9 PROCUREMENT AND SUPPLY CHAIN MANAGEMENT
PSM 206: Introduction to Purchasing and Supply II
The difference purchasing and procurement
PURCHASING
The activity of acquiring goods or services to accomplish the goals of an organization.
Purchasing can be defined in various ways, depending on perspective
The Purchasing Function of an organization involves the acquisition of supplies or inputs
(raw materials, components, goods and services) to the organization’s activities
(conversion, consumption or resale).
In some organizations, there is a purchasing department or unit which has responsibility
for carrying out this function, while in others, it may be carried out by individuals and
teams in other departments(such as finance or production) or as part of a larger, more
intergrated cross- functional(organization-wide) structure such as materials
management, logistics management or supply chain management.
The basic objective or purpose of purchasing is ‘’to buy materials of the right quality, in
the right quantity delivered to the right place at the right time at the right price. These
are sometimes known as the five rights
The purchasing process is a set of stages, or a chain of events, required to make a
purchase or acquisition on behalf of the organisation. A typical purchase process might
include receiving a purchase requisition, negotiating with suppliers, placing an order,
receiving the ordered suppliers and making payment.
PROCUREMENT
Procurement is a wider term than Purchasing. Procurement may be defined as the process of
obtaining goods or services in anyway including purchasing, hiring, leasing and borrowing.
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Procurement, on the other hand, generally includes activities prior to the act purchase, such as
identification and definition of a business need, surveying the market to identify potential
suppliers and gather intelligence (eg on availability, price and technology developments);
sourcing (identifying and selecting suppliers); and the negotiation and development of
contracts. It also includes activities after purchase, including ongoing contract management
(ensuring that both parties fulfil their obligation under contract), supplier relationship
management, dispute resolution, contract review and so on.
Procurement process
The procurement process incorporates both:
Pre- Contract Award Stages, including identification and definition of need, procurement
planning, development of the contract, market survey and engagement, appraisal and
selection of suppliers, receipt and evaluation of offers and contract award.
Post –Contract Award stages, including activities such as expediting, payment, contract
or supplier management, ongoing asset management and post contract lesson learning.
SPECIFICATION
According to CIPS, a specification can be simply defined as a statement of the requirements
to be satisfied in the supply of a product or service. Specification actually defines what the
purchaser wishes to procure or acquire and consequently, what the supplier is expected to
provide. A specification should have enough details to ensure that the product or service
fits the user’s needs but not be so restrictive that it reduces competition or discourages
suppliers from adopting a flexible approach.
The Purpose of Specification
The purpose is to:
Indicate fitness for purpose or use
Communicate the requirements of a user or purchaser to the supplier
Compare what is actually supplied with the requirements in terms of purpose, quality
and performance stated in the specification
Provide evidence, in the event of a dispute, of what the purchaser required and what
the supplier agreed to provide.
Specification actually defines what the purchaser wishes to procure or acquire and
consequently, what the supplier is expected to provide. A specification should have enough
details to ensure that the product or service fits the user’s needs but not so restrictive that it
reduces competition or discourages suppliers from adopting a flexible approach.
The specifications should include key factors and characteristics:
A description of the goods to be supplied
The output required, in amount and quantity ( and where appropriate, related to time)
Quality and performance standards to be achieved
When and how the performance of the product will be measured in quantitative terms.
Any ancillary services, eg, training, maintenance that will be required after delivery and
If the contract is for periodic supply of products, a delivery
A good specification should:
State the requirement clearly, concisely, logically and unambiguously
Contain enough information for potential suppliers to decide and cost the goods or
services they will offer, but contain only the essential features or characteristics of the
requirement
State the criteria for acceptance of goods and services and permit offered goods or
services to be evaluated against these criteria
Provide equal opportunity for all potential suppliers to offer a product or service which
satisfies the needs of the user
Use internationally recognized standards and comply with any legal obligations.
Types of Specifications
There are two (2) main types of specification, namely:
a) Conformance Specification: the buyer details exactly what the required product, part or
material must consist of. The supplier may not know in detail, or even at all, what
function the product will play in the buyer’s industry. It is its simply to conform to the
description provided by the buyer.
