Buying is the spending of money

By: Xavier Greyling

Exceptional procurement is the creation of value.

The act of 'buying' confirms that a consensus exists between a willing buyer, wishing to buy something, and a willing seller, wishing to sell that same thing. It also confirms that both parties understand the limits they have placed on their common law rights through the contract terms and conditions they have agreed upon to govern the transaction or the supply relationship.

'Buying' is also the precise point where the buyer creates a financial commitment to the seller, and the seller commits himself to supply an item or service.

'Buying' is the action that completes a process designed to ensure that best value is gained from the transaction. This process is the 'commodity sourcing framework', commonly referred to as strategic sourcing. buying1.jpg

Procurement is no one single act, as is the case with buying. Procurement is the collection of actions that ensures optimum value is extracted from a buying transaction. Procurement is holistic and governs not only the buying, but every related activity before and after the buying transaction.

Specifically, procurement has extended input into the following:

  • Corporate business-function structure relating to procurement (personnel, HR)

  • Business risk and governance compliance (legal)

  • Systems (IT)

  • Sustainability (SHE, SHEQ)

  • Business development and revenue creation though identifying and sustaining 'value-added services' (finance, production, maintenance, sales, working capital optimization and the sale of by-products/redundant items)

The process of Strategic Sourcing on identified, qualifying commodities or commodity categories is followed to ensure governance, compliance, sustainability and curtailed risk. It is a formal approach that results in selecting the correct supplier and aligning the supply chain to deliver best value to the organisation and its requirements. Importantly, the strategic sourcing process can be reproduced, is analytical and leads to an increase in value, either by reducing total cost or increasing the service and quality provided.

The Strategic Sourcing process is a multi-faceted and multi-disciplined process aimed at satisfying the requirements of all stakeholders, whether it is the end-user, the procurer's business as a whole or the supplier (or wider supplier community).

Strategic Sourcing is the enabler to 'buying': once it is effectively concluded, purchasing transactions flow from it.

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It is pairing activities

Procurement as a holistic and critical independent business function. Graphically it can be displayed as a repetitive, cyclical process consisting of at least 10 major categories of activities and is the product of pairing complementary, related activities in a reciprocal relationship. I outline this below.

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(1) Structure and (6) Skills Development

Procurement is executed by people, according to a hierarchical structure dictated by the nature of the business and its spending pattern. Once employed, these individuals must be retained through skills development and succession planning.

(2) Strategic Commodity Sourcing Framework and (7) Risk curtailment and governance

The process of acquiring goods/services must comply with the principles of generally accepted procurement best practice to limit, if not eliminate exposure to, risk. An appropriate process of Strategic Sourcing will govern the purchasing of identified commodities/commodity categories. Policies, procedures, processes and best-operating-practices are designed to govern the purchasing activities and are aimed at ensuring transactions are fair, equitable, legal and ethical. Binding contractual documents regulate the relationship between the parties and support effective Risk Management, Contract Management and Supplier Relationship Management.

(3) ERP Systems enablement and (8) Effective use of technology

The actual purchasing transaction (and process) must be executed through a well-designed and well-developed electronic system that supports legal audit, accountability and traceability of the transaction. The transactional processes relating to the origin of the need, requisitioning, approval, purchase (and approval), receipt (and issue), invoicing and payment (authorisation and approval) must be captured and visible in an ERP system. The system should also lend itself to correct and relevant reporting and continually strive to improve ease of use and simply processes by reducing actions and resultantly, reduce cost.

(4) Working capital management and (9) Revenue creation

Should items be purchased with the view of later consumption/use, it is critical to put in place effective control over the items (whether they are raw materials or semi-finished products for the manufacturing process; or spares or parts to ensure immediate repairs to manufacturing equipment). Shelf life, exposure to the elements and susceptibility to increased risk of pilferage (theft, loss, damage) are significant considerations for procurement. Discussions are required with business in respect of total cost of ownership models and make-vs-buy strategies. Redundant material, identified through effective working capital management processes, can be sold to generate revenue.

(5) Supplier relationship management and (10) Competitive advantage

Depending on the nature of supply, continuity of the relationship with a supplier (through effective contract and supplier relationship management) is pivotal to secure future success. This includes efforts aimed at securing a competitive edge over competitors, such as securing improved BEE ratings (not only aimed at improved preferential procurement, but also increased supplier and enterprise development and increased social responsibility) or mutual co-operation and joint efforts to reduce the supplier's cost. Examples are reverse supply chains, reciprocal business opportunities and initiatives aimed at reducing impact on the environment (e.g. carbon credits) that will increase reputational value of the business.

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