Procurement Management and Global Sourcing

Topic 2 – The Procurement Policy, Process and Procedure

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Topic 2 – The Procurement Policy, Process and Procedure i

Contents

Contents ii

Introduction 1
Learning objectives 1

Procurement Objectives 1

The Procurement Process 2

Purchase Situations 4

Procurement Policy and Strategic Sourcing 6

Defining the Role of Purchasing 6
Defining Buyer-Seller Relationships 7
What Makes A Policy Good? 7
Procurement Manual (Operating instructions on how to functionally
carry out a task): 7
Strategic Sourcing Methodology 7
Seven key steps are included in the overall strategic sourcing
methodology 7

Summary 8

ii Procurement Management and Global Sourcing

Introduction
This topic addresses the generic issues related to organisational
procurement. Particularly, we will address objectives and responsibilities of
procurement activities, the process of procurement, role that people play
on organization procurement, various purchasing situations and finally
discuss policies and strategic sourcing processes.

Learning objectives
At the conclusion of this topic you should be able to understand:
• Recognise procurement objectives and responsibilities
• Identify types of purchases
• Elucidate procurement policy and strategic sourcing process

Reading
Prescribed Text: Monczka, R.M., Handfield, R.B., Giunipero, L.C. and
Patterson, James L. (2014), Purchasing and Supply Chain
Management, South-Western, Cengage Learning. 6th Edition. Chapter
2,3 and 18.

Procurement Objectives
A world-class procurement team must provide cost-reductions, improve
supply chain quality, gain access to new sources of technology, improve
cycle time, involve suppliers in product and process development, and
streamline processes. Schoenherr, & Mabert 2011, p.215 describe “the four
approaches deal with the following aspects:
i. Price focus: Price focus encompasses the goal of getting the best
price
ii. Supply security: An approach that tries to minimize risk and assure
supply continuity
iii. Purchasing efficiency: Associated with the goal of supply base
consolidation and the creation of a streamlined purchasing
environment, and
iv. Bundle building: Aiming to group items into larger packages and to
avoid uncompetitive bids on less attractive items”.
The specific objectives of an efficient procurement management team are
to support operational requirements, manage the purchasing process

Topic 2 – The Procurement Policy, Process and Procedure 1

 efficiently and effectively, supply base management, develop strong
relationships with other functional groups, support organisational goals and
develop integrated purchasing strategies that support organisational
strategies. Therefore, procurement team are to evaluate and select
suppliers, review specifications, act as the primary contact with suppliers,
determine the method of awarding purchase contracts.

The Procurement Process

The organisational procurement process could be outlined as:
• Identify need for goods and services for organisation (often determined by
Planning);
• Clarify the specific requirements (item, detailed specification, quantity,
when required, pricing, for what will the item be used, other information);
• Locate suitable sources;
• Negotiate availability, pricing, quality and other aspects;
• Select the vendor;
• Place purchase order (or give appropriate authority);
• Arrange for delivery;
• Ensure delivery is made in accordance with requirements;
• Resolve any problems;
• Arrange for payment to the vendor;
• Evaluate performance and manage supplier
Some of the important decision that a procurement department are
required to do are as follows:

a. Decision to Make or Buy

In deciding to make or buy, you must first have a need for the item or
service. If you buy an item because it is “on sale” (the price is attractive,
and lower than the usual price), but you have no need for the item, it will
probably have to be stored somewhere, with the likely result that it will
become damaged, obsolete, or be considered “valueless” and therefore it
will be thrown out. Did you therefore save money through buying at a
special price? Probably not!
This same concept can be applied to volume discounts for purchases, or
production volumes for manufacture. The “per unit” price may be less for
large volumes, but if you are not going to use them, or the amount
represents many months’ or years’ supply, the larger volume may not be
worthwhile.
When items are stored, they cost money ‐ in space (which can be very
costly, particularly where real estate prices are high), in interest penalties
(with borrowed money, or money which could have been invested in other
income‐ generating activities), in handling (with movement from one place
to another so that the goods are not “in the way”), in extra administration
(keeping stock records, counting stock to verify records), and in other ways.
2 Procurement Management and Global Sourcing
These considerations important as you progress this course.
Now that the need has been established, you have to consider whether to
buy the item, or make it (if the company has the capability). There are a
range of aspects to consider. Where the word “item” or “product” is used,
be aware that the same concept can be applied to manufacturing and
service industries, but the item will vary. For example, in service industries,
you would be “buying” food ingredients for your restaurant, and “making” it
in the kitchen, or you may “buy” the food pre‐ prepared.

