The Role of Procurement in Organisations

In every organisation, having “value for money spent” can not be an option but a reasonable suggestion of gaining the greatest possible return from resources deployed. This can be achieved by a conscious effort of minimising cost and maximising profit (return) especially, in monetary engagements.

    A Procurement department therefore should be seen as a strategic function. The objectives of a world-class procurement organization move far beyond the traditional belief that procurement’s primary role is to obtain goods and services in response to internal needs. To understand how this role is changing, we must first understand what procurement is all about.

Procurement today is a complex management service, intended to support the strategic aims of an organisation. Defining it broadly, procurement is the overarching function that describes the activities and processes to acquire goods and services. Many people use “purchasing” and “procurement” interchangeably but despite their similarities they do have different meanings.

Importantly, and distinct from “purchasing”, procurement involves the activities involved in establishing fundamental requirements, sourcing activities such as market research and vendor evaluation and negotiation of contracts. In other words, it includes the purchasing activities required to order and receive goods.

Purchasing on the other hand, is a subset of the wider procurement process. It is the process of how goods and services are ordered. Generally, purchasing refers to the process involved in ordering goods such as request, approval, creation of a purchase order record (a Purchase Order or P.O.) and the receipting of goods. Purchasing can usually be described as the transactional function of procurement.

Because purchasing is a process within the overarching procurement process, both procurement and purchasing are often used to describe each other. In the business world, the practice of using interchangeable terminology seems to work well enough although it can sometimes be a little confusing.

In Ghana, Public Procurement is regulated by the Public Procurement Authority (PPA). This body was established by the Public Procurement Act, 2003 (Act 663) as a body corporate, charged with the responsibility of overseeing the effective implementation of the Act. It is mandated to regulate, assess and ensure full compliance by entities to all the provisions of the Act. PPA does not undertake procurement on behalf of entities but rather seeks to build their capacities to enable effective implementation of the Act.

The functions of the Public Procurement Authority are premised on four key principles which include: Fair Competition, Integrity, Transparency and Non-discrimination in public procurement. In a whole, PPA seeks to improve efficiency and transparency in public procurement. (Source: Public Procurement Authority (PPA) news flyer)

Procurement is more than just buying goods and services at the best price but should be seen as a fundamental part of the overall organisational goal and must be built in. It is inextricably tied to the strategic objectives of the organisation and therefore should have representation on management board.

The strategic role of procurement has a longer-term and broader perspective focused on the overall organisational objectives and strategies and consumers satisfaction. Because the purchasing function is simultaneously exposed to the needs of the organisation on one hand and the market on the other hand, it is in a unique position to identify and exploit opportunities not apparent to others in the organisation. The strategic perspective of procurement goes beyond operational needs into Risk management, Technology, Competitive intelligence and Continuous improvement of the supply chain.

Procurement, playing its role in an organisation, serves as a central repository for corporate knowledge of acquisition of goods and services. Effective procurement departments operate on a corporate oversight perspective. They evaluate the total cost of ownership of products, providing a durable product while minimizing operational support cost. They provide assistance in determining alternative acquisition and payment methods.

Procurement functions compile and analyse historical data to identify opportunities for cost avoidance, standardisation of goods and services and implementing pricing agreement for goods and services based on volume or criticality and corporate-wide services contracts.

In addition, Procurement considers issues such as longevity of items and future redeployment of assets and brings consistency to due diligence aspects and legal compliance for procurement and reporting requirements. (Source: The chat room hosted by David Newman.).

Procurement further ensures uninterrupted flows of raw materials at the lowest total cost, involving suppliers and purchasing personnel in new product design and development efforts and also working closely with strategic suppliers to improve quality materials and improved quality of finished goods.

The procurement function manages procurement processes and the supply base efficiently and effectively. It does this by Identifying opportunities where the procurement team can add true value, Evaluation and selection of suppliers, Ensuring all purchases go through the approved procurement processes, Review of specifications or statement of work and reviewing the requirements for the material or service provided.

Having talked about some key roles of procurement in organisations, it is important to note that proactive procurement is done with an understanding of the 7 “Rs” of procurement. However, the term “Right” is situational: what an organisation might see as “RIGHT” may be totally different from another.

The first “R” is the Right Price. The term is used as ‘right price and not lowest or cheapest price’. “Right Price” means that, it is that which is needed to meet all the demands of the organisation in terms of specification, delivery, service and cost. Procurement in view of this has the responsibility to keep –to-date with the state of market prices, keep abreast of new developments within the market and also eliminate all unnecessary cost associated with the purchases.

The second “R” is the Right Quantity. This is an assessment of the quantity that is required to meet the needs of the organisation in the most cost-effective way. Procurement must therefore ensure that investment in stock is kept to a minimum and consistent with providing the agreed level of service to meet the needs of the organisation.

The third “R” is the Right Quality. In purchasing, quality means conforming to specifications or requirements. End users do not care why a product or service is defective, all they expect is satisfaction. If the product is what they want, well designed, well made, and well serviced, then the quality is satisfactory. The purchasing function must ensure that the quality of materials purchased is adequate to meet the needs of the organisation. This also involves formulating and implementing quality control policies and procedures to ensure that the right quality is maintained thorough out.

The fourth “R” is the Right Time. This refers to the time the goods or services are needed by the organisation. Ideally, delivery should correspond exactly with the need and should not be too early (overstocking) or too late (failure to meet the need). To acquire an effective time management, lead time is considered where “Lead Time” is the period between ordering and delivery.

The fifth “R” is the Right Place. Goods or services ordered from the supplier are to be delivered at the exact place specified by procurement. The supplier should not decide where the items should be delivered. But rather ensure conformity to specifications in respect to the appropriate delivery place stated.

The sixth “R” is the Right Supplier/Source. The right supplier is the one who can fully meet the needs of the organisation in terms of specification, delivery, price, quality and service. In choosing the right supplier, the purchasing function has the responsibility to select appropriate sources of supply, develop good supplier relationships and monitor the performance of existing suppliers. In each of these activities, it is prudent for the procurement department to make sure that the organisation have an effective and efficient supplier base to meet its existing and future needs.

The seventh “R” is the Right Service. Procurement has to ensure suppliers provide the agreed level of service to meet the needs/standards of the organisation. Good quality services providered by the supplier, can lead to a long-term relationship with the organisation.

It is very important to note, that the above specified “Rights” must be consistent with corporate goals and objectives from which functional goals and objectives are derived.

In summary, the goal of procurement is to carry out activities in such a way that the goods and services procured are of the right quality, from the right source, are at the right cost and can be delivered in the right quantities, to the right place, at the right time and in all, providing right services.

Procurement really is vital and can transform companies when it is done “right”, so although procurement may not actually produce the goods that are sold it can actually help to increase profits. Procurement in its broad sense is everyone’s business.

By Jennifer Akongbota

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