Learning Objectives
To understand:
• the key objectives and responsibilities of the purchasing function
• different types of purchases made by organisations
• the purchasing process
• the evolution of the purchasing process, in particular the role of e-commerce tools
used in procurement
• different types and purchasing procedures
• the importance of procurement integration and the role that purchasing plays in
internal and external integration
• why procurement policies are important
• different types of procurement policies.
2.1 Introduction
This topic introduces course members to:
• the procurement process;
• procedures for business procurement;
• integration/alignment of procurement with other internal functions and external
organizations; and
• policy for business procurement which determines:
the objectives, strategic and otherwise, of the procurement function in a
specific business,
the responsibilities of the procurement function in the business.
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Get Help Now!Course members will note that MHGP approach this topic more from the bottom up,
dealing with procurement process (ch. 2) before policy and procedure (ch. 3) and supply
management integration (ch. 4). However, the present notes approach the topic somewhat
differently: as shown above (the order of MHGP chs.: 2, 4, 3). The approach taken in this
course is to recognise that every organization has its own policies and procedures
determining how the purchasing function should operate and that processes are embedded
within those broader understandings and guidelines. Whether the processes are consistent
with policy and procedure is a matter for analysis. Thus, as you read these notes course
members should also revisit those sections of MHGP that are specifically referred to in
the text. This will help to ‘sink in’ the material and revise the concepts learned.
In a course on procurement, the focus tends to be on how procurement should and does
take place. It is important to remember, however, that businesses always have a choice in
1
relation to anything they do: Should they buy (i.e., procure) or should they make what
otherwise would have been bought (outsourced)? We leave until later a more detailed
discussion of the Make-or-Buy decision itself. However, course members should look at
MHGP: 73-82 for an account of the items the procurement function may seek to source
from outside suppliers.
Introducing discussion of the integration of procurement with the rest of the organisation
and suppliers opens the door to the general strategic question of how purchasing and
supply chain management may generate competitive advantage – a key concern of the
whole course.
This topic is divided into four sections:
• procurement process;
• procedures for business procurement;
• functional integration; and
• procurement policy.
2.2 Procurement Process
Definition
The procurement process is “the process used to identify user requirements; evaluate the
user needs effectively and efficiently, identify suppliers who can meet that need; develop
agreements with those suppliers, develop the ordering mechanism, ensure that payment
occurs promptly, ascertain that the need was effectively met, and drive continuous
improvement” (MHGP: 41).
The Procurement Process as a Cycle
The process comprises six steps that largely match the definition:
1. Forecast and plan requirement
2. Need clarification (requisition)
3. Supplier identification/selection
4. Contract/purchase order generation
5. Receipt of material or service and documents
6. Settlement, payment, and assessment of deliverable and deliverer performance.
The process is cyclic since judgments about supplier performance at Step 6 may be used
to inform decisions about awarding future contracts (or not). The process is summarized
schematically in MHGP Exhibit 2.2 and described in detail in MHGP: 45-51.
2
Exercise 2.1
Course members are asked to read this section of the text for themselves with care and to
look at the Good Practice Example (MHGP: 82-83) for a glimpse of how the process is
put to work by the major US company, Coca Cola Consolidated.
The material is largely self-explanatory but course members should pay particular
attention to the following:
1) e-Procurement is said to bring many benefits, but can you imagine or does your
experience suggest that downsides and qualifications should also be included to
provide a more critical appraisal of electronic purchasing?
2) The mechanical business of working through the procurement process can be
transformed into an opportunity for creating competitive advantage by getting ahead
of what the firm’s rivals are doing. What examples can you find to support this view?
3) Do you find the Four Truths of Procurement approach persuasive?
4) What are the potential disadvantages of this approach?
2.3 Procedures for Business Procurement
Procedures are the operating instructions detailing functional duties or tasks, and a
procedure manual is really a how-to manual (MHGP: 108).
The answer to the question “Procedures for what?” includes procedures designed to
ensure the proper use of purchasing documents. These may either be hard-copy, paperbased
or electronic documents (e-procurement documents) and play a key role in
facilitating the procurement process.
Exercise 2.2
Course members are now asked to read MHGP: 108-111 and fill in the blanks for the
headings listed below (also look up again the Procurement Policy model introduced
earlier)
