Procurement in Logistics

Procurement in Logistics https://pmjbedumy.sharepoint.com/sites/eLearningPMJB Introduction to procurement & Procurement procedures HAZLIN BINTI JAMARI

Procurement in Logistics Introduction to procurement & Procurement procedures A guide for Malaysia Polytechnic Students HAZLIN BINTI JAMARI Penerbit PMJB Press POLITEKNIK METrO JOHOR BAHRU 2023

Procurement in Logistics FIRST PUBLISHED 2023 A guide for Malaysia Polytechnic Students AUTHOR Hazlin Binti Jamari BBA Hons (Operations Management) Introduction to procurement & Procurement procedures e ISBN 978-967-2770-09-1

Preface In the name of Allah, the Merciful, the Compassionate Finally, students and other interested readers have a solid resource that describes procurement in logistics and supply chain. The objective of this book to provide source of information and knowledge especially for students who enrolled for DPL50174 Procurement in Logistics who may require information in interpret the procurement in logistics industry. This book focuses on Introduction to procurement and procurement procedure. We welcome any constructive suggestions and comments from lecturers and students. Such feedback is given careful consideration and very helpful for future improvements. Hazlin Binti Jamari Politeknik METrO Johor Bahru Jun 2023

The objective of this book to provide source of information and knowledge especially for students who enrolled for DPL50174 Procurement in Logistics And Supply Chain who may require information for any topic relevant to them. This book entirely based on the Polytechnic MOHE syllabus for WBL Diploma in Logistics and Supply Chain. PROCUREMENT IN LOGISTICS provides knowledge and skills to meet the challenges of the procurement process. Procurement strategic process consist activities on researching, negotiation and planning, this includes identifying a specific product or service requirement and the steps on how a business finds new or existing suppliers, builds supplier relationships and arranging payment, measures cost savings, minimizes risk and is pre-dominantly focused on value and return on investment. We welcome any constructive suggestions and comments from lecturers and students. Such feedback is given careful consideration and very helpful for future improvements. SYNOPSIS

Chapter 1 - Introduction to Procurement 1.1 Explain procurement 1.1.3 Recognize purchase requisitions, forms and records 1.2 Recognize techniques of procurement 4 9 10 10 16 Contents 1.1.1 Define procurement 6 1.1.2 Identify objectives and roles of procurement 1.2.1 Identify blanket orders 1.2.2 Explain the use of electronic data interchange in procurement 1.2.3 Describe Just in Time purchasing 1.3 Summary of Introduction to Procurement Chapter 2 - Procurement Procedures 2.1 Explain the procurement order cycle standard procedure 2.2 Organize the different types of items in procurement 2.3 Recognize the implementation of e- procurement 11 13 2.4 Summary of Procurement Procedure Exercise Answer Bibliography 15 23 25 T 34 A B L E O F C O N T E N T S Introduction to procurement & Procurement procedures Procurement in Logistics 36 35 39 2

Figure 1 : Summary of Procurement Activities Figure 2 : Procurement vs Purchasing Figure 3 : Summary of Procurement Roles Figure 4 : Purchase Requisition & Forms Figure 5 : Why choose EDI ? Figure 6 : JIT Concept Figure 7 : Procurement Order Cycle Figure 8 : Procurement Order Cycle Standard Procedure Figure 9 : Eight Steps in Procurement Figure 10 : E procurement Stages Process Figure 11 : E procurement Benefits Figure 12 : E procurement Risk Figure 13 : Procurement Strategy 3 12 14 Figures & Table 8 Table 1 : Procurement Roles Table 2 : MRO and OEM Comparison Table 19 33 FIG U R E S & T A B L E S Introduction to procurement & Procurement procedures Procurement in Logistics 5 9 17 18 26 29 4 31 7 24

Chapter 1 Introduction to Procurement Discuss the concepts in procurement in logistics and Explain procurement Recognize techniques of procurement After reading this chapter, you should be able to: supply chain

