LUSAKA BUSINESS AND TECHNICAL COLLEGE

COURSE: PURCHASING AND SUPPLY - ZIPS 1

MODULE C1: PRINCIPLES OF PROCUREMENT AND SUPPLY
UNIT 1.1 PROCUREMENT AND SUPPLY CONCEPTS

Nature (Background) and purpose of procurement and supply

Defining Procurement and Supply:

Purchasing
 Purchasing is the formal process of buying goods and services. The
purchasing process can vary from one organization to another, but there are
some common key elements. The process usually starts with a demand or
requirements – this could be for a physical part (inventory) or a service
Procurement
 Procurement is the process of preparation, solicitation, and payment
processing, which usually involves several areas of a company. So then, it is
a systematic process within the supply chain in which business leaders
approach spending analytically. It is often considered a key component of a
company’s overall corporate strategy as it aligns the company’s overall
objectives with their short- and long-term goals.
Procurement is an organisational function that is responsive for: specification
development, value analysis, supplier market research negotiation, buying
activities, contract administration, inventory control, traffic, receiving and stores.

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CIPS – Cips define procurement as business management function that ensures
identification, sourcing, access and management of external resources that an
organisation needs or may need to fulfill its strategic objectives

Supply Management: the term supply management refers to the act of

identifying, acquiring, and managing resources and suppliers that are essential to
the operations of an organization. Also known as procurement, supply
management includes the purchase of physical goods, information, services, and
any other necessary resources that enable a company to continue operating and
growing.
The main goals within supply management are cost control, the efficient(capable)
allocation of resources, risk management, and the effective gathering of
information to be used in strategic business decisions. Oversight and management
of suppliers and their contributions to a company's operations, for example, should
be of paramount importance.

Supply management personnel within a company or institution are generally

responsible for the following:

 Identifying, sourcing, negotiating, and procuring a service or good that is

essential to a company's ongoing operations according to the wishes of the
organization's leaders and supervisors
 Formulating a strategy for developing and maintaining relationships with
suppliers—and then executing on it—as well as holding suppliers
accountable
 Utilizing technology and procedures that facilitate the procurement process

 Considering the theories of supply and demand and what influence they

have on supply management

Role and importance of procurement and supply in an organisation

Importance of procurement and supply Management

In order for a product to go from the manufacturing stage and into the hands of a
consumer, it must follow a long journey guided by purchasing and supply
management professionals who make important decisions regarding cost, quality
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and scheduling(preparation). These decisions can affect whether or not someone
will buy a company’s product, and also make a big impact on the company’s
revenue and sales.

1.Procurement and supply Management affects product quality

In the manufacturing sector the percentage of purchases to sales average 55%. This
means that for every amount of revenue collected on goods and services sales,
more than half goes back to suppliers. This is why purchasing is clearly a major
area for cost savings. However, savings come in different forms: the traditional
approach is to bargain hard for price reduction. A newer (fresher) approach is to
build relations with suppliers to jointly pull costs out of the product or service.

2.Reducing Costs and Improving Savings

Purchasing has a direct impact on two of the most important factors that drive a
company’s bottom line: cost and sales. Through initiating process improvements,
product improvements and supplier relationship development, purchasing
professionals are responsible for garnering cost savings for their organizations
without trading off quality. 

3.Mitigating Risk

Understanding the potential risks and developing innovative strategies to manage

them is an important aspect of purchasing and supply management. Having a
strong risk mitigation strategy can greatly affect an organization’s bottom line.
Potential risks include fraud and transparency, intellectual property and
counterfeit materials. In addition, purchasing and supply management
professionals need to have a plan in place if supplies are delayed or the schedule
changes.

4.Developing Long-Lasting Supplier Relationships

Making one-off purchases is unusual and costly. Companies typically require

supplies on an ongoing basis, and as a result, it’s important to develop enduring
relationships with suppliers. This aspect of purchasing and supply management
can add tremendous value to a business. By working with the supplier on a long-
term basis, purchasing and supply management professionals can garner higher
cost savings, increase competitive advantage and fine-tune schedules. Long-term
relationships benefit both the purchaser and supplier and builds a level of trust,
enabling both parties to succeed.

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5.Procurement and supply Management affects product and process design
For organizations to be successful commercializing new products and technologies
in today’s dynamic business environment, they need to involve procurement
professionals throughout the product design process of a product’s life cycle,
starting at the beginning. Procurement teams identify and create strategies for
reducing costs and develop and manage supply partners, creating a competitive
advantage and contributing to their organizations’ bottom lines. This level of input
doesn’t need to be delayed until after the design process though. In fact, it
shouldn’t be.

