Categories of Needs

Categories of Needs

 

Organizational needs can be classified broadly into seven general categories:

 

  • Resale – Firms go through the process of procuring materials, producing products, and distribution in order to resell the products to customers.  How these products are resold through the various distribution and marketing channels and how well these products cater to a customer’s needs determine the quantity and price of the product sold.  Resellers comprise of retailers, wholesalers, distributors, agents, brokers, and traders.  What they can resell covers the full range (and more) of products listed below.
  • Raw and Semi-processed Materials – Most users of material are converters such as factories, and this commodity includes commodities as well as agricultural and industrial products.
  • Parts, Components, and Packaging – Assemblers use parts and components produced by their suppliers to create a finished product.  Parts and components may be standard or special depending on the decision of the designer of the finished product.
  • Maintenance, Repair, and Operating Supplies (MRO), and small value purchases (SVP) – Every organization has MRO requirements and SVPs.  The availability of MRO supplies is critical to maintain continued uninterrupted operation of the office, factory, and facility.  Because many MRO requirements are relatively small in dollar value, SVPs are also included in this category
  • Capital – Any requirement that accountants classify as capital and therefore an investment, becomes a capital item.  Equipment, IT, real estate, and construction are included in this category.  Capital items can be depreciated, are often bought under a separate budgetary allocation, and may require special financing arrangements.
  • Services – Every organization has to have and acquires a variety of services.
  • Other – Covers anything not mentioned in the previous categories.  These needs include energy, water, as well as unusual or infrequent requirements.

 

Repetitive or Non-repetitive Requirements

 

For repetitive requirement, firms design a system or process of acquisition.  For non-repetitive requirements, firms make ad hoc decisions on the process of acquisition.  If non-repetitive requirements are small and insignificant, having the user order it directly on a purchase card or treating it as a small value purchase may be adequate.  The acquisition of a multimillion-dollar piece of equipment may require the efforts of a project team to finance, specify, and acquire the equipment.

 

Commercial equivalents

 

The first step in the acquisition process is to determine what is needed and why, and the next step is to translate these needs into commercial equivalents so that suppliers can understand what is needed.  Specifying the need first and then identifying the variety of options to meet the need leave the door open to lower cost and better, or more innovative solutions.  If a supply professional has reason to believe that further opportunities exist to improve on the commercial equivalent presented by a designer or specifier, he/she has the responsibility to bring this fact to the attention of the designer or specifier.

 

Early Supply and Supplier Involvement

 

Given the high opportunity to affect value during the need identification and specification stages, it is essential that supply considerations are brought to bear on decisions during the determination of need and finding commercial equivalents stages. This is fundamental in value analysis/value engineering.

 

Method of Description

 

The description of an item may take one of a variety of forms, or a combination of several different forms.  The term description will mean any one of the various methods by which a buyer conveys to a seller a clear, accurate picture of the required item or service.  The term specification will be used in the narrower and commonly accepted sense referring to one particular form of description.  The methods of description are:

 

  • ·         By brand – Description by brand or trade name indicates a reliance on the integrity and the reputation of the supplier.  It assumes that the supplier is anxious to preserve the goodwill attached to a trade name and is capable of doing so.
  • ·         Or equal – The buyer tries to shift the responsibility for establishing equality or superiority to the bidder without having to go to the expense of having to develop detailed specifications.
  • ·         By specification – It is becoming common practice to specify test procedures and results necessary to meet quality standards as part of the specification as well as instruction for handling, labeling, transportation, and disposal to meet environmental regulations
    • o        Physical or chemical characteristics – Specification by physical or chemical characteristics provides definitions of the propertied of the materials the purchaser desires.  These specifications represent an effort to state in measurable terms those properties deemed necessary for satisfactory use at the least cost and best quality.
    • o        Material and method of manufacture – This method is used when special requirements exist and when the buying organization is willing to assume the responsibility for results.  Many organization are not is this position, so firms make little use of this form of specification.
    • o        Performance – The heart of performance specification is the understanding of the required functions.  It is the most used specification method because many times it is used with requests for proposal (RFP).  Performance specification throws the responsibility for a satisfactory product back on the seller.  This enables the supplier to take advantage of the latest technological developments and to substitute anything that exceeds the minimum performance required.
  • ·         By engineering drawing – Description by design or dimension sheet is common and may be used in connection with some form of descriptive text.  It is used for the purchase of construction, electronic, and electrical assemblies, machined parts, forgings, castings, and stampings.  While it maybe the most expensive method of description, it is most likely to describe an item that is quite special as far as the supplier is concerned.  It is probably the most accurate of all forms of description.
  • ·         By miscellaneous methods
    • o        Market Grades – This confined to certain primary materials.  This method of description depends on the accuracy with which grading is done and the ability to ascertain the grade of the material by inspection.  The grading must be done by those the purchaser perceives and knows has the ability to accurately discern commodity grades.
    • o        Sample – Almost all purchasers use this method from time to time but ordinarily (there are some exceptions) for a minor percentage of their purchases and then more or less because no other method is possible.  Examples of items requiring visual acceptance are wood grain, color, appearance, and smell.

 

By a combination of two or more methods

 

An organization frequently uses a combination of two or more method of description already discussed.  The exact combination found most satisfactory for an individual organization will depend on the type needed by the organization.

 

  • ·         Sources of Specification Data
    • o        Individual Standards – these require extensive consultation among users, engineering, supply, quality control, suppliers, marketing, and possibly the customer.  This task can be arduous and expensive.
    • o        Standard Specifications – Used when a firm desires to buy on a specification basis but hesitates to undertake origination of its own specifications.  Standard specifications have been developed by governmental and nongovernmental agencies, and these specifications have been applied to raw or semi-manufactured products, component parts, or to the composition of material.  Standard specifications have major advantages in that they are commonly recognized and readily available to all procurement professionals, and typically have lower costs to manufacture.
    • o        Government, Legal and Environmental Requirements – Federal legislation concerning environmental factors, employee health and safety, security, and consumer product safety requires that supply professionals remain vigilant in ensuring that products purchased meet governmental requirements.

 

Standardization and Simplification

 

Standardization means agreement on definite sizes, design, quality, and the like.  It is essentially a technical and engineering concept.  Simplification refers to a reduction in the number sizes and designs for example.  It is a selective and commercial problem, an attempt to determine the most important sizes of a product and to concentrate production or use on these whenever possible.  Simplification may apply to articles already standardized as to design or size or as a step preliminary to standardization.  The challenge in an organization is where to draw the line between standardization and simplification, and on the other hand, suitability and uniqueness.