Procurement management

Outlines
Basics of procurement management
Outline of procurement policies
The basic procurement procedures
Developing purchase specification and standardization
Supplier Selection
Purchase negotiation
Value analysis
1

Why procurement in the supply chain is
important?
 Procurement is a critical part of the logistics cycle.
 Procurement planning and the procurement process are important
activities that ensure the correct products are available in-country
also are ready for distribution when they are needed
 Without procurement procedures and processes, you would
not be able to meet the six rights.
2

Why procurement in the supply chain is important?...
 Not only is procurement essential, but it is also responsible for
a lot of expenditure (price × volume).
 So procurement is directly responsible for most of a
company’s spending, and a relatively small improvement can
give substantial benefits.
E.g. For atypical manufacturer, 60% of its spending goes on materials, with
companies spending over $50 billion a year.
 Suppose that a company buys raw materials for a 60, spends a 40 on
operations and then sells the product for a 110.
 It clearly makes a profit of 110 – (60 + 40) = a 10 a unit.
 Now suppose that procurement negotiates a 5% discount on materials.
 Materials now cost 60 ×0.95 = a 57,and with the same selling price a 3 unit
saving goes straight to profit, so a 5% decrease in materials costs raises profit
by 30%.
3

Why should procurement be a challenging
problem?
 Procurement chain network is often very complex and/or
procurement chain partners have conflicting objectives.
New drug procurement?
E.g. Adopting foreign price controls would jeopardize access to
new, innovative medicines for patients in need.
 The pharmaceutical procurement system is a major
determinant of pharmaceutical availability and total
pharmaceutical costs.
4

Basics of procurement management
Definition of concepts
Tender
the documentation and initiation of a process for soliciting bids; the
specifications for the product/service desired and opening the contract to
the bidding process.
Bidding documents
documents issued by the procuring entity to provide prospective
bidders all the necessary information that they need to prepare their
bids.
Bid
a written offer for a quantity of goods, works, or services, at a stated
price; based on technical specifications and other terms and conditions.
Bids are submitted to a purchaser by an interested seller in
response to an invitation for Bids
It is a stage in the procurement process extending from
advertisement of or invitation to bid up to signing of contract
5

…Concepts
Technical Specification
document describing the quality, type and standard with which the
required goods, services, works or consultancy services should comply
 Contract/framework contract
 a contract is an agreement entered into by two parties for the
execution of a certain activity.
 A framework contract is a general term for an agreement with a
supplier that sets out terms and conditions against which specific
purchases can be made throughout the life of the agreement.
WHO prequalification
this is a process of predetermining that a specific product,
from a specific manufacturer, meets stated requirements.
provide assurance of quality, especially for countries unable to
undertake the process.
6

…Concepts
 Post-qualification- is a process undertaken by a public body at
the end of the bid evaluation stage to ascertain the capability
of the least evaluated bidder to perform the contract.
 Post qualification assessment may be done for prequalified
bidders.
 The purpose of the post qualification is to ascertain that the
lowest evaluated bidder is still capable to perform the contract.
 Back order
 an order for a product that is currently out of stock.
 Back orders are filled when a new supply of the product becomes
available.
7

…Concepts
 Total price- payment made by public bodies in respect of a
particular procurement which includes taxes and all other
incidental costs.
 Standard Bidding document- the document prepared by the
Agency to serve as a point of reference in the preparation of
bidding documents by Public Bodies.
 Procurement is a process of acquiring supplies through
purchases from the manufacturers, their agents like
distributors or from private or public suppliers.
 Procurement can be as simple as buying pens for a single public
sector agency or as complex as establishing a long term
arrangement to buy a range of highly technical goods and
services for collective agencies or jurisdictions.
8

…Concepts
Purchasing vs. procurement
 Importantly, and distinct from “purchasing”, Procurement
involves the activities involved in establishing fundamental
requirements, sourcing activities such as market research and
vendor evaluation and negotiation of contracts.
 It can also include the purchasing activities required to order
and receive goods.
 “purchasing”, refers to the process of ordering and receiving
goods and services.
o It often includes receiving and payment
 It is a subset of the wider procurement process.
 Generally, purchasing refers to the process involved in
ordering goods such as request, approval, creation of a
purchase order record and the receipting of goods.
9

…Concepts
 Procurement is a complex process which involves many steps,
agencies, ministries and manufacturers.
 It is used to identify user requirements, evaluate the need
effectively and efficiently, identify suppliers, ensure payment
occurs promptly, ascertain that the need was effectively met,
and drive continuous improvement.
 Sustainable procurement is an approach to purchasing
products and services that takes into account the
economic, environmental and social impacts of an
organization's buying choices, at all times.
10

…Concepts
 Public procurement-procurement by a public body using
public fund
 Public sector drug procurement must take place in the context
of both the local pharmaceutical market and the international
market.
 It is recognized that public sector procurement may be
managed in a variety of ways, ranging from total in -house
systems, through various autonomous or semi-autonomous
procurement agencies, to total privatization.
 An increasing number of countries have moved from public
procurement and distribution system to private sector in
order to enhance public health.
11

…Concepts
 Procurement efficiency
 Core indicator
 Ratio between median price of products procured and the
international median reference value =>
NB. Target ratio≤ 1
what it measures?
 This indicator measures the efficiency of procurement
practices by comparing the prices paid for medicines with
international price standards.
12

…Concepts
Rationale
 Price is a key issue in procuring good-quality pharmaceuticals.
The choice of procurement method (e.g. competitive
bidding, direct procurement) affects the prices obtained.
 An efficient programme obtains best prices using
reference price benchmarks, and reliable deliveries of good-
quality pharmaceuticals from suppliers.
13

…Concepts
Procurement environment
 The public sector procurement environment includes both
core technical components and supporting system
components.
 personnel technical capacity, staffing resources, and
management expertise are core components;
 while institutional systems, policy and regulations,
government leadership, and other factors are supporting
components.
14

