Eskom Procurement Book 2015

PRINCIPLES OF SUPPLY CHAIN AND PROCUREMENT MANAGEMENT

Purchasing products and services poses risks for the organisation in terms of availability of supply, difficulty and costs of securing the products and services. The procurement function therefore has to develop a comprehensive picture of the procurement profile and the procurement needs of the organisation. This involves conducting the spend analysis of the past and projected spends for materials/products and services as well as analysing the risks associated with securing the goods and services. This helps the organisation to categorise purchases of goods and services according to the difficulties of securing them and their relative expenditure. Table 1.1 shows the categories of purchases, their characteristics and possible strategies for reducing the risks associated with purchases.

Table 1.1: Categories of purchases [10, 23]. Category Typical characteristics

Possible strategies

Routine (low risk and low spend)

Minimise administrative efforts by: • Procurement at the lowest practical level (decentralised). • Encouraging local suppliers to view the organisation as a valuable client, resulting in lower transaction costs. • Focusing ordering and payment terms with suppliers on transaction efficiency (direct debiting, aggregation of orders, monthly accounts, payment cards, etc.). Total cost reduction and high service levels from suppliers by: • Establishing automated supplier interfaces to minimise process- related costs for high-volume standard goods. • Ensuring regular management information reports on the nature of this expenditure to keep strategic focus. • Establishing long-term agreements to simplify procurement, coupled with automated paying systems. • Regionalising supply by using local suppliers that are agents for centralised arrangements. • Forming collaborative initiatives with other organisations to build leverage, target off-peak periods in supply markets.

Usually low value and low volume items. • Represent routine procurement processing. • Typically represent up to 90% of the organisation’s suppliers. • The suppliers are often small businesses. • Transaction costs can be greater than the value of the items themselves. • There are generally competitive local supply markets for these items. Commodities commonly used across the entire organisation with high volume. • Represent commodities where there is potential for reduction of inventory management, handling and storage costs. • Mature and competitive supply markets. • Markets are served by

Leverage (low risk and high spend)

a few suppliers with extensive distribution networks.

18 CHAPTER 1