Research Paper: Contracting and Procurement in Supply

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SAMPLE EXCERPT:

[. . .] Supplier evaluation is highly important if the organization wants to purchase the raw material of its choice and avoid unwanted circumstances in the future. Therefore, it is done through both, qualitative and quantitative assessment techniques.

Setting Evaluation Criteria and making Contract with the Selected Supplier:

Supplier evaluation starts with the identification of all the reliable suppliers in the market that are offering the raw material of required quality and other features. The organization can list out these suppliers and rank them according to different objective and subjective parameters (Monczka, 2009). The supplier or vendors that rank the highest among all are selected for contracting and procurement process. The organization enters into a contract with the supplier for a specific period of time that he will supply the required quality and quality of raw material whenever the organization will send a purchase order (Leeman, 2010).

3. Creating Purchase Request and Preparing Purchase Order

Once the Production department finalizes the needs of the business on the basis of recommendations given by different departments and the supplier evaluation, it creates a purchase request to the Head of the Purchase Department. The request can be converted into a purchase order soon after the Head approves it. A purchase order is a formal document created by the Purchase department on behalf of the organization and passed on to the supplier for fulfillment of the transaction mentioned in the order.

The Components of a Purchase Order:

A typical purchase order contains the following essential information:

a. Order Number: every purchase order has a specific order number which helps the purchase department in keeping a proper record of its transactions with different suppliers.

b. Order Date: The date on which the Purchase order is created.

c. Supplier Name: The name of the supplier to whom purchase order is being sent.

d. Address of the Supplier: The address of the supplier's headquarters or office where purchase orders are received. Phone numbers, fax, and email can also be mentioned after the office address.

e. Product Detail: Specification, quantity and unit of measurement, quality, Unit Price (pre-decided), country of origin, manufacturer, etc. In case of raw material, the manufacturer mentions the pre-finalized quality and other specifications for the convenience of the supplier.

f. Required by: The maximum period allowed to the supplier to make the delivery of the products.

g. Shipping details: Transportation, destination, etc.

h. Taxation and Total Amount: The sales and withholding tax applicable on the required quantity and quality of the products.

i. Payment Terms: Cash or Credit Basis (e.g. 15-days credit, 30-days credit, 45-days credit, etc.)

j. Authorized Signature: The name and signature of the purchase manager at the bottom of the purchase order (not need for signature if the Purchase order is computer-generated) (Bower, 2003).

4. Submission of Purchase Order

After finalizing and printing the purchase order, the purchase department sends it to the supplier through a reliable courier service. The delivery of purchase order takes sufficient time depending upon the location of the supplier.

5. Receipt and Acknowledgement of Purchase Order

After receiving the purchase order, the supplier acknowledges its receipt to the Manufacturer through telephone or email. The acknowledgement is a message that the supplier has received the order and started working on it.

6. Delivery of Raw material

The supplier finishes the procurement process at his end by delivering the required quantity of raw material to the manufacturer at its store or other pre-specified location; like production center, manufacturing plant, etc. The manufacturer makes payment for the raw material on cash or credit basis and completes the transaction. The flow chart for complete contracting and procurement process is depicted in Figure 1.

Figure 1: The Flow Chart of Contracting and Procurement Process

Step 1:

Identifying the Needs of the Business

Feedback from the R&D Department

Feedback from the Sales and Marketing Department

Feedback from the Finance Department

Production

Department

Step 2

Supplier Evaluation

and Contracting

Step 3

Creating Purchase Request

and Preparing Purchase Order

Step 4

Submission of Purchase

Order

Step 5

Receipt and Acknowledgement of Purchase Order

Step 6

Delivery of Raw material

Changing market needs

Consumer trends

Competitors' strategies

Organizational Resources and Capabilities

Setting parameters

Evaluating all suppliers

Choosing the best supplier

Making contract

Purchase request preparation

Approval from the Head of Purchase Department

Preparing Purchase Order

Purchase order sent to the supplier through courier

Receipt of Purchase order by supplier

Acknowledgement of receipt via telephone or email

Delivery of Raw material by the supplier at the Manufacturer's store, production center, or manufacturing plant

Supplier Contract

In order to perform their transactions in a legal way, manufacturers must enter into formal contracts with their suppliers. Supplier contracts not only take both the parties under the umbrella of local laws and regulations, but also provide them a surety that any illegal action from either side will be dealt under strict regulatory framework. Therefore, purchaser enters into transaction with a confidence that he will get the required quantity and quality of raw material against his money. Similarly, the vendor or supplier confidently sends his raw material to the manufacturer on credit basis.

