CIPs L4M4 - Ethical & Responsible Sourcing

Ethical & Responsible Sourcing

Sourcing Covers

supplier analysis, make and buy decisions, consideration for outsourcing and evaluating associated risks

Sourcing is...

the location, acquisition, and management of vital inputs required for an organisation to operate. This includes raw materials, component parts, products, labour in all its forms, locations and services

2 types of Sourcing

• Tactical

  • Low level decision making

  • High profit, low risk items

  • Short Term projects

  • Transactional relationships

• Strategic

  • Top level decision-making

  • High profit, high risk items

  • Long - term projects

  • Collaborative relationships

Tactical Operating Sourcing

Low Level decision making
High profit, low risk terms
Short Term projects
Transitional relationship

Strategic Sourcing

Top Level decision making
High profit, high risk terms
Long term projects
Collaborative relationship

Factors that represent value to a procurement organisation when sourcing

Price -
Delivery - Lead time should be acceptable
Quality - Goods should be fit for purpose & meet specification
Ethics - Suppliers should follow ethical codes of practice & treat workers fairly
Sustainability - Suppliers should be sustainable plus promote environmental sustainability
Availability - Product need to be available, price become irrelevant if product is not availabel.

11 Stages of sourcing process (Novack/Simco)

Identify needs

Define user requirements

Decide whether to make or buy

Identify purchase type (new, modified, straight re-buy)

Carry out market analysis 6-Identify potential suppliers

Pre-screen suppliers & create a short list

Evaluate shortlisted suppliers

Supplier selection

Final product or service delivered

Evaluate supplier performance

CIPs Procurement Cycle

Understand the need,

Market/Commodity,

Develop Strategy,

Pre-Procurement,

Develop Documentation,

Supplier Selection,

Issue ITT/RFQ,

Bid/Tender, Contract Award,

Warehouse/Logistics,

Contract Performance,

Supplier relationship Management /Supply Chain Management,

Asset Management

What is Outsourcing?

Outsourcing means contracting an external supplier to manage and run a function that was previously handled in-house

Reason's for outsourcing

Financial

Technological

Resource

Skill Set

Improved Focus

Reduce Risk

Porters Five Forces - how competition can be examined in a market place

Threats of new entrants

Bargaining power of suppliers

Threat of substitutes

Bargaining power of buyers

Rivalry among existing competitors

Make Decision

Strategy of the organisation is to be self-sufficient

Enhanced control over processes

Improved quality control

Workforce remains stable

Continuity of supply

No suitable ‘buy’ suppliers

Economies of scale available

Reduced risk

Easier to amend volumes and specifications

Buy Decision

Specialised Knowledge available

Technological advancements available

Small volumes are not cost effective for make

Cheap to buy than manufacture/deliver

‘Make’ organisation does not have the machinery required

Economies of scale available

No capacity in house

Less inventory

Reduced overheads

Costs associated with all forms of sourcing

Procurement professionals salary Resources, such as computers / telephones

Training Development of policies & procedures Time

Kraljic Matrix

Profit /Supply Impact - Low Low - Non Critical Items
Profit / Supply Impact - High Low - Leverage Items
Profit / Supply Impact - High High - Strategic Items
Profit / Supply Impact - Low High - Bottleneck Items

Is outsourcing recommended for core functions?

Yes
No
Maybe
It doesn't matter

Four Outsourcing Decision Matrix

Outcome - Eliminate - These functions contribute little to the organisations strategy so their value should be questioned and they may be eliminated.
Outcome -Form Strategic Alliance - Some functions are strategically important they can contribute little to the operation performance. These can transition to a partner but the buying organisation keeps an element of control
Outcome - Retain - Functions which are strategic and operationally important should not be outsourced.These will be classed as core functions and should stay in the control of the company
Outcome - Outsource - Functions that are operationally important but are not key to the strategy can be outsourced with minimum risk

Areas that are frequently outsourced

IT Support

Catering Cleaning

Marketing

Social Media

Human Resources

Accountancy and Payroll

Techniques that help provide a list of potential suppliers

Previous Knowledge
Recommendations
Internet research
Market publications
Trade Shows
Networking

PQQ = Pre-Qualification Questionnaire

Seeks to answer the following -
Is the supplier financially stable?
Does the supplier have the relevant experience & accreditations to carry out the contract?
Does the supplier have the capacity, control and commitment to manage the contract?
Does the supplier follow ethical and sustainable practices?

