Purchasing is often seen as a buying action, where goods are transferred in exchange of the money. But, purchasing in an organisation is a highly complicated process with goals that reach far beyond the conventional belief that purchasing’s essential role is to acquire goods and services in response to internal needs.The different activities within purchasing process are understandably reticular and interdependent on each other, and they can be unionised in a process, where it is suggested that they take place after each other in time (van Weele, 2010).
A more specific definition was provided by Van Weele which defined purchasing as “The design, initiation, control and evaluation of activities within and between organisations aimed at obtaining inputs from supplier’s at the most favourable conditions”
An illustration of the van weele purchasing process is shown in the figure. The overall perspective of the process is highly focused in the connection between the ingoing activities, due to the reason that they are interrelated. More generally , this means that the quality of the output from one activity in the process determines the quality of the output for the succeeding activity. In an organisation , it is important to see the different steps of the process and improve them them individually in order to make the purchasing process a more strategic business plan.
Specification
The first step in the purchasing is to understand what is necessary to be purchased and the quantity to be purchased. In this step , all the requirements of the product to be purchased is specified. There are two types of specifications: functional specifications and technical specifications, as mentioned by Van Weele. Functional specification is important for service purchases , and can also be applicable for products because it describes the buyer’s desired functionality of the purchase. The technical specification, sets the technical characteristics of the product and the expected activities of the supplier. The purchase order specification are made by these two specification , which can be further classified into logistics, maintenance, legal , environmental and financial specification (Figure) These specification are usually specified in a purchase document or purchase requisition. S The requirements , including the cost and quality are also specified in the documentation. There are also some problems that can arise during this phase and is mentioned by Karlsson et al. Incomplete or too general product requirements can cause delays in the operational design because more time is required in order to find out the under specified specification of the product. There will be also a chance of over specification of the product. It can also cause the increased delay time and also cost , usually without adding any value in the improvement of the functionality of the product.
Supplier Selection
This is the phase in the purchasing process where the actual supply market research is taking place (Van Weele). First, they must decide whether if subcontracting is required to get the required product and then they must find out which kind is the most economical and suitable for the occasion. The important things that the purchasing department considers in this phase are price, quality, terms, delivery, service and a good experienced performance on previous orders, one of the important task of the supplier is to provide an on time delivery, a consistent quality, a good service and is responsible for the buyers’s needs (Baily et al,1998). Evaluation of the supplier’s capability to meet the required specification, is usually done through the following methods :
Past Performance; it depends upon the statistical records and include data on timely delivery, performance and service. This data is used for the evaluation of the supplier.
Reputation; The suppliers gain their reputation based on their actual performance which can an important asset. the suppliers are asked to give customer reference, which gives the buyer an idea about the supplier performance.
Visit and Appraisal; This method is expensive and also takes time , but it is a good way to ensure quality.
Third part certification; These are the certification made by the independent organisations, not connected to the buyer or supplier. e.g- quality certificates.
Negotiation and Contracting
When the decision for the supplier is made, then they have to get down to the details. The contract and negotiation differs depending upon the company and business involved. The contract is signed by considering various important aspects of the purchase agreement such a as prices of the material, terms of delivery, payment terms, penalty clauses and warranty conditions.(van Weele, 2010).
Ordering
In this step the purchase order is placed, which includes a purchase order requisition and follows the agreements made during the contracting phase.
Expediting
After contracting the next process is Expediting. There are different types of expediting. The most used as well as the most ineffective is the exception expediting, where when the company faces zero-stocks the buyer starts to take action. This way if safety stocks are adequate late deliveries get no attention.
If there are not too big amount of orders actively involved , then routine status check can work. In this method the supplier is asked to confirm the delivery date a number of days before.
Another method called advanced status check is used for the critical parts and suppliers. In this case , critical not only refers to important as well as problematic also.
Follow-up and Evaluation
The purchasing process is not finished when the goods are delivered at the the right time. The purchasing department has a key role even after the material is delivered at time. This includes penalty clauses, warranty claims, invoice administration, purchasing and supplier files, evaluations of the project and supplier and also the maintenance agreed with the supplier. The follow up and evaluation phase concerns the suppliers performance regarding the product that was delivered.
Evaluating process is an important tool to identify the problems that can be prevented next time and whether the supplier can be used again.
Strategic sourcing process in BAT
Preparation
This molecule is about agreeing the project’s objectives and scope and ensuring key stakeholders’ alignment. Initial opportunities are identified here and the project team is formed.
Preliminary Analysis
At the beginning of all sourcing projects, it is essential to ensure that the objectives and boundaries of the project are clear & understood by all parties involved and that the potential investment in time and effort justifies the potential benefits.
This stage in the process is not about providing absolute detail but about providing a high level overview. It is possible that detail will not be available at this time and hence it is sufficient to make assumptions, provided these assumptions are stated.
Purpose
The Mobilisation stage is about ensuring that those people that will be involved in the project are aligned to the objectives and are committed to the project.
