Category : Corporate Finance Examples, Management Essays
Business firms or companies have internal organizations, which perform different functions. Separate functions are being executed for the efficiency of the company for faster production, for easier dissipation of information, for clear evaluation of the employees, for implementation of projects, and for the development of the whole company. The establishment of different organizations with various functions enables the companies or business firms to effectively penetrate the market for faster trade and relations with the consumers or with other business firms as well. This is even more evident when the company decides to expand, having more organizations and an increase in the workload.
Business firms are consumers as well, so as consumers, they are also entitled to purchase good and services. Constant participation in trade and relations enables business firms to have reliable contacts and suppliers for better quality of goods and services, which helps the company in efficient production, and in turn, serve their customers better. With this kind of chain of reaction, companies continuously develop and improve their internal organizations in generating success. One of the vital organizations, which a business firm must thoroughly develop, is its procurement or purchasing division. The procurement function has a crucial role in the success of a company, and somehow dictates the rising or the downfall of a company in the market.
This paper discusses the procurement or purchasing function of a business firm, its importance in its internal organization, and the interrelation of organizations. It also emphasizes on the value-added elements of the procurement function, and its significance to the company.
Business Organizations and Their Functions
It has been reported that business enterprises perform certain functions, which are separated in nature but are closely linked to each other (2006). These business organizations perform eight basic functions, namely, the management function, the production function, the human resource function, the finance function, the marketing function, the communication function, the information function, and the procurement or purchasing function. The management function is broadly concerned with planning, organizing, directing, staffing, controlling, and communicating for business operations, and each businessperson must understand the importance of these managerial functions for purposes of effective operations (2006). The production function is concerned with transformation or changing raw materials into finished goods and services needed by customers (2006)., along with other organizations, which are also engaged in transformation of inputs. Another function is the human resource function, which is concerned with managing the people as an important business resource. The finance function is involved with the budget and allocation of resources of the company, while the communication function and the information function focus on the dissipation of information. The marketing function is concerned with ensuring that goods that have been transformed reach the final customers (2006).
The procurement or purchasing function, which is the focus of this paper, influences other functions of the organization and success of the business. It has been reported that for businesses to operate successfully, they need an uninterrupted supply and flow of requirements to perform all their business activities (2006). This situation can be compared to the acquisition of raw materials of the right quality and quantity, at the right time and cost or price from the right sources, for the interruption of the supply of the required materials could also interrupt the operation of the business.
In relation to other departments or organizations, good procurement practices will ensure the efficient running of the operations department, influences production, and marketing. Marketing depends on efficient procurement practices, and facilitates procurement as well. The procurement division contact with suppliers and enables them to identify products with good market potential, and provide this information to the marketing department, and in turn, the marketing department will require these products, which have to be produced by the operations department (2006). Additionally, the personnel or human resource department also depends on efficient purchase or procurement requirements, as it cuts across the rest of function. In each of the functions, the value of the people cannot be overstated, for each function in the business firm requires the use of the human resource and their potential has to be harnessed to get the best out of them (2006). Similarly, the finance and the administration departments require services of efficient procurement, and cut across the variety of business functions. However, it can be deduced that the procurement department links the business firms with the external environment, and the perception created by the procurement department can either improve or damage the image of the business enterprise (2006).
Elements of the Procurement Function
(2005) reports that procurement is the common point of contact for departments in an organization, a central repository for corporate knowledge of acquisition of goods and services (). Moreover, the author adds that effective procurement departments operate on a corporate oversight perspective, evaluating the total cost of ownership of products, providing a durable product while minimizing operational support costs, and provide assistance in determining alternative acquisition and payment methods ( 2005, ). In this light, procurement functions compile and analyze historical data to identify opportunities for cost avoidance, standardization of goods and services and implement pricing agreements for goods and services based on volume or critically, and corporate-wide services contracts, consider issues such as longevity of items and future redeployment of assets, and bring consistency to due diligence aspects and legal compliance for procurements and reporting requirements ( 2005, ).
The effectivity of the procurement function depends on its key elements, namely, customer service, supplier performance, people capabilities, cost performance, and future direction setting.
- Customer Service
Procurement will not be as effective without a good quality of customer service. Customer service determines the sales of the company from outside suppliers, and its success in the market by adequate interaction with the consumers and with the employees as well. (1998) reports that in the process of developing customer needs, it would be extremely beneficial to evaluate the key processes used to complete purchase transactions. This means some level of continuous improvement and flowcharting of the procurement flow, perhaps with user assistance. In addition, similarly, the supplier is also a customer of procurement, and provides ideas and suggestions for improvement. One of the ways to determine the extent to which customer needs are satisfied is to conduct a user and supplier satisfaction survey on a periodic basis, which provide an independent and regular way to receive customer input so that improvement can occur ( 1998).
- Supplier Performance
It has been reported that the procurement makes the buying decision on selected suppliers and must ensure that the suppliers meet the user requirements, so the crucial step is to align the actual measures with those requirements (1998). This could lead the procurement to evaluate the cause and effect of customer satisfaction, and ensure that supplier improvement occurs in the key measures.