Strategic objectives for good pharmaceutical
procurement
 The operational principles for good pharmaceutical
procurement are based on four strategic objectives.
 Four strategic objectives of pharmaceutical procurement
i. Procure the most cost-effective drugs in the right quantities
ii. Select reliable suppliers of high-quality products
iii. Ensure timely delivery
iv. Achieve the lowest possible total cost
An effective procurement process seeks to ensure the availability
of products and services at the right price, from the right source,
at the right specification, in the right quantity, delivered at the
right time and to the right internal customer.
15

Strategic objectives…
I. Procure the most cost-effective drugs in the right quantities
 all organizations responsible for procurement should develop an
essential drugs list to make sure that only the most cost-effective
drugs are purchased.
 Procedures must also be in place that accurately estimate
procurement quantities in order to ensure continuous access to the
products selected without accumulating excess stock.
II. Select reliable suppliers of high-quality products
 reliable suppliers of high-quality products must be (pre-)selected,
and that active quality assurance programmes involving both
surveillance and testing must be implemented.
16

iii. Ensure timely delivery
 procurement and distribution systems must ensure timely
delivery of appropriate quantities to central or provincial stores
and adequate distribution to heal the facilities where the
products are needed.
iv. Achieve the lowest possible total cost
 procurement and distribution systems must achieve the lowest
possible total cost, considering four main components:
17

Achieve the lowest possible total cost…
 the actual purchase price of drugs;
 hidden costs due to poor product quality,
 poor supplier performance or short shelf-life;
 inventory holding costs at various levels of the supply system;
and operating costs and capital loss by management and
administration of the procurement and distribution system.
18

Key principles of good pharmaceutical
procurement
 Key principles of good pharmaceutical procurement for health
systems include;
 Reliable payment and good financial management
 Procurement by generic name
 Clear specification of a recognized pharmaceutical quality
standard
 Limitation of procurement to the essential medicines list
 Increasing procurement volume by aggregating demand
 Formal supplier qualification and monitoring
 Competitive procurement
19

Key principles…
 Monopsony commitment
 Order quantities based on reliable
estimate of forecasted actual need
 Transparency and written procedures
 Separation of key functions
 Product quality assurance program
 Annual audit with published results
 Regular reporting of procurement performance indicators
20

Cont…
Lowvalueandlowrisk(Quadrant1)
Characteristics
 Goods or services in this
category are usually low
value.
 These goods or services can
be routinely procured or
procured as required.
 The skills required for these
types of transactions are
generally administrative.
Basic procurement strategy
 Keep procurement in this
quadrant relatively simple to
minimize procurement and
transaction costs.
 Document the administrative
procedures for procuring
goods or services in the entity's
procurement policies and
procedures.
22

Cont…
highvalueandlowrisk(quadrant2)
Characteristics…
category are generally widely
used by public entities, they
have no special quality, safety,
reliability, or environmental
implications, they are simple
to specify, and they have
common standards.
 However, high level
procurement skills are
required to establish and
manage these arrangements
(for example, setting up travel
arrangements).
Basic procurement strategy…
 Aim to ensure that total
costs, including the costs of
processing large numbers of
low value transactions, are
reduced.
 Consider if there is a need
to address environmental
issues about disposal, waste
management recycling,
handling, or storage.
23

Cont…
Lowvalueandhighrisk(Quadrant3)
Characteristics…
category are usually highly
specialized (for example, high-tech
medical equipment).
 There are often very few
potential suppliers.
 High-level procurement and
technical skills are required to
establish and manage these
arrangements.
 Price may not be the principal
factor in the procurement.
 Reduce exposure to limited
sources of supply.
 This can be done through
actively identifying alternative
sources of supply and/ or
changing the demand
requirements of the public
entity.
 Prepare individual strategies
or procurement plans for each
procurement project is this
category.
24

Cont…
Highvalueandhighrisk(Quadrant4)
Characteristics…
category are often a complex
“bundle” or “package” of
services and associated goods
that are critical to the service
delivery of the public entity.
 Long-term relationships with
suppliers are common.
 Supplier attitudes to the
public entity as a customer are
often critical to the value the
entity will derive from the
delivery of the goods and/or
services.
 Focus on ensuring that the
successful supplier has the
ability, availability, and
resources needed to work
with the public entity.
 Manage the relationship with
the supplier to obtain value
for money.
 Have a detailed understanding
of what is required, how the
arrangement should be
managed, and the market
characteristics.
25

Relationship of procuring department
with other functional areas
 Organizations have replaced the segmented structure of the
procurement function with integrated structures, and
procurement has moved on from being a discrete activity to
being the hub of a large part of the organization's business
activity.
 procurement has continuing relationships with many other
functions in an organization, in addition to the relationships
established with the organization's suppliers and customers.
 The procurement operations cut across most departmental
lines.
26

Cont.…
 Figure: the many internal interfaces of the procurement
function
27

Cont.…
 some of the challenges that often surface in the team working
between procurement and four other key functions.
i. Procurement and design engineering
 Procurement, engineering and production have many mutual
problems.
 Design engineering, like production, greatly influences the
amount of time procurement has to handle a procurement
assignment.
 Engineering usually has the initial responsibility for preparing
the technical specifications for an organization's products and
the materials that go into them.
 To exercise this responsibility effectively, engineering must
have the constant help of procurement and production.
28

Cont.…
Procurement and Design engineering...
 A number of organizations have initiated early Procurement
and early supplier involvement programs to assist this effort.
 The prices paid for production materials and the cost to
fabricate them are inextricably related to their specifications.
 Similarly, specifications can be written in a manner that reduces or
enlarges the number of organizations willing to supply specific
items.
 If profit is to be maximized, the materials specified by
engineering must be both economical to procure and
economical to fabricate, and they should normally be
available from more than one efficient, low-cost producer.
29

Cont.…
ii. Procurement and Production
 the procurement-production relationship begins when the
production function transmits its manufacturing schedule or
materials requisitions to the procurement function.
 when production does not allow procurement sufficient time
to procure wisely, many needless expenses inevitably creep
into the final costs of an organization's products.
 when procurement has inadequate time to develop
competition or to negotiate properly, premium prices are
certain to be paid for materials.
30