b. Making the Item

If the organisation has the knowledge, skills, equipment and time to
produce/manufacture an item at a reasonable cost and in good quality,
making the item is realistic option to consider. Some companies have
manufacturing capabilities, but not necessarily for every item required. For
example, some items may need to be made on particular types of
equipment, have to go through a special process, or have long lead times to
develop, especially if they are “new” to the company.
Even if an organization has the capability, it is often worthwhile to look at
outsourcing as in many cease benefit of outsourcing supersede making the
item. Keep in mind that this decision should not only be based on price, but
take into consideration lead times, quality, ongoing availability, batch sizes
(some organisations have “minimum quantities” which they will make or
sell), contribution towards other business costs (eg rent), and your business
situation at the time. For example, if you do not have very much work at
the factory, but wish to keep your workers employed, you may believe it
worthwhile to still make the product, even if you can buy it from elsewhere
at a lower price.

c. Buying the Item

Usually organisations try to buy non-core products (goods or services). The
issue of whether a core competency should or could be outsourced is
difficult to resolve. Further, exactly what defines a firm’s core
competency? This may not be obvious. For example, is the ownership and
management of its vehicles is considered as the core competency of a
transport company? Some may argue that, the provision of a service to
move things as quickly and cost efficiently as possible is the core
competency. Is the core competency of a film company making films or
entertainment?
The above representation is very simplistic. Along the way complications
can arise, and much more detail needs to be considered. Many of these
aspects will be examined throughout this course.
Webster (1972) asserts that organisations accomplish its purchasing function
through Buying Center, which has been defined as the “informal, cross
departmental decision unit” in which the primary objectives are the
acquisition, importation, and processing of relevant purchasing related
information”. The members of a buying centre can be classified as user,
gatekeeper, influencer, decider and buyer. (Spekman and Stern, 1979,
p.56; Wind, 1967a; Webster & Wind, 1972; Lau & Goh et. al. 1999).
User- by definition is the group of people or section of organisation that will
be using the goods or services that will be outsourced. Gatekeepers are the

Topic 2 – The Procurement Policy, Process and Procedure 3

 staff members in an organisation who have the capacity to control the flow
of information. A secretary to the managing director, for example, although
not directly involved in managing organisation, may have the capacity to
decide when and how much information may be passed on to the managing
director. If this is the case, the secretary plays the role of a gatekeeper.
Influencers are the people from within or outside organisation who
influence the purchase decision. Decider usually either the departmental
boss or a committee responsible for procurement decision. The Buyer
comes last, who executes the procurement decision.
Therefore, in business, departments which work in isolation do a disservice
both to themselves and their organisation. Integrated business practice
means that all aspects of the business work together towards a common
goal. Performance measures for each part of the organisation much
complement the overall business goal. Some organisations fall into the trap
of setting performance measures for one department which contradict those
of other departments, and this in turn impacts adversely on business
outcomes.

d. Competitive Bidding or Negotiation

When an organisation buys high enough volume with clear specifications
from a competitive marketplace (has sufficient number of capable
suppliers), has adequate time for the process, and it has no preferred
supplier it may exercise competitive bidding.
BusinessDictionary.com
(http://www.businessdictionary.com/definition/competitive-bidding.html
accessed 20 November, 2104) defines competitive bidding as “transparent'
procurement method in which bids from competing contractors, suppliers,
or vendors are invited by openly advertising the scope, specifications, and
terms and conditions of the proposed contract as well as the criteria by
which the bids will be evaluated. Competitive bidding aims at obtaining
goods and services at the lowest prices by stimulating competition, and by
preventing favouritism. In (1) open competitive bidding (also called open
bidding), the sealed bids are opened in full view of all who may wish to
witness the bid opening; in (2) closed competitive bidding (also called
closed bidding), the sealed bids are opened in presence only of authorized
personnel”.
A negotiation, as opposed to competitive bidding process may be applied, if
the above conditions are not applicable that means when a criteria for
competitive bidding is missing or the price is not the only deciding factor or
an early supplier involvement is needed or supplier can’t determine risks
and costs or when development and production time are lengthy.

