1.3 - Describe the categories of spend that an organisation may purchase Flashcards
Name 4 things that make up costs
- Time
- Material
- Effort
- Opportunity
Name 2 types of organisational costs
- Fixed
- Variable
What are fixed costs
Do not change with the output of the organisation
Variable costs
Do change with the output of the organisation
Name 3 examples of fixed costs
- Salaries of management team
- Insurance
- Rent on an office or factory
Name 3 examples of variable costs
- Raw materials
- Haulage costs
- Wages for hourly-paid workers
Direct costs
Associated directly with a job or a contract
Indirect costs
Not directly associated with a job or contract, they are often referred to as overheads
Name 3 examples of indirect costs
- Salary of support staff
- Rent of head office
- Mobile telephone contracts
Name 11 examples of organisational costs
- Capital purchases
- Insurance
- Marketing
- Raw materials, components and consumables
- Research and development
- Salaries/pensions
- Services
- Sundry items
- Training
- Utilities
- Vehicles / transport
Specification
A detailed description of the product or service required
Total life cost
The total amount a product will cost an organisation throughout its life
Benchmark
Comparing an element of one business, such as price, quality or service against another
Assets
Items of value owned by an organisation, which can be used to meet debts
Name 11 things procurement professionals will do when undertaking a capital purchase
- Evaluate potential suppliers
- Be involved in preparing specifications
- Review quality and standards
- Assess ethical requirements
- Compare buy or lease options
- Investigate transport
- Review packaging option
- Research total life cost
- Calculate currency differences
- benchmark prices
- Ensure assets are fit for purpose
Economies of scale
Cost savings made as a result of increased levels of production, alternatively the financial benefit gained from purchasing more units of an item resulting in lower unit costs
Sundries
Miscellaneous goods or services, usually of low value
Carriage deals
Negotiations to achieve the best possible cost
Fleet
A group of vehicles used by an organisation
In-house
An activity conducted within an organisation by its own workforce
Primary sector
Industry sector that extracts raw materials
Primary sector products
Products that are extracted from their natural source, such as iron ore
Secondary sector
Industry sector that manufactures things
Secondary sector products
Products converted in the manufacturing or assembly process, such as cars
Product organisation
An organisation that makes or manufactures products
Sector
A classification given to an area of industry, society or the economy to distinguish it from other areas
What sector do raw materials come from
primary sector
What sector do components come from
Secondary sector
Name 3 examples of stock procurement
- Raw materials
- Components
- Finished goods
What does non-stock procurement relate to
Items that are purchased that will not be stored as inventory
Name 6 features of goods
- Tangible
- Can repeat orders
- A lead time
- Quantifiable specification
- Can be stored for later use
- Direct purchases
Name 6 features of services
- Intangible
- One-off orders
- Immediate, consumed as they are supplied
- Qualitative specification
- Stops once delivered
- Indirect purchases
Name the 13 stages of the CIPS procurement cycle
- Define business needs and develop specification
- Market analysis and make or buy decision
- Develop the strategy and plan
- Pre-procurement market testing
- Develop documentation and detailed specification
- Supplier selection to participate in tender
- Issue tender documents
- Bid and tender evaluation and validation
- Contract award and implementation
- Warehouse, logistics and receipt
- Contract performance and improvement
- Supplier relationship management
- Asset management
Direct procurement
The purchasing of large quantities of raw materials needed for production, at the best possible rates
Describe leverage suppliers (3)
- Vast competition
- Low cost to move suppliers
- Often utility services
Describe strategic suppliers (2)
- Critical supplier to an organisation
- Responsible for core products
Describe routine or non-critical suppliers (3)
- Low-value items
- Lots of work associated with these suppliers
- Lots of variety available
Describe bottleneck suppliers (3)
- Holds monopoly in marketplace
- Little or no other options
- Low-value items
Indirect procurement
Services, tools and equipment that do not form part of the finished product but are required to maintain the business and production process
What is the vertical axis on the Kraljic matrix
Cost impact
What is the horizontal axis on the kraljic matrix
Risk impact
Operational expenditure
Costs associated with the running of an organisation, such as electricity, labour or waste collection
Budget
Financial plan for a set period of time on how much can be spent
Name 2 types of budgets organisations have
- CAPEX - budgets relating to capital expenditure and include capital purchases
- OPEX - budgets relate to operations expenditure
Capital purchases
One-off purchases of machinery, land or property
Depreciation
The reduction in value of a tangible and fixed asset overtime
Name 5 examples of operational expenditure
- Rent
- Raw materials
- Salary
- Insurance
- Transport
Name 6 features of capital purchases (CAPEX)
- An asset purchased to last a long period of time
- Often paid out as a lump sum or through a bank loan
- Accounted for and depreciating over a period of time
- High value
- The purchase can be postponed if it suits the business to buy at another time
- Requires a business case to demonstrate the return on investment (ROI)
Name 6 features of operational expenditure (OPEX)
- An ongoing expense to an organisation
- Paid monthly or annually
- Accounted for in the current month or year
- Low to medium value
- Required on an ongoing basis, cannot be deferred
- Business as usual, does not require any extra investment
services
Activities or benefits from one party to another that do not result in the ownership of anything tangible
Name 4 types of service
- Contracts for specific tasks
- Management contracts
- Maintenance contracts
- Professional services
Utility procurement
Refers to the procurement of services required to support the basic infrastructure of an organisation
Name 6 thing typically included in utilities
- Electricity
- Gas
- Mains water
- Telephone/broadband
- Mortgage or rent
- Transport
Monopoly
A situation where one supplier has the entire market share and there is no competition
Oligopoly
A market structure in which a few firms dominate
Commodity
A raw material that can be bought or sold
Name 9 different cost structures that can be used for utilities
- Costs based on usage with fixed per unit costs for a period
- Costs based on usage with variable, market costs per unit
- Costs with a low rate for low usage and a higher rate for a higher usage
- Costs with low (off-peak) time elements and high (peak) time elements
- Two-part costs with a fixed-cost element and a rate per unit
- Costs quoted against a variable wholesale commercial market price
- Costs based on type of user
- Energy costs based on origin of energy sources
- Water costs may have two elements
Name 3 examples of commodities
- Energy - crude oil, electricity, coal
- Metals - copper, steel, tin, gold, silver
- Farmed produce - corn, barley, sugar, coffee
Fixed price contract
A contract where the price remains the same for the agreed period
Futures exchange
A marketplace 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
Name 4 examples of future exchanges
- London Metal Exchange
- National Association of Securities Dealers Automated Quotation
- Chicago Mercantile Exchange
- Intercontinental Exchange
