Procurement activities in an organization
III. Importance of procurement activities
Builds better relationship between customers and suppliers
Proper management of commodity risk
Drawbacks of procurement activities
Table of Contents
Procurement activities in an organization. 4
Importance of procurement activities. 5
Strategic perspectives. 5
Builds better relationship between customers and suppliers. 6
Biding process. 6
Make/buy decision. 7
Proper management of commodity risk. 9
Drawbacks of procurement activities. 10
Procurement is an essential part of business activities because there are many benefits that are accrued from the process. The evolution of market economies has made it important for companies to focus on effective procurement activities because there has been a great need to improve the competitiveness of the production process. To maintain a competitive position in the global market it is essential to have cost effective procurement processes to ensure an organization provides quality products at low costs (Cavinato, 1992). Procurement is an important part of the organizational processes and a lot of attention should be paid to ensure the decisions made are right. However, there are various drawbacks associated with procurement and managers should aim at reducing such challenges.
Procurement activities in an organization
According to Warrillow (1995) “professional purchasing circles define procurement as covering not only the purchase of goods but also operations such as inward transport and stockholding” para. 3. Procurement process controls all the production processes, the aspects of products and other logistic processes in an organization. The activities of procurement involve requesting production materials, processing purchase orders and establishing other contractual relationships with the suppliers. Today procurement has been focused on cost reduction mechanisms, quality improvement and promoting the corporate social responsibility of an organization among other aspects which embrace modern developments Warrillow (1995).
It is the obligation of the procurement managers to determine the capacity of the vendors so that they can determine whether to accept their supplies or not. The size and amount of supplies allotted to a particular supplier depends the resources and credibility of such a vendor. As such, the organization must make a decision about the vendors to deal with. Managers have the obligation to select the vendors on a competitive basis so that the company can purchase high quality products at the best price possible. On the other hand, the suppliers must be ready to provide supportive services to the company so that they can be accepted (Thomson & Mayo, 1960).
Importance of procurement activities
Procurement activities add value to the activities of an organization in the following ways:
Procurement has encouraged companies to focus on globalization strategies as a way of promoting the performance of businesses. Outsourcing goods and services from foreign countries has become a common practice and companies have made tremendous progress in the production and marketing processes. More opportunities to expand businesses have emerged with the emergence of multinational partnerships. As such, companies can interact and exchange various programs in the global markets. Firms have changed their strategic perspectives due to the introduction of the global markets. It is through the international trade that firms have been able to expand their operations (Mehra & Inman, 2004).
Procurement is applied when a company has adopted a differentiation strategy. This strategy is used when the mangers have the desire to have unique products which are competitive in the market. Differentiation strategy can only be applied by liaising with different suppliers to provide with different kinds of materials for the production process. Differentiation strategy is applicable when there is intense competition in the market such that many companies are manufacturing almost the same product. To acquire more customers a company specializes in manufacturing many products with different characteristics. This can only be achieved by procuring commodities from different suppliers. Therefore, procurement is used as a tool of implementing differentiation strategy (Dimitri, Piga & Spagnolo, 2006).
Builds better relationship between customers and suppliers
Managers must consult their customers to identify their demand before placing bids for products from suppliers. As such, the suppliers should manufacture products which will satisfy the needs of the consumers. The managers act as a link between the suppliers and the consumers because there must be a link between the two parties for a better market system. With the introduction of global markets, suppliers have the obligations to have knowledge about the needs of consumers all over the world. A strong relationship develops between the consumers and suppliers due to the procurement activities (Chang, Markatsoris & Howard, 2004).
Suppliers associate with companies with a good public image and it is important for managers to enhance good corporate social responsibility. When organizations embrace good CSR strategies there is a good public image. Since consumers of products are the publics themselves, companies with a good public profile promote demand for their products. As a result, the link between the suppliers and the consumers is established (Burt, Dobler & Starling, 2003).
It is through procurement activities that an organization is able to tender some of the processes. The binding process adds value to the procurement activities of an organization in that it enables the organization to obtain the most effective organization in providing supplies. When firms are allowed to tender the provision of certain services or goods it provides opportunities for competition among firms or suppliers. When competition prevails it becomes possible to acquire the best supplies. As such, the activities of an organization are improved because the best supplier is allowed to supply products to the company (Cavinato, 1992).
Additionally, the binding process adds value to the processes of an organization by improving the relationship with all stakeholders. It is important to note that binding process allows the organization to get the best quality services and products and as a result the performance improves. The welfare of the stakeholders is improved when the performance of an organization is promoted. Some of the stakeholders who benefit from such a process are shareholders, customers and others (Cavinato, 1992).
Tendering process provide opportunities for an organization to interact well with other firms in the market. Some companies outsource the services of tendering process and this makes it possible to have a good relationship with other firms in the market. As such, a company must have good relationship to acquire tenders from other companies. To achieve a better public image, it is important for the management to improve its corporate social responsibility status. By promoting corporate social responsibility the company adds value to all stakeholders. Thus, tendering can be said to be a factor which encourages the managers to promote its public image and this adds value to all activities of the company (Cavinato, 1992).
