The procurement process is the process of acquiring goods or services from an external source. It is a critical part of any business, and it can have a significant impact on the bottom line. In this chapter, we will discuss the procurement process and supply chains in detail.
Learning Objectives
By the end of this chapter, you will be able to:
- Classify purchases as direct or indirect goods, and as contract or spot purchases.
- Trace the documents created at each step of a purchase, from requisition to payment.
- Describe a multi-tier supply chain and the three flows that run through it.
- Explain the bullwhip effect and how shared data reduces it.
- Discuss the state of procurement and supply chains in Nepal.
1. Types of Procurement
Not every purchase is the same. Firms classify what they buy in two ways.
What is bought:
- Direct goods go into the product itself. For a biscuit factory, flour, sugar, oil, and packaging film are direct goods. A shortage stops production, so they are bought from known suppliers in planned quantities.
- Indirect goods keep the business running but are not part of the product. Office supplies, cleaning materials, spare parts, and repair services are indirect goods. They are often called MRO (maintenance, repair, and operations) goods.
How it is bought:
- Contract purchasing is based on a long-term agreement that fixes price, quality, and delivery terms for repeated orders.
- Spot purchasing is a one-off purchase at the current market price, usually to meet an immediate need.
| Purchase type | Contract purchasing | Spot purchasing |
|---|---|---|
| Direct goods | Flour from a regular mill under a yearly deal | Extra sugar bought urgently during festival |
| Indirect goods | Annual cleaning-services contract | A replacement fan belt for a machine |
| Typical B2B market | Industry consortium, private network, or e-procurement | Exchange or e-distributor |
The bottom row links to the next chapters: each kind of B2B market grew up to serve one corner of this grid. See B2B marketplaces for the four market types.
2. The Procurement Process and Its Documents
The B2B overview lists the seven steps of procurement. In practice, every step leaves a document behind, and those documents are what B2B e-commerce systems automate.
| Step | What happens | Document created |
|---|---|---|
| Need recognition | A department notices it needs something | Purchase requisition |
| Search and qualify | Buyers find suppliers and check their reliability | Approved supplier list |
| Request quotes | Suppliers are asked for prices and terms | Request for quotation (RFQ), quotations |
| Negotiate and order | The best offer is chosen and terms agreed | Purchase order (PO) or contract |
| Shipping and receiving | Goods are delivered and checked | Delivery note, goods received note (GRN) |
| Invoicing | The supplier bills the buyer | Tax (VAT) invoice |
| Payment | The buyer pays according to the agreed terms | Payment voucher, bank transfer record |
Before paying, a careful buyer performs a three-way match: the purchase order, the goods received note, and the invoice must agree on item, quantity, and price. If the PO says 100 cartons at Rs. 1,200 each, the GRN shows 95 cartons received, and the invoice bills for 100, the buyer pays for 95 only. On paper, this matching is slow and error-prone; in an online procurement system it happens automatically.
flowchart LR
A[Requisition] --> B[RFQ and Quotes]
B --> C[Purchase Order]
C --> D[Goods Received Note]
D --> E[Invoice]
E --> M{Three-way match}
C -.-> M
D -.-> M
M -->|Agree| P[Payment]
Figure 1: Procurement Documents and the Three-way Match
3. Supply Chains
A supply chain is the network of organizations, people, activities, information, and resources involved in moving a product or service from supplier to customer. Supply chains can be complex, and they can involve a number of different organizations, such as manufacturers, wholesalers, and retailers.
There are two main types of supply chains:
- Direct supply chains: The product moves straight from the manufacturer to the business customer, as when a cement factory sells to a large construction company.
- Indirect supply chains: The product passes through intermediaries such as wholesalers, distributors, and retailers before it reaches the customer, as with most consumer goods sold in Nepal.
flowchart LR
MFG[Manufacturer] --> WH[Wholesaler]
WH --> RET[Retailer]
RET --> CUST[Business Customer]
Figure 2: B2B Supply Chain Flow
The multi-tier supply chain
A firm’s direct suppliers are its tier-1 suppliers. They in turn have their own suppliers (tier 2), who have suppliers too (tier 3). A large manufacturer may have hundreds of tier-1 suppliers and thousands across all tiers. This is the multi-tier supply chain, and it is why a problem far upstream, such as a crop failure or a port closure, can stop a factory that never dealt with the affected supplier directly.
flowchart LR
T3A[Tier 3: Wheat farmers] --> T2A[Tier 2: Grain trader]
T2A --> T1A[Tier 1: Flour mill]
T3B[Tier 3: Resin producer] --> T2B[Tier 2: Film maker]
T2B --> T1B[Tier 1: Packaging printer]
T1A --> F[Biscuit factory]
T1B --> F
F --> D[Distributors] --> R[Retail shops]
Figure 3: A Multi-tier Supply Chain for a Biscuit Factory
Three flows in every supply chain
| Flow | Direction | Examples |
|---|---|---|
| Material | Mostly downstream (to customer) | Raw materials, finished goods, returns upstream |
| Information | Both directions | Orders, forecasts, stock levels, delivery status |
| Money | Mostly upstream (to suppliers) | Payments, credit terms, refunds |
Supply chain management (SCM) is the coordination of all three flows so that the right goods arrive at the right place, at the right time, at the lowest total cost. B2B e-commerce mainly improves the information flow, and better information improves the other two.