CHAPTER ONE What is procurement? Procurement refers to the wide range of activities that evolve around the obtaining of goods and services. It involves sourcing a vendor, negotiating pricing and terms, procuring items from them, paying the vendor, and more. For instance, it can be purchasing raw materials for building your product, software for communication purposes, or even services to keep up your facilities—every business requires goods and services of some kind to achieve their desired results. 1.0 Introduction to Procurement CONSISTENCY CREATES A STRONG PROCUREMENT PROCUREMENT Why is procurement important? Determine the need for purchasing Manage inventories effectively Forecast budgets Identify potential suppliers with the help of market research Negotiate terms and contracts with vendors Manage supplier relationships Track supply status Perform quality assurance on the goods and services secured Maintain purchase order records Keep track of procurement process KPIs Achieve continuous improvement While it does involve purchasing in a literal sense, it's also closely related to strategic planning, as it takes a lot of time and money to keep an organization running. It requires that procurement professionals: PAGE 01

Procurement 1.1 EXPLAIN PROCUREMENT Procurement can be explained as the acquisition of goods, services or works from an external source. The goods and services are procured at the best possible cost to meet the needs of the acquirer in terms of quality and quantity, time, and location. You know what procurement as well as logistics is, but what you may wonder about is how important these are from the perspective of a business organisation. The qualification of this does not end there because when you procure, you see to it that you get the needed goods and services at the best cost, cheapest if possible. Next we go to the meaning of logistics. The word can be defined in different contexts but for this discussion, we take it from the view point of a business environment. Logistics is a framework of business planning so that the materials, services, capital and information assets are properly managed. Procurement in the logistics operation responsible for supplying raw materials or goods in general to a warehouse, logistics center, production plant, or store to ensure that the business activity (production, distribution, or sale) is properly carried out. From a warehouse standpoint, procurement relates to the reorder point. When the stock is below the preset level, a purchase or replenishment order should then be triggered to prevent a stockout from occurring, as that could lead to a loss of sales or even halt production. Therefore, procurement management is vital for business development. CHAPTER ONE PAGE 02

Procurement Activities 1.1 EXPLAIN PROCUREMENT FIGURE 1: SUMMARY OF PROCUREMENT ACTIVITIES CHAPTER ONE PAGE 03

Procurement 1.1.1 DEFINE PROCUREMENT Procurement can be defined as the sourcing of materials needed to manufacture products. In other words, this part of the supply chain focuses on purchasing raw materials, replacement parts, auxiliary supplies, operating supplies and other items needed for the manufacturing process to work. In this sense, the procurement function can also buy logistics services. Logistics includes transport, warehousing and added value services - end-to-end, from extraction to factory, to delivery, to maintenance and return. The logistics that supports procurement can be called procurement logistics. When the procurement department buys good it requires the logistics function to organize transport and potentially the storage of the orders. Procurement logistics can also include quality control of the purchased goods, inventory management and several other added value services. So when looking at the relationship between logistics and procurement, you should really be looking to understand who is engaged in the end to buying process, and what role does procurement play in the process for your organization. This will help you determine how/where there is overlap. The procurement supply chain person needs the logistics supply chain person to organize to a full “journey” from beginning to final end, including all other tools needed to make a sound and safe adventure. CHAPTER ONE PAGE 04

Procurement vs Purchasing FIGURE 2: PROCUREMENT VS PURCHASING CHAPTER ONE PAGE 05

Continuous Supply Stockouts of raw materials or components parts can shut down or force a change in production plans, resulting in unexpected cost. Downtime due to production stoppage increases operating costs and may result in an inability to provide finished goods as promised to customers. Imagine the impact if an automobile assembly line had all parts except tyres. One of the core objectives of procurement is to ensure that a continuous supply of materials, parts and components is available to certain manufacturing operations. In the past, downtime due to material shortages was minimized by maintaining large inventories of materials and components to protect against potential disruption in supply. However, maintaining inventory is expensive and requires scarce capital. One goal of procurement is to maintain supply continuity with the minimum inventory investment possible. This requires balancing the costs of carrying material against the possibility of a production stopage. The ideal, of course, is to have needed materials arrive just at the moment they are scheduled to be used in the production process, in other words, just-in-time (JIT). Minimize Inventory Investment Procurement is critical to the quality requirements of every organization. The quality of finished goods and services is dependent upon the quality of the materials and components used. If poor-quality components and materials are used, then the final product likely will not meet customer quality standards. Thus, both a firm and its suppliers need to be likely committed to a continuous quality improvement initiative. Quality Improvement Objectives and Roles 1.1.2 IDENTIFY OBJECTIVES AND ROLES OF PROCUREMENT Procurement CHAPTER ONE PAGE 06