Purchase Situations
Everything an organization may buy can be classified into two broad
categories. These are (i) product type and (ii) buy class. We also can
classify everything an organisation buys according to importance matrix.
These are discussed below:

4 Procurement Management and Global Sourcing

 i. Product type
This classification is according to the product type or usage from the point
of view of a buying organisation. These are listed in Table 1 with examples:

Table 1: Product Type with Examples

Product Type Examples
Raw Materials Petroleum, Coal, Lumber.
Semi -finished Products Subassemblies, semi-finished components.
MRO Maintenance, Repair and Operating items.
Production Support Packaging Materials, Tapes, Glues, etc.
Items
Services Payroll services, Lawn care, Snow removal, cleaning
Capital Equipment Production machinery, New manufacturing facilities
Transportation and Third Logistics services, management of inbound and
Party Purchasing outbound materials.

ii. Buy-class
Instead of using the product characteristics or product type, we also can
classify everything an organisation buys into three classes from the view
point of buying frequency. These are
• Straight Re-buy: This class represents the product (goods or services) that
am organisation buys on a regular basis. Usually the buying process of
these products is less complex, less uncertainty is involved and associated
with less risk. Organisations with formal buying process in place can assign
a relatively lower level staff to order the materials falls into this class
whenever their stick needs replenishment. Usually the purchase orders are
generated to existing suppliers with existing contract or arrangements in
place.
• Modified Re-buy: When an organisation needs to modify its specification of
products that it will buy may face a bit of complex situation. It may face a
bit of more uncertainty, and also associated with some risks. It requires
decision for higher authorities both for the selection of product and
supplier.
• New Buy: Organisations face more complex situation, higher risk, and
greater uncertainty when it buys a new product. A new product in this case
is a product that the respective organisation did not buy before. Usually,
the buying centre members are more involved in this buying situation. The
decision making process is also lengthy compared to the above two.
The degree of factors such as novelty (newness), complexity, importance,
perceived risk and time pressure may determine degree of buy class of a
product for an organisation. Novelty refers to the situation where the
organization is represented by a group of individuals who have varying
degrees of experience of similar purchase situations. The less experience
these people have, the more novel the purchase is to them, and hence, to
the organization. In considering complexity construct and its impact on
participation and influence in industrial buying, researchers have examined
two general areas (i) complexity of the purchase situation and (ii)
complexity of the product. The importance of the purchase can be defined
as the (i) perceived impact of the purchase on organisational productivity
Topic 2 – The Procurement Policy, Process and Procedure 5
 and profitability and (ii) to affect participation and influence during the
buying process. The perceived risk depends on the level of uncertainty
present in a specific purchase situation and on the severity or irreversibility
of the potentially unfavourable consequences. Therefore, it can be
supposed that those industrial consumers who perceive the greatest risk in
their purchase situations will be the most inclined to increase their
participation level and degree of influence in the buying centre, in order to
reduce the risk. Finally, the time-pressure refers to the degree to which
buying centre members feel under pressure when
For example, if an organisation buys a product which is completely new
(highest in newness or novelty scale), it is assigned with high importance,
and it faces greater uncertainty as it is associated with higher risk. This
buying usually is more complex, and complexity increases if the
organisation faces time pressure to buy the concerned item.

Procurement Policy and Strategic Sourcing

Policies are established principles and rules of action that guide an
organisation. It has a significant role in today’s business environment.
Policy designates overall authority of a purchasing department (origin and
scope), sets forth the principles and objectives guiding the purchasing
process, defines the corporate purchasing office responsibilities, delineates
authority and responsibilities between corporate and division purchasing
departments, defining Buyer-Seller Relationships. A good policy is action
oriented, relevant, concise, unambiguous/well understood, timely and
current and guides problem solving and behaviour.
The development of an integrated procurement strategy can be
divided into three major phases:
• Phase I: Analyze inputs: This can be viewed as the information
gathering and appraisal stage.
• Phase II: Initiate activities: This comprises the identification and
integration stages of the strategic planning process.
• Phase III: Abolish or avoid inertia: This stage involves communication and
i m p le m en t a t io n of the strategic purchasing Intent, through and b y
all affected parties.
For further discussion refer to a conceptual frame work for
development of a competitive purchasing strategy in Rajagopal &
Bernard, 1993, p. 15.

