We all know purchasing is buying the goods and transporting them to the production unit. However, when we want to take our purchasing process to the next level we need to consider thinking of ‘procurement’ instead. What’s the difference then?; well, procurement goes beyond the purchase, since it takes into account not only the external supply but the internal supply as well (i.e. purchasing and delivering to the production line on time). Procurement requires the good planning of the purchases and delivery, analysing the market after the suppliers and the needed products, quality control on the incoming goods, the payments, and so on.
So, what’s required to achieve good procurement processes?. Here we show you the ‘seven rights’ rule (7 R’s); a good procurer will stand in his/her process for (1) obtaining the RIGHT materials, (2) at the RIGHT moment in time, (3) with the RIGHT amounts, (4) delivered at the RIGHT place, (5) by the RIGHT supplier, (6) with the RIGHT service and, of course, (7) the RIGHT price.
Having the 7 R’s right can prove a very difficult task since different options have their pros and cons; for example, which supplier?, what about our strategy?, sales budget?, or the production planning?
This is so complicated that several requirements and skills are needed in the procurer, from quality management, cost-benefit analysis, to supply chain management. However, usually the procurement managers are blamed for being too price-focused. As a helping tool we propose another definition for ‘price’, in order to accomplish the 7 R’s; it is what we will call the ‘Total Cost of Ownership’ (TCO). It assumes the total cost the company is actually acquiring the good for; as an example, a simple TCO would consider the buying price, delivery cost, the wage for the QC inspector, and the goods that have to be rejected because of bad quality.
As a conclusion, TCO serves as a tool for measuring the REAL COST of the good X, bought from supplier Y, allowing us to make better and more accurate purchasing decisions.
Francisco Marco-Serrano is Economist/Joint Administrator of K|P|K – Key Productivity Konsulting (Spain); Business Administration Adjunct Professor at the University of Valencia (Spain), and Economics Adjunct Professor at the University Jaume I (Spain).