A conformance specification may take the form of:
1. An engineering drawing, design or blueprint(technical or design specification):
commonly used in engineering and construction or architecture environments,
which require a high degree of technical accuracy and very low tolerance
(because of the complexity of assembly and machine function)
2. A chemical formula or recipe of ingredients and materials (Composition
specification): commonly used where particular physical properties (eg strength,
flexibility or durability) are important for safety or performance ( eg the metal
used in car manufacture) or where materials are restricted by law, regulation or
codes of practice etc.
3. The specification of a brand name and model name or number if a marketed
product meets the buyers’ criteria. Branded products tend to be of good quality
and easy to source, if available.
4. A sample of the product, with a requirement for the supplier simply to duplicate
the features and performance of the sample. This is a quick and easy method of
specifying requirement without having to describe it, and offers some assurance.
b) Performance Specification: is a relatively brief document( compared to a conformance
specification) in which the buyer describes what it expects a part or material to be able
to achieve, in terms of the functions it will perform, the level of performance it should
reach, and any relevant input parameters and operating conditions. It is up to the
supplier to furnish a product which will satisfy these requirements. The specification
defines the functionality or performance to be achieved but does not (unlike a
conformance specification) prescribe how they are to be achieved (in terms of
materials, designs or processes)
A typical performance specification might include the following details:
1. The functionality, performance or capabilities to be achieved, within specified
tolerances
2. How the product is required to interface with other elements of the process
3. Required quality levels (including relevant standard)
4. Required safety levels and controls (including relevant standard)
5. Required environmental performance levels and controls (including relevant
standard)
6. Criteria and methods to be used to measure whether the desired function has
been achieved.
Advantages of Specification
It is unlikely that a vendor will supply what cannot be articulated.
Both buyer and vendor need a common understanding of what is required.
Something is needed to measure quality, standards and performance against.
There is a need to specify to ensure consistency of supply.
Disadvantages of Specification
Detailed specification is an expensive and time consuming process, and almost certainly
uneconomic for small value purchase
The costs of inspection and quality control are greater than if a simpler form of need
definition (eg. by brand name) is used.
Specifications can become too firmly embedded: they need to be regularly reviewed, to
ensure that the latest design decisions and the latest developments in the supply
market, are being might be counterproductive if existing taken into account
Value Engineering
The term ‘Value Engineering is generally used more specifically for the application of value
analysis from the product design and development stages onwards. It involves cross- functional
teams in this process, including specialists from all the functions that can contribute to overall
objectives and external suppliers.
The value engineering aims:
To ensure quality is built in from inception, not merely inspected in later
To maximum cost efficiency of the design.
To reduce the need for engineering changes at a later stage
To reduce time to market (the lead time between inception and launch)
To reduce development and production costs
To improve cross- functional collaboration and sensitivity to customers’ needs.
Value Analysis
It has been defined as the organised, systematic study of the function of a material, part, component
or system to identify areas of unnecessary cost. It begins with the question ‘what is it worth? anold
proceeds to analysis of value in terms of function the item perform.
YEAR TWO: SEMESTER TWO
PSM 206: Introduction to Purchasing and Supply II
Course Outline
The difference purchasing and procurement
Specification
a. characteristics of specification
b. advantages and disadvantages of specification
c. sources and methods of specification
d. value analysis and value engineering
Sourcing and selecting suppliers,
a. sourcing decisions,
b. identifying potential sources of supply,
c. factors influencing organisational buying decisions,
d. tendering and supplier base management,
e. Legal aspect of purchasing and supply.
References
The following books were referenced for this material and students who wish to read
further material can make use of any of them.
1. Peter B., David F., Barry C., David J., and David J (2008)” Procurement Principles and
Management”. 10th ed. Harlow, Financial Times Prentice Hall.
2. Annan J.(2011) “ Procurement Principles and Objectives”, Institute of Distance
Learning,KNUST
3. Chartered institute of Procurement and Supply (2012) “Contexts of Procurement and
Supply” Diploma course Book, Profex Publishing Limited.