Defining the Role of Purchasing

Procurement policy determines overall authority of a purchasing
department (origin and scope), sets forth the principles and objectives
guiding the purchasing process, defines the corporate purchasing office
responsibilities and delineates authority and responsibilities between
corporate and division purchasing departments.

6 Procurement Management and Global Sourcing

Defining Buyer-Seller Relationships
Procurement policy often indicates the benefits of strong buyer-seller
relationship.
Many policies reflect a base of mutual trust and respect, principles that
support positive relationships. Policies also govern the supplier selection
process, guidelines for awarding contracts, and measuring of supplier
performance help to keep these processes fair and consistent.

What Makes A Policy Good?

A policy is considered good policy if it is action oriented, relevant, concise,
and unambiguous/well understood, timely and current and guides problem
solving and behaviour.

Procurement Manual (Operating instructions on

how to functionally carry out a task)
Manual outlines specific steps to follow in administering a procurement
process. There are several benefits of manuals. For example, it assists in
training employees, offers tool for consistency and provides a way of
documenting “industry-best” practices. However, manual also has
disadvantages. For example, it may make the process rigid, often found
that companies do not update, therefore, enforcement may not reflect
current policy.

Strategic Sourcing Methodology

Five core principles are recognized as key drivers to achieve the desired
levels of value. These are (i) assess the total, (ii) develop individual
sourcing strategies, (iii) evaluate internal requirements, (iv) focus on
supplier economics and (v) drive continuous improvement.

Seven key steps are included in the overall

strategic sourcing methodology
Assess Supply Market
Step 1: Project Planning and Kickoff, which suggests that a formal start to
the strategic sourcing process is warranted.
Step 2: Profile Spend, to develop an accurate understanding of
requirements.
Identify or reevaluate needs
Define and evaluate user requirements
Topic 2 – The Procurement Policy, Process and Procedure 7
 Decide whether to make or buy
Step 3: very critical step in the strategic sourcing process
all potential sources of supply are identified
a thorough assessment of a supply market
identify all possible suppliers
prescreen all possible sources
Step 4: Develop Sourcing Strategy
develop a sourcing strategy
establish whether a supplier has the capabilities
RFP provides specific information as to what the buying company
Step 5: Execute Sourcing Strategy
begins with an evaluation of the suppliers that remain following the
RFI and RFP processes and culminates in the award of a contract.
Step 6: Transition and Integrate
Important elements of this step are the finalization of the
contractual agreement, planning the transition process, and receipt
or delivery of the product or service.
Step 7: Measure and Improve Performance
very important, involves making a post purchase performance
evaluation

Summary
This section outlined procurement policy, process and procedures of
organizational procurement. Procurement objectives drive the policies,
process or procedure of procurement in an organisation. Policies are
established principles and rules of action that guide an organization,
defining the role of purchasing, defining buyer-seller relationships.
Procurement process starts from identifying needs and ends by evaluating
performance of supplier. Some of the important decision that a
procurement department are required to take are decision to make or buy,
making the item, buying the item, competitive bidding or negotiation.
Everything an organisation may buy can be classified into (i) product type and
(ii) buy class. It also can classify according to importance matrix. An
organisation’s strategic sourcing may follow seven key steps to achieve it
strategic sourcing goals.
Our next topic, supplier selection and evaluation, is the most important
aspect for procurement professionals. It is also very important for your
assessment, assignment as well as examination.

