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We often hear the words Sourcing and Procurement and also contract management. On top of these three terms, we do hear direct Procurement and indirect Procurement and category management. Let me assure you it is not rocket science but simple common sense. Things do not change, we change, and we complicate our thinking. Let us tackle each of the terms in Common man’s language – simplified. “When we simplify, we are attending to our minds. Clear minds lead to creativity, vision, health, and productivity.” – Angela Lynne Craig.
Sourcing is the process that includes activities that relate to identifying and assessing potential suppliers and selecting and engaging with an appropriate supplier who offers the best value for money and fit-for-purpose goods and services. At the end of the sourcing process, usually, the procurement activity occurs, leading to contract management on a need basis. In this process, the binding terms are Vendee (buyer) and Vendor (seller). Sourcing professionals evaluate the supply market, develop and execute sourcing strategy, negotiate terms of Procurement, determine contract management parameters, and finally develop the contractual agreement with the suppliers. If we are sourcing a product with a contractual obligation that ends when receiving goods, the contract management may not be involved. Contract management kicks in if the goods or services performance needs to be monitored over a certain period.
Souring identifies the next step, and that is Procurement. It is as s process of finding suitable suppliers after satisfying that the suppliers can supply goods or services specified in the need analysis. Need analysis is a process that initiates the procurement process, wherein the purpose, specifications, and budget to buy goods are defined. Once it is determined that the suppliers are suitable to negotiate, the next step involves agreeing to terms and acquiring goods, services, or works from an external source, often via a tendering or competitive bidding process. Procurement generally involves making buying decisions under conditions of scarcity and based on an evaluation matrix and plan. The evaluation matrix is an essential tool for planning and organizing an evaluation process to evaluate a bunch of suppliers. It is simply a table with one row for each evaluation question and columns that address fit-for-purpose selection criteria with scoring weightage. The outcome is to identify a suitable supplier based on pricing, quality, reputation, and the ability to deliver specified goods and services.
As discussed above, if the Procurement of goods and services needs to manage a supplier/service provider, we may have to establish a contract management framework. The contract management framework is divided into three phases. The first one deals with contract initiation, the second one deals with contract performance management, and the third one deals with closeout or extension depending upon the terms of the contract. Closeout generally occurs when a contract is a fixed-term contract, and extension happens when the services or supply of goods are required for a further period. Let us go back to the first phase dealing with initiation. Contract management is aligning of objectives of Vendee and Vendor. It is the responsibility of the Vendee to debrief the critical performance levers of the project. And introduce who is who in the organisation. The second phase deals with performance management; in this phase, the Vendee and Vendor agree to meet regularly (generally quarterly) to exchange thoughts about the project and review the supplier’s performance and explore the opportunities for value addition and economic value addition. The third phase deals with the termination of the contract if it is a fixed-term contract and recording lessons learned during the contract management phase. If the agreement is flexible and needs to extend, the Vendee and the Vendor agree on terms, document the revised terms, and extend the contract.
Now we may have to distinguish between direct and indirect Procurement:
Indirect Procurement is defined as “Non-revenue-generating expenses, or expenditures that do not relate directly to the product or service being sold” (Cox et al.,2005). In simple terms, any expenditure not involved is related directly to the products or services procured. Some indirect procurement examples include Facilities, Utilities, Technology, Office supplies, HR function, Travel expenses, Outsourced services as security, accounting, payroll, call centres, etc.
Direct Procurement involves the acquisition of the raw materials used in producing tangible products. This means wood, nails, concrete, and other basics for building houses for a home builder. For a retail store, it is goods to be sold and raw food items for a restaurant, in case of direct Procurement of services, any service that produces desired tangible outcome. If we engage a law firm to fight litigation, it is direct Procurement of services. Commonly, differences lead to issues, issues are escalated through the escalation process identified in phase three, and unresolved problems lead to litigations.
Finally, let us understand category management:
Category management is popularly used in the retailing industry. The range of products purchased by a business organization or sold by a retailer is broken down into discrete groups of similar or related products; these groups are known as product categories. Nowadays, category management is popularly used in all business categories to maximize the core competency, achieve the best value for money, and create a competitive market.
The whole process was made simple for everyone to understand, the complexities will be known to the people who deal with the subject from a daily basis.