PROCUREMENT

Sectoral Report, 2009

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National Institute of Agricultural Extension Management (MANAGE) Hyderabad

INDEX
S.No I I.a I.b I.c II II.a II.b III. IV. V. V.a V.b V.c VI. VI.a VI.b VII TOPIC THE NEED TO ASSESS PROCUREMENT Foreword Procurement and Probity Assesing procurement GOOD PROCUREMENT PRACTICES Identifying Objectives Laying the Foundation of good procurement practices Tapping the strategic potential of procurement Risk Assessment INTERNAL CONTROL Conflict of Interest How do Managers control Procurement activity Do we have clear procurement procedures ACHIEVING VALUE FOR MONEY Value for Money What are we Buying? CONTINUOUS IMPROVEMENT
16 20 13 15 10 10 11 5 6 7 8 2 3 4 Page No.

VII.a Information Technology in Procurement VII.b Traceability

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THE NEED TO ASSESS PROCUREMENT: FOREWORD: Procurement is the orderly process of acquiring, by lease or purchase, goods and services such as food, meals, equipment, bookkeeping, and auditing. One must comply with state and federal procurement procedures which enable to purchase goods and services at the best available price and avoid conflicts of interest when making purchases. Costs incurred through improper procurements are unallowable. Procurement is a big business. Failure to purchase them cost effectively can put the achievement of key objectives and services at risk. So it is not surprising that auditors are interested in how departments procure goods and services and in the good practice which might be more widely applied. Whatever approach departments and agencies adopt to procure goods and services there are number of key principles which they need to follow: 1) Have a strategic approach to procurement 2) Make appropriate use of electronic commerce 3) Manage procurement risks 4) Develop contract strategies and manage supplier relationships 5) Develop partnerships and longer term collaboration with suppliers when appropriate 6) Carefully manage major procurement projects 7) Ensure there is reliable procurement financial and management information 8) Measure and evaluate procurement performance

PQRST are factors of procurement management. These factors are price, quantity, quality,
relationship, source and time and above all how to get them right. Understanding of the PQRST factors of procurement will be incomplete without understanding how these factors are getting affected across the supply chain and how each of the members in the chain are adding value and costs to the chain. Value chain disaggregates a firm into its strategically relevant activities in order to understand the behavior of costs, and the existing and potential sources of differentiation. The value activities are the physically and technologically distinct activities a firm performs. Therefore value chain displays total value, and consists of value activities and margins.
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PROCUREMENT AND PROBITY: In this framework we are concentrating on procurement as it applies to the less-than-arms-length transaction between the contractor and its parent corporation, corporate divisions, subsidiaries, an employee(s), officer(s), agents(s), of the contractor or members of their immediate family either directly or indirectly through corporations, trusts or similar arrangements in which they hold a controlling interest, no matter how represented. All related-party transactions are lessthan-arms-length transactions. However there are some special features of procurement which means that we need to particularly concentrate on this area. The particular features of agri related procurement are the sizeable budgets involved, the frequency of the activities, and the technical complexity of procurement in this area. More recently the subject has become more complicated by the inclusion of construction partnering, and by the acceptance that best value cannot be measured by price alone, but needs to take account of time, quality and sustainability considerations as well. Systems which were originally developed around a proof of value by reference solely to price are challenged by the new environment. But probity and public accountability are still paramount, and procurement associations need to be sure that their systems protect probity in the new environment, and deliver true value. Definitions of Procurement and Probity Our definition of procurement for the purposes of this document is as follows: Procurement in the context of development and maintenance services is the activity by which it takes price, quality, time and sustainability into account to deliver overall best value. Our definition of Probity is: Probity is the concept of fairness, transparency, and accountability, which ensures that an organization obtains (and can be seen to obtain) the maximum benefits for its declared objectives, operating within the law and within the rules of its legal constitution. One of the key issues about probity is the avoidance of fraud and corruption. Every procuring association needs to give serious consideration to the systems it employs with the aim of avoiding fraud. Fraud detection is seldom easy, but when detected many cases of fraud are found to derive from a misapplication of control processes. However there is no simple guarantee against fraud and every housing association needs to exercise continual vigilance to ensure probity in all its dealings.

