Home > Articles > Software Development & Management

The Fundamentals of Procurement

  • Print
  • + Share This
One reason there is so much confusion surrounding the e-procurement marketplace today is that the press so often lumps all procurement into a single group. This is not the case; and there are several key distinctions that should be made when considering your company’s e-procurement strategy. Get a complete overview in this article, excerpted from e-Procurement: From Strategy to Implementation (Financial Times Prentice Hall, 2001, ISBN: 0130914118).
This article is excerpted from the author's book e-Procurement: From Strategy to Implementation (Financial Times Prentice Hall, 2001, ISBN: 0130914118).
This chapter is from the book

Objective: One reason there is so much confusion surrounding the e-procurement marketplace today is that the press so often lumps all procurement into a single group, as if all purchasing techniques and all commodity groups required the same systems and same approach. This is not the case; and there are several key distinctions that should be made when considering your company's e-procurement strategy.

  • Procurement materials can be broken down into two major categories: indirect and direct.

  • Indirect procurement involves any commodity or service that a company buys that does not result directly in finished goods.

  • Indirect procurement can be divided into two groups: ORM (Operations Resource Management) materials such as office products and travel services, and MRO (Maintenance, Repair and Operations) materials such as replacement parts.

  • Direct procurement involves materials purchased for use in the manufacturing or distribution supply chain that are "directly" related to the production of finished goods.

  • With e-procurement, the traditional division between direct and indirect purchasing paths is beginning to blur.

Traditionally, procurement has been broken down into two major categories: indirect and direct. In general terms, indirect procurement describes all of the day-to-day necessities of the workplace—staplers, paper, furniture, laptop computers, pencils, travel services—those things that tend to be of low value per item, but are usually bought in high volumes.

In the typical company, indirect procurement accounts for 60% to 80% of all purchasing transactions.

Direct materials, obviously then, are those involved in the manufacturing supply chain that are directly related to the production of finished goods. These materials tend to be purchased in large volumes, and depending on the level of sophistication of a company's forecasting and planning capacity, are, at least to purchasing specialists, fairly predictable in name, if not in exact amounts. Purchasing officers in aluminum manufacturing companies know they need to procure certain quantities of bauxite and aluminum at certain times during the manufacturing process. High-technology manufacturers know that they will require microchips, wiring, and other components. Procurement of direct goods, then, is of concern only to manufacturing, distribution, or retail companies—those that create, assemble, or move large numbers or amounts of finished or perishable goods. Because of their predictability and high volume, procurement of direct materials accounts for far fewer purchasing transactions (between 20% and 40% in manufacturing companies), but can account for up to 60% of a manufacturing firm's total procurement expenditure. ("E-Procurement: Unleashing Corporate Purchasing Power," Time, Inc.).

Indirect Procurement: ORM Versus MRO

The term ORM (Operating Resource Management) is now used commonly to describe the many ordinary office products and services that organizations purchase day-to-day: office supplies, furniture, forms, travel services, computers, janitorial and maintenance services, light bulbs, extension cords, and the like. Usually thought of as high-volume and low-dollar items, they nonetheless amount to a significant portion of a company's total spending. To give some idea of the scale, in the U.S. alone in 2000, the overall market for ORM products and services reached $725 million.

Over the years, the abbreviation MRO—for Maintenance, Repair and Operati—has come into popular use, and today most software vendors selling solutions for indirect materials (and, therefore, the popular business press) have begun to mistakenly lump all indirect goods together under this heading. But there is an important distinction that should be made. Office products should not be confused with mission critical overhaul or maintenance items. In purchasing, the two groups of goods are often known as white collar ORM (staples and notepads) and blue collar MRO (replacement parts); and the respective purchasing processes in terms of the levels of complexity, cost, and volume, vary enormously. Many analysts believe that MRO is in fact the much more important of the two.

