About Procurement

Procurement vs acquisition

The US Defense Acquisition University (DAU) defines procurement as the act of buying goods and services for the government.
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.
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.
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:
  • 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 systems

Another common procurement issue is the timing of purchases. Just-in-time is a system of timing the purchases of consumables so as to keep inventory costs low. Just-in-time is commonly used by Japanese companies but widely adopted by many global manufacturers from the 1990s onwards. Typically a framework agreement setting terms and price is created between a supplier and purchaser, and specific orders are then called-off as required.

Procurement process

Procurement may involve bidding process known as tendering. A company or organisation may require some product or service. If the price exceeds a threshold that has been set (e.g.: government department procurement policy: "any product or service desired whose price is over X must be put to tender"), depending on policy or legal requirements, the purchaser is required to state what is required and make the contract open to the bidding process. The concept of total cost also comes into play. At times, not just price, but other factors such as reliability, quality, flexibility and timing, are considered in the tendering process. A number of potential suppliers then submit proposals of what they will provide and at what price. Then the purchaser will usually select the lowest bidder; however if the lowest bidder is deemed incompetent to provide what is required despite quoting the lowest price, the purchaser will select the lowest bidder deemed competent. In the European Union, strict rules on procurement must be followed by public bodies, with contract value thresholds determining the processes required (relating to advertising the contract, the actual process etc.).

Procurement steps

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. There are many sources to search for supplier; more popular ones being Ariba, Alibaba, other suppliers 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 acquire the P/S is completed.
  • 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 notification company.

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%.

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