Objectives

of
Procurement
By: Ms. Mbeleje Kusenha
Procurement objectives at
managerial level
The management expects the procurement department to obtain the five
rights that is the acquisition of materials:
Of the right quality,
From the right source,
In the right quantity,
At the right time, and
At the right price.
 Right quality
What is quality?
decision
◦ Is it about conformance or performance?

◦ Who defines quality? Seller or buyer?

◦ Meeting requirements
◦ Fitness for purpose
◦ Minimum variance
◦ Elimination of waste
 Definition of Quality.
Crosby defines quality as conformity to requirements
not goodness.

He also stresses that the definition of quality can never

make any sense unless it is based on what the
customer wants i.e. a product is a quality product only
when it conforms to the customer’s requirements.
Definition of Quality.
Juran defines quality as ‘fitness for use’.
This definition implies quality of design,
quality of conformance, availability and
adequate field service.
 Eight dimensions of
quality:
1. Performance: The product’s operating characteristics.
2. Reliability: The probability of a product surviving over a
specified period of time under stated conditions of use.
3. Serviceability: the speed, accessibility and ease of
repairing the item or having it repaired.
4. Conformance: The degree to which delivered products
meet the pre determined standards.
 Eight dimensions of
quality:
5. Durability: Measures the projected use available from the product over its
intended operating cycle before it deteriorates.
6. Features: ‘The bells and whistles’ or secondary characteristics which
supplement the product’s basic functioning.
7. Aesthetics: how a product looks, feels, sounds, tastes or smells.
8. Perceived quality: Closely identified with the reputation of the producer. Like
aesthetic, it is a personal evaluation.
 Quality control
Quality control: Is concerned with defect detection and correction. Inspection activities can be
classified as quality control processes, along with other activities which involve monitoring to
ensure that defectives or potential defectives are spotted.
Quality control can also be defined as a process employed to ensure certain level of quality or
service.
It may include whatever actions a business deems necessary to provide for the control and
verification of certain characteristics of a product or service.
 Quality assurance
Quality assurance: Differs from quality control and is defined as all those planned and
systematic activities implemented within the quality system and demonstrated as needed to
provide adequate confidence that an entity will fulfil requirements for quality.
Quality assurance can also be defined as a planned and systematic production processes that
provide confidence in a product’s suitability for its intended purpose.
It can also be defined as a set of activities intended to ensure that products and services satisfy
customer’s requirements in a systematic and reliable fashion.
 Key principles of quality
assurance
Two key principles characteristics of quality assurance entail:’ fit for purpose’’ (the product
should be suitable for the intended purpose) and ‘’right first time’’ (mistakes should be
eliminated). Quality assurance include regulation of the quality of raw materials, assemblies,
products, components, services related to production, management production and inspection
processes.
Quality assurance is concerned with defect prevention and has become synonymous with
quality systems such as Tanzania bureau of standards (TBS), Kenya bureau of standards (KEBS),
BS5750 and international counterpart ISO 9000.
 Quality assurance
activities
Quality assurance includes all activities connected with the attainment of quality such as:
1. Design, including proving and testing
2. Specification, which must be clear and unambiguous
3. Assessment of supplier to ensure that they can perform
4. Motivation of all concerned parties
5. Education and training of supplier’s staff
6. Inspection and testing
7. Feedback to ensure that all measures are effective
Right Quantity decision
What is the right quantity to buy?
How much to buy and when to buy
are fundamental questions.
 The Right Quantity.
To determine the right quantity in manufacturing or assembly-type organizations, the most
important factors are as follows;
The inventory policy of the organization.
Market conditions.
Demand of the product
 Buying through EOQ
The EOQ is the replenishment practice that minimizes the combined inventory carrying and
ordering cost.
Identification of such a quantity assumes that demand and costs are relatively stable throughout
the year.
Since EOQ is calculated on an individual product basis, the basic formulation does not consider
the impact of joint ordering of products.
Economic Order Quantity is meant to equate ordering cost with holding/carrying costs.
As a result, the total cost is brought to the minimum.
 Right time decision.
Right time to buy or to deliver?

