Introduction
Project Procurement Management covers many topics that relate to purchasing and supply processes. This paper will explore a number of issues while including examples from personal experiences as well as the course text. The topics include strategies for price negotiation, the importance of supply and purchasing management, steps of creating project supply, costs, and benefits of outsourcing, and the best practices of benchmarking in supply and purchasing management.
Importance of Purchasing and Supply Management
Supply and purchasing management is one of the most crucial aspects of enhancing operational efficiency in business organizations (Johnson, Leenders, & Flynn, 2010) . Supply management and suppliers are vital for organizational success. In business organizations, supply and purchasing management forms one of the essential tasks. The management process consists of such tasks as observing the behaviors of customers and ensuring the provision of adequate high-quality products while ensuring cost-effectiveness at the same time (Avery, 2009).
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The concept of purchasing is a comprehensive process, and it is highly relevant t organizations. The process is confined to the aspect of buying, and it pertains to the selection of the location of purchase as well as the suppliers. The process involves such elements as selecting the items that need purchasing, negotiating the terms of agreement and prices, and ends with the delivery and payment for the products. According to the Project Management Institute (2004), supply managers are required to understand customer needs, select the appropriate suppliers for products that customers needs, and appropriately negotiate the product prices to ensure that they satisfy their customers’ needs. Johnson, Leenders, and Flynn (2010) note that the terms, procurement, supply management, and purchasing, are often used interchangeably in referring to the integration of the functions that focus on providing efficient services and materials to the firm.
Supply management is vital to an organization for a number of reasons. One of the most critical roles of supply management pertains to supporting the procurement process. The procurement process involves several steps, including recognizing needs, translating market and customer needs, searching for appropriate suppliers, selecting the sources of materials or products, making and signing agreements of contracts, delivering the services and products, and making payments to the suppliers (Johnson, Leenders &Flynn, 2010). Secondly, supply management is responsible for performing tasks in relation to the receipt and inspection of products, warehousing, materials handling, inventory control, in and outbound logistics, packaging schedules, and product disposal and traffic, which are all vital in meeting consumer needs, and therefore ensuring organizational success (Johnson, Leenders &Flynn, 2010).
Thirdly, supply management is also crucial in business organizations since it enhances the revenue of an organization, which is critical in achieving organizational success. Majorly, the essential objective of supply management is increasing or maximizing revenues and decreasing or minimizing costs. The goal of cost reduction benefits both the organization and the customers since customers can access products at lower prices, while the organization benefits by increasing their customer base through the low-cost leadership strategies and incurring lower operational costs, which demonstrates higher profitability. Moreover, all aspects of supply management are vital in selecting the best-qualified supplier. Hence, by factoring each dimension of supply management, organizations are capable of settling for a qualified supplier who promotes higher levels of customer satisfaction through the production or provision of high-quality products, as well as ensuring organizational success (Mikkola & Skjoett-Larsen, 2003, Vol.4) .
Selecting Strategies for Negotiating Prices
Negotiation is one of the critical processes that are applicable in nearly all aspects of an organization, including determining commodity prices, meeting prices, and resource allocation. A strategy, on the other hand, refers to the active processes that are implemented with the aim of helping organizations to achieve their long-term objectives and goals (Johnson, Leenders &Flynn, 2010). There are diverse strategies that firms employ in their supply and purchasing management process. In the concept of supply, strategy pertains to the supply chain approaches that can contribute to organizational success regarding cost reduction, operational efficiency, and increased customer satisfaction. However, supply managers often encounter significant obstacles in their effort to select the most effective strategy to enhance the achievement of critical organizational objectives including cost reduction. The approaches range from those that focus on prices negotiation to those that aim at selecting the most qualified suppliers.
Arriving at the most suited supplier requires supply managers to scrutinize several concepts. At least, a qualified supplier should be capable of meeting the quantity and quality standards that an organization needs, the actual services offered, and the price and cost comparisons (Mikkola & Skjoett-Larsen, 2003, Vol.4) . Hence, negotiation strategies are increasingly becoming a ritual that must be executed by the seller and buyer respectively. According to Johnson, Leenders, and Flynn (2010), it is expected and reasonable for suppliers to operate efficiently, avoid taking advantage of their privileged positions, be well prepared to satisfy the individual needs of an organization's consumers, make reasonable and proper adjustment of claims, and streamline prices with the costs before they can enter into a contract with an organization. The establishment of these strategies with suppliers is crucial to enhancing open communication and creating healthy and productive relationships between organizations and suppliers.
