Chapter Two Literature Review: Meaning of Public Procurement

CHAPTER TWO
LITERATURE REVIEW
This chapter presents review of literature related to various issues of the public procurement.
It presents broad themes as well as associated sub-themes of the extant literature. This is
followed by detailed review of issues pertinent to public procurement.
2.1 Meaning of Public Procurement

Terms procurement and purchasing are often interchangeably used, however, purchasing
refers to the process of acquisition in manufacturing, while procurement is a term used in
governmental circles for acquisitions (Quayle, 2000; Bowersox et al., 2002). In recent
decade‟s public procurement have received greater attention due to emergence of the concept
of New Public Management (NPM) (Pollitt and Bouckaert, 2000; Hood, 1991) which focuses
on how the public sector can be more effective.
2.2 Public Procurement and Supply Chain Management

Across economies public procurement encompasses greater share of public sectors overall
budget. The size of public procurement in terms of purchasing volume and value is at the
same level or even higher than volume and value dealt with by private actors. The theoretical
development of Supply Chain Management (SCM) is primarily derived from insights of
private organizations. The dominating focus in SCM has been related to the physical
movement of tangible products as well as intangible products. The public sector primarily
produces services and can also benefit from a SCM orientation on the dual objectives of
service improvements and cost minimization. Public procurement includes entities such as
communication and Information Technology (IT), stationery, power, utilities, insurance,
cleaning and maintenance, capital expenditures, and consultants. Public enterprises enter into
many business relationships, both upstream and downstream. However, the objectives of the
public sector, and thus also for public procurement, are wider than a single company‟s profit
(Murray, 1999; Larson, 2009). Such objectives include the effective delivery of a wide range
of public services, including law and order, health, social services, education, defence,
transport, and the environment. The scope of most public sector organizations is, therefore,
much wider than the scope of private companies in terms of the diversity and needs of
customers being served (Erridge, 2007).
2.3 Procurement
2.3.1 Purchase as a Driver of Supply Chain
Level of involvement of purchasing department in an organization is generally found to be

low. In public procurement the purchase professionals are more concerned about adherence
to policies and procedures then meaningful contribution. Purchasing department has been
commonly referred as clerical process-oriented function that adds little value to purchase
(Schiele and Clifford, 2006). Purchasing department involvement in an organization can
range from none to documentary to professional to meaningful. No involvement means the
purchase department is a bypass. Documentary involvement represents very basic
administrative activities like preparation of Request for Quotation (RFQ), collection and
distribution of proposals. Professional involvement indicates that purchasing perform higher
order activities. Meeting with clients and understanding their requirements require higher
level of skill and knowledge. Meaningful involvement occurs when purchasing department is
professionally involved considering the interrelationship between the various purchasing
activities and their impact on long term need and strategies of organization.
Purchasing departments meaningful involvement depends on its trustworthiness, capability

