97 5.2 Services Procurement

Objectives

By the end of this section, you should be able to:

1.  Differentiate between the characteristics of service sector and manufacturing sector.

2. Explain the increasing role of procurement in services acquisition.

3. Identify the processing steps and contracting methods for services procurement.

4. Identify the different aspects of service contract administration.

Introduction

Every firm, whether in the manufacturing sector or the service sector, requires services in the course of its operations. Over the past 60 years, since the end of World War II, the service sector has taken on an increasingly important role in the world economy whether it is in developed nations as in USA or newly industrialised nations such as Malaysia. For example, in the USA, jobs in the service sector have increased from just fewer than 50% of the total jobs in the US economy to more than 85% of the total jobs. One-third of this growth has taken place in the last 20 years, as organisations offering financial services, health care, communications, food, insurance, transportation, utilities, hospitality, entertainment and virtually every other kind of service have proliferated.

As reported in The Sun on April 23, 2009, Malaysia is planning to raise the contribution of the services sector to 60% of the Gross Domestic Product (GDP) as the nation progresses to becoming an industrialised nation. The services sector has contributed 55% to the GDP in 2008 of which 47.6% was by non-government services. The sector accounts for 57% of total employment and the country has recorded a surplus in its services trade for the first time in 2007. Likewise, the service sector is growing as a portion of many other progressive nations’ GDP and so is the percentage of expense for services.

If the economy were broken into three segments — manufacturing, service and public — then manufacturing organisations have a higher percent of expense allocated to the procurement of goods than services. In comparison, public/governmental and service organisations have a much higher percentage allocated to service than goods. Service organisations have the highest percentage of expense for services.

The growing GDP and magnitude of the dollars spent to acquire services indicates that a professional Procurement function that attains a reduction of even 5% in overall prices paid would have a major impact on a firm’s profitability. If the focus were placed on lowering total cost of ownership, the contribution from a structured sourcing process and knowledgeable Procurement management would be even greater.

However, it is not only the sheer dollar volume spent to acquire services but also the impact of these services on organisational success that makes the effective acquisition of services a significant and important challenge.

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