Cont.…
Procurement and production…
 costly special production runs and premium transportation
costs are two additional factors that frequently result from
inadequate procurement lead time.
 The most serious problem stemming from insufficient
procurement lead time is a production shutdown.
31

Cont.…
Procurement and Production…
 The potential consequences of a production stoppage cause
many Production managers to advocate an excessively large
inventory of production materials.
 For Production managers to reach their main manufacturing
objective of low unit costs, they must minimize idle time and
keep the production line operating.
 However, Procurement has the related objective of accomplishing
the task with the minimum reasonable capital investment in
inventory, a major concern which production typically does not
share with equal intensity. The cost of carrying inventory is high.
32

Cont.…
iii. Procurement and Sales
 All organizations recognize the direct relationship between
the sales function and profit.
 In their enthusiasm to increase sales, however, many
organizations overlook the leaks in profit that can occur when
the sales activity is not properly meshed with the
Procurement and Production activities.
 The Procurement-Production-Sales cycle has its genesis in a
sales forecast.
33

Cont.…
Procurement and Sales….
 Most sales forecasts include two important parts:
1. An estimate of sales based on what has happened in the past to
an organization's products, territories and markets;
2. An adjustment of this estimate to include changes the
organization expects in its future sales.
 procurement must immediately transmit to sales, as well as to
other management groups, information concerning increases
in materials prices.
 this permits sales to evaluate the effect of price rises in price
estimates given for future sales quotations, on current selling
prices, and on plans for future product lines.
34

Cont.…
Procurement and Sales…
 procurement and sales must wisely blend their interest in the
delicate area of reciprocity (buying from customers).
 buying from customers can be good business, but not when it
is done at the expense of product quality or organization
profit.
 sometimes, increased sales result in decreased profit if they
simultaneously require a greater increase in procurement
costs.
35

Cont.…
iv. Procurement and Finance
 Procurement’s relationship with Finance is different from its
relationships with Production, Engineering and Sales.
 The difference stems from the fact that cost determinations
cannot be hidden in the Procurement-Finance relationship as
they often can in the other relationships.
 The importance of good financial planning is highlighted by
the fact that poor financial planning is one of the major
causes of business failure.
36

Cont.…
Procurement and Finance…
 Among the basic data needed by an organization for proper
planning of its working capital and cash flow positions are
accurate sales forecasts and accurate procurement schedules.
 It is just as important for Procurement to inform Finance of
changes in its schedule, as it is to inform Production and Sales
of these changes.
37

Essential knowledge tobecome asuccessful
procurement professional
 Procurement professional-leads, controls, develops and is
accountable.
 In the public sector work within a governance framework to
develop and implement strategies, tools and systems that
deliver high quality, best practice, and compliant value for
money solutions.
 Procurement professionals also have the skills to identify
opportunities to lead procurement and reform initiatives both
within their organizations and across the public sector.
 She/he has to ensures that procurement outcomes are clearly
defined and that the strategic procurement and contracting
models are appropriate and applied in a standard manner.
38

Cont.…
 Typically they lead a major procurement change initiative in
either the senior managerial role or as the prime decision-
maker.
 A procurement professional often manages high value, high
risk or complex procurements, or an interdependent range of
individual contracts to support the delivery of a major
procurement capability.
 To deliver these outcomes, they also have a key role in
ensuring their procurement workforce have the appropriate
knowledge and skills.
39

Cont.…
 A procurement professional may lead multi-disciplinary and
integrated procurement teams.
 If so, they apply highly developed program and project
management skills to monitor and control the entire
procurement activity, including potentially:
 enterprise risk management, organizational demand and
costs modeling, strategic category management activities,
leading contract negotiations, resolving contract management
disputes, and leveraging strategic relationships and
sustainable supplier value.
40

Cont.…
 A procurement professional within government is expected to
demonstrate and uphold the highest ethical standards of
conduct and integrity.
 acting with care and diligence and making decisions that are
honest, fair, impartial, and timely, and
consider all relevant information,
 treating people with respect, courtesy and sensitivity and
recognizing their interests, rights, safety and welfare, and
acting responsibly and in an accountable manner to ensure
the efficient, effective and appropriate use of human,
environmental, financial and physical resources, property and
information.
41

Cont.…
 knowledge and capabilities that individuals carrying out
procurement activities should have at each of the five levels of
competence.
42

Cont.…
 Through each pillar there are five levels of competency
43

Procurementprofessionalcapabilitydomains
Legislative and regulator
environment
 Public sector context
Laws and policies covering
agreements
Ethics and probity
 Strategic
Manage risk
 Commercial risk
Financial risk
Strategic procurement planning
market analysis and market
engagement
 contract management
 operational
professional development
and contribute to the
professional body of
knowledge
44

Procuring intheorganizational structure
 Broadly, the process of establishing a new procurement
arrangement is known as a contracting activity, whilst
acquiring a good or service from an existing procurement
arrangement is known as a purchasing activity.
 The size and activities of the procurement function in a single
business unit organization will depend on a number of factors,
such as the size of the organization and the nature of its
businesses.
 Obviously, in small and medium-sized organizations where the
supply staff consists of only one or two individuals, the staff is
expected to be flexible in terms of their capabilities and skills.
45

Cont.….
 In fact, in small companies, it is not unusual to see
procurement responsibilities shared by a variety of individuals
for whom procurement may even be a secondary
responsibility.
 As the size of the organization grows, the idea of assigning a
professional the responsibility of procurement emerges and a
separate function is created.
 six main structural characteristics of a purchasing organization
are; centralization, standardization, specialization,
formalization, involvement, and configuration Glock, C. H, 2011
46

Cont.….
 Configuration refers to the design of the authority structure
of the organization and includes dimensions such as vertical
and lateral spans of control, criteria for segmentation and
numbers of positions in various segments.
 A high degree of configuration in purchasing results in a purchasing
organization that implements a high number of different design
elements, such as positions, departments, formal communication
channels or control structures.
 Another system design element that may be summarized
under heading “configuration "is the hierarchical position of
the purchasing department.
47