Carters 10 C's

Competency

Capacity

Commitment

Control

Cash

Cost

Consistency

Culture

Clean

Communication

ITT

Invatation to tender

RFQ

Request for quotations

Dangers of not performing supplier pre-qualification checks or process appraisals

Poor Quality

Failed Delivery

Breach of Contract Ethical

Concerns Environmental Damage Stakeholder Dissatisfaction Financial

Concerns Reputational Damage

Macro Environments - Steepled

Social Technological Economic Environmental Political Legal Ethical Demographics

Qualitative

Measures terms of quality

Quantitive

Measured in terms of numbers or quantity

In order for KPI's to be effective they need to be SMART

Specific

Measurable

Achievable

Relevant

Timebound

Out sourcing risks

Loss of control

Supplier reliance

Confidentiality

Quality

Intellectual property

Reputation Loss of expertise

Inflexibility

Cultural differences

Benefits linked to market development via the growth of outsourcing

Cost saving to the developed country

Ability to grow the organisation due to outsourcing non-core functions

Increased employment in developing countries Ethical and sustainable behaviour promoted in developing countries

TUPE

Transfer of Undertakings (Protection of Employment)

2 main advantages of TUPE regulations

Continuity of supply
Continuity of employment for the workers

Single Sourcing

Where one supplier is contracted by a buying organisation to supply all the needs for an item

Single Sourcing is used when..

There is a monopoly supplier (the buyer has no choice)
Economies of scale can be achieved
Order quantities are small
One supplier offers outstanding value compared

Duel Sourcing

Where two suppliers are responsible for supplying the needs of a single item to the buying organisation

Duel Sourcing is used when..

The is a risk that one of the suppliers is not able to supply
A product or service is critical to an organisation

Multiple sourcing is used when..

Supplier competition is vast
The supplier relationship is not business critical
Constant supply is critical

Single Sourcing Advantages

Maximum Leverage with suppliers giving them full volume
Strong Relationship
Strong Commitment
Good communication
New product development
Innovation
Confidentiality
High Trust
Economies of scale
Cost Effective

Single Sourcing Disadvantages

Risk of failure to supply
Price may inflate if no competition and monopoly supplier is used
Restricted Options
Over reliance on supplier

Duel/Multiple Sourcing Advantages

Easy to drive down cost

Switching between suppliers is easier

Wide knowledge of expertise

Low risk of failure to supply

Duel/Multiple Sourcing Disadvantages

Transactional relationship
Lack of supplier commitment
Lack of economies of scale
No supplier loyalty

Generic Tendering Process contains

Planning = Budget,project and procurement plans, market studies Initiation (Tender) = Tender notices,

Specifications, Values, Enquires, Live Items Award = Details of award, bidder information, bid evaluation, values

Contract = Final details, signed contract, amendments, Values Implementation = Payments, Progress updates, Location, extension, amendments, completion or termination info

Tender Documents contain

Company information,

Specifications

Contract requirements - including terms and conditions

Deadline for submission

Approaches to tender

Open

Restricted

Negotiated

Competitive dialogue

Innovation Partnership

Competitive procedure with negotiation

Negotiation five possible outcomes

The buyer wins supplier loses

The supplier wins and the buyer loses

The buyer wins the supplier wins

The buyer loses the supplier loses

Neither the buyer or suppliers wins (a compromise)

Four stages of the negotiating process

Preparation
Information exchange
Bargaining
Closing

Intra-company Trading

Where business is conducted between two or more companies that are owned by the same entity.
This can be between divisions both in current location or part of a global departments. It often occurs when departments have their own budgets.
Main areas are stationary or consumables

Centralised Procurement

A structure where procurement for the whole organisation is carried out by a centralised function often from one central location

Devolved Procurement

Devolved or centralised procurement is a purchasing structure whereby individual locations are responsible for their buying activity.