Because of their comprehensive knowledge of capabilities, cost controls, and

manufacturing processes, procurement professionals can add considerable value to
a given program, even early on. By working with designers and engineers during
the design phase, instead of working after them, procurement teams help answer
design and materials questions that commonly solve problems long before they
happen, ultimately improving timeline efficiency, which subsequently reduces
costs. Procurement should do whatever it takes to be included during the early
stages of a product’s design.

The role of Procurement and Supply Management in the Organisation

The objectives of a world-class procurement organization move far beyond the
traditional belief that procurement’s primary role is to obtain goods and services in
response to internal needs. To understand how this role is changing, we must
understand what purchasing is all about, starting with the primary objectives of a
world-class purchasing organization.

1.To Support Operational Requirements

Supporting this requires Procurement to understand business requirement. It is the

responsibility of the function to ensure that the organisation buys products and
services:
 At the right price
 From the right source
 At the right specification that meets users’ needs
 In the right quantity
 For delivery at the right time and
 To the right internal customer
Internal customers of purchasing include:

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  Manufacturing
 Physical distribution centers
 Engineering and technical groups
 Research and development
 Information technology
 Transportation and other services

2.To Manage the Procurement Process and the Supply Base Efficiently
and Effectively
To manage the procurement process and supply base efficiently and effectively
procurement must follow the following key steps:

 Identify opportunities
 Manage internal operation
 Achieve objectives

3.Identify opportunities where the procurement team adds true value:

 Evaluation and selection of supplier

 All purchases should go through the approved procurement processes
 Engineering and other functional inputs are part of this process
 Sales personnel should not be allowed to enter contractual agreements without
procurement’s involvement
 Increasing use of sourcing teams
 Review of specifications or statement of work
 Review the requirements for the material or service being provided
 May be able to suggest alternative standardized materials that can save the
organization money
 Periodic review of requisitions can allow greater leveraging of requirements
 Acting as the primary contact with supplier
 Determining the method of awarding contracts
 Managing the supply base
 Current suppliers are competitive
 Identification of new potential suppliers and develop relationships

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  Improvement and development of non-competitive existing suppliers

4.To Manage its internal operations efficiently and effectively, including:

Management of procurement staff

Developing and maintenance of policies and processes
Introducing and leveraging appropriate technology and systems
Defining procurement strategy and structure
Developing plans and measures
Providing procurement leadership to the organization
Providing professional training and growth opportunities for employees
5.To Achieve this objective through:
 Leadership of procurement for the organization
 Sourcing management
 Ownership and accountability for sourcing processes
 Communication of purpose, process and pay off
 Collaboration and partnering
 Teamwork

6.To Develop Strong Relationships with Other Functional Groups

It is the study of Procurement to develop working relationship with other functions

that it provides services to (internal customers)

7.To Support Organizational Goals and Objectives

Develop integrated purchasing strategies that support organizational strategies.
Effective purchasing strategies involve:

 Monitoring supply markets and trends (e.g., material price increases,

shortages, changes in suppliers) and interpreting the impact of these trends
on company strategies
 Identifying the critical materials and services required to support company
strategies in key performance areas, particularly during new product
development
 Developing supply options and contingency plans that support company
plans
 Supporting the organization’s need for a diverse and globally competitive
supply base
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Evolution and development of procurement and supply profession

The purchasing profession has evolved at faster pace over the last few years than it
did in over a hundred years. This evolution has been split in seven periods
spanning the last 150 years by a number of observers. Therefore, this history
provides an important study in the development of purchasing and supply
profession.

Period 1: The Early Years (1850–1900)

Some observers define the early years of purchasing history as beginning after
1850. There is evidence, however, that the purchasing function received
attention before this date. Charles Babbage’s book on the economy of machinery
and manufacturers, published in 1832, referred to the importance of the
purchasing function. Babbage also alluded to a “materials man” responsible for
several different functions. Babbage wrote that a central officer responsible for
operating mines was “a materials man who selects, purchases, receives, and
delivers all articles required.
The growth of the railroad industry dominated the early years of purchasing
development. Major contributions to purchasing history during this period
consisted of early recognition of the purchasing process and its contribution to
overall company profitability. The late 1800s signaled the beginning of
organizing purchasing as a separate corporate function requiring specialized
expertise. Before this period, this separation did not exist.

