Fundamentals of Business

Procurement Types

Based on the consumption purposes of the acquired goods and services, procurement activities are often split into two distinct categories.

Procurement for conversion or consumption
Procurement for conversion occurs in manufacturing settings only. It encompasses all items that are part of finished products, such as raw material, semi finished goods, component parts and assemblies. Direct procurement, which is the focus in supply chain management, directly affects the production process of manufacturing firms.

Procurement for consumption activities concern "operating resources" that a company purchases to enable its operations. It comprises a wide variety of goods and services, from standardised low value items like office supplies and machine lubricants to complex and costly products and services like heavy equipment and consulting services. It is easy to forecast because demand is dependent.

Purchasing fo for resale
This is purchasing for trade, the purchase of finished goods and sale them in retail. Demand is independent, is trend orientated and almost impossible to forecast. It is important to understand what sells, where and when. You must have the flair and a good grasp of merchandising.

Procurement/Purchasing Steps

Information Gathering: If the potential customer does not already have an established relationship with sales/ marketing functions of suppliers of needed products and services (P/S), it is necessary to search for suppliers who can satisfy the requirements.

Supplier Contact: When one or more suitable suppliers have been identified, Requests for Quotation (RFQ), Requests for Proposals (RFP), Requests for Information (RFI) or Requests for Tender (RFT) may be advertised, or direct contact may be made with the suppliers.

Background Review: References for product/service quality are consulted, and any requirements for follow-up services including installation, maintenance, and warranty are investigated. Samples of the P/S being considered may be examined or trials undertaken.

Negotiation: Negotiations are undertaken, and price, availability, and customisation possibilities are established. Delivery schedules are negotiated, and a contract to acquire the P/S is completed.

Fulfillment: Supplier preparation, shipment, delivery, and payment for the P/S are completed, based on contract terms. Installation and training may also be included.

Consumption, Maintenance and Disposal: During this phase the company evaluates the performance of the P/S and any accompanying service support, as they are consumed.

Renewal: When the P/S has been consumed and/or disposed of, the contract expires, or the product or service is to be re-ordered, company experience with the P/S is reviewed. If the P/S is to be re-ordered, the company determines whether to consider other suppliers or to continue with the same supplier.