and benevolence. The client department trusts its perception that the purchasing department is
capable of adding value and its own knowledge and experience. The authors carried out the
survey and the important findings suggest that client department involve purchase department
in its decision if they trust ability and benevolent intention of the purchasing department
otherwise, they find ways to bypass them. The purchasing departments identified factors are
soft skill such as tact, respect, openness and friendliness, initiative, service-based approach
and benevolence. The factors categorized under client department for meaningful
involvement of purchasing department are positive relationship with the client
department, positive perception about the value offered by purchasing department, lack of
knowledge and experience of client department and heavy work load. Meaningful
involvements require team approach in decision making to achieve common and not
mutually exclusive goal. Management should therefore invest in developing capabilities
of purchasing department personnel.
2.4 Public Procurement
The public procurement is defined as purchase for people by agent of people by using public
funds i.e., taxes (Murray, 2009c). Generally, a role of politician in public procurement is not
well researched. The purchasing professionals are required to appreciate the difference
between political interference and political mandate. The politicians are answerable to local
people who elect them therefore they may influence the policy in their favor.
The issue such as accountability, transparency, integrity and cronyism are areas of concern
which result in huge wastage of public funds. Some of the important findings entails lack of
transparency which result into inflated cost, thus, the emphasis should be on transparency
rather than confidentiality, there are ample evidence of direct political interference, the
corruption activities exist at every stage of the procurement starting from procurement
planning, budgeting, invitation of tender, contract award, and contract acquisition.
Procurement reforms are suggested such as devising higher ethical standards for procurement
officials, asset discloser and Right to Information (RTI).
It is generally seen that Public procurement professionals pay more than they should for
goods they buy and doing so support sub-optimal enterprise (Martin and Keith, 1997). Taking
some empirical evidences of the public purchasing in the European Union it has been brought
that public enterprise has to pay higher due to protectionist sentiments. The bureaucrats do
have close working relationship with domestic suppliers. Politicians play critical important
role. Vote sensitive government can always justify preferential purchase from domestic
source in terms of claim about jobs, technology and balance of payment benefit. This paper
suggested more competition by inviting open tender for all high value purchases. However,
this paper has not discussed the pros and cons of the open tender. It does not talk about the
underlying supply chain
2.5 Importance of Public Procurement
Public procurement is an important tool for strategic change (Stykes, 2007) and it is very
much different from private procurement (Kelman, 2005). It has more systematic and
strategic approach. However complex set of rules, procedure and structure make it more
difficult (Thai, 2001). Public procurement is affected by several factors which may be
internal as well as external. The role of society, media and politician plays important role
(Pegnato, 2009).
Public procurement is an important tool to drive the economy of the country. (Murray,
2000a) wrote an article “public procurement strategy for accelerating the economic recovery”
in the context of United Kingdom (UK) and highlights how public procurement can help the
Small and Medium Enterprises (SMEs) to deal with economic down turns. It also gives a hint
that the approach of long-term perspective on supply chain is to be preferred over one time
negotiation of lowest/best deal. Lean working, simple tendering procedures, following best
practices and ensuring timely payment to contractors and subcontractors will help both buyer
and sellers. Single sourcing and long-term contract however require high level of dependency
and trust which few organizations have. Longer term contract requires significant
responsibilities for a supplier including the provisions of guaranty and liabilities in the event
of contract failure. Co-operative purchasing is considered good practice in reducing cost and
risks and maximizing economies of scale. Murray (2009) suggest following four themes as
procurement strategy:
 Providing leadership and building capacity
 Partnering and collaboration
 Doing business electronically and
 Stimulating markets and achieving community benefits.
Public procurement is a government policy tool where the basic objective of public
procurement is to deliver government policy (Harland et al., 2003). The objectives of public
procurement are economy, efficiency, transparency and accountability (World Bank, 2003).
Thus, beside value for money there are other principles like efficiency, transparency and
accountability which are sometime contradictory in nature.
Public procurement is the driver of the policy tool of the government. The total public
procurement in India contributes to almost 30 per cent of Gross Domestic Product (GDP).
Current Indian prime minister has announced his vision “Make in India” which needs to be
incorporated in the public procurement framework. Almost all developed countries have used
variety of policy tools to encourage domestic bidder participation thus enhancing indigenous
domestic content in government supply, clever use of outsourcing for encouraging local
employment. To achieve these objectives the policy framework include preferential treatment
of domestic bidder/exclusive reservation for domestic bidder, imposing mandatory minimum
domestic content in government supplies, imposing offset obligations etc. Government of
India, Department of Electronics and Information Technology issued a policy (2012)for
purchase preference to Domestically Manufactured Electronic Product (DMEP) policy were
in a purchase preference (and not the price preference) is given to domestically manufactured
electronic products
2.6 Quality in Public Procurement-
Åsa (2012) in his research paper on “Quality in public procurement process” has mentioned
the importance of price and non-price criteria for vendor selection. The over emphasis on
price has resulted into reduced and inferior service to the customer. It has prescribed four
dimensions for assessing the quality of procurement process. These four dimensions are:
Using Key Performance Indicators (KPIs) and developing a self-assessment model for
assuring quality in the procurement tender:
 Balance between price and quality