8 Procurement Management and Global Sourcing

References
Garrido-Samaniego, M.J & Gutierrez-Cillan, Jesus (2004) Determinants
of influence and participation in the buying centre. An analysis of
Spanish industrial companies, Journal of Business & Industrial
marketing, Santa Barbara: 19, 4/5; pp.322-323
https://login.ezproxy.lib.rmit.edu.au/login?url=http://dx.doi.org/10
.1108/08858620410561051
Lau, G. T., M. Goh, et al. (1999). "Purchase-related factors and buying
center structure - An empirical assessment." Industrial Marketing
Management 28(6): 573-587.
https://login.ezproxy.lib.rmit.edu.au/login?url=http://dx.doi.org/10
.1016/S0019-8501(98)00031-5
Caniëls , Marjolein C.J. and Gelderman, C.J. (2005), Power and
interdependence in buyer supplier relationships: A purchasing
portfolio approach
(http://www.ou.nl/documents/13141/2710925/GR05-01.pdf accessed
20 November 2014)
Monczka, R M., Handfield, R. B., Giunipero, L. C and Patterson, James
L. (2011), Purchasing and Supply Chain Management, South-Western,
Cengage Learning, Fifth Edition.
Rajagopal, S., & Bernard, K. N. (1993). Strategic procurement and
competitive advantage. International Journal of Purchasing and
Materials Management, 29(4), 13.
https://login.ezproxy.lib.rmit.edu.au/login?url=http://search.proqu
est.com/docview/235216286?accountid=13552
Schoenherr, T., & Mabert, V. A. (2011). An exploratory study of
procurement strategies for multi-item RFQs in B2B markets:
Antecedents and impact on performance. Production and Operations
Management, 20(2), 214-VIII.
https://login.ezproxy.lib.rmit.edu.au/login?url=http://search.ebsco
host.com/login.aspx?direct=true&db=bth&AN=59226336&site=ehost-
live&scope=site
Spekman, R. E. and L. W. Stern (1979). "Environmental Uncertainty
and Buying Group Structure: An Empirical Investigation." Journal of
Marketing 43(2): 54-64.
https://login.ezproxy.lib.rmit.edu.au/login?url=http://search.ebsco
host.com/login.aspx?direct=true&db=ufh&AN=4999837&site=ehost-
live&scope=site
Webster, Frederick E., 1972,‘A General Model for Understanding
Organizational Buying Behavior, Journal of Marketing. 36, (02) pp.12-
19.
https://login.ezproxy.lib.rmit.edu.au/login?url=http://www.jstor.org
/stable/1250972
Weele, AJ Vn (2000), Purchasing and Supply Chain Management,
Thomson Learning, p. 34.
Wind, Y. (1967a). The Determinants of Industrial Buyers' Behavior.
Industrial Buying and Creative Marketing.

Topic 2 – The Procurement Policy, Process and Procedure 9

 Online Discussion Activity
Study the business case ‘CSX Purchasing and Supply: Managing into the
Winds of Change’, (page 4-6, of your prescribed textbook). Write an
overview. Follow the Case Analysis Guide.

Source: (Monczka et al, 2014)

10 Procurement Management and Global Sourcing

Case Analysis Guide
Cases describe real life business situation, therefore, you are able
to:
• Know nature of real life problems
• Sharpen your analytical skills
• Develop problem-solving abilities
• Learn how to make decisions and more importantly how to defend
your decisions against the challenges of your colleagues.

How to study a case

(There is no single prescription. The following are guide only)
1. Quickly go through the case. Seek answer to the following
questions:
1.1 What broadly is the case about?
1.2. What type of information am I being given to analyse?
Pay particular attention to first few and last few paragraphs.
2. Carefully read the case, underlining important information and
key facts. Raise the following questions:
2.1. What is the basic problem the manager has to resolve?
2.2. Develop a sense of involvement; think yourself as
with the prime responsibility of solving the problem(s)
3. Identify the key problem; note the associated problems.
4. Go through the case again, sorting out the relevant
considerations for each problem.
5. Analyse the information pertaining to each problem to develop a
set of recommendations. Support your recommendations with an
appropriate argument.

Guide to Write an Overview of Business Case:

The overview should lead the reader towards an area or field of
knowledge from where the solutions for the case can be found.
Classify the case according to the nature of its problem(s) to be
solved or core issue(s). The topic sentence (first sentence) of an
overview may be written as “this is a case of mismanagement
of inventory systems/major change/globalising a predominantly
domestic supply base and so on”. Do not summarise the case.
This should not be too long.
Remember, there is no single answer or solution to the business
problems. Your answers would be judged on the bases of your efforts,
analysis, use of references and proposed solutions to the audience.

Topic 2 – The Procurement Policy, Process and Procedure 11

 Web resources
Title: Procurement processes - Procurement training - Purchasing skills
(http://www.youtube.com/watch?v=aPO3fwYnaXA)
The Procurement Process in 5 Stages
(http://www.businessdictionary.com/definition/competitive-
bidding.html)

12 Procurement Management and Global Sourcing