Transfer Pricing

Amounts of money payable between divisions of the same organisation that conduct business with one another, common transaction types labour or products

OECD

Organisation for Economic Co-operation and Development - regulates international tax laws

Advantages of Transfer pricing arrangements

Global tax bills
Simplified internal accounting processes
Entire organisations can have fixed pricing on products and services
Divisions can easily be evaluated based on spend
No physical money needs to be transferred between divisions

Disadvantages of transfer pricing arrangements

Some countries economies can be impacted negatively
Careful & Strict monitoring is essential to avoid tax evasion
Sourcing local may cot more
Negative effect on the local economy
Inter-organisation competition

Benefits of International Sourcing

Reduce Costs
Exposure to world class technology
Availability of Materials
Improve Quality
Wider Selections of suppliers

Risks of International Sourcing

Extended Lead-times

Importation / Exportation Rules & Regulations Currency Exchange Fluctuations Payment Methods and guarantees Cultural Differences

Language Barriers

Quality issues

Different Standards

Ethical Behaviour Logistics problems Infringement of intellectual properties Conflict resolution

Selection Criteria

Quality Assurance
Environmental awareness and sustainability
Technical capability
Systems Capability
Labour Standards
Financial Capability
Credit rating Scores

Performance Specification (outcome focused)

This specification will state what the product or service should do but not give instructions on how this is to be achieved. The supplier can deliver the service or product however they think best

Conformance Specification

This specification provides a structured and details on how the product or service must be made. Examples of conformance are recipes or chemical formula

Continuous Improvement

Continuous Improvement comes from a Japanese theory known as Kaizen.
The process involves four stages - Identify, Plan, Execute, Review

Seven Waste Changes within the supply chain

Motion
Inventory
Over-Production
Defects
Over - processing
Transportation

Total Quality Management (TQM)

Focus on the consumer
Continuous Improvement
Quality Improvement
Accurate Evaluation
Involve All Employees

Main objectives of the financial ratio analysis

1: To track company performance in order to track trends & raise awareness of any potential concerns

2: To compare the suppliers performance against those of other organisations in order to gain competitive advantage

Ratio Analysis

Profitability

Liquidity

Gearing

EBITDA

Earning Before Interest, Tax, Depreciation and Amortization

Gearing Ratio

High Gearing ration means a lot of long term debt which may present long term risk

Low Gearing means the organisation relies on equity capital & should have less difficulty copying during tough economic times

Liquidity Ratios

Current Ratios = Total current assets /Current Liabilities

Acid Test = Total current assets - stock(inventory) / current liabilities

Gearing Ratio

Long term debt +Short term debt +bank overdrafts / shareholders equity

or in simple terms

Long term debt / Shareholders equity

Return on Investment Ratio (ROI)

ROI ratio

Net Income / Total Assets

Reasons for ratio analysis limitations

Data is historical (not live)

Current Rates of inflation not factored

Stock inventory could be high at point of analysis due to seasonal variances

Operational changes - has the business made any large investments

Current economic status

Ratios only provide numerical data

Accountancy methods may be calculated differently between companies

If by using the different ratios they provide different results, this can lead to conflicting information

Typical Award Criteria

Price

Total life-cycle cost

Technical merit

Added Value

Systems and Resource

Price due dilligence

Exchange rate

Batch quantities quoted for

Is carriage included?

Are taxes included?

What are the payment terms? 7days, +10%

Pricing mechanism used - fixed costs, cost-plus

Total Cost of Ownership

Acquisition

Tooling

Insurance

Operating

Maintenance

Training

Storage

Disposal

Added Value Solutions

Innovation

On - Time & in full deliveries

Strong supplier relationships

Sustainability

Good Ethical practices

Corporate & Social Responsibility Policies

Shorter Lead times

Improved Quality

Support and Training

Good Reputation

Balancing commercial and technical aware criteria

Technical - Specification, Delivery, Quality

Commercial - Cultural fits, Ethical standards, Sustainability

Pareto Principle

A theory that states that 80% of events are generated from 20% of causes, you can also look at this as 80% of supplier spend is generated through 20% of suppliers

