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Procurement is the acquisition of goods or services at the best possible total cost of ownership, in the right quantity and quality, at the right time, in the right place for the direct benefit or use of the governments, corporations, or individuals generally via, but not limited to a contract. Simple procurement may involve nothing more than repeat purchasing. Complex procurement could involve finding long term partners – or even 'co-destiny' suppliers that might fundamentally commit one organisation to another. Even simple purchasing can involve trade-offs. What IS the quality required? Are there advantages buying fewer or more items? The timing can be critical. Each supplier may have different attributes, capabilities and values. The total cost of acquisition should be considered alongside the total lifetime cost, not just the purchase price. The physical handling of any products should be considered, with links to methods of transport, logistics and warehousing. A key question in procurement is what to buy, given a limited budget. A manager in a health service may have a large choice of possible health technologies which could be purchased. Is it better to buy an MRI scanner for a hospital or an advertising campaign to encourage parents to have their children vaccinated? A military officer may wish to choose between buying more fighter aircraft or more trucks. If good data is available it is good practice to make use of economic analysis methods such as cost-benefit analysis or cost-utility analysis. An important distinction is between analyses made without risk and those with risk. Where risk is involved, either in the costs or the benefits, the concept of expected value should be employed.
Procurement Types
Based on the consumption purposes of the acquired goods and services, procurement activities are often split into two distinct categories. The first category being direct, production-related procurement and the second being indirect, non-production-related procurement. Direct procurement occurs in manufacturing settings only. It encompasses all items that are part of finished products, such as raw material, components and parts. Direct procurement, which is the focus in supply chain management, directly affects the production process of manufacturing firms. In contrast, indirect procurement 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. Procurement Systems Another common procurement issue is the 'timing' of purchases. Kanban or Just In Time is a system (commonly used by Japanese companies but widely adopted by many global manufacturers from the 1990s onwards) of timing the purchases of consumables so as to keep inventory costs low. Shared Services In order to achieve greater economies of scale an organisation’s procurement functions may be joined up into shared services. This results in rather than a number of small procurement agents, one centralised procurement system. Procurement Process Procurement may also involve a bidding process. A company may want to purchase a given product or service. If the cost for that product/service is over the threshold that has been established (eg: Company X policy: "any product/service desired that is over $1,000 requires a bidding process"), depending on policy or legal requirements, Company X is required to state the product/service desired and make the contract open to the bidding process. Company X may have ten submitters that state the cost of the product/service they are willing to provide. Then, Company X will usually select the lowest bidder. If the lowest bidder is deemed incompetent to provide the desired product/service, Company X will then select the submitter who has the next best price, and is competent to provide the product/service. Procurement Steps Procurement life cycle in modern businesses usually consists of seven steps: See also | |||||||||||||||||||||||||||||||||||||||||||||
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