"In spite of the current hype about the ability to buy office products or janitorial supplies over the Web," contends Lisa Williams of the Yankee Group, "the real 'gating' factor to growing this B2B e-commerce market will be the use of the Internet to manage and procure mission critical items such as component parts, expensive plant spares, and outsourced manufactured items." ("E-Procurement: The Transformation of Corporate Purchasing," Time, Inc. in association with AMR Research, Inc., May 2, 2000).

Certainly, procurement of white collar indirect supplies tends to be less complex than procurement of blue collar, or industrial, MRO, for obvious reasons. Indirect goods are seldom time or mission critical, and as important as pencils or notepads are, items like these can be purchased from any number of wholesale—or retail—vendors, each selling similar, if not identical, brands. These items can easily be described and cataloged—black ball-point pens or bond white liquid paper—and therefore do not require the specialist expertise necessary when purchasing complex electrical repair components or highly-engineered machine parts necessary for maintenance of complex manufacturing equipment. After all, it is much easier to quickly look up in a catalog—or run down to the local retail outlet—to purchase paper clips than it is to search for and procure a specially tempered, metal valve stem.

The consequences of misordering are also obviously different. Getting the wrong color ball point pen is bad, but buying the wrong shear pin or gasket for a critical assembly-line component can be catastrophic. Also blue collar MRO orders are often single-sourced, purchased in limited quantities, and are necessary to prevent the shut-down of the production lines. Blue collar MRO orders can easily amount to several hundreds of thousands of dollars, and require special service contracts. Blue collar items are often listed as inventory, tied into the company's inventory system, and accompanied with critical and complex design and performance regulations. Purchasing and maintenance employees often need to do a good deal of time-consuming prescreening of suppliers in order to understand which vendors will be trustworthy. MRO buyers are usually looking for high levels of quality control and technical support from their suppliers, so that replacement parts are delivered quickly, often at a few hours' notice. As a result, the average company uses up to 50 different MRO suppliers, and over a third of U.S. companies use 50 or more. (Miklovic, D., "The MRO E-Procurement Civil War: Blue vs White," Gartner Advisory Research Note, Tactical Guidelines, The Gartner Group, February, 2000, pp. 2–3; "Survey: How Companies Order MRO Supplies," Modern Distribution Management, February 25, 2000, p. 6.)

Table 1 A comparison of white collar ORM and blue collar MRO. (Source: The Gartner Group)

Issues

"White Collar" ORM

"Blue Collar" MRO

Number of Orders

Moderate

Often hundreds of thousands

Quantity per Order

Few to moderate

Varies from one to thousands

Delivery Criticality

Generally low

Routine to critical to the point of work stoppage for delivery failures

Ratio of Single Source

Low

High percentage (up to 30% by count, more by value); may be single/very limited sourced

Services/Contracts

Some

Almost always required—performance is critical in many cases

Accounting Tie Back

Generally only to a GL account

May be multiple—to work order, equipment, GL and other accounts, capital tie back as well

Controlled Inventory

Rarely

Always

Internal Item Master

None

Frequently—usually critical functionality

Vendor Performance Measurement

Minimal—usually by contract

Almost always—variable measurement criteria


There are two key cost areas in indirect procurement. The first is simply the straightforward inefficiency and labor-intensity of the process itself. For most companies, the centralized purchasing function has traditionally been responsible for buying a good portion of all indirect, non-production goods—whether blue or white collar—with around half of the workload of a typical purchasing department dedicated to these low-value, repetitive orders. The average level of productivity for this area is appalling, and it is one of the most labor-intensive areas of modern business.

Part of the problem is that indirect procurement policies are seldom standardized in large or multisite companies, varying greatly between departments and between branch and corporate office. The accompanying approval policies are usually cumbersome, sometimes requiring multiple levels of sign-off, which causes delays and internal inconvenience when employees wait for needed items and middle management staff members put off signing burdensome paperwork. In exasperation, approval thresholds are raised, and spending anarchy ensues, with only the larger ticket items falling into an even more stringent and extended approval process.