 How tenders perform their self-assessment and
 Use of external and/or external examiner
The research has shown that self-assessment generates several improvement opportunities for
tenderers. This paper does not suggest any model and how that model can be applied.
Supplier development is possible through a continuous mentoring and it should fervour
supplier in the short-term more than the buyer. Vendor development in public procurement
cannot take place if we assume equivalence between buyer and supplier. Supplier
development in public procurement is slow to develop due to accountability, deficit,
commercial incentive and lake of skills. The public buyers are less focused on relationship
building and more on how to obtain lowest price. Public buyers are generally risk averse.
Finally rules and regulations impose certain constraints upon how and when public buyer
interacts with supplier. A public buyer relies upon formal bid procedures such as competitive
tendering rather than relational contracting. Due to frequent use of formal tendering in public
procurement buyer supplier relationship are often formal (McKevitt and Paul, 2014).
2.7 Contract Management
Outsourcing is increasing in public enterprises and effective public sector management is
becoming effective procurement and contract management. There is critical debate on trust
and public sector procurement and contract management. In procurement contracts, the trust
is defined as expectation of one party to exchange is that other party will not take advantage
of commercial vulnerability even when there is an incentive to do so (Watson et al., 2012).
For building trust the buyer should not be aggressive during pre-contract, there should be
clear communication of interest of both the parties. It also argues that the formal contracts are
incomputable with trust; contract designed should not be too restrictive and instead provide
an opportunity for supplier to innovate for mutual gain.
For building trust the contract should get translated into a set of working procedures.
Economics of tender is based on supplier opportunism. Supplier may underperform to earn
higher profits, when buyer is not able to monitor under performance. (Watson et al., 2012) in
his paper has provided data set about procurement and contract management practices by
surveying 180 contract management situations. It suggests that there is no significant
difference in supplier‟s opportunistic behaviour between public and private enterprises. The
risk of supplier opportunism is significant when there is high uncertainty, high sunk cost,
high complexity and less extensive management control. Higher the management control
lesser is the risk of supplier opportunism. Contract management in India is poor (Verma,
2010). There is poor work management and poor relationship management. Often the
decision of outsourcing is not correct (Schooner, 2010).
2.8 Financial Management

Financial management is the most important issue and often the most important barrier for
sustainable procurement (Walker and Brammer, 2009). There is uncertainty of budget. Often
there is a tendency to buy immature technology without taking into account, long term impact
because of budgeting cycle (Schooner, 2010).
2.9 Important Factors in Public Procurement
2.9.1 Market Conditions

Public procurement especially of high value items operates in market condition where
competition is distorted (Mckie, 1970). It is large buyer large supplier situation with barriers
to entry thus, competition is not perfect. Long term contracts favour large and monopolistic
suppliers (Williamson, 1981).
2.9.2 Political Environment

The role of political head is important in public procurement (Murray, 2008) and public
procurement strategy. There is direct and indirect role of politician in award of contract
(Knight et al., 2007). Any attempt to reform public procurement is always constrained by
political interference (Pegnato, 2009). Highlighting political apathy it is mentioned that the
last effort for drafting model tender document for civil works took more than 14 years
(Shourie, 2004). The political masters are responsible for their democratic accountability. The
bureaucrats therefore required to understand the different between political interference and
political mandate (Murray, 2009). However, the role of politician is taken in negative sense as
serving their self-interest (Haruta and Radu, 2010).
There are empirical studies to prove the political connection and influence in decision making
process of public procurement. The companies therefore try to have political connection
(Goldman, 2008). In US there are political lobbying firms. The politics has become important
integral part of decision making process in large value public procurement cases (Eisenhardt
and Zbaracki, 1992). At times even the basic framework and provisions of contract are
challenged by politician. This makes the entire progress in public procurement very slow
(Goodman, 1988).The role of politician become more critical when we consider huge amount
of money involved and many times the entire process of procurement is longer than the
tenure of the political master (Bipindra, 2014).
Due to very high lead time of procurement, forecast of technological requirement becomes
very difficult and it is subjected to political and organizational pressure (McNaugher, 1987).
Such pressures situation become more vulnerable where there is lack of clarity on
procurement specifications. Generally it is seen that indenting authority and contract
enforcing authority are independent. They are interwoven but not integrated. Their
perspective has distorting implications in the entire procurement process (Graells, 2010).
2.9.3 Organization Culture

Cultural is defined as collective, shared, believe and behaviourand cultural environment play
very important role in functioning of an organization and impacts its efficiency and
effectiveness (Casson, 1992). Efficiency of organization depends on combination of
organization cultural and market condition (Ghoshal and Moran, 1996). Public procurement
is constrained by bureaucratic cultural, hierarchal setup and uniform policy for different
situation (Henry, 2012). This unique culture should be taken into account while dealing with
public procurement. Some authors have been very critical for public procurement and have
considered it as outright toxic (Schooner, 2010).Organization culture also impacts its
Performance Measures Systems (PMS)(Hall and Holt, 2003).
2.9.4 Individual Transaction Perspective