4. Why Supply Chains Need Better Information
Many firms still run on legacy systems: older, separate programs for purchasing, inventory, and accounting that do not share data with each other or with partners. Each firm in the chain sees only its own orders, not the real demand of the end customer.
This causes the bullwhip effect: small changes in customer demand grow larger as they move up the chain, because each firm adds its own safety margin to its orders.
Worked example: festival demand for biscuits
During Dashain, shops in a district see biscuit sales rise by 10%.
- Each retailer orders 20% more from the distributor, to be safe.
- The distributor sees orders jump and orders 40% more from the factory.
- The factory, seeing a 40% spike, buys 60% more flour and packaging film.
After the festival, real demand falls back, but the warehouses are full. The factory and its suppliers cut orders sharply, and some workers sit idle. Customer demand only moved by 10%, but the swings upstream were four to six times larger.
If the factory could see the retailers’ actual sales data, through a shared portal or an EDI feed, it would plan for a 10% rise, not 60%. Sharing demand data is the main idea behind collaborative commerce and vendor-managed inventory.
Procurement and Supply Chains in Nepal
Procurement and supply chains in Nepal face real constraints, but digital tools are starting to reduce them.
Constraints:
- Geography and transport: Goods move over mountain roads that landslides block in the monsoon, which makes lead times long and unpredictable.
- Import dependence: Many raw materials are imported through Indian ports and the land border, so a delay at a border point or port affects factories across the country.
- Fragmented retail: Thousands of small shops buy in small quantities, often on informal credit recorded in paper ledgers.
- Limited data sharing: Few firms share stock or sales data with partners, so the bullwhip effect is common.
- Skills: There are few trained supply chain and procurement professionals outside large firms.
Positive developments:
- Government e-procurement: The Public Procurement Monitoring Office (PPMO) runs the electronic government procurement (e-GP) system, where suppliers register and bid online for public contracts. Many suppliers learned online bidding through it.
- Electronic customs and trade: Customs declarations are processed electronically, and the Nepal National Single Window lets traders submit import and export documents online.
- Digital payments: Bank transfers, connectIPS, and QR payments make supplier payment faster and leave a clear record for the three-way match.
- Distributor apps and ERP: Larger manufacturers and distributors use ERP and ordering apps so that retailers can place orders and see stock without a sales visit.
Summary
Procurement is how firms buy what they need. Purchases are classified as direct or indirect goods and as contract or spot purchases, and each combination is served by a different kind of B2B market. Every procurement step creates a document, and online systems automate these documents, including the three-way match before payment. A supply chain is a multi-tier network with material, information, and money flows. Poor information flow causes the bullwhip effect, which sharing demand data can reduce. In Nepal, transport and import constraints are serious, but e-GP, electronic customs, and digital payments are making procurement more digital.
Key Takeaways
- Direct goods go into the product; indirect (MRO) goods keep the firm running.
- Contract purchasing uses long-term agreements; spot purchasing meets immediate needs at market price.
- Each procurement step leaves a document; the PO, GRN, and invoice must match before payment.
- Supply chains have several tiers and three flows: material, information, and money.
- The bullwhip effect magnifies small demand changes upstream; shared data reduces it.
Discussion Questions
- Pick a business you know in Nepal. List two of its direct goods and two of its indirect goods, and say whether each is bought on contract or on the spot.
- Why might a factory be stopped by a problem at a tier-3 supplier it has never dealt with?
- How would a shared sales portal between a distributor and its retailers reduce the bullwhip effect?
Exam-Style Questions
Short answer
- Distinguish between direct goods and indirect goods with examples.
- What is the difference between contract purchasing and spot purchasing?
- What is a three-way match in procurement?
- Define a multi-tier supply chain.
- What is the bullwhip effect?
Long answer
- Describe the steps of the procurement process and the document created at each step. How does B2B e-commerce improve this process?
- Explain the structure of a multi-tier supply chain and the three flows that run through it. Use the example of a manufacturer in Nepal.
- Discuss the challenges and opportunities for digital procurement and supply chain management in Nepal.