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ASSESSING PROCUREMENT:

LAYING THE FOUNDATION OF GOOD PROCUREMENT PRACTICES:

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Identifying Objectives: Do we have clear & comprehensive policies for our procurement activity?
The association should have interlinking strategies for the procurement of commodity and for the maintenance of its existing one. The objectives of these strategies should not conflict. If conflicts arise it needs to be cleared why and how such conflicts have arisen and decide upon a logical course of action, the reasons for which can be clearly justified. It needs to be satisfied that the activity meets the strategic objectives of the association as defined by the development strategy, asset management strategy and the business plan. The strategies must be fully reflected in the business plan assumptions, and must be tested to ensure that sufficient funds are available throughout the life of the business plan to ensure that all of the associations strategic targets can be met. This will include undertaking sensitivity analysis to demonstrate that the business plan is robust enough to withstand significant changes to the assumptions being made, particularly those for any new procurement model that it proposes to develop. The association should examine the worst case financial scenario and compare it with its financial covenants to confirm that the association has the capacity to deal with all probable risks. The committee should consider whether by embarking upon this project or programme the association would be overreaching itself and in particular whether it will undermine existing commitments This will not only include, whether the association has the financial capacity to deliver the project/programme, but also that the risks associated with each activity have been correctly identified and that they can be managed without threatening the financial stability of the association. Procurement activity must therefore be considered as an integral part of the business planning process and must relate to the asset management strategy. There are 8 basic objectives of procurement function: 1. Uninterrupted flow of materials and services so that the conversion to finished products and sales do not suffer. 2. Buy competitively and wisely. 3. Keep inventory losses due to deterioration, obsolescence and theft at a minimum. 4. Develop alternative sources of supply. 5. To develop well, continuing vendor relationships to get advance information on new products and prices. 6. Integration with other departments so as to translate the needs to material support action. 7. Train and develop resources 8. Develop policies and procedures so that material procured is of quality and service.

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FOUNDATION OF GOOD PROCUREMENT PRACTICES

Do we have the skills ?

Will this project undermine other commitment

Does it meet our strategic objectives?

Does it fit into our other strategies ?

Are the risks regularly reviewed by board

How do we manage risk in our procurement activities?

Do we have clear policies for procurement?

Are the delegated authority

procedures
appropriate?

What are the risks ?

Laying the foundation of good procurement practice

Is the delegation of authority clear,pragmatic and effective?

Is compliance with these procedures regularly reviewed?

How do we monitor and control risk?

How are we seeking continuous improvement in procurement

Are these procedures regularly reviewed

Do we consider the aggregated risk ?

Are we committed to SUPPLIERS

Do we review our procurement strategy?

What are the potential gains ?

How soon do we need results ?

What are our priorities ?

What resources can we invest ?

What outcomes?

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TAPPING THE STRATEGIC POTENTIAL OF PROCUREMENT:

As a procurement professional, are you out with your sales force, for example, and interacting with the customer to see how general policies translate into real behaviors? Few business functions play a more critical role across the entire global organization than procurement. And for a selected group of leading companies, procurement has become a strategic, proactive organization that contributes to profitability, growth and competitive advantage. That often anonymous functionwith the traditional mission of obtaining highquality goods and services for the lowest possible costhas become a strategic, proactive organization with the potential of contributing as much as, or more than, other business. Companies that excel in procurement face significant challenges in their ongoing efforts to outpace the competition. Visibility, business acumen and reputation constitute one set of challenges. Because traditionally, procurement has been perceived primarily as a support function, it has not enjoyed much status in the corporate hierarchy. The only experience that lifts you out of that position, notes former chief procurement officer Welch, is to deliver strategic value to the company; if youre not doing that, youre just performing. Procurement professionals thus need more general business skills as a foundation for delivering greater value. They also need ways to get out and see how ideal processes are actually being performed in real life. KEY SUCCESS FACTORS: The experiences of CPOs working for companies that have mastered procurement point to a list of consistent success factors in creating a procurement organization that helps drive high performance. 1) Collaborating across business. 2) Establishing trusted supplier relationship. 3) Using outsourcing to extend the value-producing potential of procurement. 4) Combining process excellence. 5) Making a commitment tp talent development. Accenture research into procurement mastery found that across the board of procurement activitiesfrom order management to helpdesk to catalog management and goods receiving procurement masters were far more likely to engage outsourcing service providers.

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RISK ASSESSMENT: Production is a function of many uncontrolled factors Business organization can take only infinite amount of risk depending upon the objectives and visions of the organization. Risk Management Strategy: 1) Identify risks 2) Analyze risks
Judgemental Boundary Unacceptable Risk Unacceptable Risk I M Medium

High

Acceptable

Judgemental Boundary

Unacceptable Risk

P A C T

Low

Acceptable Unlikely

Acceptable Might LIKELIHOOD

Judgemental Boundary Expected

3) Develop and implement risk mitigation strategies. 4) Monitor risk on an ongoing basis. Risk Mitigation strategies: Identified risk should be looked at, as case to case basis to determine whether additional management efforts are required and decide whether its cost effective to take further actions to mitigate this risk. Risk can be handled in ways below: 1) Retain: Downside risk can be retained. 2) Shift: Commodity exchange work on this factor. 3) Reduce: Alternative source of supply. 4) Self Insure: Maintaining enough inventory. 5) Avoid: Unacceptable risk can be avoided.