A supplier contract is a typical formal contract that binds both, the manufacturer (purchaser) and the supplier (or vendor) into an agreement that these parties will enter into a transaction on a specific date (or a number of transactions during a specified period of time).

The Components of a Supplier Contract:

A formal supplier contract has the following major components:

a. The date on which the contract is made

b. The location where the contract is made

c. The definition of supplier under this specific contract

d. The definition of manufacturer under this contract

e. The definition of other important terms like; raw material, time, purchase order, submission of purchase order, business day, delivery of raw material, just-in-time, lead time, pricing, product details, quantity, unit of measurement, etc.

f. Terms of agreement

g. Essential components of Purchase order

h. Actions to resolve conflicts and issues related to any kind of matter in this contractual relationship

i. Actions in case of non-compliance by either party in any kind of matter

j. Quality assurance

k. Warrantee conditions and clauses

l. Termination of supplier contract

m. Supplier's signature, stamp, address, and other business details

n. Manufacturer/purchaser's signature, stamp, address, and other details

Risks involved in Contracting and Procurement

Like other areas of business operations, contracting and procurement in supply chain management also involves a number of risks. The biggest risk lies in the selection of raw material supplier for the business. If a business fails to find a reliable supplier, it has to face various kinds of financial and operational consequences in the future.

a. Delivering poor quality raw material:

A wrong supplier can impact the business operations of a company in a number of ways. First of all, it may deliver poor quality raw material against the payment for high quality material. In this way, he deceives the purchaser and gets more profit than normal. The consequences of this action are eventually borne by the manufacturer (Bower, 2003).

b. Making late delivery of raw material:

Secondly, the raw material supplier may not be efficient in making deliveries of raw materials at the manufacturer's store or production units. In this way, the manufacturer fails to achieve a good balance between his raw material demand and supply. The late delivery of raw material badly impacts the inventory management system of the manufacturer. That is, if the supplier does not make delivery on time, the manufacturer cannot store and provide the sufficient quantity of raw material at the production units. It also slows down the company's normal speed of manufacturing which ultimately impacts its sales and financial performance.

Negative Consequences:

When an organization gets poorer quality of raw material, its manufacturing department fails to produce the products for which the organization is recognized in its industry and among its target consumers. When consumers observe that the organization is now producing poor quality products, they immediately switch to other manufacturers which are producing higher quality products at competitive prices. The wrong selection of supplier also spoils the brand image and stakeholder relationships of the company. Therefore, it is crucial for the success of the business that companies always choose reliable and well-recognized suppliers from the industry.

Ethics in Contracting and Procurement:

Supply chain management also requires business organizations to perform their contracting and procurement function in the sound ethical and social grounds. First of all, they must know their suppliers before entering into any kind of relationship with them. A reliable supplier is always registered with the Chamber of Commerce or Trade or some other regulatory authority. Secondly, the purchaser must ask for a price that is acceptable for both the parties. Any effort to make an undue advantage from the supplier's side falls under unethical business practice. The manufacturer must also ensure that the supplier has a sound track record in the current industry in order to safeguard itself and… [END OF PREVIEW]

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Contracting and Procurement in Supply.  (2013, May 17).  Retrieved July 24, 2019, from https://www.essaytown.com/subjects/paper/contracting-procurement-supply/8608232

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"Contracting and Procurement in Supply."  Essaytown.com.  May 17, 2013.  Accessed July 24, 2019.
https://www.essaytown.com/subjects/paper/contracting-procurement-supply/8608232.