Public procurement are subjected to scrutiny of various constitutional and extra constitutional
authority such as Central Bureau of Investigation (CBI), Central Vigilance Commission
(CVI), Comptroller and Auditor General of India (CAGI) and Right to Information (RTI).
Each transaction is subject to scrutiny individually for an efficiency, efficacy and correctness
rather than overall transaction. For example one wrong decision out of hundred good
decisions can create problems. The magnitude of hazard depends on attributes of transaction.
Long term contracts have greater uncertainty and incompleteness therefore considered more
hazards (Masten, 2006).
2.9.5 Make and Buy Decision

Outsourcing in public services is increasing on the basis that private sector can deliver the
same quality of service as their public sector counterpart at lower price. The effective public
sector management is therefore becoming effective contract management (Watson, 2012). A
facility and infrastructure created for in house production many time has to be closed down
because the same quality products were available from market at cheaper rate. It is generally
seen that if there is in house production then cartel formation tendency of private supplier is
kept under check. This leads us to the need for drawing a fine balance between the make and
buy spectrum.
2.9.6 Rule of Law Codes and Manual

Often the legal process of public procurement dominates the whole character. It consists of
multi-layer bureaucracy which is risk averse. Regulation codes and manual are sometime
conflict the very basic objective of procurement. These regulations are seen as obstruction
rather than facilitator (Callender and Schnapper, 2007).Risk reward ratio in doing business
with public enterprise is higher because of complexity of rules. Over regulation act as a
barrier to entry in the government controlled businesses. These regulations also contribute to
constraint in building up the relationship between buyer and seller (Knight et al., 2007). Over
regulation, risk aversion and unpredictability of budget is one of the challenges of public
procurement (Harland et al, 2007). Many times these over regulations contribute to delaying
tactics for the bidders who are not able to win the bid. There has been tendency of
representation and complaints by the losing bidder. This tendency frustrates the buyer
(Lennerfors, 2007).
2.9.7 Key challenges in the Public Procurement

There is a general perception that public procurements are generally inefficient. High value
contract specially are generally incomplete and require post contract modifications
(Williamson 2007). Incomplete and poorly made contracts create procedural difficulties and
risk. In a study conducted in the United States of America it is found that the regulations and
over regulations prohibit the realization of best value for money and proper collaboration
(Korosec, 2003).
Schooner (2010) highlight that the key challenges are to get right partner and realize the best
value for money, achieving balanced outsourcing and neutralizing the adverse implication.
In-adequacies in public procurement are asymmetry of information (Williamson, 2007), lack
of trust, budget uncertainties and risk aversion by purchase professionals. The other
challenges are lack of commercial incentives, lack of performance measure systems (Ergas
and Menzes, 2004) and process complexity. It is generally seen that public procurement
professionals are de-motivated and demoralized due to high work load, red tape and lake of
appreciation (Kausal et al., 1999)
2.9.8 System Approach

Different situations, different type of items requires different procurement solutions.
However in government it is generally seen that there is single uniform policy prescription.
One size does not fit all and this creates systemic problems (Henry, 2012). Instead of system
approach there is fragmented approach (Thai and Drabkin, 2007). Different departments can
issue policy directives on a subject which are not coherent with each other. Suppliers are
generally not consulted in the process of decision making. Several organizations share the
vision with the supplier. Because of fragmented approach despite best of intensions the
government procurement may end up with poor results (Berrios, 2006).
2.9.9 Multiple Stakeholders
In public procurement there are multiple stakeholder including society at large with
conflicting interest. Achieving the cooperation between the stakeholders is a key challenge
(Korosec, 2003). Incongruity of goals leading to complexity and inefficiency has also been
highlighted (Ergas and Menzes, 2004; Ouchi, 1979).
2.9.10 Make in India

There are policy directives to prefer indigenously manufactured product even if it gives us
less value for money and poor technology (Walker and Brammer, 2009). Democracy and
protectionist policies create pressure to buy national (Kono & Rickard, 2014).
2.9.11 Value for Money