Cont.….
 The position of organizational unit helps to assess the status
this unit has in the organization and the degree to which an
organizational unit can influence decisions on the strategic
and tactical levels.
 Involvement may be subdivided in lateral involvement and
vertical involvement.
 Lateral involvement measures the number of separate
departments, divisions or functional areas participating in the
purchase decisions, but vertical involvement measures the number
of heir archival levels involved.
 As the number of departments involved in the purchasing
process increases, more information becomes available,
which helps to reduce uncertainty.
48

Cont.….
 Formalization is the degree to which an organization relies on
rules and procedures to direct the behavior of its members.
 can be achieved by defining roles and authority relations
or by establishing rules that regulate decision process, the
communication of employees, or the processing of
information in the organization
 Higher degree of formalization is achieved by establishing rules,
regulations and guidelines that dictate how each procedure is
supposed to be executed ensuring that identical operations are
performed identically by different members of the same
organization.
49

Cont.….
 One benefit of high degree of formalization, possibility, is to switch
among employees from different organizational units with the same
everyday responsibilities.
 Since one type of procedure in whole company is executed
in the same way, no additional training is required.
 Formalization is all about reducing variability in process and it
is opposite to creativity.
 It result in reduction of employee motivation and finally lead
to lower efficiency.
50

Cont.….
 standardization “is the degree to which purchasing takes place
in a standardized way ”
i.e. the degree to which characteristics of the product
that is bought are standardized in the same way
throughout the company
 Several authors define standardization of process similarly to
formalization.
 The only difference is that formalization require
establishment of tangible documents.
51

Cont.….
 However, have conceptualized standardization of purchasing in
three distinct dimensions:
 Purchasing process standardization;
 Product standardization;
 Purchasing personnel standardization.
 Specialization is the division of labor in the organization to
enhance efficiency and subdivided in two directions.
 Functional specialization implies jobs being broken down into
simple and repetitive tasks that may be efficiently executed.
 Object-oriented specialization helps to reduce interface
problems since employees are responsible for different tasks
that are logically interconnected.
52

Cont.….
 specialization may provide higher procurement quality,
because the likelihood that an experienced specialist
would make a mistake is lower than for employee who has to
take care of different kinds of tasks.
 Specialization will occur as the organization gets larger and
can afford to hire additional procurement personnel.
53

Centralizedand Decentralizedpurchase
Centralization is defined as the degree to which
authority, responsibility and power are
concentrated within an organization or buying unit.
Often centralization is viewed as a means for
complexity reduction, as well as a means for
achieving higher efficiency.
 However, in reality this is not always true.
54

Cont.….
Centralization is very common in public
procurements.
 occurs in an organization when a limited amount of
authority is delegated.
 Public institutions tend to have larger buying centers
and use a higher degree of specialization,
formalization and complexity in organizing their
purchasing functions
 It might be caused by legal regulations, which require that
public funds have to be spent transparently and which
necessitates a formal and complex public purchasing process.
55

Cont.….
 Decentralized procurement is where the purchasing decision
making process is “localized”
 occurs when a significant amount of authority is delegated to
lower levels in the organization.
56

Cont.….
Advantages of Centralization
 Uniformity of policies, practices, and procedures
 Better use of centralized, specialized experts
 consolidation of all orders for the same, and similar, materials
to get quantity discounts coordinating associated activities to
reduce costs of transport, stockholding and administration
 eliminating duplicated effort and haphazard practices
 allowing other people to concentrate on their own work
without diverting into purchasing
 concentrating responsibility for procurement, making
management control easier.
57

Cont.….
 Three decisions that should be made regarding the
degree of centralization are the following:
(1) whether to price centrally,
(2) whether to actually purchase centrally and
(3) whether to store the materials in a central warehouse
The first option is price individually.
 Each business unit or department select their suppliers and
negotiate on prices separately.
 individual purchasing and delivering directly from
supplier’s factory or warehouse to warehouse, production
plant or construction site assigned to the business unit.
 This is complete decentralization.
58

Cont.….
 The second option is centralized pricing that requires
negotiation with vendors about company-wide contracts
that includes fixed prices for orders from all business units.
 At the same time each unit can place orders, purchase and
store materials individually.
 Goods are delivered directly from supplier’s factory or
warehouse to a location assigned to the business unit.
This is called centralized pricing with decentralized
purchasing.
59

Cont.….
 The third option contains centralized pricing and centralized
purchasing.
 The items are purchased from one location and delivered to a
central warehouse where they may stay for some time until
requested for distribution to the individual sites
 The fourth option is centralized pricing and purchasing
without central warehouse.
 The company purchases the items from a supplier and all
items are delivered to a location assigned to the business
unit.
60

Cont.….
 To centralize or not to centralize…
Market
difficulty
Complexity
of
Change
Business
impact
61

Positiveandnegativeaspectsofcentralizedand
decentralizedprocurementsystems
 There are positive as well as negative aspects of both, centralized
and decentralized procurement structures.
 Centralization creates purchasing synergy benefits, which can be
divided into three main categories
 Economies of scale;
 Economies of process;
 Economies of information and learning
Economies of scale
 Economies of scale refer to attaining lower unit costs by increasing
market power through volume bundling and standardization of
categories.
 Centralized procurement could provide maximum discount from
the supplier, because large quantity of required materials in
one purchase allows supplier to feel safe about higher
revenue and it would be willing to reduce the price.
62

Cont…
Economies of scale…
 Some cost estimates of the savings achieved through
centralized purchasing have been presented in the
literature, and they vary between 10% and 20% comparing to
the decentralized purchasing.
 In purchasing the two most common quantity discount forms
are:
 All units-the lower price applies to all units purchased, not
just those above the price break;
 Incremental-only those units within a price break interval
receive that interval’s discount.
63

Cont…
Economies of process
 Economies of process mean less administrative work and a
decrease in administration duplication in addition to
reduction of purchasing organization expenses as a
purchasing synergy benefit.
 The company that is making the purchase should at first
collect information about material requirements from all
units internally.
 That would reduce number of outgoing orders and incoming
invoices, what would reduce work load on accountants who
register expenses.
64

