Contracting and Procurement in Supply Chain Management Supply Chain Management 5960

This paper comprehensively describes the contracting and procurement function in the supply chain management of an organization. The paper starts with an introduction to the supply chain management and proceeds by discussing the importance of contracting and procurement function for an organization. The paper also describes the whole contracting and procurement process and highlights some risks and ethical issues associated with this function.

Contracting and procurement is the acquisition of raw material, goods, or services from external suppliers or vendors. It is one of the most important functions in the supply chain management of an organization. An effective and efficient contracting and procurement is vital in achieving success in the industry and satisfying the stakeholders through manufacturing capabilities. This paper comprehensively describes the contracting and procurement process which business organizations generally follow while purchasing raw material for their business.

The contracting and procurement process starts with the identification of business needs which is carried out with the help of recommendations and feedback by the Sales and Marketing, Research and Development, and Finance Department. All these departments recommend new product development or innovation in existing products to the production department. After analyzing the business needs, the company evaluates the available suppliers in the industry and chooses the one that best fits the selection criteria. It then enters into a contract with the supplier and paves its path towards a successful business relationship. The purchase manager sends a purchase request to the Head of the Department and gets its approved. Once the request is approved, the department prepares a purchase order and sends it to the supplier. The supplier acknowledges the receipt and sends the ordered quantity of raw material to its client.

There are various issues and challenges which organizations have to face in the contracting and procurement process. A wrong selection of supplier may result in poor acquisition of raw material and manufacturing of lower quality products -- both are ultimately bad for the company's brand image and sales performance. There are some ethical boundaries which must be taken into account while making business relationship with the suppliers.

Introduction: Supply Chain Management

A number of firms play their role in the process of manufacturing a product and delivering it to the final consumers. All these firms are collectively called as the 'supply chain' for that product (Arlbjorn, 2010). Therefore, the manufacturing and delivery of every product or service is backed up by the cumulative efforts of its supply chain members; that include raw material suppliers, wholesalers, retailers, distributors, transportation and logistics companies, etc. Supply chain is basically a path from the raw material supplier to the final consumer of a product (Coyle, 2009). Thus, supply chain management involves all those activities that must be carried out to produce the desired quality of products and deliver them to their target consumer in an effective, efficient, and systematic way (Ivanov & Sokolov, 2010). The major activities in supply chain management include planning and decision making, purchase of raw material, manufacturing of the products, moving and storing the finished products in the company's stores, distributing them to the wholesalers or retailers, and delivering or selling to the final consumers at the right place and right time (Leeman, 2010).

Contracting and Procurement in Supply Chain Management

Procurement refers to the acquisition of raw material, goods, works, or services from external vendors against pre-agreed payment or credit basis. Organizations procure their desired raw material or goods in order to fulfill the needs of their business operations in a cost-efficient and effective way (Ivanov & Sokolov, 2010). They use different methods like cost-utility analysis and cost-benefit techniques to evaluate the required raw material or goods on the basis of their quality, pricing, marginal benefit, origin, supplier's credibility and track record in the industry, delivery and transportation costs, etc.

Once these things are analyzed, the organization can choose the supplier or raw material vendor that best fulfills the needs of its business operations. The organization then enters into a contract with that supplier or vendor in order to carry out the transaction and take the supply to its production centre or manufacturing plant. Thus, contracting and procurement can be considered integral parts of an organization's supply chain management function.

The Contracting and Procurement Process

In the contemporary business world, contracting and procurement has gained importance due to the organizations' emphasis on competitiveness and sustainability. In order to compete with their rivals in a more effective and profitable way, organizations are...

Therefore, contracting and procurement has become a more complex and challenging process for organizations all over the world. Generally, every type of business organization passes through the following steps in its contracting and procurement process:
1. Identifying the Needs of the Business

First of all, the purchase or procurement managers identify the current needs of their business in terms of the quantity, quality, and features of the products which they want to manufacture (Ivanov & Sokolov, 2010). The need identification process wholly depends upon the nature of the business and the industry in which the company is operating (Coyle, 2009). The purchase directors set the roadmap for the company for its short-term and long-term moves in the industry, i.e. what the company should offer; what are its successful projects which must be continued in the long run; what products have an attractive demand in the market; and what products should be retrenched in order to save the costs of operations (Arlbjorn, 2010).

i. The Role of Different Departments in the Procurement Decision Process:

Each and every department in an organization has a unique role to play in the contracting and procurement process. Therefore, it is not only the purchase department that can be appreciated for success, or otherwise, be held responsible for any type of failure of the organization. The role of different departments in the procurement and contracting process is described below:

a. The Role of Sales and Marketing Department:

The primary role in the procurement and contracting process is played by the sales and marketing department of the organization. It is the Sales department that gives full report of the past sales trends for different products of the organization. On the basis of these trends, the purchase department can easily forecast the demands of these products. The sales force also gives valuable feedback to the marketing department about changing consumer trends, needs, and expectations.

b. The Role of Research and Development Department:

In large scale organizations, Research and Development is carried out by a separate department, called R&D Department. On the other hand, it is just a small section of the Sales and Marketing department in medium and small scale organizations. Research and Development section also plays a vital role in identifying the current needs of the business (Coyle, 2009). It conducts market analysis and appraises the competitors' strategies and industry trends for the purposes of recommending the production department regarding potential opportunities which can be availed by the organization to become more successful and profitable. The analysis conducted by the R&D department helps the company in redesigning and restructuring its business operations according to the changing market demands. Thus, on the basis of these recommendations, the production department identifies the need to develop new products and the type of raw material required for these products (Arlbjorn, 2010).

c. Finance Department:

In contracting and procurement process, the Finance department is responsible to analyze the current financial position of the company and recommend strategic moves which can be more feasible in the light of this financial position (Leeman, 2010). When the sales and marketing department recommends new product development or improvement in the current product lines, the Finance department gives it feedback that whether the company has sufficient financial resources to support these new strategies or not (Ivanov & Sokolov, 2010).

d. The Role of Production Department:

When all these departments coordinate with each other and reach a definite decision, the production department implements the strategy and commences the new product development or innovation process. Thus, the identification of business needs is never done by a single department in the organization -- it is the result of the cumulative efforts of all the departments. The production department identifies the need for raw material on the basis of these analyses and recommendations and decides what quantity and quality should be ordered.

2. Supplier Evaluation and Contracting

Organizations realize that a reliable supplier helps them in ensuring business stability in the long run and showing exceptional performance on continuous basis. Therefore, supplier evaluation and selection can be the most difficult step in the contracting and procurement process due to various issues and challenges which arise at different intervals. Before evaluating and selecting the best supplier or vendor for the business, it is essential to decide what quality, quantity, price, and marginal benefit does the organization expects from its procurement (Ivanov & Sokolov, 2010). Supplier evaluation is highly important if the organization wants to purchase the raw material of its choice and avoid unwanted…