Procurement Management, Essay Example

The basics of project procurement

The process of product procurement is one of the most fundamental in business.  Indeed, no matter whether a firm produces manufactured goods or services, all firms need to procure goods in order to conduct business.  The subject of project procurement is thus vitally important to all who wish to run a business.  In order to understand product procurement in greater detail, this section will first take a look at the “purchase” or “make” decision and models typically used in the process.

The “make” versus “produce” decision

In understanding the different types of product procurement, one must first understand the choices businesses face.  In any transaction, a business can decide to produce the good itself or purchase the good from outside the company.  Often times, the decision will come down to whether a firm has a competitive advantage in a certain area.  For example, if Dell Computers needed to purchase computers in order to track inventory, the company would likely procure the needed computers in house.  If, however, Dell needed to procure office furniture or stacking machines for the warehouse, Dell would likely purchase these goods on the open market.  The decision is primarily one assessing a firm’s competitive advantage and opportunity costs in a certain area.

Regarding the definition of a project, an interesting source included in the reading offers the following definition:

A project is a special kind of activity. It involves something that is both unique and important and thereby requires unusual attention. It also has boundaries with other activities so that its extent is defined. And it has a beginning and an end and whose objectives signal the end (Ruskin, A.M. & Estes, E, 1995).

The definition of a project is important because it allows one to see the  dual function or a project manager.  Indeed, according to Fleming, a project manager must be aware not only of managing the “upward” relationship with customers and the “downward” relationship with suppliers.  In managing the relationship with suppliers, however, there are a number of models to accomplish this task.

The centralized versus decentralized model of procurement

There are two models typically used in procurement: 1) centralized; 2) decentralized procurement.  If a company has one department that is responsible for procurement across the company that is known as “centralized” procurement.  All procurement requests are made through the department that then purchases the goods on the open market and distributes them to the purchasing department.  There are numerous advantages to a centralized model.

A centralized model is often times more efficient from a time and monetary perspective- this is because other functional departments can focus on their own responsibilities.  At the same time, however, centralized procurement does not always work out as the purchasing of some goods requires particular expertise not available in the centralized department.  A decentralized procurement process allows functional departments to make procurement processes on their own: Each department determines what goods needs to be bought out of the department’s budget, usually allocated on an annual basis (Huston, 1996).  While the decentralized process offers functional departments more freedom and flexibility in procurement, it is often times inefficient.  This is because departments spend precious time and resources procuring goods that should be spent on other tasks including interfacing with customers and planning new products (Guth, 2009).

The six steps in the procurement process

Beyond the two macro models of procuring goods in the firm, there are six recognized steps in the procurement process.  The first step is procurement planning. Procurement planning begins the procurement process and includes activities related to the purchase or analysis of products; the planning process ends with a procurement plan (Fleming, 2003).  The second stage in the procurement process is solicitation planning. In this stage, the procurement plan is implemented, usually issuing a document known as a Request for Proposal (RFP) (Fleming, 2003). The third stage of the procurement process is solicitation- the solicitation process involves soliciting formal proposals from sellers (Fleming, 2003).

The fourth stage in the procurement process is the source selection.  In this stage, seller proposals are evaluated and it ends with the issuance of a contract to a seller.  The fifth stage in the procurement process is the contract administration- during this stage the procurement manager manages seller performances, and manages changes to seller authorized scope (Fleming, 2003).  The sixth stage in the procurement process is the contract closeout.  Put simply, the procurement manager in this stage settles all open contractual issues and closes out existing procurement (Fleming, 2003).

The generic and specific categories of project procurement

There are three generic categories for procurement, and two specific models for procurement. The first category is major (high risk) complexity procurements.  The main characteristic of this generic category are procurement items that must be customly built, and thus, represent a substantial risk in the project management process.  In order to guarantee that the buyer and seller are on the same page, there is usually an elongated negotiation period during which discussions about the specification, uses, and timeline are talked about.  Due to the complexity of the project, procurement projects in this category may lead to a long-term working relationship, particularly if the initial procurement goes well.  As Fleming identifies, the type of products typically procured in this category are a new product or system, a major new component, a major structural element, a design to a performance requirement, or project interface documents (Fleming, 2003).