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RISK ASSESSMENT FOR PROCUREMENT PARTICIPATORS:

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INTERNAL CONTROL: Conflicts of Interest Company cannot allow a conflict of interest or potential conflicts of interest when procuring goods and services. Their must be written code of standards of conduct. No officer, agent, consultant, contractor,volunteer or other employee of organization should engage in any activity that causes or could cause a conflict of interest in the operation . "How can manager effectively control procurement activity? 1) Opportunity buying: Most of the commodities and raw material has seasonal cycle of prices as they peak and fall in intervals .Hence we can book maximum amount of our requirement when prices are low if warehouse cost is less or transportation cost is high. 2) Local Vendors: Manager should ensure that vendors are located in close vicinity of company which helps in keeping low inventory as well as low freight cost . 3) Partnership with major vendor: It is highly recommended to have partnership with vendors in having equity or technical collaboration so as to pass on saving to cost reduction in manufacturing cost. 4) E Procurement : Putting up tenders and requirement on internet and setting up auction for requirement on internet which helps in reaching out more number of vendor base .Most popular way of procurement strategy is reverse auction ,where the lowest price bidder takes away the order. 5) Buying material from tax exempted area: In several parts of country, government provide tax heavens for manufactures for certain period say 10- 15 years .Hence buying from these areas helps in cutting cost. 6) Removing intermediaries: Wherever possible buy directly from manufacturers authorised/ authorised dealers /OEM not from any

agent /dealer or commission agent. Lesser the intermediaries lower the rate. 7) Negotiations: Price should always be negotiated with all information check prices with alternative sources. 8) Economic Order Quantity (EOQ): This is the maximum qty of item which you can place to a vendor taking into account the frequency items used .It helps in reducing inventory cost. available always

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9) Inspection: By eliminating at factory and asking vendors to provide material as per standards and used in these kinds of activities.

HOW DO WE CONTROL OUR PROCUREMENT ACTIVITY:

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Do we have clear procurement procedures?

Developing a procurement strategy and adopting appropriate best practice contracting and procurement principles, policies, processes and procedures for all goods, services and works by company, enhances achievement of companies objectives such as sustainable and socially responsible procurement; bottom-line cost savings, achieving innovation. By now, most companies have ridden one or more strategic sourcing waves that have collectively saved their organizations billions of dollars. Yet even after having benefited from these initiatives, the average company still leaves on the table unrealised savings equalling 5 to 10 percent of its total spending. These savings are not lost because of ill-conceived strategies or organizational incompetence; rather, their loss is inherent in flawed or incomplete procurement operating models. There are many reasons that the operating models constructed to procure and pay for goods and services prove inadequate. Sometimes it happens that even though company adopts best procurement model still because of unclear procurement policies lend up to great loss .To avoid any confusion a company needs to have a written documents of clearly mentioned policies to be followed .This written document needs to have certain points clearly mentioned like: Clearly specified delegation of powers the ideal procurement organization must balance the desire to leverage purchasing power through complete ownership with the need to maintain the flexibility of the individual business units, functions, and regions. That balance is struck not only in the way procurement and its accompanying processes and technologies is structured, but in how the various roles, responsibilities, and decision rights are allocated between the corporate procurement organization and the various procurement functions attached to the business unit, functional, and regional stakeholders. Deciding where to land on this spectrum of options, from managing to facilitating to supporting, involves sorting out a complex mix of issues and clarity in the thoughts that how will the decision affect a companys ability to get the most bang for its buck? How will it affect the choice of suppliers, their degree of engagement in the procurement process, and decision making authority and accountability policy. Quality Specifications: Clearly mentioned quality specifications helps in conveying that what do you expect from the supplier. Quality is determined by balancing two major considerations. One, the technical consideration of suitability and two, the economic consideration of price and

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availability . For procurement of agricultural commodities, while specifying the quality time and total availability of the produce needs to be taken into consideration .For example, in retail industry ,the quality of tomato available in all the seasons is not the same and similar quality standards throughout the year may result in resistance from vendors and non compliance of standards can happen. Quality description serves three main purposes: 1. They make it possible to describe items on purchase orders. 2. They let the vendors know exactly what the buyer want. 3. They permit inspection by specified measurement or test that can verify that received is infact the material ordered. Achieving Value for Money What are we buying This means minimizing the total cost of ownership over the lifetime of the requirement consistent with acceptable quality, reliability and delivery considerations. Lowest price is not the sole determinate of value for money. Neither getting the best quality solely determines value for money. Rather it is optimum combination of price and quality. For every industry this will be facilitated by: Developing, implementing and managing procurement strategies that support the coordination and streamlining of activities throughout the lifecycle Effective use of competition Using aggregated contracts Identifying and rectifying inefficiencies in procurement processes Developing cost efficient tender processes including appropriate use of e-solutions Council staff responsible for providing procurement services or assistance within the council providing competent advice in terms of available products and agreements

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Working with suppliers to create relationships that are professional and productive, and are appropriate to the value and importance of the goods, services and works being acquired.

