Written by: Eman Abouzeid
In this article, we will discuss the primary task of procurement, which is providing the “Right” inputs for the organisation’s processes.
The “Right” inputs are traditionally described as follows:
- Inputs of the right “Quality”.
- Delivered in the right “Quantity”.
- To the right “Place”.
- At the right “Time”.
- For the right “Price”.
These are often called the “Five Rights” of procurement and supply.
The five rights are a traditional formula expressing the basic objectives of procurement, and the general criteria by which procurement performance is measured. Even if they are not called ‘five rights’, they are often covered in procurement literature as "key performance variables" or "procurement factors"; essentially, we are all talking about the same thing.
We will give a brief overview of the five rights (or five Rs) of procurement, and the importance of achieving them here as follows:
1. The “Right Quality”:
Obtaining goods which are of satisfactory quality and fit for their purpose (suited to internal and external customer’s needs), by:
- Accurate specification of requirements and quality standards.
- Supplier-and buyer-side quality management.
If the right quality is not achieved:
- Stock may have to be rejected or scrapped.
- Production machinery may be damaged.
- Finished products may be defective and have to be scrapped or re-worked.
- Defective products may reach customers, resulting in recalls, returns, compensation claims, lost goodwill, damaged reputation.
- The firm will incur high costs.
2. The “Right Quantity”:
Obtaining goods in sufficient quantity to meet demand and maintain service levels while minimising excess stock holding (which incurs costs and risks), by:
- Demand forecasting.
- Inventory management.
- Stock replenishment systems.
If the right quantity is not achieved:
- Insufficient stock may be held to meet demand.
- Stockouts may cause bottlenecks or shutdowns in production; costs of idle time; late delivery to customers; lost credibility, goodwill and sales.
- Excess stock may be ordered and/or held: tying up capital in ‘idle’ stock; wasting storage space; risking deterioration, theft or damage; risking obsolescence or disuse; incurring ‘holding costs’.
3. The “Right Place”:
Having goods delivered to the appropriate delivery point, packaged and transported in such a way as to secure their safe arrival in good condition, by:
- Distribution planning.
- Transport planning.
- Packaging.
If the right place is not achieved:
- Goods may be delivered to the wrong place, creating delay and correction costs.
- Goods may be subject to unnecessary transport and handling (and related costs).
- Goods may be damaged, contaminated or stolen in transit.
- Transport may cause unnecessary environmental damage.
4. The “Right Time”:
Securing delivery of goods at the right time to meet demand, but not so early as to incur unnecessary inventory costs, by:
- Demand management.
- Supplier management.
If the right time is not achieved:
- Goods may be too late, causing production bottlenecks (and associated costs) and/or delays in delivery to customers (with costs of damages, lost business).
- Goods may be too early, causing undue risks and costs of holding inventory.
5. The “Right Price”:
Securing all of the above at a price which is reasonable, fair, competitive and affordable. Ideally, minimising procurement costs in order to maximise profit, by:
- Price analysis.
- Supplier cost analysis.
- Competitive pricing and negotiation.
If the right price is not achieved:
- Suppliers will be free to charge what they like, without checking.
- Supplier’s profit margins will be ‘squeezed’ unfairly, leading to insecurity of supply.
- Materials and supply costs will rise.
- Profits will fall – or prices charged to customers will have to rise (losing sales).
- There will be less profit to motivate shareholders and re-invest in the business.
Based on this analysis, it is especially worth noting that the ‘five rights’ formula does not include the "right supplier" – although selection of the right supplier will be crucial in achieving the other procurement objectives.
Arguably, the ‘right supplier’ is one who can deliver the right quantity and quality to the right place, at the right time, at the right price. However, there may be other considerations in the choice of supplier, such as the supplier’s compatibility with the buying organisation; its credibility and reliability; its potential for innovation and development; its willingness to commit to continuous improvement and relationship development; its ethical and environmental performance; and so on.
I hope this has been of interest to you and provided you with some knowledge to consider !
