAU defines acquisition as the conceptualization, initiation, design, development, test, contracting, production, deployment, Logistics Support (LS), modification, and disposal of weapons and other systems, supplies, or services (including construction) to satisfy Department of Defense needs, intended for use in or in support of military missions.^[4]

Acquisition is therefore a much wider concept than procurement, covering the whole life cycle of acquired systems. Multiple acquisition models exist, one of which is provided in the following section.

Acquisition process

The revised acquisition process for major systems in industry and defense is shown in the next figure. The process is defined by a series of phases during which technology is defined and matured into viable concepts, which are subsequently developed and readied for production, after which the systems produced are supported in the field.^[5]

Model of the Acquisition Process.^[5]

The process allows for a given system to enter the process at any of the development phases. For example, a system using unproven technology would enter at the beginning stages of the process and would proceed through a lengthy period of technology maturation, while a system based on mature and proven technologies might enter directly into engineering development or, conceivably, even production. The process itself includes four phases of development:^[5]

• Concept and Technology Development: is intended to explore alternative concepts based on assessments of operational needs, technology readiness, risk, and affordability.
• Concept and Technology Development phase begins with concept exploration. During this stage, concept studies are undertaken to define alternative concepts and to provide information about capability and risk that would permit an objective comparison of competing concepts.
• System Development and Demonstration phase. This phase could be entered directly as a result of a technological opportunity and urgent user need, as well as having come through concept and technology development.
• The last, and longest phase is the Sustainable and Disposal phase of the program. During this phase all necessary activities are accomplished to maintain and sustain the system in the field in the most cost-effective manner possible.

Procurement software

Procurement software (often labeled as e-procurement software) manages the purchasing processes electronically and/or via cloud computing. As Procurement Network's research provides,^[6] there are more than one hundred e-Procurement solutions available today. As an important element of supply chain management systems, these systems help organizations efficiently manage their purchasing cycle times and maximize profit on every purchase order. Many organisations produce their own ways of working but some software does exist: SMART by GEP, a cloud-based, end-to-end procurement platform by GEP, Track8 by Future Purchasing,^[7] Puridiom - procure-to-pay software, Fishbowl Inventory - Inventory management, Tradogram - Private Purchasing Portal by PIBCI

Procurement life cycle

Procurement life cycle in modern businesses usually consists of seven steps:

• Identification of Need: This is an internal step for a company that involves understanding of the company needs by establishing a short term strategy ( three to five years) followed by defining the technical direction and requirements.
• Supplier Identification: Once the company has answered important questions like: Make-buy, multiple vs. single suppliers, then it needs to identify who can provide the required product/service (P/S). There are many sources to search for supplier and trade shows.
• Supplier Communication: When one or more suitable suppliers have been identified, requests for quotation, requests for proposals, requests for information or requests for tender may be advertised, or direct contact may be made with the suppliers. References for product/service quality are consulted, and any requirements for follow-up services including installation, maintenance, and warranty are investigated. Samples of the P/S being considered may be examined, or trials undertaken.
• Negotiation: Negotiations are undertaken, and price, availability, and customization possibilities are established. Delivery schedules are negotiated, and a contract to acquired
• Supplier Liaison: During this phase, the company evaluates the performance of the P/S and any accompanying service support, as they are consumed.Supplier scorecard is a popular tool for this purpose.When the P/S has been consumed or disposed of, the contract expires, or the product or service is to be re-ordered, company experience with the P/S is reviewed. If the P/S is to be re-ordered, the company determines whether to consider other suppliers or to continue with the same supplier.
• Logistics Management: Supplier preparation, expediting, shipment, delivery, and payment for the P/S are completed, based on contract terms. Installation and training may also be included.
• Additional Step - Tender Notification: Some institutions choose to use a notification service in order to raise the competition for the chosen opportunity. These systems can either be direct from their e-tendering software, or as a re-packaged notification from an external.

Procurement performance

In July 2011, Ardent Partners, published a research report that presented a comprehensive, industry-wide view into what is happening in the world of procurement today by drawing on the experience, performance, and perspective of nearly 250 Chief Procurement Officers and other procurement executives. The report includes the main procurement performance and operational benchmarks that procurement leaders use to gauge the success of their organizations. This report found that the average procurement department manages 60.6% of total enterprise spend. This measure commonly called "spend under management" refers to the percentage of total enterprise spend (which includes all direct, indirect, and services spend) that a procurement organization manages or influences. The average procurement department also achieved an annual savings of 6.7% in the last reporting cycle, sourced 52.6% of its addressable spend, and has a contract compliance rate of 62.6%.^[8]

Public procurement

Public procurement generally is an important sector of the economy. In Europe, public procurement accounts for 16.3% of the Community GDP.^[9]

Green public procurement

In Green public procurement (GPP), contracting authorities and entities take environmental issues into account when tendering for goods or services. The goal is to reduce the impact of the procurement on human health and the environment.^[10]

In the European Union, the Commission has adopted its Communication on public procurement for a better environment, where proposes a political target of 50% Green public procurement to be reached by the Member States by the year 2010.^[11]

Alternative procedures

There are several alternatives to tendering which are available in formal procurement. One system which has gained increasing momentum in the construction industry and among developing economies is the Selection in planning process which enables project developers and equipment purchasers to make significant changes to their requirements with relative ease. The SIP process also enables vendors and contractors to respond with greater accuracy and competitiveness as a result of the generally longer lead times they are afforded.

Fraud

Procurement fraud can be defined as dishonestly obtaining an advantage, avoiding an obligation or causing a loss to public property or various means during procurement process by public servants, contractors or any other person involved in the procurement.^[12] An example is the kickback, whereby a dishonest agent of the supplier pays a dishonest agent of the purchaser to select the supplier's bid, often at an inflated price. Other frauds in procurement include:^[13]

• Collusion among bidders to reduce competition.
• Providing bidders with advance "inside" information.
• Submission of false or inflated invoices for services and products that are not delivered or work that is never done. "Shadow vendors", shell companies that are set up and used for billing, may be used in such schemes.
• Intentional substitution of substandard materials without the customer's agreement.
• Use of "sole source" contracts without proper justification.
• Use of prequalification standards in specifications to unnecessarily exclude otherwise qualified contractors.
• Dividing requirements to qualify for small-purchase procedures to avoid scrutiny for contract review procedures of larger purchases.

See also

References

 This article incorporates public domain material from websites or documents of the Defense Acquisition University.

Further references

• Shaw, Felecia N., 2010. "The Power to Procure: A Look inside the City of Austin Procurement Program". Applied Research Projects, Texas State University-San Marcos
• Benslimane, Y.; Plaisent, M.; Bernard, P.: Investigating Search Costs and Coordination Costs in Electronic Markets: A Transaction Costs Economics Perspective, in: Electronic Markets, 15, 3, 2005, pp. 213–224.

External links

Look up procurement in Wiktionary, the free dictionary.

• Federal Procurement Data System (United States)
• Green public procurement (European Commission)
• Systems Engineering Fundamentals. Defense Acquisition University Press, 2001