Role Features Supplier Development Successful procurement depends on locating or developing suppliers, analyzing their capabilities, and selecting and working with those suppliers to achieve continuous improvement. Developing good supply relationships with firms that are committed to the buying organization’s success is critical in supplier development. It is important to develop close relationships with those suppliers in order to share information and resources to achieve better results. For example, a manufacturer might share a production schedule with key suppliers, which in turn allows them to better meet the buyer’s delivery requirements. A retailer might share point-of-sale information and promotional plans to help suppliers meet quantity requirements at specific times. This perspective on effective procurement stands in stark contrast to the traditional focus on price alone, which inherently created adversarial relationships between a firm and its suppliers. Access Technology and Innovation Firms look to suppliers as sources of innovation and new technology to aid in the design of new products and the improvement of existing ones. For example, Procter & Gamble has openly stated its goal of having 50 percent of its product and process innovation come from sources outside the company. The firm uses its procurement organization as a major source of outreach to suppliers for that innovation. One example of success is provided by the development and introduction of a new product, the Mr. Clean Magic Eraser. The technology for this product was developed and provided to P& G by a major supplier, BASF chemicals. TABLE 1: PROCUREMENT ROLES 1.1.2 IDENTIFY OBJECTIVES AND ROLES OF PROCUREMENT CHAPTER ONE PAGE 07

FIGURE 3: SUMMARY OF PROCUREMENT ROLE 1.1.2 IDENTIFY OBJECTIVES AND ROLES OF PROCUREMENT Procurement Roles CHAPTER ONE PAGE 08

PURCHASE REQUISITION FORM PURCHASE ORDER FORM QUOTATION FORM INVOICE FORM 1.1.3 RECOGNIZE PURCHASE REQUISITIONS, FORMS AND RECORDS P U R C H A S E R E Q UISITIO N & F O R M S FIGURE 4: PURCHASE REQUISITION & FORMS CHAPTER ONE PAGE 09

Blanket Orders 1.2 RECOGNIZE TECHNIQUE OF PROCUREMENT A blanket purchase order (or standing purchase order) is a long-term contract between a supplier and organization that states the supplier will provide goods or services at a set price over a specific time period. A Blanket Purchase Order (BPO) is the preferred method for placing orders which will require multiple payments over a period of time. Examples of BPO's are: standing orders, maintenance/service contracts, and open orders. A blanket purchase order (BPO) is a longterm agreement between an organization and a supplier to deliver goods or services with a set price on a recurring basis over a specified time period. If your business makes multiple payments for the same goods or services, issuing a blanket purchase order with the details, such as price and delivery schedule, already specified is an efficient way to reduce time spent and processing delays. When the procurement department buys good it requires the logistics function to organize transport and potentially the storage of the orders. Procurement logistics can also include quality control of the purchased goods, inventory management and several other added value services. Procurement departments use blanket orders, which may also be called standing purchase orders, to reduce costs and build leaner, more efficient work processes. Here are several ways blanket purchase orders can boost the bottom line and improve workflow. CHAPTER ONE PAGE 10

Electronic Data Interchange (EDI) 1.2.2 EXPLAIN THE USE OF ELECTRONIC DATA INTERCHANGE IN PROCUREMENT Electronic Data Interchange (EDI) is the electronic interchange of business information using a standardized format; a process which allows one company to send information to another company electronically rather than with paper. Business entities conducting business electronically are called trading partners. Procurement can be defined as the act of obtaining or buying goods and services. Electronic Data Interchange (EDI) which is one component in procurement defined EDI as the computer-to-computer exchange of routine business documents/data in a standard electronic data format between business partners. EDI is computer-to-computer business documents and business information file transfers between trading partners without human intervention. EDI uses standard formats for transferring the information, purchase orders, status, invoices, advance shipping notices, bills of lading, or payments with remittance advices. Minimal paper usage. EDI reduces associated expenses of storage, printing, postage, mailing and recycling. Enhanced quality of data. EDI minimises data entry errors, improves accounts payable/receivable times as processes become streamlined and can be used for forecasting. Improved turnaround times. Benefits of EDI CHAPTER ONE PAGE 11

Electronic Data Interchange (EDI) PAGE 12 CHAPTER ONE FIGURE 5: WHY CHOOSE EDI?

