1.4 - Compare the sources of added value that can be achieved through supply chain relationships Flashcards
Added value
Non-cash releasing benefits generated via procurement processes and supplier relationship management. Also defined as product and service mix features which the customer values and is therefore prepared to pay extra for
Return on relationship investment
The financial benefits for a buyer of establishing, developing and maintaining buyer-supplier relationships
Name 5 examples of added value benefits that procurement can help deliver
- Cashable savings and/or cost avoidance which can have a direct impact on internal budgets
- competitive advantage over others who are not reaping the benefits created by collaborative relationships
- Through risk management - a greater knowledge of supply chain partners and their risks will improve this process
- Improved business efficiency
- Improve contribution and commitment to ESG factors and CSR
Who developed the value chain?
Michael porter
Value chain
A business model created by Michael Porter that details the set of coordinated processes, people and resources within an organisation which generates corporate value
Competitive advantage
A benefit that an organisation can use to outperform its competitors in the marketplace
What is the value chain made up of?
Primary activities and support activities
Name 2 steps that should be taken when analysing a company’s value chain
- Split all activities within the company’s value chain into primary and secondary activities
- Review each area, looking for processes that are wasteful, for example, double handling of invoices by the procurement function
Name 5 ways in which procurement can help to add value and generate a bigger margin for organisations
- Selecting a supplier and negotiating the best deal for raw materials/inputs and logistics, thereby reducing the cost of inputs
- Developing relationships with a key supplier to ensure continuity of supply of inputs
- Managing quality of inputs by monitoring supplier performance
- Managing inventory and stock control
- Supporting the other support functions by sourcing products and services that the organisation requires in order to undertake these functions
What is a value network?
A set of connections between organisations interacting with each other which benefits the entire group
Name 4 key points regarding value chains
- An organisation will add value to its inputs in order to create value for the customer
- This will generate margin (profit) for the company
- The activities in the value chain are interdependent, what affects one will affect the other
- Waste across the value chain should be eliminated
What are the sources of added value linked to?
The 5 rights of procurement
Five rights
- Quantity
- Quality
- Time
- Place
- Price
Name 4 ways procurement can influence the pricing that is achieved for a product or service
- Reducing the unit cost paid for the product or service
- Getting additional products or services for the same price; generally these are referred to as value adds
- Increasing the payment terms can improve the cash position of the buying organisation
- Mitigating a price increase that a supplier requests
Name the 2 main ways that a supplier can price a product
- Cost-based pricing
- Marked-based/demand pricing
Name 5 key elements to consider in specification development
- Ensuring that the user department has not over-specified the requirement
- Making sure that the specification is clear and unambiguous, that prices are not being overinflated due to uncertainty
- Ensuring that all spend with a supplier us captured under the contract and in line with agreed rates
- Reviewing whether any products could be substituted for non-branded alternatives
- Involving the supplier early on in the process
What follows the specification stage
Competitive tender
Open book costing
A process whereby one party agrees to allow the other access to its finances to scrutinise and analyse costs
Which suppliers would you undertake open book costing with?
Strategic and collaborative type suppliers
Whole life costs
An estimate used to help buyers determine the end-to-end cost of providing a service, mnaufacturing or procuring a product. Also commonly referred to as total cost of ownership or total life cycle costs. The use of the terms depend upon the industry and sector
Name 6 cost mechanism terminologies
- Pre-acquisition costs
- Cost of procurement process
- Transport/delivery/insurance
- Actual cost of an item
- Operating and maintenance costs
- Disposal costs
Name 4 limits of whole life costing
- Costs included for processes that will happen in the future are only estimates
- Not all the costs that will occur during the life of an asset can be forecast
- It can be costly to do
- It can be time consuming
Life cycle costing
Relates to all costs of acquisition, owning and running the asset but does not include disposal
Total cost of acquisition
Considers all the activities and the costs associated with the procurement of goods or services but does not consider the running or operating costs
Total cost of ownership
Considers all costs associated with planning, tendering, procurement, contract management and disposal/termination of an asset or service. It does not look beyond this by considering the benefits derived from the goods or services
Life cycle costing
Traditionally used in the construction industry, its normally associated with the costs of site clearance, constructing and operating a building or large piece of capital equipment but rarely includes the cost of disposal
Whole life costing
Includes all the elements of life cycle costing but includes other factors. the term whole life costing is typically used in property projects and would consider costs such as financing the project, acquisition of the land and benefits and earnings derived from the building phased over its life.
What happens once the tender is complete?
E-sourcing
What section of the Kraljic matrix does e-sourcing usually suitable for
Routine or leverage categories
What is the most popular e-auction
reverse e-auction
What usually follows the tender process?