Improvement in value for money falls into: 1. Those aimed at reducing the cost of purchasing and time it takes for example, the administrative efforts in processing an order, seeking and evaluating tenders, and taking delivery of goods ordered. This is the procurement overhead and can typically add between 10 % to 50% to the cost of buying goods and services. 2. Those aimed at getting more value for money by negotiating improved deals with supplier or aggregating demand to get greater leverage on suppliers.

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WHAT ARE WE BUYING

Do our procurement processes satisfy all legal requirements? Are your expectations made clear? Do we have a standard brief?

How are firms selected for the approved list?

Do our consultants and contractors know what we expect from them?

Do we use a national accreditation/ pre-qualification service?

Why was this procurement method chosen?

What are we buying?

Do the firms who work for us share our commitment to equality?

Is value for money being achieved?

How are the risks apportioned ? How do we compare with other comparable bodies? Do our standards match comparable organisations?

What are the advantage of the chosen procurement route?

What benefits are from suppliers?

Are cost and time overruns highlighted and justified?

Do we complete with government guidance?

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CONTINUOUS IMPROVEMENT 1. ITC e choupal: Largest internet-based initiative in rural India Delivers real-time information and customised knowledge to improve farmers decision making ability. Furthermore provides inputs and procurement from farmers.

Traditional Value Chain - Farm to Factory Gate

E Choupal Value Chain

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Cost Analysis: Transaction Costs in Mandi Chain Soybean Transaction Costs in Choupal Chain

Source: ITC Portal 2. Dairy Information Services Kiosks (DISK): Developed to provide: Data analysis & decision support. Improve productivity and efficiency. Farmers can place orders for goods & services.

Tested in 2 cooperative society of AMUL in Kheda dist.and Uttarsanda dist.

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* If 4, 00,000 minutes are saved each day then a total of 1, 80,000 man-days/month can be saved. 3. Chhattisgarh Government Computerization of Procurement Centers. In this project, complete process computerization of food grain supply chain in Chhattisgarh from paddy procurement from farmers, its storage, milling and distribution of rice and other commodities to 37 Lakh ration card holders through Fair Price Shops was done. To accomplish this task, 1577 paddy procurement centers, 52 storage centers, all district offices concerned, 99 Civil Supplies Corporation distribution centers and 35 FCI rice receiving centers were computerized covering six different organizations involved in food grain management viz. Department of food, Marketing Federation (MARKFED), State Civil Supplies Corporation (CGSCSC), Food Corporation of India (FCI), Central Cooperative Bank and Primary Agricultural Cooperative Societies (PACS).

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4. Traceability It can be defined as the ability to trace the history, application, or location of that which is under consideration. Recently, there is an increased concern about the safety of the food items and hence came the concept of traceability into picture. But it is an easier said than done process, as it requires a huge investment and hence it becomes imperative to determine the necessary breadth, depth and precision based upon the cost benefit analysis of traceability. Examples of traceability tools and labels Sheep and goat tag, Lithuania: It includes Animal Recording Centre, Country Code and 6 digit individual animal identification numbers. Cattle Passport, Germany: It includes date of issue, Ear tag number, Origin and Name and address of owner. Label on beef steak, Belgium: It includes Traceability Bar Code, Country of Origin , Country where animal is fattened and Country where animal is slaughtered. Label on oranges: It includes Origin, Category, Weight and Traceability Code.

E Procurement: The Internet offers a natural platform to facilitate efficient procurement as numerous buyers and sellers find each other and transact according to some pre-specified protocols. The following are the procurement strategies available for a manufacturer. 1. Strategic Partnership

Strategic partnership strategy is to develop a long-term supply relationship with a specific supplier. 2. Online Search Strategy

Online Search Strategy is to shop online for a better price.

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3. Combined Strategy The combined strategy is to combine both sign a long-term purchase contract with a supplier up to a certain level, but if necessary additional quantity may be purchased online. Example: Dow. 6. Khet se Agriproduce: Khet-Se Agriproduce India Pvt. Ltd., a 50:50 JV of Tata Chemicals Limited (TCL) and Total Produce, Ireland (TOTAL PRODUCE), launched its operations with its first state-of-the-art procurement and distribution facility for fresh fruits and vegetables at Malerkotla, Punjab. Khet-Se is a B2B cash and carry business for fresh fruit and vegetables sourcing, packaging and distribution across India. Operations of its 1st such centre has

been started, which will cater to the requirements of Ludhiana and Patiala. This distribution centre has the facility of sorting, grading and packing of all fresh produce; 4 Ripening Chambers of 10 MT capacity each (to ripen fruits like Banana) and 4 Cold Storages of 25 MT each.

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