What Is Just-in-Time (JIT)? The JIT inventory system is a management strategy that minimizes inventory and increases efficiency. The success of the JIT production process relies on steady production, high-quality workmanship, no machine breakdowns, and reliable suppliers. The just-in-time (JIT) inventory system is a management strategy that aligns raw-material orders from suppliers directly with production schedules. Companies employ this inventory strategy to increase efficiency and decrease waste by receiving goods only as they need them for the production process, which reduces inventory costs. This method requires producers to forecast demand accurately. The JIT purchasing system minimizes inventory and increases efficiency. JIT production systems cut inventory costs because manufacturers receive materials and parts as needed for production and do not have to pay storage costs. Manufacturers are also not left with unwanted inventory if an order is canceled or not fulfilled. One example of a JIT inventory system is a car manufacturer that operates with low inventory levels but heavily relies on its supply chain to deliver the parts it requires to build cars on an as-needed basis. Consequently, the manufacturer orders the parts required to assemble the vehicles only after an order is received. How Does Just-in-Time Purchasing Work? JIT inventory systems have several advantages over traditional models. Production runs are short, which means that manufacturers can quickly move from one product to another. Also, this method reduces costs by minimizing warehouse needs. Companies also spend less money on raw materials because they buy just enough resources to make the ordered products and no more. The disadvantages of JIT inventory systems involve potential disruptions in the supply chain. If a rawmaterials supplier has a breakdown and cannot deliver the goods promptly, this could conceivably stall the entire production line. A sudden unexpected order for goods may delay the delivery of finished products to end clients. Advantages and Disadvantages of JIT 1.2.3 DESCRIBE JUST IN TIME PURCHASING Just In Time Purchasing CHAPTER ONE PAGE 13

JIT Concept CHAPTER ONE PAGE 14 FIGURE 6: JIT CONCEPT

Summary INTRODUCTION TO PROCUREMENT Procurement can be explained as the acquisition of goods, services or works from an external source Objectives and roles of procurement:- Purchase requisitions include purchase order, quotation and invoice form Blanket order is a a long-term contract between a supplier and organization that states the supplier will provide goods or services at a set price over a specific time period Electronic Data Interchange (EDI) is the computer-to-computer exchange of routine business documents/data in a standard electronic data format between business partners The just-in-time (JIT) inventory system is a management strategy that aligns rawmaterial orders from suppliers directly with production schedules. i. Continuous Supply ii. Minimize Inventory Investment iii. Quality Improvement CHAPTER ONE PAGE 15

Chapter 2 Procurement procedures Discuss procurement procedures . Explain the procurement order cycle standard procedure Organize the different types of items in procurement Recognize the implementation of e-procurement After reading this chapter, you should be able to:

Procurement Order Cycle Standard Procedure 2.1 EXPLAIN THE PROCUREMENT ORDER CYCLE STANDARD PROCEDURE Procurement procedures means organize procurement activity. Firms today purchase not only raw materials and basic supplies but also complex fabricated components with very high value-added content. They spin off functions to suppliers to focus internal resources on core competencies. The result is that more managerial attention must then be focused on how the organization interfaces and effectively manages its supply base. The term procurement process is the series of processes that are essential to get products or services from requisition to purchase order and invoice approval. The procurement process includes the preparation and processing of a demand and the end receipt and approval of payment. Comprehensively, this can involve purchase planning, standards, specifications determination, supplier research, selection, financing, price negotiation, and inventory control. CHAPTER TWO PAGE 16

Procurement Standard Procedure FIGURE 7: PROCUREMENT ORDER CYCLE 2.1 EXPLAIN THE PROCUREMENT ORDER CYCLE STANDARD PROCEDURE CHAPTER TWO PAGE 17

Procurement Order Cycle Standard Procedure CHAPTER TWO PAGE 18 FIGURE 8: PROCUREMENT ORDER CYCLE STANDARD PROCEDURE

REQUISITION MATERIAL FOLLOW UP AND EXPEDITE DELIVERY DOCUMENT RECEIPT OF MATERIAL MOVE TO STORE ROOM RECEIVE AND HANDLE NVOICE ISSUE PAYMENT Eight Steps of Procurement DETERMINE SUPPLIER FIGURE 9: EIGHT STEPS IN PROCUREMENT 2.1.1 EXPLAIN EIGHT STEPS OF PROCUREMENT ORDER CYCLE STANDARD PROCEDURE CHAPTER TWO PAGE 19

