This paper examines the contracting and procurement function as a critical component of supply chain management. It traces the complete procurement process from business need identification through supplier evaluation, purchase order creation, and delivery of raw materials. The paper details the collaborative roles of Sales and Marketing, Research and Development, Finance, and Production departments in procurement decisions. It also analyzes key risks such as poor supplier selection and late deliveries, and emphasizes ethical standards in supplier relationships. The paper concludes that effective procurement practices are essential for maintaining product quality, brand reputation, and competitive advantage in manufacturing industries.
A number of firms play interconnected roles in the process of manufacturing a product and delivering it to final consumers. All these firms are collectively called the supply chain for that product (Arlbjørn, 2010). Therefore, the manufacturing and delivery of every product or service is backed by the cumulative efforts of supply chain members, which include raw material suppliers, wholesalers, retailers, distributors, and transportation and logistics companies.
Supply chain is essentially a path from the raw material supplier to the final consumer of a product (Coyle, 2009). Supply chain management involves all activities necessary to produce the desired quality of products and deliver them to target consumers in an effective, efficient, and systematic way (Ivanov & Sokolov, 2010). The major activities in supply chain management include planning and decision making, purchasing raw material, manufacturing products, moving and storing finished products in company warehouses, distributing them to wholesalers or retailers, and delivering or selling to final consumers at the right place and right time (Leeman, 2010).
Procurement refers to the acquisition of raw material, goods, works, or services from external vendors on a pre-agreed payment or credit basis. Organizations procure their desired raw material or goods to fulfill the needs of their business operations in a cost-efficient and effective way (Ivanov & Sokolov, 2010). They use different methods such as cost-utility analysis and cost-benefit techniques to evaluate required raw material or goods based on quality, pricing, marginal benefit, origin, supplier credibility and track record, delivery and transportation costs, and other factors.
Once these factors are analyzed, the organization can choose the supplier or raw material vendor that best fulfills its business needs. The organization then enters into a contract with that supplier or vendor to carry out the transaction and move the supply to its production center or manufacturing plant. Thus, contracting and procurement are integral parts of an organization's supply chain management function.
In the contemporary business world, contracting and procurement has gained importance due to organizations' emphasis on competitiveness and sustainability. To compete more effectively and profitably, organizations focus on finding the highest quality raw material for manufacturing superior products. Therefore, contracting and procurement has become an increasingly complex and challenging process for organizations worldwide.
Generally, every type of business organization passes through the following steps in its contracting and procurement process:
Purchase or procurement managers first identify the current needs of their business in terms of quantity, quality, and features of the products they want to manufacture (Ivanov & Sokolov, 2010). The need identification process depends entirely on the nature of the business and the industry in which the company operates (Coyle, 2009). Purchase directors set the roadmap for the company's short-term and long-term moves in the industry, determining what the company should offer, which successful projects should continue, which products have attractive market demand, and which products should be discontinued to save operational costs (Arlbjørn, 2010).
Each department in an organization has a unique role to play in the contracting and procurement process. Success or failure is never attributable to the purchase department alone but rather reflects the collective effort of multiple departments.
Sales and Marketing Department: The Sales and Marketing department plays a primary role in the procurement and contracting process. It provides a full report of past sales trends for different organization products. Based on these trends, the purchase department can easily forecast product demands. The sales force also provides valuable feedback to the marketing department about changing consumer trends, needs, and expectations.
Research and Development Department: In large-scale organizations, Research and Development is carried out by a separate department, while in medium and small-scale organizations, it may be just a small section of the Sales and Marketing department. The R&D department plays a vital role in identifying current business needs (Coyle, 2009). It conducts market analysis and appraises competitors' strategies and industry trends to recommend production department opportunities. The R&D analysis helps the company redesign and restructure business operations according to changing market demands. Based on these recommendations, the production department identifies the need to develop new products and determines the type of raw material required.
Finance Department: In the contracting and procurement process, the Finance department analyzes the company's current financial position and recommends strategic moves feasible given this position (Leeman, 2010). When Sales and Marketing recommend new product development or product line improvements, Finance provides feedback on whether the company has sufficient financial resources to support these strategies (Ivanov & Sokolov, 2010).
Production Department: When all departments coordinate and reach a definite decision, the Production department implements the strategy and commences new product development or innovation. Thus, identification of business needs is never done by a single department—it results from cumulative efforts of all departments. The Production department identifies the need for raw material based on these analyses and recommendations and decides what quantity and quality should be ordered.
Organizations recognize that a reliable supplier helps ensure business stability in the long run and demonstrates exceptional performance on a continuous basis. Therefore, supplier evaluation and selection can be the most difficult step in the contracting and procurement process due to various issues and challenges that arise at different intervals.
Before evaluating and selecting the best supplier or vendor, it is essential to decide what quality, quantity, price, and marginal benefit the organization expects from its procurement (Ivanov & Sokolov, 2010). Supplier evaluation is highly important if the organization wants to purchase raw material of its choice and avoid unwanted circumstances in the future. It is conducted through both qualitative and quantitative assessment techniques.
