Category : Value Chain Analysis of Production
PROCUREMENT FUNCTION: AN EXAMINATION OF ITS VALUE ADDED ELEMENTS
The procurement philosophy of every organization must be to obtain the most suitable goods and services at the most reasonable contract prices, delivered when and where required ( , 1991). This maximization of the company’s resources in terms of the acquisition of materials for manufacture, production and firm use is in a continuous process of development, as more cost-effective and efficient ways are being introduced in the field of procurement. The purchasing function has received considerable attention in the past decade as firms are constantly finding ways to increase the effectiveness and the efficiency of the task of acquisition, particularly in its people, processes, technologies and the framework under which they are governed and measured ( 2006). This could lead to an overall increase in the business’ profit, as cheaper prices, less wastage in materials and fewer delays in the production of goods and/or provision of services are products of careful purchasing.
There are four main recipients of value added by the purchasing department, according to (1999): the organization, the employees, the consumers and the suppliers. “The perception of "value added" is critical to every function/department in any organization in today's business environment. Unless there is a clear understanding at the senior management levels that purchasing does contribute at a significantly higher level of adding value, then purchasing people probably will continue to be considered simply as "order placers." It matters less what any person or group in purchasing thinks about their ability to contribute; what matter more is senior management's perception of the purchasing department’s actual contribution” ( 1993). With the increased focus on finding ways to economize on purchasing costs, the procurement function has been elevated to a strategic component of creating value. (n.d.) stated that apart from salaries, the biggest area of expense for most businesses is purchasing. He said that a sharpened focus on buying can reduce a business’ costs by as much as 20%. Thus, apart from the sales department, he argues that no other area of the business could potentially have so much impact on the bottom line.
“The modern procurement organization is typically focused on delivering eight or nine key processes. These range from managing the transactional activities such as raising purchase orders and paying suppliers to the strategic activity of selecting new suppliers and managing relationships with the existing supply base. It is the strategic and tactical procurement processes that deliver the big improvements that companies are seeking from their procurement functions (for example, reduction in cost of goods sold, improvement in service levels)“, explain (2006). In the value chain analysis developed by (1985), procurement is viewed as a support activity that contributes to the competitive advantage of a business unit by adding value. The purchasing function uses various inputs to perform value-adding processes (market and value analyses, sourcing, negotiation, etc) and to provide output like quality, services, materials, etc. If purchasing performs these activities effectively, this output provides the organization with a competitive advantage (see figure1). The value-chain demonstrates that the purchasing function has a major role in adding value to the organization” ( 2001).
“For many buyers, their new acceptance of value added is closely connected to outsourcing and the need to use the resources of suppliers to conserve their own companies' limited resources. Typical of purchasing professionals holding that view is , program manager, outsourcing, at Genus Inc.'s Ion Technology Div. in Newburyport, Mass. She notes that her company's deep emphasis on adding value through outsourcing was driven by a desire to maximize use of the company's resources. By putting as much of manufacturing in the hands of suppliers, Genus is able to deploy a greater percentage of its resources behind its core competency--product development and testing ( 1995). The main value added by purchasing, according to (2001) is assuring the continuity of supply in the organization. The illustration of the purchasing process , demonstrates the flow of action that happens within the purchasing department. The diagram is used for purchasing transactions outside of the firm, as in-house transactions require simpler and faster operations (the requisitioning activity will touch on the subject briefly). Each process will be discussed in detail including the value added elements that go with it.
A requisition form always initiates the process of purchasing. The importance of requisition is often overlooked by many organizations but this initial procedure provides the purchasing officer with all the essential information that he or she needs in the actual purchase of materials. The in-house form (which means that it is for use within the firm only) usually contains these following items: (1) date of request; (2) name and department of the person requesting for the material; (3) particulars of the item/items requested i.e., product code, brand or make, etc. (4) unit and quantity of item/items desired; (5) date needed; (6) date of last request; (7) signature of the person requesting and (8) approval signature of purchasing officer. The form is then forwarded to the purchasing officer. As in the case of outsourcing materials, the purchasing officer will be the one responsible for filling up a form (this time to be sent to the supplier), with basically the same items as that of the in-house form but with additional particulars as the name of the supplier/suppliers, unit price of the item/items, when and where to deliver, a purchasing order (PO) number for the reference of the supplier, and an approval signature from the financial department.
Purchasing could do away with a lot of paper work and contribute to value adding by making sure that the requisition forms that they issue to the supplier are organized and easy to read. Searle’s purchasing department does this by being very specific about the quantity that they order and by using forms that are consistent and easy for the suppliers to read. They have also made it easier for the employees to request for items by providing a requisitioner’s handbook, a step-by-step guide to filling out forms, company procedures and contact persons ( 1990).
This involves the authorization to go ahead with the purchasing commitment. This will be made easier by the allotment of a space for such purposes in the requisition form. The persons usually affixing their signature for approval are the finance or the budget department heads. This process could be made easier if there is a batch grouping for requisitions. Taking of immediate action in signing the forms contributes to the speed with which the production (if the request is for raw materials or manufacturing services) and the employees (if the request is for office use) perform their respective functions in the firm’s structure.
Once the purchasing officer receives the approved requisition form, an appraisal of the market should be done, with these following considerations in mind: (1) Is there a competitive market for the item? ; (2) Is the volume/value of goods required sufficient to warrant calling for quotations and tenders, and if so, should prices and other details be obtained by telephone or in writing?; (3) If there is no competitive market, should the sole supplier be given an immediate order, or can a lower price be negotiated?; (4) Is it appropriate to call for "Registration of Interest", prior to inviting formal tenders?; (5) Are suitable period contracts available?; (6) Is there a list of "approved suppliers" for the item, or is the establishment of an "approved suppliers" list warranted?; (7) Could there be scope for a bulk purchase? ( 1991) After having attended to such considerations, the purchasing officer could then proceed to making the purchase decision.