Period 2: Growth of Purchasing Fundamentals (1900–1939)

The second period of purchasing evolution began around the turn of the
twentieth century and lasted until the beginning of World War II. Articles
specifically addressing the industrial purchasing function began appearing with
increasing regularity outside the railroad trade journals. Engineering magazines
in particular focused attention on the need for qualified purchasing personnel and
the development of materials specifications.
Purchasing gained importance during World War I because of its role in
obtaining vital war materials. The central focus of purchasing during this period

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was on the procurement of raw material versus buying finished or semi-finished
goods.

Period 3: The War Years (1940–1946)

World War II introduced a new period in purchasing history. The emphasis on
obtaining required (and scarce) materials during the war influenced a growth in
purchasing interest. A study conducted during this period revealed that 76
percent of all purchase requisitions contained no specifications or stipulation of
brand. This suggested that other departments within the firm recognized the role
of the purchasing agent in determining sources of supply

Period 4: The Quiet Years (1947 –Mid – 1960s)

The heightened awareness of purchasing that existed during World War II did
not carry over to the postwar years. John A. Hill, a noted purchasing
professional, commented about the state of purchasing during this period: “For
many firms, purchases were simply an inescapable cost of doing business which
no one could do much about. So far as the length and breadth of American
industry is concerned, the purchasing function has not yet received in full
measure the attention and emphasis it deserves.”
Another respected purchasing professional, Bruce D. Henderson, also
commented about the state of affairs facing purchasing. In his words,
“Procurement is regarded as a negative function—it can handicap the company if
not done well but can make little positive contribution.”26 He noted that
purchasing was a neglected function in most organizations because it was not
important to mainstream problems. He went on to say that some executives
found it hard to visualize a company becoming more successful than its
competitors because of its superior procurement.
The postwar period saw the development of the value analysis (VA) technique,
pioneered by General Electric in 1947. GE’s approach concentrated on the
evaluation of which materials or changes in specifications and design would
reduce overall product costs. Although important internal purchasing
developments occurred during this era, there is no denying that other disciplines
such as marketing and finance overshadowed purchasing. The emphasis during
the postwar years and throughout the 1960s was on satisfying consumer demand
and the needs of a growing industrial market. Furthermore, firms faced stable
competition and had access to abundant material—conditions that historically
have diminished the overall importance of purchasing. The elements that would

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normally cause an increase in the importance of purchasing were not present
during these quiet years of purchasing history.

Period 5: Materials Management Comes of Age (Mid-1960s– Late 1970s)

The mid-1960s witnessed a dramatic growth of the materials management
concept. Although interest in materials management grew during this period, the
concept’s historical origins date to the 1800s, when U.S. railroads organized
under the materials management concept during the latter half of the nineteenth
century. They combined related functions such as purchasing, inventory control,
receiving, and stores under the authority of one individual.
There was widespread agreement about the primary objective of the materials
concept and the functions that might fall under the materials umbrella. The
overall objective of materials management was to solve materials problems from
a total system viewpoint rather than the viewpoint of individual functions or
activities. The various functions that might fall under the materials umbrella
included materials planning and control, inventory planning and control,
materials and procurement research, purchasing, incoming traffic, receiving,
incoming quality control, stores, materials movement, and scrap and surplus
disposal.
The behavior of purchasing during this period was notable. Purchasing managers
emphasized multiple sourcing through competitive bid pricing and rarely viewed
the supplier as a value-added partner. Buyers maintained arm’s-length
relationships with suppliers. Price competition was the major factor determining
supply contracts. The purchasing strategies and behaviors that evolved over the
last half century were inadequate when the severe economic recession of the
early 1980s and the emergence of foreign global competitors occurred.

Overall, the function was relegated to secondary status in many companies. Top
management’s view of purchasing as passive, risk averse, and a dead-end job. It
was felt that overcoming this perception could be accomplished by active
purchasing, which is measured in terms of meeting overall company objectives
and contributing to bottom-line profitability. Suggested that the function should
have sufficient stature to report to top management or a division manager
emerged.

Period 6: The Global Era (late 1970s - 1999)

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The global era, and its effect on the importance, structure, and behavior of
purchasing, has already proved different from other historical periods. These
differences include the following:
 Never in our industrial history has competition become so intense so
quickly.
 Global firms increasingly captured world market shares and emphasized
different strategies, organizational structures, and management techniques
compared with their American counterparts.
 The spread and rate of technology change during this period was
unprecedented, with product life cycles becoming shorter.
 The ability to coordinate worldwide purchasing activity by using
international data networks and the World Wide Web (via intranets)
emerged.