Cont…
Economies of process….
 The same improvement would happen on supplier’s side as
well leading to mutually beneficial cooperation.
 It is convenient for modern management and reduces the
management on repeating actions.
Economiesofinformationandlearning
 Economies of information and learning mean sharing all
available purchasing knowledge on suppliers, new
technologies, internal users, applications and the
prevention of mutually incompatible negotiating strategies.
65

Cont…
Economiesofinformationandlearning…
 Centralization often enables companies to assign certain
categories of items to specialists, who tend to be more
efficient because they are able to concentrate their
efforts on relatively few categories, which they are
responsible for when negotiating the agreements.
 Bid evaluation program can help to reduce time on decision
making in supplier selection.
 Most companies do not form an effective evaluation
system; they still adopt subjective methods such as the
review of vendor qualification, consulting the vendor’s
promotional materials and so on to evaluate suppliers.
66

Positiveandnegativeaspectsofcentralizedand
decentralizedprocurementsystems
 What is decentralized procurement?
 It is where the purchasing decision making process is
“localized”
 involves having the procurement managers, project,
subsidiary, office or departments purchasing their own
products or services.
 has individuals attached to the project manager or office
responsible for the purchasing needs of the project or office.
67

Cont…
Advantagesofdecentralizedprocurement
 Fast response and decision making process
 Reflective of local operating dynamics
 allows organizations to take advantage of division of labor
 Empowers employees and allows them to improve their
performance timeously
 It encourages motivation and creativity
 It allows many minds to work simultaneously on the same
problem
 Accommodates flexibility and individualization
68

Cont…
Advantagesofdecentralizedprocurement
 materials can be purchased
by each department locally
as and when required.
 purchase orders can be
placed quickly.
 faster replacement of
defective materials shorter
approval process
 Decisions better adapted to
local conditions
 Empowers employees and
allows them to improve
their performance
timeously
 Allows managers of
business areas to use first
hand knowledge and
experience to improve their
areas.
 Ensures quality and
standards
 Better accountability
 more secure and fault-
tolerant
69

Cont…
Disadvantagesofdecentralized procurement
 Duplication of effort in buying, receiving, inspection and
accounts payable
 Longer support cycles
 Everything is in one place
 Unnecessary asset duplication
 Technology compatibility issues
 Difficult to manage
70

Cont…
Which way forward???...
 Some organizations adopt a hybrid system that combines both
centralized and decentralized purchasing.
 To centralize or not decentralize depends on many dynamics and
variables in an organization.
71

Cont…
Common procurement challenges
 Absence of a comprehensive procurement policy
 Inadequate rules, regulations, and structures
 Public sector staff with little experience and training to
respond to market situations
 Government funding that is insufficient and/or released at
irregular intervals
 Donor agencies with conflicting procurement regulations
 Fragmented drug procurement at provincial or district level
 Lack of unbiased market information
 Corruption and lack of transparency
72

Outline of procuring policies
Procuring policies
Policy refers to the set of purposes, principles, and
rules of action that guide an organization.
Rules of action ; standard operating procedures
along with any rules and regulations, to achieve
organizational aims and goals.
Although policies are usually documented in writing,
unwritten or informal policies can also exist.
• Informal policies are understood over time and
eventually become part of an organization’s culture.
Policies are only documents and not law, but these policies
can lead to new laws.
• Laws are enforceable in which the policies comply.
73

Cont.…
 A policy is just informal as it is just a statement or a
document of what is intended to be done in the
future
 Policies outline what a government is going to do or
does not intend to do and what it can achieve for
society as a whole.
Public policy are all things the government
decides to do.
o Ethiopia health policy: aims at increasing access to all
segments of population with promotive, preventive,
essential curative and rehabilitative health services
through decentralized and integrated health care
delivery systems.
74

Cont…
Procuring policies…
Advantages and Disadvantages of Policies?
Advantages
 is an opportunity to define and
clarify top management
objectives.
 a means for executive
management to communicate
its leadership and views.
 provide a framework for
consistent decision making
and action.
 Defining the rules and
procedures that apply to all
employees.
Disadvantages
 often difficult to communicate
throughout large organizations.
 Employees might view policies
as a substitute for effective
management.
 policy development can also
restrict innovation and flexibility.
 Too many policies accompanied by
cumbersome procedures can
become an organization’s worst
enemy.
75

Cont…
 Purchasing management develops policies to provide
guidance and support to the professional purchasing and
support staff.
o These policies are general outlines clarifying purchasing
management’s position on a subject.
 Although many purchasing policies exist, most fall into one of
five categories:
 Policies defining the role of purchasing
 Policies defining the conduct of purchasing personnel
 Policies defining social and minority business objectives
 Policies defining buyer-seller relationships
 Policies defining operational issues
76

Cont…
The procurement process is often complex and,
frequently, has many regulations and policies.
 Therefore, you must undertake procurement carefully
and methodically, and with a good understanding of
local procurement laws and processes.
 There are no strict system wide procurement regulations.
 To support and regulate the daily detailed procurement
operation, each organization has its own internal rules that
are often incorporated within the financial regulations and
the financial rules, supplemented by the procurement
manual.
77

Cont…
 The process and procedures to procure goods and
services vary according to the legislative context,
compliance obligations, organizational risk appetite, market
availability and complexity of requirements.
 Therefore the procurement knowledge, skills, behaviour and
experience required will also vary.
 Ideally, procurement laws and regulations should be clear,
consistent, comprehensive, and flexible.
78

Cont…
Procurement rules exist in most countries and for all
international financing agencies and these must be
followed.
 These rules should encourage true and open
competition in tendering and contract award, open
meetings and equitable and fair distribution of
information, effective monitoring and auditing of all
processes and implementation activities.
To be effective, health policies should be based on
reliable information.
79

Cont…
 Importance of procurement policies for pharmaceuticals and
basic assumptions:
 “The pricing, procurement, and use of prescribed medicines
are a big source of inefficiency across healthcare systems
around the world.” Kanavos, P. (2016)
 Drug spending makes up a considerable part of any
healthcare budget.
 In middle-income countries it can be as high as 35% to 45%.
 It is the single most important, after salaries, item in any
country’s healthcare budget.
 Therefore, it is crucial to look into these medicines, especially
inefficiencies in their procurement and ineffectiveness of
regulation in this area.
80