There is a second area of cost. For most companies, this cumbersome, centralized process is augmented by independent, or maverick, buying by employees throughout the organization who buy items—paper, scissors, light bulbs—when needed independently, often at nondiscounted and even retail prices. This maverick buying—that tendency for individuals, or often entire departments, to buy "off-contract" without taking advantage of negotiated company discounts—is often rampant, particularly among larger companies, and typically can account for a staggering average of between 30% and 45% of all indirect procurement spending. To put the effect of this maverick buying phenomenon into perspective, consider that at these rates a typical billion-dollar company would be losing up to $10 million each year just in lost discounts alone. The smaller the company, the less formal the process, as a rule, and for those non-manufacturing companies that do not see purchasing as a core competency, a frightening 84% of indirect materials are purchased simply by employees visiting their local retail outlet. ("Survey: How Companies Order MRO Supplies," Modern Distribution Management, February 25, 2000, p. 1–2.) This "rogue buying" can be a significant cost to companies, and even a modest reduction in maverick purchasing can significantly cut procurement costs.

  • + Share This
  • 🔖 Save To Your Account

InformIT Promotional Mailings & Special Offers

I would like to receive exclusive offers and hear about products from InformIT and its family of brands. I can unsubscribe at any time.

Overview


Pearson Education, Inc., 221 River Street, Hoboken, New Jersey 07030, (Pearson) presents this site to provide information about products and services that can be purchased through this site.

This privacy notice provides an overview of our commitment to privacy and describes how we collect, protect, use and share personal information collected through this site. Please note that other Pearson websites and online products and services have their own separate privacy policies.

Collection and Use of Information


To conduct business and deliver products and services, Pearson collects and uses personal information in several ways in connection with this site, including:

Questions and Inquiries

For inquiries and questions, we collect the inquiry or question, together with name, contact details (email address, phone number and mailing address) and any other additional information voluntarily submitted to us through a Contact Us form or an email. We use this information to address the inquiry and respond to the question.

Online Store

For orders and purchases placed through our online store on this site, we collect order details, name, institution name and address (if applicable), email address, phone number, shipping and billing addresses, credit/debit card information, shipping options and any instructions. We use this information to complete transactions, fulfill orders, communicate with individuals placing orders or visiting the online store, and for related purposes.

Surveys

Pearson may offer opportunities to provide feedback or participate in surveys, including surveys evaluating Pearson products, services or sites. Participation is voluntary. Pearson collects information requested in the survey questions and uses the information to evaluate, support, maintain and improve products, services or sites, develop new products and services, conduct educational research and for other purposes specified in the survey.

Contests and Drawings

Occasionally, we may sponsor a contest or drawing. Participation is optional. Pearson collects name, contact information and other information specified on the entry form for the contest or drawing to conduct the contest or drawing. Pearson may collect additional personal information from the winners of a contest or drawing in order to award the prize and for tax reporting purposes, as required by law.

Newsletters

If you have elected to receive email newsletters or promotional mailings and special offers but want to unsubscribe, simply email information@informit.com.

Service Announcements

On rare occasions it is necessary to send out a strictly service related announcement. For instance, if our service is temporarily suspended for maintenance we might send users an email. Generally, users may not opt-out of these communications, though they can deactivate their account information. However, these communications are not promotional in nature.

Customer Service

We communicate with users on a regular basis to provide requested services and in regard to issues relating to their account we reply via email or phone in accordance with the users' wishes when a user submits their information through our Contact Us form.

Other Collection and Use of Information


Application and System Logs

Pearson automatically collects log data to help ensure the delivery, availability and security of this site. Log data may include technical information about how a user or visitor connected to this site, such as browser type, type of computer/device, operating system, internet service provider and IP address. We use this information for support purposes and to monitor the health of the site, identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents and appropriately scale computing resources.

Web Analytics

Pearson may use third party web trend analytical services, including Google Analytics, to collect visitor information, such as IP addresses, browser types, referring pages, pages visited and time spent on a particular site. While these analytical services collect and report information on an anonymous basis, they may use cookies to gather web trend information. The information gathered may enable Pearson (but not the third party web trend services) to link information with application and system log data. Pearson uses this information for system administration and to identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents, appropriately scale computing resources and otherwise support and deliver this site and its services.