Supplier evaluation starts with identification of all reliable suppliers in the market offering the required quality and features. The organization can list these suppliers and rank them according to different objective and subjective parameters (Monczka, 2009). The highest-ranking suppliers are selected for the contracting and procurement process. The organization enters into a contract with the selected supplier for a specific period, specifying that the supplier will deliver the required quantity and quality of raw material whenever the organization sends a purchase order (Leeman, 2010).
Once the Production department finalizes business needs based on recommendations from different departments and supplier evaluation, it creates a purchase request to the Head of the Purchase Department. The request is converted into a purchase order after the Head approves it. A purchase order is a formal document created by the Purchase department on behalf of the organization and sent to the supplier for fulfillment of the transaction mentioned in the order.
A typical purchase order contains the following essential information:
Order Number: Every purchase order has a specific order number that helps the purchase department maintain proper transaction records with different suppliers.
Order Date: The date on which the purchase order is created.
Supplier Name: The name of the supplier receiving the purchase order.
Address of the Supplier: The address of the supplier's headquarters or office where purchase orders are received. Phone numbers, fax, and email may also be included.
Product Detail: Specification, quantity and unit of measurement, quality, unit price (pre-decided), country of origin, manufacturer, and other relevant details. For raw material, the manufacturer mentions pre-finalized quality and specifications for supplier convenience.
Required by: The maximum period allowed for the supplier to make delivery of the products.
Shipping Details: Transportation method, destination, and other logistics information.
Taxation and Total Amount: The sales and withholding tax applicable to the required quantity and quality of products.
Payment Terms: Cash or credit basis (e.g., 15-day credit, 30-day credit, 45-day credit).
Authorized Signature: The name and signature of the purchase manager at the bottom of the purchase order (not required if the purchase order is computer-generated) (Bower, 2003).
After finalizing and printing the purchase order, the Purchase department sends it to the supplier through a reliable courier service. The delivery time depends on the supplier's location.
After receiving the purchase order, the supplier acknowledges its receipt to the manufacturer through telephone or email. The acknowledgement indicates that the supplier has received the order and begun work on it.
The supplier completes the procurement process by delivering the required quantity of raw material to the manufacturer at its store, production center, manufacturing plant, or other pre-specified location. The manufacturer makes payment for the raw material on a cash or credit basis and completes the transaction.
In order to perform transactions in a legal way, manufacturers must enter into formal contracts with their suppliers. Supplier contracts place both parties under the umbrella of local laws and regulations and provide assurance that any illegal action will be dealt with under strict regulatory framework. Therefore, the purchaser enters the transaction with confidence of receiving the required quantity and quality of raw material in exchange for payment. Similarly, the vendor or supplier confidently sends raw material to the manufacturer on a credit basis.
A supplier contract is a formal agreement that binds both the manufacturer (purchaser) and the supplier (or vendor) to enter into a transaction on a specific date or multiple transactions during a specified period of time.
A formal supplier contract has the following major components:
The date and location where the contract is made; clear definitions of the supplier and manufacturer under the specific contract; definitions of important terms such as raw material, time, purchase order, submission of purchase order, business day, delivery of raw material, just-in-time, lead time, pricing, product details, quantity, and unit of measurement.
Additional components include the terms of agreement; essential components of purchase order; actions to resolve conflicts and issues related to any matter in the contractual relationship; actions in case of non-compliance by either party; quality assurance provisions; warranty conditions and clauses; terms for contract termination; and the signatures, stamps, addresses, and business details of both the supplier and the manufacturer/purchaser.
Like other areas of business operations, contracting and procurement in supply chain management involve a number of risks. The biggest risk lies in the selection of a raw material supplier. If a business fails to find a reliable supplier, it faces various financial and operational consequences.
Delivering Poor Quality Raw Material: A wrong supplier can impact business operations negatively. First, it may deliver poor quality raw material while accepting payment for high quality material, deceiving the purchaser and obtaining higher profit than normal. The manufacturer ultimately bears the consequences of this action (Bower, 2003).
Making Late Delivery of Raw Material: Secondly, a raw material supplier may lack efficiency in making timely deliveries to the manufacturer's store or production units. The manufacturer then fails to achieve a good balance between raw material demand and supply. Late delivery badly impacts the inventory management system. If the supplier does not deliver on time, the manufacturer cannot store and provide sufficient raw material to production units, slowing down manufacturing speed and ultimately impacting sales and financial performance.
"Ethical obligations in supplier relationships"
Supply chain management is one of the leading functions in business organizations. It involves numerous risks and challenges that must be managed to succeed among potential consumers and ensure a sustainable future in the industry. Contracting and procurement is a primary function in supply chain management of manufacturing organizations. It refers to the evaluation and selection of suppliers that can provide raw material with required specifications and quality at pre-agreed prices (Bower, 2003).
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