Program Planning (Drafting Purchase Requirements and Specifications)

Program planning (Drafting purchase requirements and specifications)

- Evaluation of RPQs and RFPs

Contract management (monitoring & control)

Exhibit I- Consumption-based purchase planning

Procurement Planning

This paper has three main parts. Part one describes the process of purchase planning and the method through which medium and large organizations conduct purchase planning. Part two of the paper analyzes the main purposes of a procurement plan. The main purpose of a procurement plan is to integrate the procurement activities with the business and strategic level goals of the firm. It also enhances the competitive cost positioning of the firm and increases the level of coordination between different stakeholders in the supply chain of the firm. Part three of the paper analyzes three main components of a procurement plan. The last part of this paper presents the conclusion and recommendations aimed at improving the performance of procurement management.

Introduction

Businesses engage in planning of their materials' management to achieve business-level goals and competitive advantages. There are a number of stakeholders involved within the supply chain. Early coordination is needed to make the procurement process cost effective and time efficient. The purchase planning process is essentially a process in which companies plan their purchase activities for a period. The most desirable outcome of the purchase planning is to eliminate over ordering and under ordering. Over-ordering causes an organization to overspend its working capital resources as over-ordering results in additional storage resources required to maintain excess supplies. Under-ordering may result in shortage of critical supplies required to manufacture the committed products or a delay in service delivery. The purchase planning process also aims at decreasing the uncertainty of cyclical shortages and surpluses of materials.

Also known as the procurement planning process, purchase planning is executed during the budgeting process whereby each department and division of a business is required to request budgets for their annual expenses, purchases and staff needs. The department is required to determine the projects and tasks for which materials purchasing are being proposed. Having received the total demand of purchases, the procurement department identifies the common purchasing requirements. In large organizations having huge procurement needs, each division of the firm is expected to carry out the purchase planning process strategically, keeping in consideration the business plans of their division. Since Enterprise Resource Planning (ERP) is practiced by a majority, the majority of large scale enterprises change the planned orders into purchase orders.

The purchasing officer of the procurement department identifies the potential vendors based on cost, lead time for delivery, and transportation costs to the buyer. Planned order is converted into purchase requisitions and the procurement officer then decides on the schedule of delivery for the requested materials (See Exhibit I). The delivery schedules are prepared in coordination with the concerned departments who had initially requested the materials. It is pertinent to mention that there are several techniques for managing 'consumption-based purchase planning. Three of them are:

Reorder point planning: The purchase requisition is generated once a predetermined reorder point has been reached in the warehouse stock.

Forecast-based planning: In this method, forecasting programs are used to determine the future demand and forecasting is performed on regular intervals.

Time-phased planning: In this method, planning calendars are drafted, and materials can only be requested after the passage of specified gap of time.

2. Purpose of the procurement plan

A procurement plan carries a detailed description of the materials that an organization plans to purchase during a specified time. The procurement plan also identifies the time for purchasing and the details of potential suppliers and vendors. Organizations use the procurement plan to mitigate the risks associated with supply chain management. There may be different purposes for different organizations to have a procurement plan. Large scale enterprises have integrated ERP systems and procurement plans are an integral part of these systems. Small or medium scale firms prepare procurement plans to mitigate risks of cyclical surpluses and shortages of supplies.

Integrating procurement plans with strategic and business goals: One of the most important purposes to develop procurement plan is to synchronize the procurement plan and expectations of materials requesting entities to the business plan of the respective department as well as with the strategic aims of the organization. Anderson and Katz (1998) described that business leaders are turning towards increasing the shareholder value and reducing the operational costs. Procurement is increasingly seen as a strategic task and not just a function of purchase department. To discourage wasteful purchasing, overstocking, and procurement of potentially harmful materials inconsistent with the firm's corporate image, firms are engaged in central procurement planning for which procurement plan is the main artifact.

Mitigation of supply disruptions: Kraljic (1983) argued that organizations will increasingly experience disruptions in their supplies' purchasing because resources are depleting, and competition for these resources has increased. To guard against 'disastrous supply interruptions', the author argued, firms must adopt a supply-chain orientation rather than standalone purchasing activities. To offset the supply disruptions that may take place due to several external factors, firms develop concerted procurement plans engaging different divisions and even subsidiaries to increase the buying clout. Further, the firms aim to avoid the bottlenecks and supply interruption created due to disruption of transportation routes, political instability or shortage of supplies.