Cont…
In-patent medicines account for a significant proportion
of total drug spending, despite there being a fairly small
number of them.
 Off-patent medicines constitute 70 to 80% of the total
volume of drugs and represent around 30% of total
expenditure.
There are three basic assumptions that should be
considered as a starting point for policy
recommendations to ensure that the procurement policy
interventions set out a positive impact.
81

Cont…
 The first assumption is that there should be a third party
player at the national, regional or local health system level
who pays for a significant proportion of pharmaceutical costs
and intervenes to regulate the performance of the market
from a health insurance perspective, particularly regarding
price.
 Second, it is important that there should be a national drug
policy in place that includes a system of reimbursements of
certain medicines at a certain price and establishes co-
payments.
82

Cont…
 The third assumption is that there should be an effective
regulatory framework in place, guaranteeing safety, efficacy,
and quality, especially of new medicines and bioequivalence
or bio-similarity of off-patent medicines.
 Generally, countries establish both health related goals and
economic goals. WHO (2003)
 NDP goals tend to ensure:
i. Access
ii. Quality of medicines
iii. Rational use
83

Cont…
 A national drug policy is a written document, officially
approved by the national government, and used as the basis
for current policy in the pharmaceutical sector.
 It has guidelines pertaining to three areas:
i. Control of import, export, manufacture, and pricing of drugs, and
of distribution, supply, storage and sale.
ii. Authority for regulation of labelling, information and advertising,
drug registration, scheduling of controlled substances, imposition
of fees and price controls.
iii. Drug control administration: organization and function,
prescribing and dispensing restrictions, mechanisms of appeals
against decisions.
84

Cont…
Procuring Ethics
 “Ethics is all about what is morally right and morally wrong, so
procurement ethics is concerned with what is morally right
in procurement as profession.”
 Ethical behavior includes avoiding conflicts of interest, and
not making improper use of an individual's position.
 Public officials should always behave ethically and fairly,
including in their business undertakings.
 When interacting with suppliers, an ethical buyer treats them
in a just, decent, fair, honest, and fitting manner.
 Being ethical means following a code viewed as fair by those
within the profession as well as the community.
85

Cont…
Procuring ethics…
 Three rules are understood to be a part of ethical behavior.
 First, buyers must commit their attention and energies for the
organization’s benefit rather than personal enrichment at the
expense of the organization.
 Ethical buyers do not accept outside gifts or favors that violate
their firm’s ethics policy.
 Ethical buyers are also not tempted or influenced by the
unethical practices of salespeople and do not have personal
financial arrangements with suppliers.
 Second, a buyer must act ethically toward suppliers or
potential suppliers.
 This means treating each supplier professionally and with
respect.
86

Cont…
Procuringethics…
 Finally, buyers must uphold the ethical standards set forth by
their profession.
 A code or statement of professional ethics usually formalizes
the set of ethical standards.
 Purchasing managers, more than any other group within a
firm, experience enormous pressure to act in unethical ways.
 This occurs for several reasons.
 First, purchasing has direct control over large sums of money.
 A buyer responsible for a multimillion-dollar contract may find sellers
using any means available to secure a favorable position.
 The very nature of purchasing means that a buyer must come in contact
with outside, and occasionally unethical, sellers.
 A second reason is the pressure placed on many salespeople.
 A seller that must meet aggressive sales goals might resort to
questionable sales practices.
87

Cont…
TypesofUnethicalPurchasingBehavior
 The definition of ethical behavior can differ from buyer to
buyer or from firm to firm.
 Despite these possible differences, most professionals
recognize certain behavior or actions as unethical.
 Some of these behaviors are listed below.
 Reciprocity- this action involves giving preferential treatment
to suppliers that are also customers of the buying
organization.
 it refers to a purchasing arrangement that dictates “I’ll buy
from you if you buy from me.”
88

Cont.…
TypesofUnethicalPurchasingBehavior...
 Personal Buying
 This occurs when a purchasing department purchases
material for the personal needs of its employees.
 Some states have outlawed such practices with statutes called
“trade diversion laws.”
 These laws prohibit purchasing from engaging in personal
buying for items not required during the normal course of
business.
 Accepting Supplier Favors
 Accepting gifts and favors from a supplier is the most common
ethical infraction involving buyers.
89

Cont.…
Sharp Practices
 A sharp practice is any misrepresentation by a buyer that
falls just short of actual fraud.
 Sharp practice occurs whenever a buyer “plays games”
with a supplier and operates in an underhanded manner.
 Sharp Practices includes many different behaviors:
• Willful use of misinformation, when a buyer knowingly
deceives a supplier to realize some advantage.
e.g. requesting quotes on inflated volumes and then
placing smaller orders at the reduced price is a willful
use of misinformation.
90

Cont.…
Sharp Practices…
Exaggerating of suppliers problem to obtain maximum
penalty fee.
Requesting bids from unqualified suppliers for the sole
purpose of driving qualified supplier’s price lower.
 A buyer should request bids from qualified suppliers only.
Gaining information unfairly through deception.
Sharing information on competitive quotations.
Not compensating a supplier for design or other work.
 A supplier that helps a buyer should receive fair
compensation for its efforts.
91

Cont.…
Sharp Practices…
Taking unfair advantage of a supplier’s financial situation.
 Taking advantage of a financially susceptible supplier is
an unethical business practice.
Any instance of lying or misleading a seller is a sharp
practice
Financial Conflicts of Interest
 When a buyer awards business to a supplier because the
buyer, the buyer’s family, or relatives of the buyer have a
direct financial interest in a supplier, this is considered a
major unethical practice.
92

The Basic Procurement
Processes
93

 The procurement cycle includes most of the decisions and actions.
Cont.…
94

Cont…
 These stages may vary in different organizations, depending
on whether purchasing is sourcing a new or a repetitively
purchased item, and also whether there is a detailed approval
process for purchases that exceed a specific dollar amount.
 New items require that purchasing spend much more time up
front evaluating potential sources.
 Repeat items usually have approved sources already available.
95

