cips l3m2 - Chapter 1

3 possible scenarios a buyer can do when making a decision to procure an item

straight rebuy

Modified rebuy

New purchase

Straight rebuy

What an org has bought before

Existing and agreed spec with existing supplier from approved supplier list

Routine purchase like maintenance, repair, op, stationery, raw materials

Low value

Call off from existing contract / framework agreement

Modified rebuy

product/service that has been sourced before but requires a slight change prior being rebought.

Example: attempt to get lower price

Instead of buying from multiple suppliers get from one and get volume discount

Change in regs product needs to be modified

Commonly used for:

Components for production

Consulting services

Software ie number of users

New purchase

A completely new requirement

For example:

New service

Tech changes and new equipment needed

Need to understand new requirements completely, write the specification, research the market and decide key capabilities suppliers must have. Write tender, manage process, negotiate and select supplier.

What’s a business case

Aims to gain approval for a project or activity requiring significant org commitment by clearly demonstrating how it meets the needs of the business and its benefits.

It will need to demonstrate the activity is consistent with your strategic objectives and how the intended activity will benefit the need of the business.

For procurement could include increased competitive advantage, reducing lead times or cost reduction.

Implications of a business needs on type of purchase

• the level of effort required

• the problem solving skills needed

• the degree of risk to the org

• the current level of experience of buying the product/service

• the number of tasks involved

• the amount of info required

Developing a business case for a new or modified rebuy

A business case is the justification for undertaking an action, its purpose is it seek approval and possibly finance the recommended action plan.

It should clearly identify the opportunity it seeks to exploit or problem it’s looking to solve, the benefits of the action, any risks and how they can be mitigated, the timescales for completing the project, the roles and responsibilities of who’s involved and why something needs to be done not just what needs to be done.

Why is a business case prepared for in procurement?

When a contract is coming to an end and a product or service needs to be procured

When cost reductions need to be made which requires change to the way the business operates

What does a business case include?

1. An executive summary

2. What our long term strategy considerations are

3. The business need/ requirements why do we have it

4. Price and cost analysis

5. Market analysis - what’s going on

6. Suppler analysis - what’s going on

7. Tech development

8. Vulnerability analysis

9. Sourcing objectives

10. Implementation plan

11. The competitive advantage it will deliver

identify business needs - RAQSCI

Regulatory - legal requirements

Assurance of supply - continuing supply of goods and services when required based on capacity, financial stability and risk

Quality - consistency, repeatability and how fit for purpose the procured goods/services are

Service requirements - the way services are supplied, flexibility, availability or support such as help desk

Cost - cost and price, target costs, whole life costs, benchmarked prices and continuous improvement

Innovation - finally, look for innovation, particularly in terms of improving customers experience like emerging tech

Why is the order of the RAQSCI important

Focuses attention on potential trade-offs that may have to be made

A trade-off is

a decision-making situation where one aspect, quality, or benefit is sacrificed to gain another, often due to limited resources like time or money. It involves balancing competing alternatives where improving one factor (e.g., speed) results in the detriment of another (e.g., quality or cost).

Requisition

An internal document raised by a user to communicate to procurement the need to buy the product or service specified

Annual planning cycle

Planning involves number of activities such as analysis of opportunities, setting aims, exploring options, producing detailed plans and reviewing the plans against expectations

R: straight rebuy

Procurement task is straightforward- raising a requisition and placing a PO. Testing and challenging the business need shouldn’t be done as part of annual planning cycle not every time it’s ordered

4 ways to know if a purchase is a straight rebuy

1. A list of approved suppliers exists and t&cs have previously been agreed

2. New suppliers are not considered

3. Process for ordering is procurement approved and routine

4. Buyers have relevant buying experience and require little to no new information

Modify rebuy - value in revisiting the business need, particularly if it is part of cost reduction plan. What is the best way to do this?

Create a sourcing strategy

10 steps of sourcing strategy

1. What do we need to buy? - define the scope of spend for the strategy and requirements

2. 2. What is bought where? - assess the current spend

3. Who offers what? - assess the supply market

4. How much cost? - analyse total cost

5. Who can we buy from? - identify suitable suppliers

6. Take into consideration the demand and supply situation, where to buy what? - Develop a strategy

7. Tender exercise or negotiation with suppliers? - decide the route to market

8. Decide how to implement the new supply arrangement

9. Decide how to track

10. Define the trigger events that will restart the process

3 questions to ask to help define the scope of strategy

1. Are there any geographical boundaries that need to be considered?

2. What time period should the strategy cover?

3. Are there any org boundaries that need to be considered?

Remember: when creating your sourcing strategy

What is a business case?

A justification for undertaking an action. Should explain why something needs to be done and not just what needs to be done. Its purpose is to seek approval and possibly finance for the plan of action. It Captures the benefits of the proposed action, any risks involved and how they can be mitigated, timescales for completion of project and roles and responsibilities

Name 3 reasons why procurement might need a business case

1. A contract is coming to an end and the product/service needs to be procured again

2. Cost reduction needed

3. An alternative product/service has been found that potentially delivers a number of benefits

What 2 groups can problems be divided into

1. Closed problems - when something happens that should have not happened

2. Open-ended problems - something is stopping the achievement of an objective or blocking progress

Examples of closed problems

1. The price of a key raw material suddenly increases and makes a product less profitable

2. The level of buying off-contract increases quickly and incurs unnecessary cost for the org

3. An employee is under performing and not achieving the expected results

4. An unusual high level of purchase invoice errors

Examples of open-ended problems

1. Agreement from senior management is required for an additional budget to hire people in the new org structure

2. There is an emerging monopoly in a key market and competition needs to be simulated

3. A 10% cost reduction is needed across all purchases to meet new objectives

4. An individual wants to start a category management program but the org will not cooperate

Buying off-contract

The purchase of an item without a contract when a contract for that item already exists

A way of identifying a problem

Use 5 whys analysis. Ask why 5 times to identify the problem and find a solution

How are closed problems often identified?

Using performance monitoring systems. Any variance between target and result indicates a problem

Kepner-Tregoe approach

Technique for defining closed problems.

Answer a series of questions about the situation

How do you analyse your data you have collected

Building an issues map (sticky notes and arrow heads from issue to issue that results ie we don’t train staff > less motivated staff)

SCAMPER

To generate options through a checklist

Substitute

Combine

Adapt

Modify

Put to other uses

Eliminate

Reverse

RACI Matrix

Define roles and responsibilities

Responsible

Accountable

Consulted

Informed

5 elements that appeal to senior management for business case

1. Return on investment- finance wellbeing. Profit and asset value (value of what the org owns) is the ROI

2. Time to market - first to market gets the largest market share, particularly true where product life cycle are short

3. Customer satisfaction - acquiring new customers can be costly so keeping existing customers loyalty to key to increasing sales and reducing costs

4. Improving productivity- increasing output for the same input or getting the same output but less input. If an org can achieve this result is better profit as it can either sell more with same costs or reduce costs with same level of sales.

5. Managing risk - risk can never be eliminated but can be managed. Show how you can reduce risks

Product life-cycle

The stages relating to the development of a product from scratch.

Introduction

Growth

Maturity

Decline

1.2 Market data

Information is power, we gather information to enable us to become more knowledgeable, the more knowledgeable the better we can meet business needs

Desk research (Secondary Research)

A way to collect information already available from published sources.

Local business reference library

Trade associations

Official statistics on the economy, population and social trends shown on UK statistics authority website

Reports in business magazines

Local authorities & chamber of commerce for local info

The internet

Commercial publishers of market reports like keynote can be purchased

Own data - analysing sale records etc

Field research (Primary research)

Collection of original or raw data from a questionnaire from customers.

Can be quantitative or qualitative

More appropriate for strategic and important procurements.

Quantitative data

Is statistical. Numerical info such as size of market, how many competing businesses supply it

Qualitative data

People’s thoughts and feelings like attitude towards brands or why they purchase the product

R: talking to customers and monitoring their buying habits and how they behave is one of the best methods of market research

Pricing strategy

Factors an org will consider when selling an end product or service

Example of pricing strategy:

Cost-plus

Production costs are calculated and a margin added for profit

Example of pricing strategy:

Marginal

Once all fixed costs have been recovered the cost of any extra sales is the only variable cost associated with the product/ service being sold. This permits pricing at below the total cost to be profitable

Example of pricing strategy:

Going rate

Pricing a product at a similar level to the competition

Example of pricing strategy:

Premium

Pricing products/services high because market is prepared to pay for it. Like premium brands

Example of pricing strategy:

Buyer-based

Pricing at a level the buyer will pay

Example of pricing strategy:

Discriminating

Such as off peak, special rates for child or pensioner

Example of pricing strategy:

Captive

Pricing high because the buyer has no choice but to buy from the supplier relationship pricing. Price is aimed at maintaining a long term relationship with a buyer

Open-book costing

Where a supplier provides complete transparency of the costs associated with producing a product or service, which buyer can analyse to ascertain of the final cost price is fair

RFI

Request for information- a document used to gather info about suppliers and their capabilities prior to a formal procurement process

Just for information- good way to get information before you go to market

Used early in procurement process

Testing the market

RFQ

Request for quote - an invitation to suppliers to bid on specific products or services

RFP

Request for proposal - a document used to canvass potential solutions from suppliers when the specification is still unclear

Direct costs

Costs that are directly associated with the production of a product or service like direct materials or direct labour

Indirect costs (overheads)

The general running costs of the org - these costs cannot easily be attributed to specific products or services (also known as overheads)

Value chain

A business model that details the set of coordinated processes, people and resources within an org which generates corporate value

Primary activities in porters value chain model (direct costs)

1. Inbound logistics - interactions with suppliers and their capabilities prior activities of receiving storing and distributing supplies internally

2. Operations - all the activities which turn inputs into goods and services which can be sold to customers

3. Outbound logistics- activities that receive products from operations, store them and deliver them to customers

4. Sales and marketing- activities that find and keep customers, make them aware of the products and services on offer and determine prices

5. Service- activities that maintain products after sales and achieve customer care

Secondary activities in porters value chain (indirect costs)

Firm infrastructure

HR management

Tech development

Procurement

Fixed costs

Business costs that remain the same irrespective of the volume of activity of a business

Variable costs

Costs that change in proportion to the output of the business. They increase as the volume of the product produced increases. As sales increase variable costs increase. As sales go down variable costs go down.

Total cost of output

Fixed and variable costs together your total cost

Semi- variable costs

A cost that is made up of both fixed cost and a variable cost

Example: an org first formed may not be large enough to justify a full time accountant as a permanent employee but as business grows there will come a point this is essential.

2 ways to produce estimated costs and budgets

1. Break even analysis

2. Procurement cost analysis

Break even point

The level of output of a business at which revenue equals total costs.

Point where lines cross over when total cost and sales revenue are plotted on same graph. It’s the point where sales revenue is equal to value of costs

How do you calculate the break even point * need to look up

The break even point can be stated as the fixed cost * by marginal profit

R: knowing the break even point helps you to better understand a suppliers price offer. If an offer is below its total costs then you need to understand why. Is it because the supplier is sustainably above its break even point or is it because it has too little business and needs to keep the workforce busy? If the latter is this sustainable or does it create a supply risk for you?

Procurement cost analysis

The analysis of the cost of the individual materials, components and activities that make up a purchased item So that strategies can be developed for reducing costs and at the same time improving supplier relationships

R: by carrying out PCA you can answer a key question that is often asked of procurement - is the price paid for goods or services the best it could be? It’s impossible to answer without some kind of benchmark analysis

Example questions:

Which costs are both necessary and legitimate in manufacturing this product or delivering this service?

Are the values for these necessary cost items reasonable?

What are the 4 segment models for PCA

• Strategic - ongoing purchase and strategic alliance

• Leverage - ongoing purchase and arms length

• Critical projects - one off purchase and strategic alliance

• Low impact - one off purchase and arms length

PCA techniques for each quadrant

• Strategic = Continuous improvement techniques

• Leverage = Cost analysis techniques

• Critical = Life cycle costing techniques

• Low impact = price analysis techniques

Leverage focus - cost analysis techniques include:

• Cost estimating

The process for arriving at the approximate cost of a product or service

Leverage focus - cost analysis techniques include:

• Value analysis

The process of analysing costs to identify cost reduction and cost control opportunities to ensure that a product or service production costs are as efficient as possible in order to max profit

Leverage focus - cost analysis techniques include:

• supplier cost breakdown

Where the supplier provides a breakdown of its costs and products

Leverage focus - cost analysis techniques include:

• should cost analysis

A technique used by procurement for determining what a purchased product or service should cost based on the materials etc

Leverage focus - cost analysis techniques include:

• total cost modelling

A process which uses algorithms designed to arrive at the provable cost of a product or service

Arms length relationship

An org should apply every tool available to build a case for the supplier reducing its price based on the organisation analysis of costs

Strategic suppliers

Those who have an integral role in an orgs value chain over and above the provision of a service or product.

Alliances need to be handled with care.