Negotiations
Name 5 ways in terms of cost management that procurement can add value
- Specification development
- Competitive tender
- E-sourcing
- Negotiations
- Contract management
Fit for purpose
The product or service is capable of doing what it was designed to do
Name 2 key elements when considering the quality of products and services
- Whether they are fit for purpose
- Whether the products or services meet the specification
Name the 2 types of specification
- Performance
- Conformance
What can a performance specification also be referred to
Output-based specification
Name 1 advantage and 1 disadvantage of a conformance specification
- Easy for the supplier to understand and enables the buyer to detail technical information
- Limits the suppliers freedom to innovate
Name 2 advantages of a performance specification
- Easier to draft, which may be relevant if the buyer has little knowledge of the product
- Encourages innovation from the supplier, which may add value and could also widen the supply base
Name 1 disadvantage of a performance specification
The burden is placed on the supplier to ensure that the outcomes are achieved
Name 3 costs of poor quality
- Cost of the organisation undertaking rework to products that may include faulty components
- Cost of downtime
- Poor quality products/services reaching the end customer, affecting the reputation of the buying organisation
Name 4 processes involved in ensuring the right quality
- Quality planning
- Control
- Assurance
- Improvement
Quality control
The process of controlling variation
Quality assurance
Managing quality with various systems and processes
Give an example of quality assurance
Mystery shopper
Value engineering
Involves a review of the current product or service including the specification, its component parts and the processes used for manufacturing in order to create an optimum product or service at the lowest total cost
What process is value engineering linked to?
Early supplier involvement
Name 4 issues of late deliveries
- Production bottlenecks of stoppages which could have a number of negative effects
- Lost time costs
- Late delivery
- Products delivered early may perish, or be lost or stolen
Name 4 ways of reducing lead times
- Paying higher prices for shorter delivery times
- Simplifying transaction processes such as time taken to convert a purchase requisition to a PO
- Working with suppliers to reduce waste in the cycle of ordering such as delays
- Holding more stock
What can expediting be used to do?
Chase up orders and ensure that deliveries are received on time and at the correct quality
Inventory
Components, raw materials, work in progress, finished goods and supplies required for the creation of goods and services for the customer. It can also refer to the number of units and/or the value of the stock of goods held by a company
Stock cleanse
A contractual option where the supplier is obliged (sometimes for a fee) to take back old stock
Name 5 reasons for holding stock
- Holding stock can ensure continuity of supply if unforeseen events occur, such as natural disasters, which can severely affect global supply chains
- It can reduce long lead times and ensure production can continue in the short-term
- Potential discounts may be available for buying in bulk. This will need to be evaluated against the costs of stock holding. This is linked to economies of scale
- Holding stock can protect against price fluctuations. this is more applicable to commodity items such as metals
- Stock holding can support demand management. This will require the involvement of internal stakeholders such as operations, marketing and sales. Demand management can be based on historic demand forecasts
Name 4 costs of stock holding
- The cost of storage space such as warehouses
- Cost of capital
- Obsolescence, depending on the product
- Opportunity costs
Just in time
A philosophy used in manufacturing that is based on suppliers delivering goods at the point that they are needed. It aims to reduce inventory costs and reduce waste in the supply chain
Just in case
A term used to reference inventory held for an unexpected event to reduce risk of a production stoppage
Name 3 benefits of just in time
- Cost savings
- Improved cash flow
- Better utilisation of space
Name 2 limitations of just in time
- Not appropriate for all businesses
- Does not allow for risk of unexpected events that can affect supply chains
Vendor managed inventory
Inventory owned by the buying organisation that is monitored and managed by the supplier to ensure that adequate supply provision is made in line with usage and forward demand
Consignment stock
Product owned by the supplier which is stored on the buyings organisations sit to ensure immediate availability without any delivery lead times. Usage is normally invoiced when goods are used
Name 6 ESG factors that will negatively impact an organisation
- Human rights issues
- Irresponsible removal of hazardous waste
- Unnecessary or excessive carbon emissions
- Use of non-renewable materials for which renewable materials are available
- Lack of equal, diverse and inclusive opportunities
- Exposure to bribery or corrupt practises
Name 3 types of standards that can be incorporated into specifications
- Environmental standards - ISO14001
- Social standards - ISO45001
- Governance standards - ISO37001
What does it mean to incorporate social value into contracts
Where the contract available for award must be seen to give back positively to the community in some way
Whistleblowing
When an individual reports an activity or information which they believe to be illegal, unethical or not in accordance with the organisations policies or procedures
Code of conduct
A series of rules set by an organisation that define suitable behaviours and values that should be used and applied by a member of that organisation, for the purpose of acting in a suitable manner, as well as demonstrating uniformity and upholding the standards of the organisation
Name 4 documents procurement professionals can request to assess a suppliers commitment to ESG
- Suppliers code of conduct
- Suppliers code of ethics
- Suppliers labour policies for their own employess
- Accreditations or membership associations that promote good ethical conduct