Cont…
 a typical procurement cycle has the following steps.
1. A user department:
 identifies a need for purchased materials
 examines materials available and prepares specifications
 checks departmental budgets and gets clearance to purchase
 prepares and sends a purchase request to procurement
2. Then procurement:
 receive, verify and check the purchase request
 examine the material requested, looking at current stocks,
alternative products, production options, and so on and after
discussions with the user department confirm the decision to
purchase
96

Cont…
 make a shortlist of possible suppliers, from regular
suppliers, lists of preferred suppliers, or those known
to meet requirements
 send a request for quotations to this shortlist.
Figure: outline of steps in a procurement cycle
97

Cont…
3. Then each supplier:
 examines the request for quotations
 checks the customer’s status, credit, and so on
 sees how it could best satisfy the order
 sends a quotation back to the organization, giving details of
products, prices and conditions
 examine the quotations and do commercial evaluations
 discuss technical aspects with the user department
 check budget details and clearance to purchase
 choose the best supplier, based on the details supplied
 discuss, negotiate and finalize terms and conditions with the
supplier
 issue a purchase order for the materials (with terms and
conditions attached).
98

Cont…
5. Then the chosen supplier:
 receives, acknowledges and processes the purchase order
 organizes all operations needed to supply the materials
 ships materials together with a shipping advice
 sends an invoice.
 acknowledge receipt
 do any necessary follow-up and expediting
 receive, inspect and accept the materials
 notify the user department of materials received.
99

Cont…
7. Then the user department:
 receives and checks the materials
 authorizes transfer from budgets
 updates inventory records
 uses the materials as needed.
 arrange payment of the supplier’s invoice.
100

Cont…
 Apart from its cost, another problem with the formal
procurement procedure is the time that it takes.
 It is too slow to make quick purchases.
 average times for processing orders at manufacturers.
Karundawala G. (2000)
101

Cont…
Purchasing staff typically spend a third of their time
dealing with problems that occur when the procurement
process fails in some way. Anon. (2001), Packer J.J.
(1997)
Some of these problems with paper-based
procurement include:
 taking a long time to go through the whole procedure
 relying on a lot of forms and paperwork which move around
different locations
102

Cont…
 needing a lot of people to complete, analyze, process, store
and generally deal with all the paper
 having other people to supervise, manage and control the
administrative procedures
 inevitable errors with so many documents and people
involved
 not giving attention to related systems, such as stock control.
103

Cont…
e-procurement
 reduce paper based procurement problems
o Some of the advantages this brings are:
 allowing instant access to suppliers anywhere in the world
 creating a transparent market where products and terms are
readily available
 automating procurement with standard procedures
 greatly reducing the time needed for transactions
 reducing costs
 outsourcing some procurement activities to suppliers or third
parties
 integrating seamlessly with suppliers’ information systems.
104

Cont…
 Different approaches for different products
 procurement effort depends on the importance of materials:
 Leverage Items have high profits but have less risk in supply, and
need using full purchasing power, substituting products or
suppliers, placing high-volume orders ->Mgt focus: Materials
 non-critical items have low profits with little risk in supply, and
need basic, simple procedures for purchasing->Mgt focus: purchasing
 bottleneck items have low profits but have more risk in supply, and
need long-term contracts with alternative sources to avoid
potential problems-> Mgt focus: Sourcing
 strategic items with higher profits need more formal relationships
with suppliers over the long term, possibly developing into alliances
and partnerships->Mgt focus: Supply
105

Cont…
A strategic item is one that is both very critical to the
business and has a high annual purchase value.
a routine purchase is one that has a low annual purchase
value and is not critical to the business.
Figure: Purchase Classification/Approach
106

Cont…
 Once purchases have been categorized in this way, the
process by which they are to be purchased may be decided
upon.
 Buying processes include:
 online catalogues; tendering; a system of approved suppliers
and strategic partnerships.
Figure: appropriate buying processes
107

Cont…
 Forecast and plan requirement
 The purchasing cycle begins with the identification of a need.
 In most cases, procurement personnel have an annual or
biannual planning process, whereby they will review the
spending pattern for the organization, and prepare a forecast
of what will be purchased.
 In some cases, there may be a whole set of new requirements
that have not been planned for (such as for new product
introductions).
 In such cases, purchasing personnel meet with internal
customers to discuss their needs for the coming year.
108

Cont…
Forecast and plan requirement….
 purchasing is the primary vehicle for obtaining external inputs
(products or services) from suppliers,
 so that purchasing personnel have to work with a large number of
internal customers, which will often include marketing, operations,
finance, information technology, and other internal customers.
 Through a structured dialogue, purchasing will understand
and plan for what these customers will be buying and
translate this into a forecast that is shared with suppliers.
109

Cont…
 Of course, not all needs can be forecasted ahead of time.
 There are situations that arise when an internal customer has
a need that comes up suddenly, which is not planned for and
for which there is no pre-existing supplier identified to
provide the product or service required.
 Such needs are often handled through a spot buy approach.
 If it was not planned for, then purchasing must work with
marketing to quickly identify a supplier to provide these
products on short notice at the lowest possible cost with an
acceptable level of quality and delivery time.
110

Cont…
 When creating a forecast for a needed product or service,
internal customers may not always be able to express exactly
what it is they will need at a single point in time.
 In such cases, purchasing may negotiate agreements with
distributors of parts that can provide a whole different set of
products that can meet that need.
 In other cases, an internal customer may say that they need to
work with a specific service provider for temp services, consulting
services, or software programming, but they cannot express exactly
what type of service they will need in advance.
 Purchasing will then go off and attempt to secure a contract
with predefined costs for different classes of workers who can
provide these services on short notice.
111

Cont…
 Needs clarification: requisitioning
 Internal users communicate their needs to purchasing in a variety of
ways including purchase requisitions from internal users, forecasts
and customer orders, routine reordering systems, stock checks, and
material requirements identified during new product development.
 The most common method of informing purchasing of material
needs is through a purchase requisition.
112