Since the key stakeholders and sponsors have a vested interest in the successful outcome of the project, this stage ensures that resources are made available in the timelines agreed.
As well as primary stakeholders, support resources should also be involved, such as Legal and Finance.
Plan
The purpose of this stage is to ensure that a clear project plan is made for the sourcing activity covering the essential elements.
Approach Gate
The purpose of this approval gate is to ensure that the identified sourcing initiative is aligned with the category strategy , justifies the likely time spent and that all key resources including stakeholders and project team are aligned and in agreement to proceed.
Approval must be gained from both the Stakeholder and the relevant Procurement Approver(s) according to the approval flow
Analysis
This molecule deals with capturing the detailed requirements of the Business. Internal and external research and analysis is performed to evaluation the various opportunities that have been identified.
Internal Analysis
The purpose of this stage is to obtain sufficient data and information to understand the historical aspects of the category of spend in scope. This provides both insights for potential improvement opportunities and a baseline from which the results of the sourcing initiative can be objectively calculated.
Client Requirements
The purpose of this stage is to obtain a clear understanding of what the client requires, both from a short term perspective of the product and services and also of the likely future requirements. It endeavours to focus on a set of characteristics that can be used to ensure that the clients needs are satisfied at the end of the sourcing process.
Market Analysis
Market analysis is performed to gain an appropriate level of understanding of the supply market. It is from this analysis that the relative competitiveness of the market is gauged together with supplier capability.
It enables the selection of the most appropriate suppliers that can satisfy the business need. Equally importantly it will provide insights on how potential opportunities may be unlocked.
Sourcing Strategy
The focus of the sourcing strategy stage is on drawing insights from the data and information from the previous stages. From these, prioritised benefits & opportunities will be identified, taking into account the relative bargaining power of buyer and supplier. The final outcome of this stage is a sourcing strategy which identifies the most appropriate tactics and techniques to unlock the value of the identified opportunities and benefits.
Value Drivers
The purpose of this stage is to identify the key value drivers from the information that was obtained during the analysis phase.
Sourcing Strategy
The focus of the sourcing strategy stage is on drawing insights from the data and information from the previous stages. From these, prioritised benefits & opportunities will be identified, taking into account the relative bargaining power of buyer and supplier.
The final outcome of this stage is a sourcing strategy which identifies the most appropriate tactics and techniques to unlock the value of the identified opportunities and benefits.
Negotiation Strategy
The purpose of this stage is to prepare a high-level negotiation strategy that covers the key deliverables and constraints.
Baseline & Strategy Gate
To ensure that Procurement Approver(s) and Stakeholder(s)with the conclusions drawn from the previous phases of the process, validate de the Baselines and agree to the way forward expressed in the Sourcing strategy.
Approval must be gained from both the relevant Stakeholder(s) and Procurement Approver(s) according to the approval flow.
Market Engagement
This molecule is about communicating (typically through a Request For Proposal) with the supply market to short-list potential suppliers. This molecule also covers the supplier negotiations preparation and execution which results in identifying the most appropriate supplier agreement.
Go To Market
The primary purpose of this stage is to develop, deploy and manage the communications with the supply market in accordance with the approach identified in the sourcing strategy.
The final outcome of this stage is a short list of suppliers that are most appropriate to maximise the identified opportunities & benefits while satisfying the needs of the business.
Negotiations
The purpose of this stage is to plan for and execute negotiations with the selected suppliers using the most appropriate tactics and techniques. It may be repeated a number of times.
The outcome of this stage is to arrive at the best achievable result, based on agreed stakeholder requirements.
Wherever possible, e-auctions should be used in place of face to face negotiations.
Business Allocation
The purpose of this stage is to ensure that the results of the initiative are communicated effectively to all interested parties.
In addition to communicating the results of the initiative it is critical to ensure that any change management implications are understood and an outline plan is identified to deal with them.
Decision Gate
This approval gate is critical to ensure that both Procurement and the Business confirm the results of the negotiation phase and agree to proceed with implementation.
It is at this point that the Stakeholder agrees in principle to the savings achieved which will be captured in savings tracking (as per implementation timeline).
The Decision gate needs to be completed during the Business Allocation stage of the Market Engagement phase.
Implementation
The purpose of this molecule is to ensure that all necessary closure activities are carried out to finalise the initiative and deliver the benefits. To ensure that the benefits are sustained it is also necessary to identify the way in which the supplier performance will be monitored. Many of the actions at this stage form inputs into the Supplier Management process.
Deployment
The purpose of the deployment stage is to ensure that all necessary closure activities are carried out to finalise the initiative and deliver the benefits.
To ensure that the benefits are sustained it is also necessary to identify the way in which the supplier performance will be monitored.
Many of the actions at this stage form inputs into the Supplier Management process.
Tracking
The purpose of the tracking stage is to ensure the on-going tracking for the spend and the selected supplier as relevant.