In high value purchases both the cost of purchase and cost on purchase are major issues.
Developed countries take help of experts for assessing the cost of acquisition. In India
inaccurate cost estimation is a major problem in large value public infrastructure project
(Ministry of Statistics and Programme Implementation, April 2011). Cost estimation helps as
negotiating tools to realize the value for money (Moore and White, 2005). The public
procurement is budget driven and the risk of uncertainty of budget is charged as risk premium
by the supplier.
2.9.12 Decision Making

The public procurement is handled by bureaucrats in layers of hierarchical setup. The
bureaucratic setup runs the public administration in a country like India (Mises, 1944). A
study on bureaucracy role in policy making (Haruta and Radu, 2010) highlights that the core
values such as inclusiveness, transparency, fairness are compromised in policy making.
Layers of hierarchical setup adversely impact the efficiency in public procurement (Henry,
2012). In one of the research it is found that the risk avoidance tendency is one of the prime
inefficiency (Callender and Schnapper, 2007). Quick decision making has positive impact in
strategic decision making is better as more efficient information processing and transmission
is available (Baum and Wally, 2003). External interest group often tries to the derail decision
(Nutt, 2002).
2.9.13 Human Resource Issues
The positions in public procurement organizations are considered sensitive. As a policy
measure dealing purchase professionals are subjected to periodical transfer. This affects
institutional integrity and knowledge management. Sometime this discontinuity can create
serious financial repercussion. Lake of competent work force, their training is a challenge
(Thai and Drabkin, 2007). Senior management support is most important factor in public
procurement (Walker and Brammer, 2009). Work load, red tape and lack of appreciation
demoralize and de-motivate the procurement officials (Kausal et al., 1999). There is a gap
between the future requirement and present status of skill and leadership in public sector.
Strengthening leadership will have positive impact (Stykes, 2007).
Client department involve purchase department in its decision if they trust ability and
benevolent intention of the purchasing department otherwise, they find ways to bypass them.
The purchasing departments factors identified are soft skill such as tact, respect, openness
and friendliness, initiative, service-based approach and benevolence (Schiele and Clifford,
2006). The factors categorized under client department for meaningful involvement of
purchasing department are positive relationship with the client department, positive
perception about the value offered by purchasing department, of knowledge and experience
of client department and heavy work load. Meaningful involvement of purchase department
requires team approach in decision making to achieve common and not mutually exclusive
goal. Management should therefore invest in developing capabilities of purchasing
departments personnel.
Multilayer hierarchy and relationship between junior and senior have been area of study
(Tullock, 1965). This hierarchy impacts the efficiency of public procurement bureaucracies.
The role of individual personality also becomes significant in many cases (Biggart and
Hamilton, 1984).
2.10 Ethics
Although public procurement is major instrument of public service delivery but it is having a
poor image (Hui et al., 2011) due to failure to buy the right quality in right quantity at right
time resulting into higher cost of acquisition. Inefficient and effective procurement processes
result into higher cycle time. Lack of transparency and ambiguity in the procurement
processes result into leakage and corruption.
Corruption negatively impacts the image of a country (Chang and Chu, 2006) and its ability
to become a global player (DiRenzo et al., 2007). Transparency International (TI)ranks India
as 76 out of 168 countries. It scores only 38 out of 100 for the year 2015.
Policy formulation, its implementation and lack of transparency and accountability are the
reasons for corruption (Debroy and Bhandari, 2012). External factors contributing to
corruption are organizational and social climate (Badenhorst, 1994). Greed and lack of
respect to the law is the prime reason for corruption, resulting in leakage of billions of dollars
every year (D'Souza and Kaufmann, 2011). Disturbing phenomena is that corruption is able
to influence to the extent of policy making by the government (Hellman et al., 2000). For
bringing efficiency in public procurement system the issue of corruption and transparency
must be taken into consideration (Mori and Doni, 2010). Lack of transparency results in poor
image of the buyer. This in turn manifests in terms of lack of interest and non-participation
by various competent suppliers (Evenett and Hoekman, 2004). The dealing professionals tend
to employ non transparent procedures (Søreide, 2006). The bid rigging and cartel formation
by the supplier is another problem which has indirect support of government officials and
suppliers (Baiman, 1990).
2.11 Supplier Relation Management