This intensely competitive period witnessed the growth of supply chain

management. Now, more than ever, firms began to take a more coordinated view
of managing the flow of goods, services, funds, and information from suppliers
through end customers. Managers began to view supply chain management as a
way to satisfy intense cost and other improvement pressures .

Period 7: Integrated Supply Chain management (Beyond 2000)

Purchasing and supply chain management today reflects a growing emphasis
concerning the importance of suppliers. Supplier relationships are shifting from an
adversarial approach to a more cooperative approach with selected suppliers. The
activities that the morden purchasing organisation must out in pace are quite
different from just a few years ago. For example, the following are now seen as
ways to create new value within the supply chain:
 Supplier development
 Supplier design improvement
 The use of full-service suppliers
 Total cost supplier selection
 Long term supplier relationship
 Strategic cost management
 Enterprise wide systems (enterprise resource planning) or ERP and
 And integrated internal linkages and shared databases

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Purchasing behaviour is shifting dramatically to support the performance
requirements of the new are:

The Position of procurement and supply in the organisation

structure

It is not the case that all organisations will wish to develop mutual or partnership
relationships with all of its suppliers. The pareto principle will be applied in this
case. It will generally be found that per cent of expenditure will be 20 percent of
suppliers, and it is likely to be the suppliers with whom large sums of money are
spend that will be the ones with whom closer relationships are sought(required).
A use tool in determining those suppliers with whom close relationship might best
be sought is the Procurement positioning; tool based on the work of Kraljic, which
is known as Kraljic matrix as shown bellow

The Kraljic Matrix is a strategic tool used by procurement and supply chain
professionals to identify and minimise supply risks. Using the tool to classify the
importance of suppliers’ products and services can highlight supply chain
weaknesses, support strategy development and minimise supply disruption.

Determining the type of relationship by positioning supplier by risk and profit

impact will support procurement and supply chain professionals to build the right
type of supplier relationships and utilise their time more efficiently whilst
mitigating supply risk for their organisation.
The vertical axis, labelled ‘Risk’, is concerned with the degree of difficulty
associated with sourcing a product or service, or the vulnerability of the supplier to
provide the product or service on time.

The horizontal axis, ‘Profit potential’, is used to indicate the extent of the potential
of the supply to contribute to the profitability (or efficiency) of the buying concern.
This profit potential might be realised by achieving lower costs, either by paying a
lower price for a good or service or by introducing more efficient buying methods.
The key commodities or services for which a company wishes to develop tailored
procurement strategies can be ranked as high or low in terms both of risk exposure
and of procurement potential.  The score of an item in respect of each of these
criteria determines the positioning of the commodity or service on the procurement

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positioning/targeting matrix.  The quadrants of the matrix represent the four
categories, which are:
Critical (Strategic)
Leverage
Bottleneck
Routine
Following the classification of risk impact and cost impact to your business that
each supplier potentially holds, you can then identify the type of relationship that
you should consider building with the supplier and how to mitigate supply risk to
your organisation.

Risk
Bottleneck Critical (Strategic)
e.g proprietary (branded) spare part e.g key sub – assemblies for a car
or specialised consultancy need engines for an airline

Routine Leverage
e.g common stationary items, e.g paper supplies for a printing firm,
commercial grade industries fasteners common chemicals
(pins)

Profit potential

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 Non-critical items: components that have a low impact on the company and
that are found in abundance and / or in low-risk markets (e.g., office
stationery). For such items, the goal should be to maximize efficiency of the
procurement process to reduce the administrative burden, for example by
delegating purchasing to local managers, or using catalogs.
 Leverage items: components that are important for the company but sourced
from low-risk markets with an abundant supply. As the name suggests, the
optimal management of these purchase categories is essential to ensure a
satisfactory business result. For this type of component, the company tends to
make the most of its bargaining power and the abundance of the offer with
frequent negotiations.
 Bottleneck items: components with a low business impact in economic terms
but where supply continuity is at risk. The management of these components
should be aimed at creating relationships of collaboration in the medium-long
term between customer and supplier to guarantee the supply, with less emphasis
on the cost.
 Strategic items: components that are important for the company both in terms
of economic impact and for supply conditions from complex and / or risky
markets. In this field, the horizon is medium-long term with a continuous
monitoring of the economic situation of the market, technical evolution,
evaluation of "make-or-buy", creation of alternatives and development of stable
relationships and maximum collaboration with the suppliers.

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 Description Procurement Cycle

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The Procurement Cycle can be defined as the cyclical process of key steps
when procuring goods or services for the organization. This interactive tool is
strategically developed to guide and enlighten the members of the company
through the procurement process with links to relevant knowledge to support
each and every step through the procurement journey.

