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PURCHASE MEANING:
To buy a product or service
A product or service that has been bought by an individual or business.
PROCUREMENT MEANING:
The act of obtaining or buying goods and services. The process includes preparation and
processing of a demand as well as the end receipt and approval of payment. It often involves
(1) purchase planning,
(2) standards determination,
(3) specifications development,
(4) supplier research and selection,
(5) value analysis,
(6) financing,
(7) price negotiation,
(8) making the purchase,
(9) supply contract administration,
(10) inventory control and stores, and
(11) disposals and other related functions.
The process of procurement is often part of a company's strategy because the ability to
purchase certain materials will determine if operations will continue.
A business will not be able to survive if it's price of procurement is more than the profit it
makes on selling the actual product.
STEPS IN THE PROCUREMENT PROCESS:
Aligning your procurement function with your corporate strategy is only one part of
the ultimate goal of procurement. Goods and services also need to be purchased.
The process of purchasing these good and services is known as the Procure-To-Pay Cycle.
The entire Procure-To-Pay Cycle can be an involved process with numerous steps:
Identification of Requirement
Authorization of Purchase Request
Approval of Purchase Request
Procurement
Identification of Suppliers
Inquiries Receipt of the Quotation
Negotiation
Selection of the Vendor
Purchase Order Acknowledgement
Advance Shipment Notice
Goods Receipt
Invoice Recording
3 Way Match (The goal of three-way matching is to highlight any discrepancies in three
important documents in the purchasing process – purchase orders, order receipts/packing slips,
and invoices – in order to save businesses from overspending or paying for an item that they did
not receive.)
Payment to Supplier
Although this list is extensive, the nature of your specific business will determine the extent of
the Procure-To-Pay cycle you use. For example, if your work in a large, multinational
corporation, you may have to undergo a more involved “Identification of Requirement” phase.
On the other hand, if you work in a small firm, that stage may be quick and simple. Understand
the scope of your business and tailor as needed.
PURCHASE VS PROCUREMENT:
Procurement involves the process of selecting vendors, establishing payment terms,
strategic vetting, and selection, the negotiation of contracts and actual purchasing of goods.
Procurement is concerned with acquiring (procuring) all of the goods, services, and
work that is vital to an organization. Procurement is, essentially, the overarching or
umbrella term within which purchasing can be found.
PURCHASE CYCLE:
14 STEPS FOR PURCHASING CYCLE WITH TENDERS:
1. The Need
In this case, the need usually goes through a business case and is then tightly defined
and specified.
2. Financial Authority
This usually happens at a higher level and includes the management of the department
that requires the goods.
3. RFP
A Request for Proposal (RFP) is written, in which the need is highly specified.
4. Invite Tenders
This is always done formally, usually by posting the request in trade magazines and
appropriate web sites. Government projects are posted on government web sites.
5. PQQ
A Pre Qualification Questionnaire (PQQ) is sent out to likely suppliers in order to select
a short list of appropriate potential suppliers.
6. Tenders
The tenders are sent in from the qualified suppliers.
7. Qualifying
A number of meetings are held to clarify any questions that suppliers may have.
8. Evaluation
This is the most exciting part of the purchasing cycle and can take many weeks for a big
tender. All the tenders are evaluated and the requirement awarded to the winning
bidder.
9. Negotiation
The fine print of the terms and conditions are negotiated with the chosen supplier. The
price is fixed at the bid price.
10. Contract Award
In a very short time, the contract is awarded to the chosen bidder.
11. Manage Contract
This is the period in the purchasing cycle when the goods are delivered.
12. Approval And Payment
If the contract is carried out completely then full payment is made. If there are
problems, there may be a damage request.
13. Sign Off
At the end of the contract work and deliveries, the contract is signed off and all
relationships with the supplier are finished.
14. Update Of Records
The purchasing ledger and stock records are updated. This is automatically done by
many purchasing computer systems.
CONTRACT MANAGEMENT:
MEANING:
Contract management or contract administration is the management of contracts made
with customers, vendors, partners, or employees. The personnel involved in
contract administration required to negotiate, support and manage effective contracts.
TYPES OF CONTRACT:
A contract is an agreement between two entities or individuals, which serves as legal
protection for both parties involved in a potential business deal. There are different types of
contracts, and each determines the rights and duties of both sides. A specific type of contract
regulates the risks and expenses for the contractor.
Two different kinds of groups of contracts are fixed price contracts and cost-
reimbursement contracts. Different types of contracts, which are contained within each of
these two types of groups, may be used separately or in combination with one another.
FIXED PRICE CONTRACT or LUMP SUM CONTRACT:
Contract that provides for a price which normally is not subject to any adjustment
unless certain provisions (such as contract change, economic pricing, or defective pricing) are
included in the agreement. These contracts are negotiated usually where reasonably definite
specifications are available, and costs can be estimated with reasonable accuracy. A fixed price
contract places minimum administrative burden on the contracting parties, but subjects the
contractor to the maximum risk arising from full responsibility for all cost escalations. Also
called firm price contract.
A sales contract is a contract between a company (the seller) and a customer where the
company agrees to sell products and/or services and the customer in return is obligated to
pay for the product/services bought.
A purchasing contract is a contract between a company (the buyer) and a supplier who is
promising to sell products and/or services within agreed terms and conditions. The
company (buyer) in return is obligated to acknowledge the goods / or service and pay for
liability created.
A partnership agreement may be a contract which formally establishes the terms of a
partnership between two legal entities such that they regard each other as 'partners' in a
commercial arrangement. However, such expressions may also be merely a means to
reflect the desire of the contracting parties to act 'as if' both are in a partnership with
common goals. Therefore, it might not be the common law arrangement of a partnership
which by definition creates fiduciary duties and which also has 'joint and several' liabilities.
TO MANAGE A CONTRACT:
At the start of the procurement process, a contract is created that outlines the
operational, functional and business objectives which will be met as a result of the agreement.
SLA:
It includes;
A description of the service being provided
Reliability
Responsiveness
Procedure for reporting problems
Monitoring and reporting service level
Consequences for not meeting service obligations
Escape clauses or constraints
KPI:
It is a measurable value that demonstrate how effectively a company is achieving key
business objectives. Organization use KPI at multiple levels to evaluate their success at
reaching targets. High level KPI’s may focus on the overall performance of the enterprise ,
while low level KPI’s focuses on processes or employees in department such as marketing,
sales and call center.
FREE FLOAT: It is the amount of time by which the completion time of an activity can be
delayed beyond the earliest finish time without affecting the earliest start of the
succeeding activity.
(FF = Total float – Head event slack)
INDEPENDENT TIME: The time which an activity can be rescheduled without affecting
the preceding or succeeding activities.
(IF = Free float – Tail event slack)
THREE TIME ESTIMATION:
CPM is considered as Deterministic approach. Whereas PERT is considered as
Probabilistic in nature. Hence, Probabilistic consideration are incorporated while obtaining
time durations of the activities in a project. The following three estimates are used:
Optimistic time – notations: (to) (a)
Pessimistic time – notations: (tp) (b)
Most likely time – notations: (tm) (m)
The optimistic time is a time estimate if the execution goes extremely good.
The pessimistic time is a time estimate if the execution goes very badly.
The most likely time is a time estimate if execution is normal.
The probabilistic data for project activities generally follow beta distribution. The formula for
mean (µ) and variance (σ2) of the beta distribution are given below:
µ = a+4m+b / 6
σ2 = ( b-a / 6 )2
For this, the beta distribution is approximated to standard normal distribution whose statics is
given below:
Z=x-µ/σ