Xu and Dey (2010) in his study have suggested Multi-Criteria Decision making Approach
(MCDA) over traditional cost based approaches. Chai et al., (2013) have used Analytical
Hierarchy Process (AHP) to carry out Multi-Criteria Decision making Approach (MCDA).
DeBoer et al., (2003) have reviewed the variety of procurement situation and the complexity
involved, and concluded that this method does not address the contextual issues completely.
Sarkar and Mahapatra (2006) have discussed the importance of developing the partnership
with small supplier base. They have also suggested the systemic process to reduce the
supplier. The important factors under consideration are performance and capability.
Performance is short-term and capability is the long term view of criteria of supplier
selection.
DeBoer et al., (2003) considered two phases of supplier selection that is pre-selection and
selection phase. Pre-selection phase is divided into (1) defining the problem (2) formulation
of criteria (3) evaluation. The important has been attached to pre selection process.
Nrasimhan et al, (2001) proposed supplier performance evaluation using Data Envelop
Analysis (DEA) technique. Capacity factor is taken as input and performance factor is taken
as output. These analyses categories a supplier into 2x2 matrix of high and low performance
and high and low efficiency. Degraeve and Roodhooft (2000) proposed the concept of Total
Cost of Ownership (TCO) as criteria for compeering vendor selection. They have used case
study of supply of ball bearing to the Belgian multinational company in the steel industry.
Sadigh et al., (2009) have used Taguchi loss function for supplier evaluation. After assessing
the quality and expected value and integrating this function with cost of purchasing and
transportation. A simple Linear Programming (LP) model was used. Pi and Low (2005) also
used Taguchi loss function using four criteria i.e. quality, on time delivery, prize and service.
Ordoobadi (2009) have further extended the use of Taguchi loss function by including
intangibles in the evaluation criteria, such as trust, risk to perform outsourcing function.
Falagario et al., (2012) have taken case of supplier selection in public procurement
environment. They proposed the tool of supplier selection maintaining the transparency and
fair and equal chance to all bidders through a case study of the Italian Government Tender.
Lee (2009) proposed analytical approach of buyer supplier relationship using Analytic
Network Process (ANP) and Benefit, Opportunities, Cost and Risk (BOCR) concept. The
paper suggests that the supplier maintain quality when good quality management is present in
the buyer organization.
2.12 Performance Measurement System (PMS)

Performance Measurement System should save the purpose of identifying success,
identifying whether customer needs are met, understanding of processes, identifying
bottlenecks, identifying wastes, identifying problems, improvement opportunities, providing
factual decision, enabling progress, tracking progress, facilitating a more open and
transparent communication and co-operation(Gunasekaran et al., 2007).
Typical key performance indicator for supply chain suggested by Stadtler and Kigler (2008)
are:
 Delivery performance: service level (event oriented a-service level, quantity-oriented B-
service level, Y-service level), on time deliver, forecast accuracy, and order lead time.
 Supply chain responsiveness: planning cycle time
 Assets and inventories: asset turns, inventory turns, inventory age
 Costs: cost of goods sold, value-added employee productivity, warranty cost
There are hardly any established key performance indicators as a part of Performance
Measurement System (PMS) in the area of public procurement (Ergas and Menzes, 2004).
Sometime attempts are made to introduce the Performance Measurement System (PMS) but
their authenticity and validity is always challenged (Hall and Holt, 2003). There is a need to
introduce the acceptable norms of the Performance Measurement System (PMS) to manage
this activity (Ouchi, 1979).
Hong and Sang (2005) proposed supplier selection to maintain continuous relationship
through a mathematical programming model. Petroni and Marcello (2000) suggested a model
to evaluate related performance of supplier with multiple input and output through a
multivariate statistical method.
2.13 Material Management Information System (MMIS) and e-procurement
Asymmetry of information leads to in efficiency and corruption (Williamson, 1981; Ergas &
Menzes, 2004). The asymmetry of information is taken care of by MMIS in the Indian
Railways. While implementing the e-procurement system the existing procedures is mapped
and replicated. Such practice may drive only some of the possible advantage (Thai &
Drabkin, 2007).
2.14 Estimation of Optimum Number of Supplier