The steps:

1) Need Recognition

The purchasing department and the management of the company must

understand and figure out the needs a new product development from the
internal or external sources. The product required is the one that needs to
be reordered from the vendors, or it is the new item for the company.

2) Specific Need

The right product is quite important and crucial for the company. Some
industries have standards to help determine specifications of
the products required whilst some of the industries domains have no point
of reference whilst ordering the products such as the management might
have ordered the product in the past for some other requirements. If not,
then the business must specify the necessary product by using identifiers
such as color, weight, and other such vital specifications.

3) Source Options

The next step involves that the company needs to determine the sources
from where to obtain the product. Many companies have the approved
vendor lists who are the regular suppliers. If this is not the case, the
company will need to search for a supplier using purchase orders or
research a variety of other sources such as such as social media, internet
portals, and other lucrative sources and reference points. The company will
qualify various suppliers shortlisted to determine the best product suited for
the business operations.

4) Price and Terms

Next step in the line is that the company has to investigate all relevant and
vital information to determine the best price and terms for the product

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required. This will depend on if the company needs ready products or
specialized materials that are made to order. As per the thumb rule of
the market, the company will have short list three suppliers before arriving
at the final decision.

5) Purchase Order

The purchase order is the formal document and is used to buy materials
between a buyer and seller. It defines the aspects of price, specifications of
the product, and the terms and conditions of the product and all other
mandatory terms as per the requirements of the industry.

6) Delivery

The purchase order must be delivered, usually by the means of e-mail or

personal delivery. Many a time, the specific delivery method is specified in
the purchase order. The recipient then acknowledges receipt of the
purchase order and both parties involved keep a copy in their records as a
proof and for future reference.

7) Expediting

The expedition stage of the purchase order addresses the timelines of the
materials delivered. It becomes quite important if there are any delays in
the entire procedure. The issues that arise in the process most include
payment dates, delivery times, and the final completion of the order.

8) Final Receipt and Inspection of Purchases

Once the vendor delivers the product, the recipient company accepts or
rejects the items as per the specifications and terms noted in the purchase
order. Acceptance of the items receives obligates the company to pay for
them to the vendor.

9) Invoice Approval and Final Payment

Three vital documents are required for the final payment method – the
invoice itself, the receiving document or the proof of delivery, and the
original purchase order signed by both the parties. The agreement of these
documents provides confirmation from both the parties involved and any

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sort of discrepancies must be resolved before the recipient makes the final
payment. The payments are made in the form of cash, Cheque, bank
transfers, or other types of electronic transfers depending on the terms and
conditions agreed upon.

10) Record Maintenance

In the case of audits and other accounting procedures, the company must
maintain proper records for the proper evaluation. These include purchase
records to verify any sort of tax-related information and the document of
purchase order confirms warranty of the required information.

Applying the Purchasing Rights

Right quantity
The decision to obtain goods of the right quantity is important since it enables the
organization to meet its demand and maintain service levels while minimizing
excess stockholding. This therefore means understanding demand forecasting,
inventory management, as well as having a reliable stock replenishment system.

As a procurement specialist a mistake at this variable will mean that you either
have less stock which leads to ultimate customer dissatisfaction due to slow
production process or excess stock and that result into things like, storage cost,
risks of deterioration etc.

Right place
The objective here is to ensure that goods are delivered to the appropriate point of
delivery. Check on our distribution plan, does it guarantee delivery? What about
the transportation plan and packaging? How effective are they?

An incorrect answer to any of these questions would mean goods being delivered
to the wrong venue and that will result into extra charge in correction costs not to
mention delays that result from it. It could also lead to goods being damaged while
in transit or even at times stolen.

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Right time
Securing delivery of goods at the right time sees to it that 1) goods are not late,
since this would result into production delays, or 2) goods are not too early in
which case the organization would incur the cost of holding inventory. The
procurement manager, under these circumstances, will have to focus on demand
management as well as supplier management.

The right price             

In pursuits of the five rights of procurements you need to ensure that you have a
price that is reasonable, fair, competitive and affordable. The right price means the
inputs you procure don’t affect your profit margins. There are a number of
analyses you will have to conduct such as price analysis, supplier cost analysis, and
competitive pricing and negotiation all of which will help you arrive at the right
price

ASSIGNMENT
1.Analyse the role and importance of procurement and supply in an
organisation(20marks)
2. Evaluate the evolution and development of procurement and supply
profession(20marks)
3.Describe the typical steps of procurement cycle (20marks)

Prepared by: Mr. Mukanda Ps

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