Anatomy of Procurement Process

 What is Procurement:

Procurement is the process of finding desired goods or services with agreed terms and conditions with free consent of both the parties, from an external source/supplier through some tendering or bidding process. The process of agreement or contract must be done in accordance to the guidelines of  .Indian Contract Act , 1872.

The 5R’s of Procurement:

Procurement process is not only to find and buy things from outside source, it’s far beyond than this. This can be defined in terms of 5R’s. 

P     Procurement is to find and buy required goods or services

1.       In Right Quantity

2.       Of Right quality

3.       From Right Source

4.       At Right time

5.       And at Right Price

These all 5R’s are the most important factors in the field of procurement which, in turn, helps any organization to reach to its ultimate goal, “To Make Money”.

Objective of Procurement:

The principal objective of Procurement function can be summarized as to arrange materials, supplies of services of right Quality, at right Quantity, from right source, at right Time and  right Price. As already discussed, these 5 “Rights” have meaning and significance far beyond their dictionary meanings.

To state more broadly, the main objectives of this functions are:

·         Maintaining continuity in respect of Supply of materials to support the production and the company’s operation.

·         Doing all the above with the minimum investment consistently with safety & economic advantage. This, achieved by firstly, complete buying which involves a great sensitivity to the force of supply & availability regulate the price & availability of the materials, and secondly, by controlling investment on inventory.

• ·         Avoiding duplication , waste and obsolescence with respect to materials.
• ·         Maintaining standards in quality of materials, based on suitability for use.
• ·         Developing good and reliable suppliers and ensuring satisfactory vendor relationship.
• ·         Procuring materials at optimum cost with consistent quality .
• ·         Maintaining company’s competitive position by controlling costs of materials and thereby, maximizing profits.

To state in another way, to obtain  best service and greater value for money spent should be the goal of procurement function.

Types of procurement (Centralized and De-centralized):

When a company is small or located in a single location, all the purchasing/procurement activities are concentrated at one place.

However, when the company grows, and has perhaps, two or three factories under it, then the problem may arise as to whether the purchasing function should be centralized  in one place or it should be decentralized , say among the division or branches or factories.

There are advantages & disadvantages for both the systems and companies take the decisions according to their suitability.

Some advantages of Centralized  structure are:

·    Economies obtained by consolidating similar requirements from all the factories , thereby improving the              purchasing  strength in negotiation.

·     Avoidance in price abnormalities between different factories.

·     Overall better control on supplier, inventory and material utilization

·     Economies of staffing & clerical efforts together with uniformity in procedure, forms, standards & specifications.

Whether the Decentralized approach has some other benefits like:

       ·    In depth knowledge & sight of the factory condition & criticality. Better understanding & control on local            suppliers, transporters, storage facilities.
·         Ability to respond faster to emergency conditions partly because of shorter line of communication.
·         Direct responsibility, better liaison & tighter control.

Procurement process cycle:

As in the case of every aspect of management, there cannot be a standard method of organizing a purchase department or having a standard set of  system & procedures. Each set-up has to be tailor-made to suit the specific requirement of that particular organization, enterprise or institution..For example, a big hospital or a government institution or an engineering company would all have different types of organization for their respective purchase department and may follow altogether different types of procedures. However there are some basic elements in the purchase transaction which is common to all. In summary, these are as follows: