D1- Contexts in Procurement and Supply
Key Definitions Concepts in only 20 pages
Essential pass notes
CIPS LEVEL 4 DIPLOMA
By D Dearing © version1.0
Contexts of procurement and supply L4 unit content
1.0Understand the added value that can be achieved through procurement and supply chain management
1.1 Explain the categories of spend that an organisation may purchase
• Definitions of procurement and purchasing and supply
Purchasing describes all those transactional processes concerned with acquiring goods and services, including payment of invoices.It is a narrower term than procurement, describing reactive, tactical processes.
Procurement describes all those processes concerned with developing and implementing strategies to manage an organisation’s spend portfolio in such a way as to contribute to the organisation’s overall goals and to maximise the value released and/or minimise the total cost of ownership. Procurement is a more comprehensive term than purchasing, which is more focused on the tactical acquisition of goods and services and the execution of plans rather than the development of strategies.(CIPS Glossary)
• Typical breakdown of organisational costs represented by procurements of goods, services or constructional works
Many organisations now have as much as 80% of their turnover comprising bought-in goods and services.
In any manufacturing industry the materials cost ranges from 50 to 80% of the product cost, depending on the nature of the product procurement of goods through purchase accounts for about 50% of the money spent by the average industrial enterprise and ranges from 20 to 90% among different industries. Hence, the financial aspect of purchasing is of great importance.Outsourcing is increasing as firms concentrate on their core capabilities/ competences
Profit-Leverage Effect- a reduction in purchase spend increases profit more than an equal sales increase- A decrease in purchasing expenditures directly increases profits before taxes
• Stock and non-stock procurements
Buying for stock
Stock refers to additional materials and goods that are purchased as back up or spare resources. It helps in times of supply shortage or if a supplier has delivery problems, therefore reducing the risk of stopping the production process. In recent years, holding stock has been seen as a detrimental activity that adds cost to the organisation but little value. As such, the concept of 'stockless purchasing' has become increasingly popular. Nevertheless, every organisation holds something in stock, even if it just items of stationery.
Buying for production
Such items are bought to support a specific production schedule. This might be continuous or batch. Materials / goods are therefore bought against a known demand and once that demand has been satisfied there should be no left over (redundant stock).
Buying for production requires direct links with production schedules and accurate demand forecasting.
The study guides also discusses stock to order- where materials are only procured as required to fulfil orders received from customers. Example jobbing manufacturers, construction- which requires specific supplies
• Direct and indirect procurements
Direct spend refers to purchases of goods and services that are directly incorporated into a product being manufactured. Examples include raw materials, subcontracted manufacturing services, components, hardware, etc.
Indirect spend refers to purchases of goods and services that are not directly incorporated into a product being manufactured. Examples include computers, safety goggles, printed forms, office supplies, janitorial services, equipment, furniture, bags and packaging, wrapping supplies, store fixtures, receipt and point of sale supplies, floor cleaning products, building service and facilities maintenance supplies, etc.
• Capital purchases and operational expenditures
The most frequently quoted differences relate to: destination (point of use), the length of their lifecycle and cost.
Capital expenditure is sometimes referred to as ‘investment expenditure’. In general they are one-off items which form part of the company’s asset base. Examples include: premises, plant, machinery, heavy equipment and hardware and / or infrastructure. Purchasing provides support rather than a lead role and financing the expenditure is an important consideration.. It MUST yield a benefit for a period of more than one year
Operational expenditure is referred to as ‘revenue expenditure’ and relates to day-to-day spend that the organisation needs to perform its everyday operations. Operational expenditure includes: raw materials, professional services, energy, training, marketing, travel, facilities management and maintenance. Such items are frequently purchased and purchasing takes the lead role in the acquisition process.
• Services procurements
The characteristics of services that make them distinctive are as follows.
Intangibility: refers to the lack of substance that is involved in service delivery. Unlike goods there are no physical aspects, no taste, no feel etc. This can inhibit the choice of a customer to use a service, as they are not sure what they will receive.
Inseparability: a service often cannot be separated from the provider of the service. The creation or the performance often occurs at the same instant that a full or partial consumption of it occurs. Goods must be produced, then sold, then consumed (in that order). Services are only a promise at the time they are sold; most services are sold and then are produced and consumed simultaneously.
Variability: many services face a problem of maintaining consistency in the standard of output. Variability of quality in delivery is inevitable because of the number of factors that can influence it. It may prove difficult or impossible either to attain precise standardisation of the service offered or to influence or control perceptions of what is good or bad customer service.To minimise the impact there is a need to monitor customer reactions.
Perishability: services cannot be stored. Seats at a concert, provision of a lecture, services of a dentist consist of their availability for periods of time. Perishability presents specific marketing problems. Meeting customer needs in these operations depends on staff being available as and when they are needed.
Ownership: services differ fundamentally from goods in that purchase does not result in a transfer of property. The purchase of a service only confers on the customer access to or rights to use a facility — not ownership. This may lower the customer’s perception of the service’s value.
Services involve a higher degree of customer contact and presentation than with the selling of a product. The physical delivery of a service is less of a problem as the service element is intangible.
1.2 Analyse the different sources of added value in procurement and supply
• The five rights of procurement
1.The right quality: quality as ‘conformance to specification’ and ‘fitness for purpose’, the costs of getting quality wrong, specifications and quality, approaches to managing supplier quality
2.The right quantity: determining the quantity required, factors influencing the choice of how much to buy, minimum order levels and values
3.The right place: in bound transportation of goods to the delivery point, issues arising from international transportation
4.The right time: internal, external and total lead time and factors that influence lead time, expediting, measuring supplier delivery performance
5.The right price: the different types of cost, and where purchase price fits in, factors affecting how a supplier prices their products or services
• Achieving the right price for procurements from external suppliers
The right price: the different types of cost, and where purchase price fits in, factors affecting how a supplier prices their products or services
• Defining total life cycle costs or the total costs of ownership
WLC is a technique used to establish the total cost of acquisition and ownership. It is a structured approach which addresses all the elements of cost and can be used to produce a spend profile of the product over its anticipated lifespan.
• Achieving quality, timescales, quantities and place considerations in procurements from external suppliers
Quality- approved suppliers, clear specifications, ISO9001, kaizen etc
Quantity- ROL systems, use of MRP,
Time- understanding supplier lead times, agile supply chains,JIT/Lean, expediting, use of liquidated damage clauses.
• Other sources of added value such as innovation, sustainability and market development
Innovation involves the conversion of new knowledge into a new product, process or service and the putting of this new product, process or service into actual use-Johnson & Scholes 2010. From a procurement viewpoint this can be– a change in the procurement process itself. Indeed, innovation in procurement processes may be an essential precursor to the active use of public procurement to stimulate innovation in suppliers and the wider economy. It can also be in Public procurement “the purchase of goods or services that do not yet exist” (European Commission 2005).
Sustainable procurement as "a process whereby organisations meet their needs for goods, services, works and utilities in a way that achieves value for money on a whole life basis in terms of generating benefits not only to the organisation, but also to society and the economy, whilst minimising damage to the environment" (Department for Environment, Food and Rural Affairs, 2006). Sustainable procurement considers the environmental, social and economic consequences of design, materials used, manufacturing methods, logistics and disposal. Sustainable Development is defined as “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs”. Brundtland Report:
• Defining value for money
VfM is defined as the optimum combination of whole-of-life costs and quality (or fitness for purpose) of the good or service to meet the user’s requirement. VfM is not the choice of goods and services based on the lowest cost bid. (HM Teasury 2006)
It is also often described in terms of the ‘three Es’ – economy, efficiency and effectiveness.
1.3 Compare the concepts of procurement and supply chain management
• Definitions of procurement, supply chains, supply chain management and supply chain networks
“A supply chain is that network of organisations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate customer or consumer”.Lysons 2012
Supply Chain Management
The CIPS (Positions on practice: 8) defines supply chain management (SCM) as
"the continuous planning, developing, controlling, informing and monitoring of actions within and between supply chain links so that an integrated supply process results which meets overall strategic goals."
Alternatively, SCM is the:
"process of strategically managing the movement and storage (if necessary) of materials, parts and finished product from supplies, through the manufacturing process and on to customers or end user, as well as the associated information flows"(Yeo and Ning, 2002:256).
Supply Chain Networks
According to Christopher (1994), a supply chain is “a network of organizations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate customer.”
• The length of a supply chain
The supply chain may be long, with numerous tiers, or short, with few tiers. As an example, the network structure for bulk cement is relatively short. Raw materials are taken from the ground, combined with other materials, moved a short distance, and used to construct buildings
• Definitions of logistics and materials management
Materials Management
“is the planning, organisation and control of all aspects of inventory embracing procurement, warehousing, work in progress and distribution of finished goods”.
Logistics is;
“The total management of the key operational functions in the supply chain – procurement, production and distribution. Procurement includes purchasing and product development. The production function includes manufacturing and assembling, while the distribution function involves warehousing, inventory, transport and delivery”.-Lysons Farrington 2012
• Comparisons of supply chain management with procurement
“procurement is a sub leg of the modern Operational environment of the Company's Supply Chain Operations" that have the responsibility of managing the Supply chain with in the operation, The sub directives of the supply chain may include. 1. Materials Sourcing, 2. Procurement, 3.Distrubution, 4.Inventory Control, 4.Warehouse management, 5.Production Materials Flow Planning est., 6.Vendor/Supplier Sourcing, Materials Supply Contracting, in fact any activity regards Materials and service supply may fall under the umbrella of "Supply Chain Management”
1.4 Differentiate the stakeholders that a procurement or supply chain function may have
• Defining stakeholders
A stakeholder is a person who has something to gain or lose through the outcomes of a planning process or project. Stakeholders can be organisations, groups, departments, structures, networks or individuals.
The best definition of this is by Freeman, who in 1984 defined a stakeholder as:
‘Any group or individual who can affect or [be] affected by the achievement of an organisation’s objectives’.
• Examples of stakeholders for a procurement or supply chain function
End users, suppliers, marketing, purchasing, engineering, finance etc.
Internal stakeholders exist within the boundaries of the organisation.
Connected stakeholders are those outside the organisation – such as suppliers, partners, customers and shareholders – who have a direct interest in the organisation’s activities.
External stakeholders include national and local government, the public and pressure groups.
• Mapping stakeholders for a procurement or supply chain function
You can use the grid (Mendelow) to organize/map stakeholders according to their interest and power.
Influence = Power x Interest
Stakeholders with high power and interests aligned with the purpose are critical to achieving your purpose.
Stakeholder mapping in 4 steps
1. Define your stakeholders
2. Analyse stakeholders by power and interest –to establish their importance/influence.
3. Plan Manage stakeholder communications and reporting
4. Engage with your stakeholders
2.0 Understand the stages of sourcing processes in creating added value outcomes that can be achieved with suppliers
2.1 Explain the main aspects of sourcing processes
• Defining the stages of a generic sourcing process from identification of needs to contractand supplier management
Identify the need/ Define the need/specification/ Develop the contract/ Source the market/ Appraise the suppliers/ Invite quotes/tenders/ Analyse quotes/ Negotiate best value/ Award the contract/ Contract management
• Analysis and planning, tender management and contract management
Circumstances in which a competitive tendering exercise might not be the best approach to making a purchase.
• Urgency:
• Commercial confidentiality or national security
• Value of the purchase: if this is insufficient to justify the costs and time of tendering, negotiating with one supplier might be better.
• Production costs cannot be measured accurately:
• Price is not the only criterion for supplier selection and contract award.
• Tooling or set-up costs are major factors:
• Intellectual Property Rights and monopoly: these might prevent meaningful competition because there is only one supplier.
When is it appropriate? Past question-Dobler and Burt have suggested the following 5 conditions for the appropriate use of competitive tendering;
1.The value of the goods or services to be purchased must be large enough to justify the expense for both parties
2.The specification needs to be clearly defined for both buyer and seller alike.
3.The market must comprise an adequate number of suppliers.
4.The suppliers must be technically qualified and competent to fulfil the requirements. Similarly they must actually want the business.
5.There must be sufficient time to allow the tender process to be fulfilled.
Benefits? Transparency etc. competition- audit trails etc.
• Differentiating between pre contract award and post contract award stages
The following are typical pre-contract activities:
•Assembling/analysing the views of stakeholders
•Market and Spend analyses
•Developing a supply strategy (including a risk assessment/exit strategy)
•Drafting specifications and agreed requirements
•Pre-qualification of potential suppliers if appropriate
•Drafting and circulating the Invitation to Tender documentation
•Evaluating tenders and possible supplier audits/post-tender meetings
•Awarding of contracts
If this is a contract renewal, in addition to the above, other activities will include:
•Reviewing the supplier performance over the contract period
•Analysing stakeholder perceptions of supplier performance.
•Requesting the supplier’s contract renewal proposals or the decision to re-tender the business
Post-contract activities include:
•Administration of the contract, including any subsequent agreed contract changes
•Continuous assessment of performance and re-assessment of risk within the contract
•Handling of stakeholder complaints
•Chairing any agreed supplier/buyer contract review meetings
2.2 Analyse the main stages of a sourcing process
• Stages of the sourcing process that relate to defining needs, creation of contract terms, supplier selection, contract award and contract or supplier management
Need to explain what happens at each stage see other sections.
• The purpose and added value that is created by each of the stages of the sourcing process
‘Value-added’ may be defined as the achievement of financial savings or benefits that are not based on changes in unit price. Examples include:
•Changing the specification of the product or service
•Substituting lower cost inputs
•Improving operational efficiency.
P2P /E-procurement systems enable inputs to be bought and paid for electronically. The main saving is time as purchasing officers can procure inputs more quickly
In detail the Purchasing Steps/stages/cycle
For example defining the needs- specification – the benefits or value added are that they :
■ Communicate to professionals in the supply management department what to buy.
■ Communicate to prospective suppliers what is required.
■ Establish the tangible goods to be provided.
■ Establish the intangible services to be provided, such as warranty, maintenance, and
support.
■ Establish the standards against which inspections, tests, and quality checks are made.
■ Balance the specification goals of individual departments, relevant suppliers, desired