ABC Principle

Suppliers defined into A, B & C

A suppliers = 20% of spend

B suppliers = smaller percentage of spend due to volumes of supplier

C suppliers = Majority of suppliers but represent the smaller amount of spend

A, B, C Suppliers

A = Strategic

B = Closer Tactical

C = Transactional

Indices (Index’s) Used to measure suppliers

Stock Markets aka FTSE 100 - Value of public limited companies

GDP Gross Domestic Product - Monetary value of goods and services manufactured or supplier in a financial period

PPI Producer Price Index - Average changes in price that a producer would receive in return for its goods or services

CPI Consumer Price Index - A weighted measure of an average price of goods in a basket purchased from a consumer

Commodity Indices - A value of a particular commodity as a point of time such as oil, steal, wheat

SBLI Small Business Lending Index - An indicator of small business lending

CIPs Purchasing Manager Index - Set of facts for current industry conditions in manufacturing, constructions and services

Two Data Forms - Primary Data

Primary data - New and comes direct from the source by the individual or company that will use the data

Primary data is collected by -

direct communication,

Networking,

Specifically commissioned market research - focus groups, questionnaires

Trade fairs

Primary Data - Output

Product availability

Pricing Strategies

Trends and forecasts

Contact Details

Company Strategy

Organisational pressures

Personal Opinions and Views

Two forms of data - Secondary Data

Information from published research or indices

Secondary data easily sourced and can be collated from -

Economic Indices

Supplier Websites

Financial journals

Professional magazines

Published surveys

Professional bodies

Third party comparison websites

Publish List prices

Commodities traded on the stock Exchange

Energy

Agriculture

Metals

Livestock

Commodity - Energy

Oil (Petrol, plastic)

Natural Gas (Propane, carbonated drinks)

Commodity - Agricultral

Wheat (flour, bread)

Cotton (Clothing, Bedding)

Cocoa (Chocolate)

Commodity - Metals

Steel (Cars, Trains, Machinery)

Gold (Jewellery)

Commodity - Livestock

Live cattle (Beef/Steak)

Lean Pigs (Pork/Bacon)

Commodity Pricing Influences

Supply and demand

Currency fluctuation

Political situation

Conflict

Force Majeure - aka earth quakes, volcano eruptions

Severe or unseen weather conditions

Price of competitors

Price substitutes

Speculations

Future Exchange

A market place where the seller of a commodity agrees to sell or buy a certain amount of the commodity to a buyer at a particular price on a specific date in the future.

A future exchange is a centralised financial trading exchange.

Analysing potential sales tools

Porters five forces

Supply and Demand

Historical sales data analysis

Trends

Expert opinions

Potential areas that show financial instability

Reduced Levels of performance

High Staff Churn

A change of bank

Rumours

Request for payment before the agreed due date

Financial reports or statements contain three documents

Income statement/profit and loss account

Balance Sheet

Cash flow statement

Income statement / profit and loss statement

1. Contains companies trading performance in terms of revenue, profit, expenses and losses over a period of time typical time frames 12 months or financial year)

Balance Sheet

This will show a company’s equity, assets and liabilities at a particular time, this is typically year end and linked to the income statement reporting timelines

Cash Flow statement

This will show the generation and utilisation of cash during an accounting period

1. Credit rating assessments (performed by agencies) the data they use is reports from -

Banks and financial institutions

Lenders

Creditors

Public Information

Financial Reports

Court Judgements for debt

Weighted Score

Payment History 35% - has the organisation paid on time and in full

Accounts Owed 30% - What Debts does the organisation have?

Length of Credit History 15% - average time taken for a company to pay their debts

New Credit 10% - Has the company been approved for new credit recently

Credit Mix 10% - Does the company credit have different lenders and terms

Credit Rating

Credit Rating Low - implies higher level of risk

Credit Rating High - implies lower level of risk

CARR

Cyber Assurance Risk Rating

Request for quotation (RFQ) approach

Less formal

Used for less complex requests

Less detailed than an invitation to tender (ITT)

Low to medium value contracts

Invitation to Tender (ITT) approach

More formal

Used for complex requirements

More details than an RFQ

Medium to high value contracts