Step 1: Requisition Material Step 3: Purchase Order A purchase order (PO) is a document that represents an agreement with a vendor to buy goods or services. A purchase order is the first official document created by the purchasing department to procure products. It is made after the purchase requisition is approved by the procurement department. Each purchase order is given a unique number by the buyer. Step 2: Determine Supplier A material requisition, also known as a materials requisition form, or a material request, is a document used by the production department to request materials they need to complete a manufacturing process. It is a request from an employee or department to buy goods or services. After internal review and approval, it is used to create a purchase order that is sent to a supplier. Quality and reliability Speed and flexibility Value for money Strong service and clear communication Financial security Procurement takes the lead to evaluate each prospective supplier against specific criteria like cost, quality, consistency, and other performance metrics. There are a number of key characteristics when identifying and short listing possible suppliers. 2.1.1 EXPLAIN EIGHT STEPS OF PROCUREMENT CHAPTER TWO PAGE 20

Step 4: Follow up and expedite delivery Step 6: Move to store room Warehousing is the process of storing physical inventory for sale or distribution. Warehouses are used by all different types of businesses that need to temporarily store products in bulk before either shipping them to other locations or individually to end consumers. Storage is defined as 'the marketing function that involves holding goods between the time of their production and their final sale. ' It bridges the gap between the time when goods are produced and the time when these are ultimately consumed as there is always a time gap between production and consumption. Step 5: Document receipt of material Follow-up is done by the Purchasing Department upon request of the ordering department on all purchase orders where all or part of the order is still outstanding. Expediting or expedited shipping is defined as the moving of shipments at an accelerated rate or priority. Expedited shipping often refers to overnight or twoto three-day delivery and is more costly than standard shipping. Documents including the purchase order, receiving report, packing slip, and vendor's invoice can be filed together (preferably in electronic format) and attached during the receipt process so that they are readily available when the invoice is received, and bills are being paid. A receipt is a written acknowledgment of having received, or taken into one's possession, a specified amount of money, goods, etc. A receipt is not a confirmation notice or quote. The information on a receipt should include: Vendor Name. Description of purchase. 2.1.1 EXPLAIN EIGHT STEPS OF PROCUREMENT CHAPTER TWO PAGE 21

Step 7: Receive and handle invoice Step 8: Issue payment It exists within the larger procurement management process and involves four key stages: Selecting goods and services. Enforcing compliance and order. Receiving and reconciliation. Invoicing and payment. Purchase order payment terms are the conditions that specify when and how a vendor should be paid for the goods or services they deliver to a customer. Invoice processing involves the complete cycle of receiving a supplier invoice, approving it, establishing a remittance date, paying the invoice, and then recording it in the general ledger. It is a critical aspect of running a business. Purchase orders and invoices are crucial documents that are part of every company's procurement process. An invoice is a bill sent to a customer after they receive a product or service. If a customer purchases something without paying immediately, you will send an invoice to collect payment. You might also receive invoices from your vendors if you purchase something on credit. 2.1.1 EXPLAIN EIGHT STEPS OF PROCUREMENT CHAPTER TWO PAGE 22

Material, Repair and Overhead (MRO) MRO meaning is maintenance, repair, and operations. It describes all steps and actions that are needed for the upkeep of a facility, the systems within the facility, and of course, the machines needed for the company's main business output. MRO in procurement is an umbrella term covering all maintenance parts used for repairs or to support production operations. Whilst they are classed as indirect purchases, this procurement category plays an essential role in day-to-day operations. An original equipment manufacturer (OEM) traditionally is defined as a company whose goods are used as components in the products of another company, which then sells the finished item to users. It is a company that supplies components that are used in the production of goods by other manufacturers. OEM procurement for manufacturers comes with a range of benefits such as cost savings as well as freeing up resources to look into areas that require deep involvement. Original Equipment Manufacturer (OEM) Cost-effectiveness Since OEMs offer overall maintenance packages rather than smaller repair jobs, logistics are wary of to what level the full lifecycle support costs could spiral. MROs, on the other hand, have proven they can return logistics back to service as quickly and safely as possible at minimum expense. MRO VS OEM 2.2 ORGANIZE THE DIFFERENT TYPES OF ITEMS IN PROCUREMENT Different Types of Procurement Item CHAPTER TWO PAGE 23