Cont…
Needs clarification: requisitioning…
 Although there are a variety of purchase requisition formats,
every requisition should contain the following:
 Description of required material or service
 Quantity and date required
 Estimated unit cost
 Operating account to be charged
 Date of requisition (this starts the tracking cycle)
 Date required
 Authorized signature
113

Cont…
Choosing Suppliers
 Arguably, the most important part of procurement is finding
the right supplier.
 There is no point in having a well-designed product, if the
supplier cannot actually deliver it.
 Procurement starts, then, by finding a qualified supplier. This
is one who can actually deliver the materials needed.
 In general, organizations look for suppliers who:
 are financially secure with good long-term prospects
 have the ability and capacity to supply the necessary
materials
 accurately deliver the requested materials
114

Cont…
 send materials of guaranteed high quality
 deliver reliably, on time with short lead times
 quote acceptable prices and financing arrangements
 are flexible to customers’ needs and changes
 are experienced and have expertise in their products
 have earned a good reputation
 use convenient and easy procurement systems
 have been used successfully in the past and can develop long-
term relationships.
115

Cont…
 In different circumstances, many other factors might be
important, such as convenient location, ability to deal with
variable demand, and so on.
 Most organizations have a list of approved suppliers who have
given good service in the past, or who are otherwise known to
be reliable. If there is no acceptable supplier on file, the
organization has to search for one.
 Suppliers for low value items can probably be found in trade
journals, catalogues or through business contacts.
 More expensive items need a thorough search, and this can
be very time consuming.
116

Cont…
 A useful approach for choosing the best supplier for a
product has the following steps:
 Look for alternative suppliers
 Build a long list of qualified suppliers who can deliver the
products
 Compare organizations on this long list and eliminate those
who are, for any reason, less desirable
 Continue eliminating organizations until you have a shortlist
(usually four or five) of the most promising suppliers
 Prepare an enquiry, or request for quotation, and send it to
the shortlist
 Receive bids from the shortlist
 Do a preliminary evaluation of bids and eliminate those
with major problems
117

Cont…
 Do a technical evaluation to see if the products meet all
specifications
 Do a commercial evaluation to compare the costs and other
conditions
 Arrange a pre-award meeting to discuss bids with the
remaining suppliers
 Discuss condition bids, which are specific conditions that
have to be agreed
 Choose the supplier that is most likely to win the order
 Arrange a pre-commitment meeting to sort out any last
minute details
 Award orders to the preferred supplier.
118

Cont…
 Normally, an organization will spend little time looking at
alternative suppliers if:
 it is buying low value materials
 there is only one possible supplier
 there is already a successful arrangement with a supplier
 there is not enough time for extended negotiations
 the organization has a policy of selecting specific types of
supplier.
119

Cont…
 When customers selecting suppliers and assume that
suppliers are happy to serve all the customers they can find.
 This is usually the case, but sometimes suppliers have more
power and effectively choose their customers.
• This might happen when a supplier has a monopoly, or near
monopoly, of some material.
• It might also happen when there is a temporary shortage of
some commodity, and suppliers choose the customers they
will supply, perhaps giving preference to larger customers,
those who pay more, or those who have long-term
agreements.
120

Cont…
 In these cases the supplier has more power.
Figure: relative power of a customer and a supplier
121

Cont…
Number of suppliers
 The choice must depend on individual circumstances, but we
can list some advantages of policy:
 Advantages of single sourcing:
 a stronger relationship between customers and suppliers,
often formalized in alliances or partnerships
 commitment of all parties to the success of the relationship
122

Cont…
Advantages of single sourcing….
 economies of scale and price discounts with larger orders
 easier communication, reduced administration and simpler
procedures for regular orders
 less variation in materials and their supply
 easier to keep requirements, conditions and so on,
confidential.
123

Cont…
 Advantages of multi-sourcing:
 competition between suppliers reduces prices
 there is less chance of disrupted supplies, as problems can be
avoided by switching suppliers
 can deal more easily with varying demands
 involving more organizations can give access to wider
knowledge and information
 is more likely to encourage innovation and improvement
 does not rely on trusting one external organization.
124

Developing purchase specification and
standardization
Product specification
 An important method of avoiding purchasing sub-standard
supplies is the development of product specifications.
 If vendors are given very clear and precise instructions about
what is being ordered, this will go a long way to avoiding
costly misunderstandings.
• This is especially true where there are many different options
associated with components of a product.
125

Cont…
 For example, when purchasing a drug the same name may be
offered for sale with different types of API and excipients.
 It is important that the choices made are clearly
communicated in writing to the vendor in the form of a
request for quotation.
• Product specifications should also be included in the purchase
order when it is issued to the supplier.
 Specifications shall be prepared to assure that they do not
restrict or preclude competition.
126

Cont…
 All requests for bids and proposals for goods and services to
be purchased at public expense shall,
 whenever possible and practical, be made in general terms
addressing functional specifications rather than brand, trade
name, or other individual mark.
• If brand names are used, the specifications shall contain an
“or equal” or "or acceptable alternate" clause.
 Recognition is also given to standardization and compatibility
requirements which should be maintained for purposes of
economies in replacement and maintenance.
127

Summary
 good product specifications are critical to good
procurement and to ensure that the procured products
meet all program requirements and quality standards.
 Selection of a procurement method will depend on the
types and quantities of products to be procured.
 aligning procurement cycles with the availability of
financing will help ensure that availability of funding does
not delay procurement.
 Procurement is often a lengthy process.
 The full timeline needs to be known and communicated
with other stakeholders to ensure that quantification and
procurement planning can be initiated early enough to
support the procurement and supply cycle and to avoid
stock outs.
128

Summary…
 It is critical to manage the bidding process to ensure
that procedures are followed and the process is well
documented. an open and transparent process will
increase competition and the perception of fairness;
 it will decrease the risk of bidder protests.
 While lowest cost is important to selecting a supplier,
other important criteria to consider when selecting
suppliers include;
 quality of products
 ability to meet delivery schedule
 past performance.
 Contract monitoring is necessary to ensure that the
supplier is meeting its obligations. and that products
arrive on time and in good condition.
129

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