Specification crucial in purchasing process
THE purchasing process is receiving increasing attention by top management as it has more impact on the profitability and supply chain performance than any other department.
Purchasing is professional buying by an organisation and involves everything you receive an external invoice for. This can be goods (materials, office supplies), services (temporary labour, accountancy services), and works (renovation of factory or office). The purchasing process consists of six steps: specification, supplier selection, contracting, ordering, expediting and follow-up.
In a series of columns, I will address each step in detail.
This column looks at the first step: specification. A specification is a statement of attributes and/or user requirements of a product, service or works. Specification is part of the first three purchasing process steps, better known as the tactical purchasing process.
In this first step, the exact needs are determined, such as quality, logistics, maintenance, legal, environment, and budget.
Who makes the specifications?
The user or budget holder is responsible for specifying the purchase order requirements. It is the task of purchasing to ensure that the specification is drawn up in objective and supplier-neutral terms.
However, in drafting the specifications, other people or departments can be consulted, such as research and development, quality, halal committee, laboratory and in some cases, even the customer. It is important that each specification is signed off by purchasing before it is released to a supplier.
What needs to be covered in
specification? Specifications cover both functional and technical specifications.
A functional specification describes the functionality that the product, service or works must have for its user. It stimulates the suppliers to contribute their expertise and new technology to meet the needs of the buyers.
In the case of services, it could describe the input, throughput, output and outcome.
In contracting, this can be further detailed in a so-called service level agreement.
Technical requirements provide details on the physical or chemical properties as well as the activities performed by the supplier. These could be laid down in detailed technical drawing and activity schedules.
The longer the relationship or higher level of trust with a supplier, the more emphasis there will be on the functional requirements as compared to the technical requirements.
The specification stage provides the largest influence on total costs of ownership. Early involvement by purchasing at the stage of specification is therefore crucial.
One of the reasons is that in this particular step, there is the opportunity to standardise, hereby reducing the number of different products, subassemblies and parts. Research shows that successful companies have four to five times less different components than less successful companies. Indepth knowledge of the supplier market by purchasing makes this possible.
Lessons learnt
What often goes wrong is that the specification phase is skipped.
Organisations go straight to supplier selection step without clearly understanding their needs. Secondly, organisations forget the consumables, spare parts or support services related to a purchase.
Third, there is too much emphasis on the technical requirements, whereas functional requirements are forgotten.
Finally it is important to clearly identify who is responsible in writing the specifications as well as who is responsible for approving the specifications.
Although developing and changing specifications cost time and money, buying the wrong products and services is even more expensive! The writer is founder and CEO of LBB International, the logistics consulting and research firm that specialises in agri-food supply chains, industrial logistics and third-party logistics.