A make/buy decision must be made to determine whether a company should be involved in procuring certain products. As such, managers must evaluate the costs to be reduced when the company procures than makes the products within its own premises. It is important that the managers should drop the decision to procure if the costs exceed the costs manufacturing the products internally. The managers may also decide to procure even when the costs exceed the cost of making the products internally when the managers evaluate that the process of manufacturing the products may hinder other processes (Thomson & Mayo, 1960).
Procurement provides an organization with the opportunity to improve its own facilities by concentrating on improving areas in which it can perform best. As such, a manager focuses on improving the strengths as well as reducing the weaknesses associated with a business. Outsourcing some commodities reduces strain on the resources of an organization and allows the managers to concentrate their efforts on improving the available resources. There is enough time to focus on how to promote the performance of all employees and this enables the managers to reduce employee turnover. Employees are motivated positively when they are able to provide better outputs as a result of the motivation they get at the workplace (Mehra & Inman, 2004).
Procurement has encouraged the development of sub-contracts among organizations and this has led to the establishment of more market opportunities to many companies. Some companies do not have the advantage of getting tenders and they may get out of business especially when there is low market performance. The establishment of sub-contracts allows companies with huge tenders to get bids for small business activities which they may not be able to provide at a cost effective manner. This strategy has improved the performance of many small companies because they can sustain themselves in all seasons. Sub contracts provide opportunities for the main company to have better and efficient service delivery systems. Procurement can therefore be said to add value to the welfare of small growing companies in the market by allowing them to participate in the tendering process (Dimitri, Piga and Spagnolo, 2006).
Subcontracts provide opportunities to improve the performance of a company because companies with the best services and goods are contracted to offer their services in areas where the main company has a weakness. Sub contracts create good relationships between companies because there is sharing of resources and other essential facilities. This partnership improves the relationship between and among companies in a given field. As such, the companies gain from the synergies attributed from doing job together (Mehra & Inman, 2004).
Proper management of commodity risk
The process of procurement spreads risks among different organizations because the ownership of the property is divided among different companies. The companies participate in sharing the risk and costs associated with handling the goods. There are many risks associated with handling goods and services within an organization and it require securing such risks by covering the risks. When an organization outsources commodities the risks are reduced and this makes it possible to provide competitive prices. In modern business environments many companies have developed to cover risks associated with transacting in different businesses and this has provided opportunities for companies to protect themselves from unknown eventualities (Chang, Markatsoris & Howard, 2004).
It is the obligation of the supplier to cover for any risks associated with the commodities before they are accepted by the company. This enables the company to clear off its responsibility of taking the risk of handling the commodities within its premises. The transfer of risk to a third party is very important for large organizations because in case an eventuality occurs the company does not incur a lot of losses. Procurement is one way of managing property risk and it provides better opportunities of improving the performance of the company. This is because instead of investing resources in managing the risks the company invests in other productive areas (Tage & Schary, 2007).
Drawbacks of procurement activities
On the contrary, procurement can be said to hinder the achievement of some organizational goals. First, managing international sourcing has been a great challenge to firms and many hindrances concerning cross-border procurement activities have affected many organizations. Various countries have different legal systems which affect trade among countries. Trade barriers have been imposed by various governments and this has hindered procurement processes among companies located in different countries (Morledge, Smith & Kashiwagi, 2006).
There is need to train employees about the procurement procedures and this creates extra challenges to the managers. Employees need continuous training about the procurement systems and this imposes extra costs and obligations to the organization. Procurement procedures are complicated and adequate knowledge is required to promote efficient organizational processes. Organizations require having employees with knowledge about the legalities that are required to promote procurement activities within specific jurisdictions. Therefore, procurement creates extra obligations to firms and can be perceived to create more costs to the organization (Tage & Schary, 2007).
Collaboration between the departments of an organization is very important during the procurement process but many managers find a big challenge to unite all the affected departments. The decisions about procuring certain commodities should be developed from all the stakeholders of the organization to ensure that the appropriate products are purchased at the right price. As such managers should collect ideas from all departments to come up with a collective decision. Failure to incorporate the ideas of all stakeholders may hinder many other activities of the organization. Procurement is a very important activity of an organization and managers may cause complete failure of other activities when poor decisions are made (Chang, Markatsoris & Howard, 2004).
Working in diversified environments is a common scenario in procurement and this has prompted companies to establish strategies to overcome the differences that arise due to working with different stakeholders. There are many challenges associated with working in diversified environments such cultural conflicts, and other barriers. During a procurement process an organization may find it impossible to work within some environments due to differences in legal systems, religion, political or any other system that has an impact on the activities of marketing (Tage & Schary, 2007).
There are many procedures involved in the procurement process and it may take a lot of time to acquire assets which are urgent to an organization. In the case of government institutions, these procedures must be adhered to and there are no opportunities to skip the protocols established. This may cause delays in important processes within an organization. In the international business, various legal systems have been established which should be followed and failing to address such issues may jeopardize most of the activities of an organization (Burt, Dobler & Starling, 2003).
Procurement has promoted the development of businesses in modern world. To achieve this, managers have applied different strategies to bring together different stakeholders so that they can improve the global markets. It is notable that procurement has created more opportunities to business people, governments, consumers and other stakeholders. On the other hand, there have been several challenges associated with procurement and these have hindered a smooth process. Organizations have encountered problems such as environmental diversity, need to train employees among other challenges associated with procurement. Therefore, managers have the obligation to assess the procurement processes to ensure they get the best out the entire process.
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