What is the cost of time?

What are the implications of NOT-RIGHT time buying and delivery?

To insist the importance of responsiveness to customer needs.

 Influencing factors for right
time procurement
Availability

Market conditions

Competition

Procurement policies
 Influencing factors for right
time delivery
Supply lead time (from ‘initial need’ to ‘available for use’)

Organizational requirements

Customer demand
 RIGHT SOURCE
DECISIONS
What is sourcing?
This is the process of identifying, selecting and developing suppliers.
Much more than simply picking a supplier or contractor.
Involves continuing relationships with both existing and potential suppliers.
It requires supply market research.
Identify sources, their capabilities, market trends, and long term supply prospects.
 Attributes of a good
Supplier
Delivers on time.
Provides consistent quality.
Gives a good price.
Provides good service back-up.
Is responsive to our needs.
Keeps promises.
 The sourcing process
Strategic sourcing is a complicated process involving a number of interrelated tasks. Not
surprisingly, a number of models of the strategic process have been devised.
Stage 1: Identify or re-evaluate needs:
In some instances, needs must be re-evaluated because they have changed.
Stage 2: Define or evaluate user’s requirements.
Stage 3: Decide on whether to make or buy.
 The sourcing process
continued;
Stage 4: Identify type of purchase.
The three types of purchases – from least amount of time and complexity to most amount of
time and complexity – are:
1. Routine purchase.
2. A modified rebuy, which requires a change to an existing supplier or input.
3. A new buy, which results from a new user need.
Stage 5: Conduct market analysis: A source of supply can operate in a purely competitive
market (many suppliers), an oligopolistic market (a few large suppliers) or a monopolistic market
(one supplier).
 The sourcing process
involves;
Stage 6: Identify possible suppliers: This may include suppliers that the purchaser has not
previously used.
Stage 7: pre-screen possible suppliers: This process will reduce the number of suppliers to
those that can meet the purchaser’s demands.
Stage 8: Evaluate the remaining supply base: This activity is often accomplished by means of
competitive bidding.
 The sourcing process
involves;
Stage 9: choose supplier: The choice of supplier determines the relationships that will exist
between the Purchasing and supplier organizations and how the relationship will be structured
and implemented. It will also determine how relationships with non-selected suppliers will be
maintained.
Stage 10: Deliver product / make performance service
The completion of this activity also begins the generation of performance data to be used for
the next activity.
Stage 11: Post purchaser/make performance evaluation
The supplier’s performance must be evaluated to determine how well the purchaser’s needs
have been met. This will provide data for future sourcing.
 Areas of sourcing
information
Analysis of the market conditions
Directives (reference by other firms)
Online trade directories
Websites
Exhibitions
trade journals
 SUPPLIER APPPRAISAL
To appraise is to examine, assess, or evaluate someone or something in-order to ascertain or
judge their ability, quality, success or needs.
Supplier appraisal may arise when a prospective vendor applies to be placed on the buyer’s
approved list or in the course of negotiation when the buyer wishes to assure him/herself that a
supplier can meet requirements reliably. Supplier appraisal can be a time consuming and costly
activity.
 Supplier appraisal should be
undertaken where:
For the purpose of supplier development
When entering a JIT arrangement
When engaging in global sourcing
When establishing long-term strategic supplier relationship
When procure new product
When develop new product
 What should be
appraised?
Supplier’s appraisal is situational. What to appraise is related to the requirements of the
particular purchaser. All appraisals should however, evaluate potential suppliers from the
following perspectives:
1. FINANCE:
2. PRODUCTION CAPACITY:
3. HUMAN RESOURCES:
4. QUALITY:
5. PERFORMANCE:
6. ENVIRONMENTAL AND ETHICAL FACTORS:
7. INFORMATION TECHNOLOGY:
 SUPPLIER ASSESSMENT
METHODS
There are two main approaches used in selecting suppliers:
1. Supplier appraisal – used to select potential / new suppliers
2. Vendor rating – used to assess already performing suppliers