Procument Item Name Features Pros Cons MRO An umbrella term covering all maintenance parts used for repairs or to support production operations. Can return logistics back to service as quickly and safely as possible at minimum expense. Improper data lead to inefficient inventory planning, high level of obsolescence, unavailability of right spares at the right time, and ultimately higher maintenance costs. OEM It is a company that supplies components that are used in the production of goods by other manufacturers. offer overall maintenance packages rather than smaller repair jobs, logistics are wary of to what level the full lifecycle support costs could spiral. OEM service are costly and inflexibility. It is expensive because much of the risk mitigation is built into the price. MRO and OEM Comparison Table Time and Cost Management The benefits of MRO efficiency include effective procurement of spare parts and services, low costs of holding inventory, high-quality production, low costs of the overall business operations, and high productivity of workers and equipment. By going to the OEM, it can be sure that the response will be quicker, as less time is required to identify and produce the part due, in a large part, to access to the original drawings. TABLE 2: MRO AND OEM COMPARISON TABLE CHAPTER TWO PAGE 24

2.3 RECOGNIZE THE IMPLEMENTATION OF E PROCUREMENT E-procurement can be defined as business-to-business or business-toconsumer or business-to-government purchase and sale of supplies, work, and services through the Internet as well as other information and networking systems, such as electronic data interchange and enterprise resource planning. Also known as e-procurement or supplier exchange, is the process of requisitioning, ordering and purchasing goods and services online. It is a business to business process. Unlike e-commerce, e-procurement utilizes a supplier's closed system and is only available to registered users. Eprocurement facilitates interactions between preferred suppliers and customers through bids, purchase orders and invoices. E-procurement started in the 1980s, following the development of Electronic Data Interchange (EDI). A decade later, improvements in EDI allowed organizations to develop online catalogs for vendors. Today, e-procurement involves everything from supplier evaluation and selection to contract management, electronic orders and payments. E-procurement uses a web interface or some other kind of networked system that connects suppliers and customers. In the enterprise, a chief procurement officer or procurement department usually sets the policies governing the e-procurement of materials for the organization. The goal of using an e-procurement system is to acquire products or services at the best possible price and at the best possible time. E Procurement CHAPTER TWO PAGE 25

E Procurement stages process PAGE 26 CHAPTER TWO FIGURE 10: E PROCUREMENT STAGES PROCESS

2.3 RECOGNIZE THE IMPLEMENTATION OF E PROCUREMENT e-Procurement as a new approach to define Procurement Strategy and not an “IT Tools support to procurement” investment. Investing in a Global Shared eProcurement model optimizes management and decreases waste and redundancy costs. e-Procurement success depends firstly on simplicity, transparence, trustable Processes and People skills, and only then on Technology issues. e-Procurement is not just “Savings”, it is also “Profits.” Transforming procurement from tactical to strategic. Create a Corporate Governance model to e-procurement and adapt Legislation to the new global trend. Improve a change management plan focused on Implementation. E Procurement Key Development CHAPTER TWO PAGE 27

Visibility Areas where approvals take the longest and can be shortened Vendors you spend a lot of money with (and who you might be able to negotiate better terms with) Times to pay invoices to take advantage of early pay discounts and optimize cash flow On-contract vs. offcontract spend e-Procurement centralized access to all data. Track down and analyze metadata to find areas where it can improve. This could mean tracking: Automated PO generation Templates Internal catalogs PunchOut catalogs A common problem with manual procurement systems is human error. A person captures incorrect data in a spreadsheet or fails to save their changes. Modern e-Procurement systems use automation to alleviate these challenges. Instead of having one of your employees enter in a PO or invoice by hand, you can use one of the following options: With these features can automate data entry and rely on invoice matching capabilities and exception alerts to notify when numbers don’t match up. Automation Consolidating similar orders to take advantage of bulk discounts Showing vendors how much we spend with them to negotiate discounts See when non-preferred vendors are being used (and even put a stop to those orders to save money there, too) When all of your orders can be viewed for a vendor in one place, can strategize remarkable cost savings. This includes: This kind of metadata just isn’t available with manual system. Easy vendor management E Procurement Benefits 2.3 RECOGNIZE THE IMPLEMENTATION OF E PROCUREMENT CHAPTER TWO PAGE 28