In addition to establishing the strategies named above, it is vital for supply managers to examine such crucial strategic questions as, the payment plans to be discussed, and the relevant negotiation variables, including performance, prices, and times (Project Management Institute, 2004). Johnson, Leenders, and Flynn (2010) postulate that there are different ways for presenting a negotiation from the perspective of supply management rather than merely focusing on the price aspect. Negotiation strategies and objectives are particularly vital in the negotiation process as well as arriving at the fair price. According to Johnson, Leenders, and Flynn (2010), the process of negotiating prices should resonate with the customer needs and avoid taking away the strategies or objectives of the process.
Steps of Creating a Project Supply, Service, and Material Budget
The first step in creating an accurate budget for the material project, supply, and service is establishing the detailed requirements for the budget (Avery, 2009). The elements act as the basis for communicating to the potential suppliers about how the vital organizational needs may be met. The steps that supply managers need to follow in creating an ideal and successful budget include, recognizing the need or needs, describing the requirements, identifying and analyzing the potential sources of supply, selecting the perfect supplier and determining the terms, preparing and placing a purchase order, expediting or following up on the law, receiving and inspecting the order, invoice clearing and making payment, and maintaining records and relationships with the suppliers (Johnson, Leenders &Flynn, 2010).
In addition to the above steps, other elements are crucial to the supply and purchasing management process, including inventory control, warehousing, inspecting, traffic and disposal, in and outbound logistics, packaging scheduling and materials handling (Johnson, Leenders &Flynn, 2010). These aspects are vital in minimizing lead times and supply chain costs, which is also ensures that customers benefit from enhanced efficiency. In this view, Smith (2009), argues that supply and purchasing management goes beyond the conventional term and its role is beyond the concept’s textbook definition. Successful organizations focus on exercising significant judgment that includes capital and service, parts, maintenance, resale, and semi-processed and raw materials. Recognizing and describing needs is crucial in facilitating detailed explanation of commodities, articles, requirements, and the services that suppliers request. On the other hand, buyers require this information before they can make their final purchase decisions.
The initial step, need recognition, occurs when a firm or places an order for a particular product. Need description comprises of a detailed report that explores the need while illustrating whether it is a service or a good. The second step, analysis, and identification of sources of supply takes place when the supply selection function is merged with the supply function. The information gathered in this step includes where the sources of supply are located, as well as a continuous assessment of the purchase agreement that ensures that the products are delivered on a timely basis (Johnson, Leenders &Flynn, 2010). Determining the terms of supply and the supply is the third step in the essential requirements for creating the budget.
The step is followed by supplier determination and selection, which involves evaluating all the potential suppliers and choosing the one whose terms and mode of operations, resonates with that of the organization. The ideal supplier must also help in facilitating the achievement of such key organizational goals as cost reduction and market growth. The fifth step pertains to the interpretation of bids, proposals, or quotes, as well as selecting the supplier lead in connection with the order that the firm is placing (Smith, 2009). The step involves elements of judgment, which makes it crucial to the supply process.
The next phase in the creation of the budget involves preparing and placing the purchase order. The step involves such activities as preparing a purchase order form once the order is placed, ensuring that the order form is correct and error-free is critical in preventing instances of miscommunication (Johnson, Leenders & Flynn, 2010). In this context, orders that are placed via the telephone need a written transmission that should be immediately followed by a confirmation to start the supply process. The step is further accompanied by order expediting, which typically involves tracking orders to make sure that the suppliers are capable of meeting all their obligations. In cases where the suppliers are adequately responsible for meeting the needs of the client, the step may be skipped although it is constructive when employed.
The next detailed step involves the receipt and inspection of commodities, and the issuance of sales slips then follows it. The receiving department works closely with the purchasing department, and it is often directly or indirectly responsible for receiving and inspecting goods as well as issuing slips. The receiving department performs five essential functions, including confirmation of order arrival, confirmation of the condition or status of the order, assuring that the department has received the quantity of the order that was ordered, directing the order to the appropriate destination such as use, inspection, or storage, and confirming the proper submission of the receipt documentation (Johnson, Leenders &Flynn, 2010).
The following step in the supply process involves invoice clearance and payment. Once the invoice is established, it is claimed against the buyer. The invoice consists of an order number, the price of each item, and the itemized list. Traditionally, invoices are managed by the accounting department, and it is, therefore, common to send a copy of the invoice to the accounts payable department of the supplier (Smith, 2009). The final step in the supply process involves maintaining relationships and records. The step requires business firms to have organized record keeping systems for the future and present transactions.