Competitive cost positioning: Porter (1986) identified the changing patterns of competition amongst the international firms. The author argued that firms are increasingly changing the way that they perform their internal functions, to be able to better withstand the worldwide competition. An organization seeks to reduce its cost of operations, an overwhelming part of which is the materials procurement expenses. To minimize the purchasing outlays as a percentage of cost of goods sold, firms engage in group buying and bulk buying. Procurement plans allow the firm to engage in forward planning and elimination of wasteful buying.

Coordination between different stakeholders: Another purpose for making procurement plan is to enable different stakeholders within the supply chain as well as in the internal and external environment of an organization (having a direct impact on purchasing, demand forecasting and production processes) to coordinate with each other. These stakeholders can be the requesting entity, the end users of materials, the procurement personnel, or the vendors responsible for delivering the materials (Kanda & Deshmukh 2008). The risks associated to under-ordering and over-ordering can be avoided by increasing the communication level between parties directly responsible for requesting materials and delivering them.

3. Key components of the procurement plan

In a project-based company, "procurement is a process through which project team comes to conclude one or several contracts for the supply of goods, works, and services that are part of the deliverables of a project" (Ribeiro 2009, 27). In a typical project-based firm, there are several key components that need to be accomplished to make an integrated procurement plan.

3.1- Program planning (Drafting purchase requirements and specifications)

The first key element of a procurement plan is to define the requirements of purchase including all the requirements for goods, services, and works to be procured. This allows the project manager to have a detailed estimate of specifications of each of the item/entity to be purchased. On the basis of these requirements and specifications of required materials i.e. goods, services, and works, the procurement manager will then drafts various contracts based on these categories. The procurement department than furnishes Request for quotes (RFQ) and request for proposals (RFP) forms on the basis of the contract to be signed with potential suppliers. These forms are used to communicate and invite bids for the list of identified works, services, and goods to be purchased. During the drafting of contracts, it is also worked out by the procurement department in coordination with respective functional departments that whether or not the buying firm will have supplier contracts, vendor contracts, or a partnership contract with the supplier firm. The mode of communication (RFQ, RFP, or personal invitation) with potential supplier/vendor/partner is also finalized at this stage.

Program planning is the most crucial phase in the procurement plan because it tends to determine the subsequent activities carried out by the buyer and the supplier. Questions of cost of procured material, service, or work is also determined at this stage, and this is based on the available budget allocated by the firm. Risk determination also takes place during this phase and is made part of the contract that is offered to the supplier. Project-based companies categorize their goods requirements into equipment, components, finished goods, and raw materials. Service requirements are usually categorized as consultants, computer programmers, transportation carriers, maintenance providers, and waste-handling providers. In this phase, the internal customers of these goods/services are named as 'Users'. Another document being prepared by procurement department is the statement of works having information regarding work specification, time of purchasing the works, and the service providers required to deliver the works and services. Project-based firms usually develop the supplier assessment criteria at this initial stage so that phase two of the procurement plan can be completed effectively.

3.2- Evaluation of RPQs and RFPs

Once the procurement department has advertised the list of goods and services/works to be procured, the suppliers can file/submit their bids/expression of interests to deliver the advertised goods/services. Evaluation of these RFQs and RFPs is the most daunting task for project managers and procurement department. It is easier to evaluate RFQs and short-listing of potential supplier as the price is the predominant criteria for accepting RFQs. On the other hand, RFPs do mention the estimated price, but project schedule and quality are the main focus in RFPs. Evaluating RFPs is complex as RFP qualification criteria includes assessment of suppliers' equipment, facilities, management capabilities, information systems and process management capabilities. RFP is usually evaluated by two core teams well-versed in administrative and technical aspects of the project.

3.3- Contract management (monitoring & control)

Once suppliers/vendors and partners have been shortlisted, contract management becomes the most arduous component of the procurement plan. This involves monitoring the delivery of goods/services and controlling the agreed quality levels. Simple projects that involve supply of goods (finished or semi-finished) are easy to monitor whereas complex projects involving longer lead times for materials delivery require periodic monitoring by the procurement department as well as the project manager of buying firm. The performance of supplier is compared against the criteria developed in the component III of the project (contract acceptance). Nonperforming contractors have to be penalized (through warning, fining percentage of fees, or repeal of contract) and quality of the project has to be controlled by the project manager.