E Procurement Benefits CHAPTER TWO PAGE 29 FIGURE 11: E PROCUREMENT BENEFITS

For procurement to be flawless and fraud-proof, there needs to be a clear and watertight internal system. The system entails transparent lines of command, a network of checks and balance, as well as a clearly outlined audit process. Lack of, or weakness, in the above measures, creates room for fraudulent activities. To mitigate this risk, organisations need to come up with clear procurement channels and a centralised procurement system. Having an independent auditor also helps in evaluating compliance with the laid down procedure of purchasing. Cyber Security Risk Poor Internal System With much procurement moving from physical to virtual, the risks posed by cyber attackers is real. Bidding information stored in organisational databases could be accessed by hackers who then use the details to distort the procurement in favour of some bidders. Moreover, hackers could scuttle the whole procurement process leading to delayed purchases and stalled operations. To reduce the risk of cyberattacks on procurement processes, organisations ought to invest in hackerproof e-procurement systems. In Having back up data for bids is also a great strategy of throwing the hackers off track. Investing in genuine security software and firewalls will also keep hackers at bay. A conflict of interest between suppliers and procurement managers poses a real danger to purchasing. Where conflicts exist, the likelihood of getting a raw deal cannot be ignored. Genuine procurement endeavours to purchase the right items at the right price and time. With conflict of interest, this can hardly be achieved. Procurement managers should desist from engaging in underhand deals with suppliers. Potential conflict should be declared. Moreover, procurement processes should be subjected to multiple level decision making rather than a single person or office. Conflict of Interest E Procurement Risk and Impacts 2.3 RECOGNIZE THE IMPLEMENTATION OF E PROCUREMENT CHAPTER TWO PAGE 30

E Procurement Risk and Impacts CHAPTER TWO PAGE 31 FIGURE 12: E PROCUREMENT RISK

2.3 RECOGNIZE THE IMPLEMENTATION OF E PROCUREMENT Online information transferring. Online information transferring, or e-informing, is the stage that aligns with a traditional procurement cycle Online sourcing Online tendering Online auctioning Online product ordering It enables digital sourcing, purchasing, spend management, risk mitigation, and other critical aspects of vendor management through a single interface. E-informing. This is the first stage of electronic procurement and occurs before purchasing the relevant good or services E-tendering E-auctioning Vendor management Catalogue management E-purchasing E-ordering E-invoicing 5 steps of e-procurement The capabilities of e-procurement Components of electronic procurement Developing an e-procurement internal customer ordering and approvals system Developing an e-quotation preparations system Developing an e-quotation evaluation system Developing an e-purchase order system Developing an e-tendering system E Procurement Development CHAPTER TWO PAGE 32

Procurement Strategy CHAPTER TWO PAGE 33 FIGURE 13: PROCUREMENT STRATEGY

Summary PROCUREMENT PROCEDURES Eight steps of procurement order cycle standard procedure :- Material, Repair and Overhead (MRO) is An original equipment manufacturer (OEM) traditionally is defined as a company whose goods are used as components in the products of another company, which then sells the finished item to users. E-procurement can be defined as business-to-business or business-toconsumer or business-to-government purchase and sale of supplies, work, and services through the Internet as well as other information and networking systems, such as electronic data interchange and enterprise resource planning. a. requisition material b. determine supplier c. a purchase order d. follow up and expedite delivery e. document receipt of material f. move to store room g. receive and handle invoice h. issue payment maintenance, repair, and operations. It describes all steps and actions that are needed for the upkeep of a facility, the systems within the facility, and of course, the machines needed for the company's main business output. CHAPTER TWO PAGE 34

What is procurement? Define procurement in logistics. What are the objectives and roles of procurement? State SEVEN (7) activities of the procurement department. What is blanket orders? Describe blanket orders with suitable examples. What is EDI? Define THREE (3) key concepts of EDI. Explain THREE (3) benefits of EDI. What is JIT? How Does Just-in-Time Purchasing Work? What are advantages of JIT? What are disadvantages of JIT? Explain in detail TWO (2) characteristics of Just in Time (JIT) concept. Explain EIGHT(8) steps of procurement order cycle standard procedure. What is MRO? What is OEM? Differentiate between MRO and OEM. What is e procurement? Define e procurement in logistics. Identify TWO (2) key development of e procurement. Explain TWO (2) benefits of e procurement. Identify THREE (3) risks and impacts of e procurement. Determine TWO (2) barriers to implement the e-procurement. Describe TWO (2) development of e procurement. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. Exercise PAGE 35 EXERCISE