Cookies and Related Technologies

This site uses cookies and similar technologies to personalize content, measure traffic patterns, control security, track use and access of information on this site, and provide interest-based messages and advertising. Users can manage and block the use of cookies through their browser. Disabling or blocking certain cookies may limit the functionality of this site.

Do Not Track

This site currently does not respond to Do Not Track signals.

Security


Pearson uses appropriate physical, administrative and technical security measures to protect personal information from unauthorized access, use and disclosure.

Children


This site is not directed to children under the age of 13.

Marketing


Pearson may send or direct marketing communications to users, provided that

  • Pearson will not use personal information collected or processed as a K-12 school service provider for the purpose of directed or targeted advertising.
  • Such marketing is consistent with applicable law and Pearson's legal obligations.
  • Pearson will not knowingly direct or send marketing communications to an individual who has expressed a preference not to receive marketing.
  • Where required by applicable law, express or implied consent to marketing exists and has not been withdrawn.

Pearson may provide personal information to a third party service provider on a restricted basis to provide marketing solely on behalf of Pearson or an affiliate or customer for whom Pearson is a service provider. Marketing preferences may be changed at any time.

Correcting/Updating Personal Information


If a user's personally identifiable information changes (such as your postal address or email address), we provide a way to correct or update that user's personal data provided to us. This can be done on the Account page. If a user no longer desires our service and desires to delete his or her account, please contact us at customer-service@informit.com and we will process the deletion of a user's account.

Choice/Opt-out


Users can always make an informed choice as to whether they should proceed with certain services offered by InformIT. If you choose to remove yourself from our mailing list(s) simply visit the following page and uncheck any communication you no longer want to receive: www.informit.com/u.aspx.

Sale of Personal Information


Pearson does not rent or sell personal information in exchange for any payment of money.

While Pearson does not sell personal information, as defined in Nevada law, Nevada residents may email a request for no sale of their personal information to NevadaDesignatedRequest@pearson.com.

Supplemental Privacy Statement for California Residents


California residents should read our Supplemental privacy statement for California residents in conjunction with this Privacy Notice. The Supplemental privacy statement for California residents explains Pearson's commitment to comply with California law and applies to personal information of California residents collected in connection with this site and the Services.

Sharing and Disclosure


Pearson may disclose personal information, as follows:

  • As required by law.
  • With the consent of the individual (or their parent, if the individual is a minor)
  • In response to a subpoena, court order or legal process, to the extent permitted or required by law
  • To protect the security and safety of individuals, data, assets and systems, consistent with applicable law
  • In connection the sale, joint venture or other transfer of some or all of its company or assets, subject to the provisions of this Privacy Notice
  • To investigate or address actual or suspected fraud or other illegal activities
  • To exercise its legal rights, including enforcement of the Terms of Use for this site or another contract
  • To affiliated Pearson companies and other companies and organizations who perform work for Pearson and are obligated to protect the privacy of personal information consistent with this Privacy Notice
  • To a school, organization, company or government agency, where Pearson collects or processes the personal information in a school setting or on behalf of such organization, company or government agency.

Links


This web site contains links to other sites. Please be aware that we are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of each and every web site that collects Personal Information. This privacy statement applies solely to information collected by this web site.

Requests and Contact


Please contact us about this Privacy Notice or if you have any requests or questions relating to the privacy of your personal information.

Changes to this Privacy Notice


We may revise this Privacy Notice through an updated posting. We will identify the effective date of the revision in the posting. Often, updates are made to provide greater clarity or to comply with changes in regulatory requirements. If the updates involve material changes to the collection, protection, use or disclosure of Personal Information, Pearson will provide notice of the change through a conspicuous notice on this site or other appropriate way. Continued use of the site after the effective date of a posted revision evidences acceptance. Please contact us if you have questions or concerns about the Privacy Notice or any objection to any revisions.

Last Update: November 17, 2020