- People Capabilities
Without the right skill sets and competencies, procurement departments will be unable to participate in the key activities of the organization and satisfy the needs of users ( 1998). The quality of the employees has a great impact with the effectivity of the decision, so assessments must also be done. This assessment can be accomplished by employing a matrix defining the position and the skills required, which can also be used to define training and development requirements, job descriptions, making hiring or promotion decisions, or developing appropriate training ( 1998).
- Cost Performance
Cost performance must be tracked and measured to evaluate the total cost of the company. These procurement organizations have found that although total cost measures are difficult to establish and maintain, they are a true measure of overall supplier and procurement performance taking into consideration the supplier quality and delivery performance, the payment terms, the freight and packaging, tooling, the warranty costs, and the currency ( 1998).
- Future Direction Selling
It has been reported that the selection of a future direction will govern the organization, the competencies, the measures, and the performance of the organization ( 1998). Some procurement departments can develop the direction from the ground-up using the data gathered from the other parts of the organization, while others can use their organization to set up the future direction, and definitely need both elements to achieve both.
Measurement of the Elements
(2006) reports that one of the most important issues in procurement is the need to prove the business value of its products and services using more effective performance measurement practices (). This feedback is essential to demonstrate that procurement is indeed providing the needed goods and services at the best prices, in a reasonable period of time, and with a high degree of compliance to procurement regulations (2006). However, measures that exist are also plagued with problems, such as technical, financial and institutional obstacles, which make the measurement of procurement function difficult, expensive to develop and maintain. Nevertheless, (2006) points out that experience shows that it can be accomplished with dramatic results, for as benefits, by reduction in the cost of goods and services, it radically improved throughput times, increased compliance, and improved client and supplier relations ().
Despite this situation, a few effective procurement performance measures that are valid, reliable, timely, and comprehensive are existent, including the PMI or the Performance Management Index. The PMI is an integrated and index-based performance measure comprised of component performance measures, which allows the combination of qualitative and quantitative information yet provides the ability to quantify both so that all component measures become output or results-oriented (2006, ). In addition, it is used to provide the strategic, tactical or operational feedbacks at all levels, and provides the essential feedback to improve procurement decision-making within the organization by enabling proactive problem solving, and by institutionalizing continuous improvement (2006, ). It has been reported that the Procurement Management Index (PMI) has been used successfully to provide a balanced or systematic assessment of the public sector procurement function from multiple points of view, which include the challenge function, cost of goods and services, throughput time, internal procurement costs, compliance to procurement regulations, issue management and client education, and overall effectiveness (2006).
- Challenge Function. This is used to challenge the necessity of any goods procurement or large-scale projects, which aims to provide checks and balances in purchasing to ensure that the client organization receives value for the funds expended prior to contracting (Shane and Lafferty 2006, ). The results of the formal or informal diagnostics determine whether the procurement would be approved, amended or disapproved, for less complex and costly goods and services.
- Service Delivery Measures. This consists of three components:
1. Cost of Goods and Services, which refers to the volume change and cost savings obtained through the centralized and standardized purchase of goods and services.
2. Throughput Time to Acquire Goods and Services, which refers to the changes in the average throughput time it takes to conduct a procurement, where throughput time is measured for different types of commodities and procurement vehicles.
3. Internal Procurement Costs, which refers to the internal procurement organization costs of acquiring goods and services and includes staff and operations managing costs.
- Compliance. This component refers to the role of protecting the interests of the government and the taxpayer, while facilitating the delivery of quality procurement services.
- Issue Management. This consists of the identification, analysis and resolution of strategic issues that can impede the functioning of procurement operations when dealing with clients or suppliers on short, medium or long-term basis, and include internal organizational issues and those related to client satisfaction and supplier performance.
- Client Education. This refers to educating and communicating the latest procurement policies, strategies, new approaches or success stories to clients in an attempt to anticipate non-compliance by increasing awareness, understanding and effective use of existing and new procurement rules and regulations.
- Overall Effectiveness of Procurement Operations. This component is determined by examining the degree of success of each sub-components of the PMI and making a judgment as to its overall effectiveness on the procurement function at any point in time.
The procurement function is an essential and crucial element in the performance of business organizations or firms. It has been reported that no business can survive without a heavy investment in under-studying skills of procurement and the benefits of efficient procurement practices (2006). Procurement function, along with the other functions of the different organizations in a business firm determines the company’s success in penetrating the market. It has several elements, which can help in the development of action plans for improvement, to communicate current and future goals to the organization, measure their performance and satisfy the goals of their users (1998).
In spite of the importance of the procurement function, many business enterprises do not consider its importance, having little realization, appreciation and acknowledgement of the value an efficient procurement scheme can have on the performance of the business (2006). However, in reality, business firms must give importance to procurement function. When compared with other business organizations, business people somehow neglect the procurement function but this will be at their own expense (2006).
Business people thus need to have a clear understanding of the procurement processes and procedures first, if they are to benefit when doing their procurements, and second, if they are to get business with other companies ( 2006). In this way, the company can enjoy its benefits and advantages, and ensure the existence of the company in the market, continuing to provide sustenance to its employees and its consumers.