The purpose of this lesson is to introduce you to the concept of procurement. You will receive a distinction from the term procurement within materials management and an overview of the individual procurement areas in the company. At the end there are some practice questions available to you.
Areas of procurement
The concept of procurement encompasses more than the area of material procurement. The procurement of materials is certainly the most important part of procurement, as it takes place regularly and is part of the operational business of a company. Therefore, a great deal of attention is paid to the procurement of materials and attempts are made to carry out optimizations in this area.
However, a company does not only have to procure materials to set up and maintain business operations. Since there are numerous procurement objects, several company departments come into contact with purchasing. Facility management, human resources or financial administration, for example, become procurers in this case.
Overview of the procurement objects
- raw materials
- auxiliary materials
- semi-finished products
- work / personnel
According to paulsourcing, material procurement is the most important area of procurement, especially in manufacturing companies. So that a company always has enough material available for production, raw, auxiliary and operating materials must be available in sufficient quantities. Since the procurement of materials takes place more frequently, automatisms are installed in many companies. This includes the reorder levels, which trigger an automatic ordering of the goods when certain material quantities are reached.
Differences also will be in the single procurement which, stock acquisition and the just-in-time deliveries caused. With individual procurement, the materials for the respective sales order are procured in the quantities that are required. This is different with the procurement of supplies, where there are always enough materials in the warehouse. Just-in-time is a special form of material procurement. The procurement logistics ensure that no stocks are created, which means that a company does not need a warehouse.
Example: procurement of materials
The, Rotherb GmbH ‘ is a producer of paper and paperboard. For production, the company needs large amounts of waste paper and water, which serve as raw materials and are always kept in stock. In addition, colors are required for the cardboard, which, however, depending on the production plan, are delivered directly as soon as they are needed.
Here, the just-in-time logistics system is agreed with the suppliers. An individual procurement does not take place. In addition, the ‘Rotherb GmbH’ needs auxiliary materials for the cardboard boxes, including the glue, for example. The machines in production run on operating materials such as oils or fats.
In most companies, the acquisition of the labor factor takes place in human resource management. Here the departments report their need for workers, which results from the order situation, personal reasons of the employees or the classic fluctuation.
The recruitment has to meet the goal, the needs of workers while cost to trade and quality-optimized. Various methods are available for procurement, from classic job advertisements to internal staff changes to head hunters or social media.
At ‘Rotherb GmbH’ it has been certain for a long time that the production manager wants to leave the company. The management has commissioned HR to fill the position. Unfortunately, due to a lack of quality, the position could not be filled internally. There were also no suitable applicants for traditional job advertisements. In the next step, ‘Rotherb GmbH’ conducts an applicant search through Head Hunter.
Procurement of services
Every company is dependent on external services. The smaller the company, the more often the required services are outsourced, as the respective tasks cannot be carried out by in-house employees.
The services can include a wide variety of company areas, such as cleaning staff, management consultancy or developers for PC programs. These can be permanent and recurring services or one-off services.
If the company needs fresh capital, various options are available. Capital requirements arise when investments are to be made, when bad times have to be bridged or when there is a change in the legal form. The capital for a company can be drawn from equity or debt.
Opportunities to raise capital
- Admission of shareholders
- Issuance of shares
- Sale of fixed assets
- Sale of land or real estate
- Taking out credit
- Skimming of subsidies
- Release of supplies
Procurement of fixed assets
A company has to procure operating resources and fixed assets on a regular basis. This can result in high costs, especially in manufacturing companies. Fixed assets are required when new products are added to the range, when advanced technology requires it, or when machines break down. In addition to the machines, office equipment and, in a broader sense, the buildings belong to the fixed assets, whereby these mostly run separately under real estate.
Example: fixed assets
The, Rotherb GmbH ‘ has an older machine that does its job reliably for 20 years for paper production. Unfortunately, production with this machine is expensive and no longer competitive, which means that the company has clear disadvantages when it comes to price calculation. In order to be able to keep up with the market in the future, ‘Rotherb GmbH’ has to invest in a new production facility. This can reduce production costs in the long term.
Obtaining information and rights
Procurements can also be of an immaterial nature, for example if information or rights are required. Obtaining information is possible in many areas, for example when it comes to market analysis, international press reviews or the current state of research.
The possible sources that are available are just as diverse as the information itself. A second area is the acquisition of rights. These are, for example, patents or licenses.
Some tasks concern the procurement regardless of the object that has to be procured. These are general activities that make purchasing easier for a company and improve the economic aspects of purchasing. The tasks include the areas of needs assessment, market analysis and order processing through to goods receipt.
Overview of the tasks during procurement
- Determination of requirements: In order for the buyer to know what to buy and in what quantity, he needs precise information on the requirements. Ideally, he knows what he has to make available in what quantity, in what way, at what location, at what time and in what quality.
- Determining the source of supply: In the next step, the procurement market for the required product must be analyzed. This gives the purchasing department an overview of potential suppliers in connection with delivery times.
- Supplier selection: Once the procurement market has been analyzed, the potential suppliers are listed. A selection of suppliers is made from this list based on evaluation factors with the aim of determining the best supplier.
- Contract negotiations: The best rated supplier is sought out for contract negotiations and the objects from the needs assessment are requested.
- Order processing: Once the contract has been concluded, the order is placed. Depending on the frequency of the orders, this can be more complex than a one-off order.
- Order monitoring: After the order has been placed, the entire ordering process and the delivery time must be monitored.
- Incoming goods: When the ordered goods arrive, it is advisable to check them for quantity, correctness and quality.
- Invoice verification with payment: If the entire process has been completed to the satisfaction, the final invoice must be checked and the invoice paid.