Eskom Procurement Book 2015

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

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