Benefits and Costs of Outsourcing
Outsourcing refers to a function in supply and purchasing management that pertains to buying an item that a firm could not produce internally from somewhere else (Smith, 2009). Most organizations in the United States and globally outsource personnel, services, and product. However, a thorough investigation of the amount of control and management of a product or service is crucial before outsourcing (Mikkola & Skjoett-Larsen, 2003, Vol.4) . One of the key advantages of outsourcing personnel is the significant differences in wage and labor laws. The difference enables organizations to lower their costs of operation by lowering their labor costs through outsourcing labor from third world countries who demonstrate significantly lower minimum wages. However, a key demerit of personnel outsourcing is the language barrier. According to Byrne (2013), although the low minimum wages may seem to save an significant organization amount regarding labor costs, language barriers may lead to poor customer services, which may leave customers dissatisfied and potentially opt for competitor products and services.
On the other hand, supply managers within an organization are responsible for executing the supply chain activities, including investment recovery, accounts payable, warehousing, logistics, production planning, and transportation, even in cases where the organization has outsourced such services (Johnson, Leenders & Flynn, 2010). Another advantage of outsourcing is that it saves on time; according to Byrne (2013), Apple Inc. is one of the companies that has realized the benefit in hiring engineers, whereby it takes them approximately 15 days to hire engineers, whereas it would take them 9 months to hire the same number of engineers, yet their role in overseeing factory workers remains critical.
Evaluating Organizations
Benchmarking is one of the primary tools that enable organizations to enhance their performance improvements, particularly in the supply industry. Johnson, Leenders, and Flynn (2010) define the tool as a source of new organizational measures and ideas. Organizations mainly use benchmarking in the evaluation of other companies’ products and services, as well as work methods for purposes of comparison. The process plays a vital role in helping organizations to identify overlooked gaps or any existing gaps. According to Blanchard (2008), most studies on benchmarking in supply chains have focused on evaluating the efficiency of the chains with the aim of generating new ideas that are then applied for implementing improvements in the chains.
One of the key organizations that act as benchmarks in supply and purchasing management is Wal-Mart. The organization has consistently demonstrated market leadership in supply and purchasing manager for the last several years. Some of the best practices that Wal-Mart demonstrates include assigning the role of managing inventory in the warehouse to their suppliers, as well as ensuring first-hand communication with the manufacturers (Blanchard, 2008). Wal-Mart’s non-traditional approach allows for greater visibility for all the available products to be distributed throughout their stores. The company demonstrates their supply management practices through collaborating and cooperating with suppliers, an efficient supply chain, and the effective utilization of technology (Project Management Institute, 2004) . The purchasing management team is responsible for determining the products that the company is to sell, and the information plays a vital role in establishing the appropriate suppliers as well as aiding in the price negotiation process. Blanchard (2008) also notes that another critical supply management best practice that Wal-Mart demonstrates is that they focus much of their attention on forecasting, demand planning, and inventory management.
Conclusion
Organizations must consider implementing several factors if they are to achieve success in their supply and purchasing management practices. Some of these factors include guaranteeing the availability of products and services to the consumers at affordable prices, delivering high-quality products to consumers while taking into consideration the customer's ever-changing needs, as well as considering outsourcing options to promote efficiency in their supply chains by saving on time and cost. Further, it is crucial for organizations to continuously evaluate the efficiency of their processes by measuring their performance against that of the industry’s established benchmarks.
References
Avery, S. (2009). MRO sourcing goes global. Purchasing 138 (2) , 48-52.
Blanchard, C. (2008). Adding value to service providers: Benchmarking Wal-Mart. Benchmarking, 15(2) , 166-177.
Byrne, B. (2013, August 14). Apple Inc. Outsources Work to China, Says "Skills Have Left the US." Retrieved from ValueWalk: http://www.valuewalk.com/2013/08/apple-inc-aapl-outsources-work-to-china/
Johnson, P. F., Leenders, M. R., & Flynn, A. E. (2010). Purchasing and Supply Management (14th ed.). Boston: McGraw-Hill Irwin ISBN: 9780073377896.
Mikkola, J. H., & Skjoett-Larsen, T. (2003, Vol.4). Early Supplier Involvement: Implications for New Product Development Outsourcing and Supplier-Buyer Interdependence. Global Journal of Flexible Systems Management , 31-41.
Project Management Institute. (2004). A Guide to the Project Management Body of Knowledge, 3rd Ed. Newton Square, PA: Project Management Institute Press.
Smith, J. (2009). It pays to compare. Supply Management, 14(4) , 34-35.
