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CHAPTER 1
PRINCIPLES OF SUPPLY CHAIN AND PROCUREMENT MANAGEMENT
1.5 THE IMPORTANCE OF PROCUREMENT WITHIN AN ORGANISATION
The recent economic recession, globalisation, changing consumer needs,
and competition have forced organisations to review their competitive space.
Purchasing is a strategic function within the organisation that can directly
influence the ‘bottom line’. For example, some organisations spend half or
more of their sales revenue on purchasing. The effective and efficient use of
financial resources through a sound procurement process therefore contributes
to the achievement of the operational and strategic goals of a project. Efficient
procurement practices generate savings on resources that would have been
lost through poorly managed procurement [9].
There are three major benefits to managing procurement effectively:
• Cost
– Since many organisations spend up to 50% of their revenue on
procurement, it represents a great opportunity for saving [14]. Significant
savings can be achieved through the effective and efficient use of financial
resources when purchasing.
• Quality
– Procurement has a direct impact on quality. For example, the
quality of raw materials used in the production of products affects the quality
of the end product. Since procurement is responsible for purchasing the raw
materials, the quality of what it buys affects the quality of the end product.
• Technology
– Procurement can improve products and process designs and
help introduce new technology into the company’s offerings of products and
services [10, 11].
Further benefits include:
• Building relationships and driving innovation
– These days, procurement
officers see building relationships with suppliers as another means to
reduce the cost of products or services. Working closely with suppliers also
helps to stimulate innovative ideas on how to continually add value to the
organisation’s products and services.
• Reducing time to market
– Procurement acts as a liaison between
suppliers and the production and engineering departments. It can encourage
collaboration during the product development stages, which reduces material
costs and improves material quality and product development times.
• Organisations are facing increasing competition
– Procurement can
contribute to the organisation’s market share by purchasing products and
services at the best possible prices whilst ensuring that deliveries are always
received on time.
• Inventory costs
– Constantly rising inventory costs have compelled
organisations to optimise their inventory levels. Procurement plays an
important role in maintaining an appropriate balance [9, 13].
To achieve the strategic goals of the organisation, and to ensure a continuous
flow of inputs that support the business’s operations, the procurement function