University of Tennessee IM341 Spring 2014 Procurement Process Authored by Dr. Hollander, all rights reserved 1 THE PURPOSE OF THE PROCUREMENT PROCESS The procurement process includes the business events associated with buying, maintaining, and paying for goods and services needed by the organization. These include inventory (e.g., raw materials or finished goods), services (e.g., utilities, insurance, repairs, maintenance, research, development, professional or legal services), supplies, human resources, financial instruments, property, plant, equipment, or fixed assets. The procurement process is referred to by a variety of names by various organizations and software vendors including Order to Pay, Procure to Pay, and/or Expenditure process. The overall objective of the procurement process is to provide needed resources for the organization’s order to cash and conversion processes at an optimal time (at the point when they are needed in an effort to reduce process cycle times, waste and costs). This objective can be broken into several sub objectives: - Purchase items from reliable vendors. - Purchase high quality items, or at least items of the desired quality. - Obtain the desired items at the best possible price. - Purchase only those items that are properly authorized and are for legitimate company purposes. - Have resources available and in useful condition when they are needed by the company. - Receive only those items ordered, and receive all the items ordered. - Control and safeguard items received so they are not lost, stolen, or damaged. - Pay for the items received in a timely manner to the appropriate party. In this narrative, we will describe some of the more common events and terms that define the procurement of goods and services. A caution before we begin the discussion. Because we discuss the activities in a sequential fashion, it may seem that the procurement process is linear. That is not necessarily true. Increasingly, business processes and the activities that comprise those processes are dynamic, rather than linear and static. PROCUREMENT ACTIVITIES THAT MUST BE SUPPORTED BY INFORMATION PROCESSES Recall from Module 1 that examples of typical activities that make up the procurement process include: - Effectively monitor organizational resources in an effort to identify the need for goods or services in a timely manner. - If applicable, internally request goods or services (after identifying valid need). - Negotiate an order for goods or services. University of Tennessee IM341 Spring 2014 Procurement Process Authored by Dr. Hollander, all rights reserved 2 - Receive and inspect goods or services (the point of purchase). - Store and/or maintain goods. - Pay for goods or services. - Return goods. Organizations need information processes to document and support each of these key business activities. Information processing activities that support the business events include recording data about business events, maintaining data about resources, agents, locations, etc. that are important to the organization, and reporting useful information to management and other decision makers. The following table lists several key examples of information processing related to the business events that we will discuss in this narrative: Business Event (discussed in Module 1) Key Information/Transaction Processing Associated with the Business Event - Monitor resource levels and, if applicable, internally request goods or services (based on valid identification of need). - Record, maintain and report data about inventory levels, and needs of products or services. - Record, maintain and report data to facilitate and document internal requests for goods or services. - Negotiate the order of goods or services with a vendor. - Record, maintain and report data to facilitate and document placing purchase orders with vendors for goods or services. - Receive and inspect goods or services (then store and/or maintain goods). - Record, maintain and report data to facilitate and document the receipt of goods or services ordered (the point of purchase) and the storage/ maintenance of goods. - Record, maintain and report data about the liability that arises due to the procurement of goods or services (and financial measurement of that liability). - Pay for goods or services. - Record, maintain and report data to facilitate and document payment for goods and services purchased (and financial measurement of that payment). - Return goods (or request refund for services received). - Record, maintain and report data to facilitate and record activities associated with returning goods and receiving refunds or liability reductions (and financial measurement of the return and refund or amount due adjustment). University of Tennessee IM341 Spring 2014 Procurement Process Authored by Dr. Hollander, all rights reserved 3 Notice that the point of purchase (the receipt of goods) leads to two critical information processes – recording the receipt and recognizing the purchase liability. Although we will not discuss them in detail in this narrative, organizations need information processes to support documentation of the return of goods and possible purchase refunds. EXAMPLES OF PROCUREMENT TRANSACTION PROCESSING The following narrative describes some of the key data flows, information processing, and files that are used in transaction processing systems (TPS) designed to support procurement business events. As with the previous narrative, notice that there is a repeating pattern of inputs (receiving data or requests for data), processes (recording or documenting activities, updating master or reference files, etc.), outputs (generating electronic or paper data flows, responding to queries, or creating reports) and data storage (files). To supplement the narrative, we have once again provided a variety of level 1 data flow diagrams (DFDs) intended to represent some of the key sources and destinations of data, data flows (inputs and outputs), information processing steps, and data stores (files) typically associated with the described information processes. The four graphical symbols used include: - labeled arrows that denote data traveling and the routes of input and output data flows, - labeled rectangles that denote sources and destinations of data that are external to the information processing scope represented on the diagram, -