Only through considering the items enumerated above could this process contribute to value adding. An excellent market assessment could prevent materials wastage, further delay of delivery and more strategic supplier selection.
The purchasing officer needs to determine the purchasing method he or she will use in acquisition. The principal methods of making a purchase are as follows: (1) tendering; (2) selective purchase; (3) emergency purchasing; (4) bulk purchasing; (5) period contracts and (6) indent purchasing. Sometimes, the purchasing officer has not decided yet on whom to buy from. Decisions can be made through bidding or asking for price quotes from a range of possible suppliers. This process must be recorded or documented for purposes of auditing and to justify the reasons for having chosen such and such supplier in case of subsequent problems. After having picked the purchasing method and the supplier suited to the firm’s standards, the officer could proceed to the rest of the acquisition process.
Value added in the purchasing decisions comes in the strategic supplier selection. Being overly dependent on only a few suppliers could prove disadvantageous to the company. If these supplier potions fail to deliver, there will be delay in the production process, and delay means additional expense on the firm’s part. Value added can also be seen in the delivery method the business chooses. Choosing the delivery method which will best preserve the original state of the items ordered will ensure that materials used in production is in top condition, which in turn would produce top quality goods or services.
The officer in charge of buying materials will then arrange to order from the supplier. This should be documented, as this will form an agreement between two parties: the buyer (the organization), and the seller (the supplier). The order contract should expressly reflect the transactions to be made, like the method of delivery and the terms of payment. All the legal and other significant details should appear in the documentation. This, then, should be forwarded to the supplier. The firm should also establish a formal order-tracking system to ensure the follow-up of orders. The system should include: (1) checking with suppliers that delivery dates are still able to be met. If timing is critical, frequent pre-delivery checks may be necessary; (2) documentation which acknowledges part-delivery of orders and allows follow-up on delivery of the remainder; (3) a procedure which ensures that suppliers are paid in accordance with contracted terms. (This double-check will help to maintain good supplier/purchaser relations); (4) a record of supplier performance (1991).
In ordering, the purchasing department could add to value by making sure that correct specifications are indicated in the order contract which will prevent incorrect delivery. The following-up of orders could also add value by ensuring that the lead time is used effectively. Processes in production which could be done without the ordered goods or services should be done while waiting for the delivery to arrive. As such, time is maximized.
The most important part of the purchasing process is the actual delivery of the goods or services ordered. Delivery forms a large part of the acquisition function, and a number of ways can be done to ensure that the form of delivery is economical. The decisions on how to deliver may be in the discretion of the buyer or the supplier, depending on the agreement. But most companies determine the method of delivery, as by doing this they could control and reduce the delivery costs, which forms part of the value added that the purchasing department contributes to the organization.
Receipting and Accounting for Goods/Services Delivered
The purchasing process does not end in the delivery of the goods or service. The receiving officer of the firm should make sure that the proper quality and quantity of items is delivered and if it was delivered on time. This check could be done by comparison of the actual delivery as against the items in the purchase order (the original form is usually in the custody of the supplier). Sometimes, a pre-delivery check is done by the firm as extra precaution against damaged or substandard goods or services being delivered. The copy of the purchasing order in the hands of the receiving officer will serve as the receipt to initiate accounting actions there from.
Value added in this case could appear at the more efficient way of checking the delivery as against the PO. The receiving section should have a system for checking the delivery in the fastest way possible. If there were inconsistencies in the delivered goods and/or services, for example the quantity in the PO did not tally with the delivery or a different make or brand has been delivered, the supplier could be readily notified of such occurrence. As such, the supplier will have to take immediate action so as not to further delay the production process that relies on purchasing for its materials.
Terms of payment that appeared in the order contract should be followed by both the parties. If they agreed on a cash-on-delivery (COD) term, the firm should make the corresponding payments upon determination that the goods or services delivered are satisfactory to the standards of the company.
Value added in this stage of purchasing includes potential areas for payment negotiation such as discounts, progress payments and postponement of payment during warranty period or until satisfactory performance is demonstrated. Ensuring that the company gets all the possible reduction in costs is an important element of the payment process.
This requires coordination between the purchasing and the accounting departments of the organization. The purchasing department should provide the accounting department with the necessary details that the latter needs for input in the books of the company. Careful transaction entries must be ensured, costs and charges must be properly documented, as these records will be useful for future reference of the company and for taxation purposes.
Value added in this last process of acquisition is, as stated above, proper bookkeeping of purchase records as this will make an excellent reference for future transactions. If, for example, a supplier was able to deliver goods in the exact conditions provided by the company, the accounting department can retrieve records of the transaction with the supplier for proof that the firm could well do business with that supplier again. In legal cases, these records could also save the organization in a way that there is proof that such and such transactions existed and that they abided by the rules of law.
How these value added elements measure up to the standards of the activities of the procurement process depends on the execution of such activities. Close coordination with all the company’s departments, especially the accounting office, the supplies and the receiving sections, is the key to attaining the true meaning of value added activities. In the end, everyone profits from this. The organization, because it has gained income and saved a lot on costs; the employees, because they were able to get on with their tasks due to prompt action for their requisitions; the suppliers, because they were able to establish a good relationship with the firm; and finally, the consumers, because they were able to get the company’s products and services with added value.
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