There are various analytical studies to find out the optimum number of suppliers (Agrawal
and Nahmias, 1997; Bakos and Brynjolfsson, 1993; Weber and Current, 2000; Kauffman and
Popkowski-Leszczyc, 2005; Jokar and Sajadieh, 2008). The classic paper in this regard is by
Berger et al., (2004) which considered the risk of inbound logistics on the whole supply
chain. Ruiz-Torres and Mahmoodi (2007) have considered various types of risk in their
model and have the extended the work of Berger et al., (2004).
Sharma and Sarkar(2011)have studied the problem of supplier selection considering the
probability of catastrophic risk. And a model is developed for different failure probability,
capacity and compensation. In this model on one hand they found out that service level
increases with the increase in number of supplier but on the other hand supplier management
cost and the probability of catastrophic event increases which adversely impact the service
level also. Weber et al., (2000) have analysed multi-vendor in procurement situation of multi
objective programming and Data Envelope Analysis. Abginehchi (2010) have done research
on a supplier inventory and optimal order splitting under stochastic lead time. Yang (2008)
has suggested a model to optimize the total cost that is cost of procurement considering
quantity discount and supplier failure probability. The finding is that if supplier is reliable
single sourcing is the best approach. As the supplier reliability decreases, additional supplier
may be required. Nam and Kwata (2011) have discussed the reliable supplier base
management under demand uncertainty with a view to maximize profit and agility.
Determining the optimal size of supply base with the consideration of risks of supply
disruptions, Sarkar and Mohapatra (2006) have developed the model considering the
variables like small base shall reduce the cost but shall increase the risk, whereas large supply
base shall increase the fixed cost of supplier management. They have considered the
probability of occurrence of various risks.
2.15 Vendor Managed Inventory (VMI)

Vendor Managed Inventory (VMI) is like automatic replenishment programme where
supplier is given access to customer‟s inventory level and demand. The main condition of an
implementation is trust and transparent exchange of information. Vendor Managed Inventory
(VMI) approach is suitable tool to decrease administrative cost, inventory carrying cost and
improved production process. The vendor has an advantage of assigning the product and
quantity for dispatch and also the product mix. He can better react to dynamic changes in the
requirement minimizing „Bullwhip Effect‟. The idea of supply chain involves coordination of
different partners to achieve higher level of service. The result of integration is positive and it
not only ensures loyalty of customer but also ensures that all the logistics partners are alive in
the whole supply chain (Dejnega, 2011). In February 2004 Volvo evaluated the result from
Vendor Managed Inventory (VMI) relation with supplier and found that inventory level
decrease by 67 per cent, the administrative cost also fell down (Gröning& Holma, 2007).
Vendor Managed Inventory (VMI) alters the fundamental structure of supply chain ordering.
Objective of VMI is higher customer satisfaction at lower inventory cost. Responsibility is
transferred to supplier for monitoring specific level of inventory, there is better visibility of
customer demand, speeding of the supply chain and reduced Bullwhip effect. This pull
system replaces historical pull system. Vendor Managed Inventory (VMI) concept is defined
as replenishment linked pull-system, where the supplier is responsible for the customer
inventory replenishment following a collaborative pre established middle/long term protocol.
The three levels of protocols are Partnering Agreement, Logistical Agreement and Production
and Dispatch Process.(Marques et al., 2011)
Towill (2002) argues that implementation of VMI changes the fundamental structure of
supply chain ordering. VMI ensures higher customer service at lower inventory and
administrative cost. Customer delegates the responsibility of ordering and replenishment
planning to supplier (Tang, 2006). It results in more accurate forecasting and more effective
distribution of inventory. Due to this coordinated production and replenishment plan various
cost such as production, logistics and transportation cost reduces. Thanks to better visibility
supplier is able to smooth the peaks and the valleys in the flow of goods. Implementation of
Vendor Managed Inventory (VMI) requires higher frequency of replenishment with smaller
lots. Supplier obtains a great degree of freedom in deciding quantity and timing of
replenishment.
Implementation of Vendor Managed Inventory (VMI) increases the frequency of

