The Procurement Process – Implementing the Plan: Procurement : A Tutorial
The Procurement Process – Implementing the Plan
- Purchaser sends a request for quotation (RFQ).
- Bids are evaluated based on lowest price, so price must be the major criteria.
- If non-price variables exist, negotiation may be more appropriate.
- Bidding may also be used to narrow the field prior to a negotiation.
Competitive bidding is effective when:
- Volume is high enough to justify this method of business
- The specifications or requirements are clear to the seller
- The seller must know or have the ability to estimate accurately the cost of producing the item
- The marketplace is competitive, which means it has an adequate number of qualified sellers who want the business
- Buyers ask for bids only from technically qualified suppliers who want the contract, which in turn means they will price competitively
- Adequate time is available for suppliers to evaluate the requests for quotation
- The buyer does not have a preferred supplier for that item
- If a preferred supplier exists, the buyer may simply choose to negotiate the final details of the purchase contract with that supplier
Negotiation is appropriate when:
- Any of the previously mentioned criteria for competitive bidding are missing
- For example, the item may be a new and/or technically complex item with only vague specifications
- The purchase requires agreement about a wide range of performance factors, such as price, quality, delivery, risk sharing, and product support
- The buyer requires early supplier involvement
- The supplier cannot determine risks and costs
- The supplier requires a long period of time to develop and produce the items purchased
- This often makes estimating purchase costs on the part of the supplier difficult
Reasons for departments to have visibility to purchase orders and incoming receipts:
- The accounting department gains visibility to future accounts payable obligations. It also has an order against which to match a receipt for payment when the material arrives.
- The purchase order provides the requesting department with an order number to include in its records.
- The requestor can refer to the purchase order number if he or she must inquire into the status of an order.
- Receiving has a record of the order to match against the receipt of the material. Receiving also can use outstanding purchase orders to help forecast its inbound workload.
- Traffic becomes aware of inbound delivery requirements and can make arrangements with carriers or use the company’s own vehicles to schedule material delivery.
Blanket Purchase Orders
- A blanket purchase order is an open order, effective for a year, covering repeated purchases of an item or family of items.
- Blanket orders eliminate the need to issue a purchase order whenever there is a need for material.
- After a buyer establishes a blanket order with a supplier, the ordering of an item simply requires a routine order release.
- The buyer and seller have already negotiated or agreed upon the terms of the purchase contract. With a blanket purchase order, the release of material becomes a routine matter between the buyer and seller.
Establishing, maintaining and improving business relationships with suppliers is another way procurement adds value to an organization.
Key factors procurement consider to ensure successful supplier relationships need to be:
- Setting expectations
- implement and maintain supplier performance measures
- ensure the measures are fully understood by all parties
- ensure the measure are good indicators of the health of the relationship to all parties involved
- Ensuring all business requirements are fully understood and met
- Ensuring collaborative work practices are implemented to ensure a joint approach to problem solving and the identification of improvement opportunities