Supplier appraisal
This is the assessment of the potential suppliers so as to be used as on of the company’s
suppliers.
Vendor Rating
It is the assessment of already performing suppliers so as to improve their performance or
replace them.
 There are two techniques
used in vendor rating:
1. Subjective supplier rating method.
2. Objective supplier rating method.
Subjective supplier rating method:
A purchasing officer is appointed to observe on how well or badly the suppliers are performing and
then judge each supplier. It is subjective because different individuals have different value judgments.
Objective supplier rating method:
Marks are allotted to each of the factors that determine a good supplier each time a supplier
performs. These factors include: Right price, right time, right quality, right quantity, service given to
the buyer, cost reduction effort, management capability.
The marks are the compiled at the end of a given period and used to come up with a conclusion in
respect to each supplier.
 Right Price
decision
Price is the amount of money for which something is bought or sold.
Pricing is the process of determining what a company will receive in exchange for its products.
Pricing Theories:
Theory of price is a micro economic principle that uses the concept of supply and demand to
determine the appropriate price point for a good or service.
The goal is to achieve the equilibrium where the quantity of the goods or services provided
match the Dd of the corresponding market and its ability to acquire the good or service.
The concept allows for price adjustments as market conditions change.
 Factors affecting pricing
decisions:
1. Competition and other market conditions.
(price mechanism)
2. Value as perceived by customers.
3. Cost of production.
4. Act of God.
5. Government policy.
 Pricing techniques/tools:
1. COST PLUS PRICING.
This is a very common method of determining the selling price of products.
The selling price is found out by adding a certain percentage mark-up to the average variable
cost.
This method ignores the influence of demand on price.
It helps fixing a fair price.
Cost is considered as the main factor influencing price.
 Pricing techniques
continued:
2. GOING-RATE PRICING.
The Going-Rate Pricing is a method adopted by the firms where in the product is priced as per
rates prevailing in the market especially on par with the competitors.
3. PRODUCT LINE PRICING.
A product line is a group of products produced by a firm that are related either as substitutes
and complements.
The products may be physically distinct or may be physically the same but sold under different
demand conditions which give the seller a chance to charge different prices.
 Pricing techniques
continued:
4. PRICE SKIMMING.
When a new product is introduced in the market, the firm fixes a price much higher than the
cost of production in absence of the competitors.
The consumers are ready to pay a high price to enjoy the pleasure of being the first users of the
product.
After a certain time, it will gain a huge profit as well as new competitors too, so after squeezing
the enthusiastic buyers, goes on reducing the price step-by-step so that it can reach the various
sections of consumers who are willing to buy it at lower prices.
 Pricing techniques
continued:
5. PENETRATION PRICING.
The price fixed is relatively a low one.
This pricing is adopted when the new product faces a strong competition from the existing
substitute products.
The new firm has to penetrate the market and achieve an acceptance for its product, so it will
charge only a very low price initially, hoping to charge a normal price later when it is established
in the market.
The penetration price sometimes below the cost of production.
 Summary
What are the procurement five Rs
What is quality
What are the dimension of quality
What is quality control
What is quality assurance
What are quality assurance activities
What is right quantity
Factors to determine right quantity
What is right time
 Cont.………..
What are the factors influence right time decision
What is right sourcing
Attributes of good suppliers
Sourcing process
Areas of obtaining suppliers information
Supplier appraisal
Where supplier appraisal should be undertaken
What should be appraised
Supplier assessment method
 Cont.….
Suppliers assessment method
Techniques in vendor rating
What is right price
Factors affecting pricing decision
Pricing techniques
THE END