replenishment. Mass Customize Distribution (MCD) provides logistic support to the supply
chain. The principle behind mass customization is use of economies of scope rather than
scale and modularization and standardization into area of distribution related activities
(Robert and Lalwani, 2006). An economy of scope is also size economy but slightly different
as they are generated by routing greater volume of compatible products through fixed asset
by merging parallel value stream. The challenge of Vendor Managed Inventory (VMI)is
incessant need to reduce the cost of distribution while coping with more accurate logistic
demand of increasingly fragmented points, tighter delivery windows, more distribution
frequency of smaller lots, providing distribution solution over extended distances working on
smaller planning horizons, large variety of products and fluctuating demand. Mass Customize
Distribution (MCD) aims to provide more efficient and more flexible customer focused,
distribution solution. It is in contrast to concept of bulk shipping. This is invariably enabled
by modularization such as trays, pallets, container etc. and standardization using IT which
permits parallel supply to integrate across value chain. This sometime requires sharing of
assets across to or more competing supply chains. The concept of Mass Customize
Distribution (MCD) is generically similar to Mass Customize Production where the
decoupling point is pushed towards customer interface. The decoupling points where the bulk
flow of pushed goods is relapsed by flow of pulled to a specific customer location (Robert
and Lalwani, 2006).Main elements of Vendor Managed Inventory (VMI)system are
inventory location, distribution model, inventory level monitoring and demand visibility, role
of information system, replenishment decision and inventory ownership. These different
elements are interrelated. For example inventory level monitoring, demand visibility and role
of Information Technology (IT). These six elements are combined together to construct an
evaluation frame work of Vendor Managed Inventory (VMI) (Sami, 2007).
2.16 Gaps in the Literature
After the detailed review of literature survey the following gaps were identified with respect
to procurement function in the context of the upstream supply chain operating under public
procurement environment. There is a lack of research covering procurement in the context of
the Indian Railways. There is a lack of research which develops tools for vendor assessment
and their rating. There is lack of research which details process redesign of procurement
function in the context of large supply chains such as that of the Indian Railways. There is
lack of research which conceptualizes inventory management of perishable items such as
electricity and diesel consumption in the context of organization such as the Indian Railways.
In order to address some of these gaps, the study adopts an integrated approach which is
depicted in figure 2.1.The approach is conceptualised on the basis of study of literature, value
stream mapping of existing system, internal and external environmental factors and desired
outcomes.
Figure 2.2 Integrated Approach of the Study
Source: Conceptualised by the researcher on the basis of Gap Analysis.
2.17 Research Questions

Through preliminary literature survey of procurement function, public management and
supply chain following research questions have been identified for the present study:
 What are various issues related with procurement processes and their consequences on
underlying supply chain management of the Indian railways material needs?
 How to develop a vendor managed inventory system so as to achieve cost reduction as
well as enhanced level of service?
 How to suggest a model for vendor evaluation, relationship management and enhanced
level of integration across the underlying supply chain?
 How to carryout portfolio analysis for carrying out risk management and finding out areas
of vulnerability and device purchase strategy?
 How to redesign procurement processes of IR in the light of best practices of procurement
and supply chain management so as to achieve enhanced level of functionality under
public procurement environment?
 How to develop a model so as to make procurement as driver of supply chain
management?
2.18 Chapter Summary
This chapter on literature review began by exploring procurement as the backbone for
performance enhancement followed by literature review on public procurement and supply
chain management. Further, the chapter covers issues such as transparency, value for money,
vendor management inventory, ethics, supplier relationship management, portfolio analysis,
contract management etc. The next chapter will outline research methodology that will be
used for this study.
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CHAPTER TWO

2.1 Meaning of Public Procurement

2.2 Public Procurement and Supply Chain Management

2.3.1 Purchase as a Driver of Supply Chain

Level of involvement of purchasing department in an organization is generally found to be

Purchasing departments meaningful involvement depends on its trustworthiness, capability

2.4 Public Procurement

2.6 Quality in Public Procurement-

 Balance between price and quality

2.8 Financial Management

2.9 Important Factors in Public Procurement

2.9.1 Market Conditions

2.9.2 Political Environment

2.9.3 Organization Culture

2.9.4 Individual Transaction Perspective

2.9.5 Make and Buy Decision

2.9.6 Rule of Law Codes and Manual

2.9.7 Key challenges in the Public Procurement

2.9.8 System Approach

2.9.10 Make in India

2.9.11 Value for Money

2.9.12 Decision Making

2.11 Supplier Relation Management

2.12 Performance Measurement System (PMS)

2.13 Material Management Information System (MMIS) and e-procurement

2.14 Estimation of Optimum Number of Supplier

2.15 Vendor Managed Inventory (VMI)

Implementation of Vendor Managed Inventory (VMI) increases the frequency of

2.16 Gaps in the Literature

2.17 Research Questions

149. Korosec, J. R. (2003), “A Review of State Procurement and Contracting”, Journal of

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