Achieving a balance between five parameters (5 R’s of procurement) is important in every procurement. These five parameters are mentioned below.
(a) Right Quality
(b) Right Quantity
(c) Right Price
(d) Right Time and Place
(e) Right Source
Whole of the procurement process is focused to achieve these five objectives. We may describe the objective of whole of the procurement process in one sentence.
“Right quality product, delivered in right quantity, to the right place, at the right time, for the right price is the objective of every procurement process.”
Here is a brief overview of the five R’s of the procurement:
The Right Quality
The objective of procurement should be to achieve right quality and not the best quality. Since there is always a tradeoff between quality and price therefore the procurement of goods or services should be done as per requirement of customer. The best quality may have adverse cost, technical and maintenance implications, therefore achieving right quality should be the prime objective of the procurement process.
The right quality which fits the need of customer can be achieved by determining accurate specification of requirements and quality standards. Establishing appropriate quality control and quality assurance system from buyer and supplier’s side is very important to achieve the right quality.
If the right quality is not achieved the organization may incur high costs, the product may get returned or rejected and the goodwill of the company may have lost. Therefore, achieving right quality is so important.
The Right Quantity
Buying more quantities irrespective of your current needs is not a good procurement practice. The organization should estimate immediate needs and try to procure just right quantity to match the immediate need. Buying excess quantity will result in more fund blockage, incurring holding cost, excess cost of handling and storage of inventory and risk of inventory getting damaged or pilferage/ theft.
Demand forecasting helps in procurement of right quantity. There are various methods of demand forecasting. Inventory management and stock replenishment system are some measures to procure right quantity.
The Right Price
It’s not always good to aim for cheapest products. The quality comes with a price so the organizations should be willing to pay the right price for the right quality. Also paying cost mote then the worth of product should also be avoided. The concept of price may also include the concepts like ‘Life Cycle Costing’ or ‘Total Cost of Ownership’ or ‘Value for Money’ to take into account not only the initial price paid but also take into consideration other costs like maintenance costs, operational costs and disposal costs.
The right price of a product can be obtained by doing price analysis & supplier cost analysis and getting competitive price through negotiation. If the right price will not be achieved then the suppliers will be free to charge whatever they want, supplier’s profit margin will reduce, prices of final product will rise, motivation among the shareholders of the company will decrease to invest in the business and the overall business of the organization will be adversely affected. Therefore, the management should pay emphasis on determining and achieving right prices for the materials and services they are procuring.
The Right Time and Place
Procuring material too early or too late is detrimental to the business. Suppose we want a particular quantity of raw material in three months for manufacturing final product. Getting it early will incur extra cost for handling and storing the raw material. The risk of damage and theft of the material will also increase. Similarly procuring the raw material later than three months’ time will cause in delay in manufacturing and supply of final product which will adversely affect the business. The procurement of materials at right time may be achieved through demand management and supplier management.
In the same way, procuring material at right place is equally important. Getting material at the places other than the required place will incur additional cost and time to bring that material to the right place. Additionally, the risk of goods getting damaged during transportation will increase and the transport may cause unnecessary environmental damages also.
Distribution planning, transportation planning and packaging help in delivering the goods to the right place, packaged and transported in such a way to secure their safe arrival in good condition.
The Right Source
The source of procuring the material should be appropriate to suit our needs. Procuring few packets of stationary material from a large manufacturer will not make any sense. Similarly, if a builder is constructing a huge residential project then procuring sanitary items from small venders or involving middlemen for procurement of such items will not be cost effective. In this case the builder will have to approach a large manufacturer of sanitary items to get the best wholesale prices. It will be also appropriate to use negotiation tactics to get the right prices.
(1) Right quality product, delivered in right quantity, to the right place, at the right time, for the right price is the objective of every procurement process.
(2) The concept of price may also include the concepts like ‘Life Cycle Costing’ or ‘Total Cost of Ownership’ or ‘Value for Money’ to take into account the total price of a product till ownership to the disposal of the product.
(3) Demand forecasting, Inventory management and stock replenishment system are some measures to procure right quantity.
(4) The right price of a product can be obtained by doing price analysis & supplier cost analysis and getting competitive price through negotiation.
(5) The procurement of materials at right time may be achieved through demand management and supplier management.
(6) Distribution planning, transportation planning and packaging help in delivering the goods to the right place, packaged and transported in such a way to secure their safe arrival in good condition.