The second main generic category is the minor (low-risk) complexity procurement. In contrast to the previous category, items procured in this category usually exist in some form and are defined by the seller’s own product specification (Fleming, 2003).  Although the ultimate monetary value of the product varies by the product, in general, procurement products in this category are usually bought off the shelf.  Due to the more simplistic nature of the design and procurement process,  the risk incurred is less.  Finally, the procurement may lead to a long-term relationship, but there are also short-term relationships for products in this category. According to Fleming, potential products in this category include the purchase of existing automobiles, buses, transportation vehicles or aircraft (Fleming, 2003).

The third generic category is routine buys of commercial-off-the shelf (COTS) items or purchased services.  The procurement of items in this category are different in that it doesn’t fall into the previous two categories.  If a procurement manager procures goods off the shelf this simply means that they exist in the market without extensive negotiation or discussion.  Indeed, these  types of products can be purchased easily and at any  stage in the project.  As Fleming notes, potential products in this area include raw materials (nuts, bolts fasterners), office supplies (pencils, paper), and packaged commercial software that might be used for analysis (Fleming, 2003).  The procurement may also involve services such as cafeteria, accounting, security (Fleming, 2003).

In addition to the three generic categories of procurement, there are also two specialized categories that deal with particular procurement strategies.  The fourth putative category is special procurement performed under strategic company teaming agreements (Fleming, 2003).  In a strategic company teaming agreement, two companies agree to unify under a pre-specified corporate structure in order to work on a pending project (Fleming, 2003).

The main difference between this category and the above categories is the reference point for how procurement proceeds.  While the above categories may proceed according to an agreement or on an ad hoc basis, this category of procurement is guided by one document: the strategic company teaming agreement.  Although the process is usually covered by one document, different stages in the project may rely on different procurement processes.  Indeed, special teaming agreements could use any of the procurement processes that compose the three discussed above.

The final category of procurement relates to special procurements to other components of the project’s company, interdivisional work (Fleming, 2003).  This type of procurement refers to intra-divionsal procurement, typically between divisions in the same company.  As Fleming notes, the origin of interdivisional projects can happen in a number of different circumstances.  A company may feel that divisions in the company are able to work well together, and thus intradivisional procurement would leverage existing synergies in the company.  On the other hand, executives may simply want to keep the project in house, despite the numerous and palpable obstacles to procuring the right goods on the determined timeline.   Whatever the reasoning may be, projects of this sort typically are difficult to complete and can often times end in “turf wars” where both executives want to make decisions, but neither has the inherent power to do so (Fleming, 2003).  Lastly, these projects can become problematic, from an economic point of view, if the company bids for these projects and all work done for the project must be classified as either “make” or “buy” work (Fleming, 2003).  Overall, Fleming provides three different generic categories, in addition to two more specific categories, that focus on how goods are ultimately procured.  Companies may use several different models in order to procure the right goods.

Conclusion

Overall, the first three chapters of Fleming’s book provide valuable insights into definitions, processes, and models related to procurement. At the core of procurement is a decision: will a company buy or make a certain good?  From that basic design flows a number of implications including how a company decides to organize procurement decisions (centralized versus decentralized), and how to procure goods under a number of different “generic” categories.  While companies may ultimately decide to use different models and contracts to procure goods, the core decision and the implications for a company does not change.

References

Fleming, Q. (2003).  Project Procurement Management. Tistin, California: FMC Press.

Huston, C.  (1996). Management of Project Procurement.  New York: McGraw Hill.

Guth, S. (2009) Project Procurement Management: A Guide to Structured Procurements.  New York: Guth Ventures.

Ruskin, A.M. & Estes, E. (1995).  What Every Engineer Should Know About Project Management.  New York: Marcel Dekker.