Continous supply Minimize inventory investment Quality improvement Answer Question 1: Procurement can be explained as the acquisition of goods, services or works from an external source. Answer Question 2: Procurement in the logistics operation responsible for supplying raw materials or goods in general to a warehouse, logistics center, production plant, or store to ensure that the business activity (production, distribution, or sale) is properly carried out. Answer Question 3: Answer Question 4: 1. Procurement Planning 2. Global / international sourcing 3. Vendor development and prequalifications 4. Request for quotes 5. Technical bid evaluation 6. Single source vendor or monopoly selection 7. Commercial negotiations Answer Question 5: A blanket purchase order (or standing purchase order) is a long-term contract between a supplier and organization that states the supplier will provide goods or services at a set price over a specific time period. Answer Question 6: A Blanket Purchase Order (BPO) is the preferred method for placing orders which will require multiple payments over a period of time. Examples of BPO's are: standing orders, maintenance/service contracts, and open orders. as the act of obtaining or buying goods and services. as the computer-to-computer exchange of routine business documents/data in a standard electronic data format between business partners. EDI uses standard formats for transferring the information, purchase orders, status, invoices, advance shipping notices, bills of lading, or payments with remittance advices. Minimal paper usage. EDI reduces associated expenses of storage, printing, postage, mailing and recycling. Enhanced quality of data. EDI minimises data entry errors, improves accounts payable/receivable times as processes become streamlined and can be used for forecasting. Improved turnaround times. Answer Question 7 Electronic Data Interchange (EDI) is the electronic interchange of business information using a standardized format; a process which allows one company to send information to another company electronically rather than with paper. Answer Question 8 Answer Question 9 Answer Question 10 The just-in-time (JIT) inventory system is a management strategy that aligns rawmaterial orders from suppliers directly with production schedules. Answer PAGE 36 ANSWER

The JIT inventory system is a management strategy that minimizes inventory and increases efficiency. The success of the JIT production process relies on steady production, high-quality workmanship, no machine breakdowns, and reliable suppliers. Answer Question 11: The JIT purchasing system minimizes inventory and increases efficiency. Answer Question 12: Production runs are short, which means that manufacturers can quickly move from one product to another. Also, this method reduces costs by minimizing warehouse needs. Companies also spend less money on raw materials because they buy just enough resources to make the ordered products and no more. Answer Question 13: It involve potential disruptions in the supply chain. If a raw-materials supplier has a breakdown and cannot deliver the goods promptly, this could conceivably stall the entire production line. A sudden unexpected order for goods may delay the delivery of finished products to end clients. Answer Question 14: Answer Question 15: a. requisition material b. determine supplier c. a purchase order d. follow up and expedite delivery e. document receipt of material f. move to store room g. receive and handle invoice h. issue payment Cost-effectiveness Since OEMs offer overall maintenance packages rather than smaller repair jobs, logistics are wary of to what level the full lifecycle support costs could spiral. MROs, on the other hand, have proven they can return logistics back to service as quickly and safely as possible at minimum expense. Answer Question 16 Material, Repair and Overhead (MRO) is maintenance, repair, and operations. It describes all steps and actions that are needed for the upkeep of a facility, the systems within the facility, and of course, the machines needed for the company's main business output. Answer Question 17 An original equipment manufacturer (OEM) traditionally is defined as a company whose goods are used as components in the products of another company, which then sells the finished item to users. Answer Question 18 1. Answer Question 19 E-procurement can be defined as business-to-business or business-toconsumer or business-to-government purchase and sale of supplies, work, and services through the Internet as well as other information and networking systems, such as electronic data interchange and enterprise resource planning. Answer PAGE 37 ANSWER

e-Procurement as a new approach to define Procurement Strategy and not an “IT Tools support to procurement” investment. Investing in a Global Shared eProcurement model optimizes management and decreases waste and redundancy costs. Visibility Automation Cyber Security Risk Poor Internal System Conflict of Interest Cyber Security Risk Poor Internal System Conflict of Interest Answer Question 20: Unlike e-commerce, e-procurement in logistics utilizes a supplier's closed system and is only available to registered users. Eprocurement facilitates interactions between preferred suppliers and customers through bids, purchase orders and invoices. Answer Question 21: Answer Question 22: Answer Question 23: Answer Question 24: Developing an e-procurement internal customer ordering and approvals system Developing an e-quotation preparations system Answer Question 25: Answer PAGE 38 ANSWER

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