Business Needs Flashcards
Modified Re-Buy / Straight Rebuy
Modified Re-Buy—————————————
- changes needed to satisfy a business need
- changes from previous purchase / quantity , materials , services
- analysis of straight rebuy / could increase provision/viable alternative such as new material
- new sources same product diff supplier cheaper or diff product diff supplier
buyer activities:
- review of current specs - maybe innovations in supply market / maybe legal changes
- challenge changes to specs / can another product be used and over specification
- -consider changes to contract / what are transition process considerations and kpis to monitor performance /payment terms move them 30-60 days maybe cash flow problems
Straight Rebuy —————————————–
- routine no risk
- purchasing process maybe simple - devolved to non purchasing staff
- no changes needed
- supplier source is appropriate
- on a new contract - a. buyer may establish a continuing need
- current supply is satisfactory
buyer activities:
- alternative replenishment sources
- review contract - is it still competitive
- additional benefits - discounts, yoy reductions, increased quality
- value analysis - still providing optimal value
RAQSCI
Regulatory, Availability, Quality, Service, Cost, Innovation
Availability - flow of inputs should match operational demand/ capacity
Quality - consistency, fit for purpose
Service requirements - flexibility, response times
Cost
Innovation - new solutions, new tech
Defining Business Need
Supplier - anyone with power or interest
- gather info about org - future plans, strategy, policies, changing legislation
- Categorise potential suppliers, identify needs and prioritise
- Identify if there will be any changes in procurement process such as process of acquisition or manufacture
- Share information gathered with shareholders
Direct / Indirect Costs
- Direct purchasing – buying goods actually used in production e.g. engine for a car manufacturer
- Indirect purchasing – buying goods to support production e.g. stationary for a car manufacturer
- Fixed costs - do not change regardless of the level of production
- variable costs - change directly based on the level of production
a business case
Tepner Tregoe approach – asking a string of questions to better define a problem
FOG – fact, opinion, guess to check if information is valid
A business case is a document detailing the justification for an action. It should show the pros and cons, timescales, stakeholder involvement etc
There should be a clear link to achieving strategy and it is used to seek approval for the action eg senior staff approval and funding allocation.
buyers needs to- to justify
a new requirement,
renewal of an existing requirement,
an alternative to an existing product/service
- what is going on
- what do we know
- what are the issues
- what could we do
- what is the best thing to do
- how do we go about it
- have we archived our objectives
- can we improve on what we have
Closed or Open ended problems
Closed problems are failures of an activity to follow the required plan or where something has happened which should not have. Closed problems include – sudden increase of a raw material price, under performing or absent staff, invoice errors etc
Open ended problems are where something is blocking the achievement of the objective. To solve those, either a correction or method to unblock the problem is required. Open ended problems include – needing to secure sign off for additional budget for new staff, new corporate objectives require cost savings of 10% on current procurements etc.
5 Whys
5 whys.
The primary goal of the technique is to determine the root cause of a defect or problem by repeating the question “Why?”. Each answer forms the basis of the next question.
why – because they didn’t get the order information in time, why – because the buying team didn’t get the information from sales, why – because one of the sales staff was struggling with their work load, why – because they had not been trained properly, why – because the HR department didn’t have the funding this calendar year. In this case it wasn’t the fault of the supplier, so challenging them to stick to the agreed delivery dates would not have been helpful. However, understanding the true cause would allow the buyer to justify release of funding for the sales staff.
Business Plan
- Executive summary – a brief but positive overview of the key details
- Long term strategy considerations – how does this business case tie in with them
- Business requirements – state the need and any cross-functional (a group of staff from different departments) agreement
- Price and cost analysis – is the expected cost seen as reasonable against average market costs etc
- Supply analysis – details about the abilities of current/potential suppliers
- Technical developments – how any changes have been included/may affect the solution
- Vulnerability analysis – any areas that may create vulnerability to the organisation and what could be done to minimise this
- Sourcing objectives – cost/value considerations of how to secure supply
- Implementation plan – roles, tasks, schedule etc
- Competitive advantage – how these actions will put the company in a more competitive place than their rivals
Business plan - what will managers be focused on
ROI
Time to Market
Customer Satisfaction
Improving productivity
Managing Risk
• Return on investment – The link between the value of the assets and the profits the company is making the shareholders have invested in the business and further investment may have been made by finance companies or by using profits to grow the business
Time to market – often it is the first company to create a new product which gains the market share. Where product lifecycles (development, launch, growth, decline, discontinuation) are short, eg in mobile phone companies
Customer satisfaction – keeping current stakeholders loyal can be much more cost effective than trying to find new customers.
Improving productivity – productivity is the level of output for a certain level of input. eg automating a process so that it can run uninterruptedly every day can increase the level of outputs. Either of these can increase profits
Managing risk – risk is categorised in relation to how likely or how bad the impact of the future event would be. Finding ways to reduce either (or both of those) can minimise the effect on the company ,
• Secondary research or Primary research (field research)
quantitative (numerical eg number of defects, number of days late etc),
qualitative (opinion based eg attitudes to certain brands etc). By carrying out the research, the buyer can set the data gathering methods, analysis methods etc.
• Secondary research (desk research) – this gathers data from existing sources eg market reports, media reports etc. It may be free or may require paying a small fee but is generally fairly cheap. Sources include
trade associations,
official government statistics,
media reports,
the internet,
commercial market reporters eg Mintel
internally produced reports eg annual sales figures
It is important to consider that the data is historic and cheap
• Primary research (field research) – this is the collection of original data, which could be
This may reduce bias, make sure that the data is current and mean that the results are only available to the buyer so could drive competitive advantage, it is much more expensive.
Producing estimated costs and budgets
Breakeven analysis + Margin of safety
Breakeven analysis -
the point at which the company sales revenue has covered both its variable and fixed costs but has not made a profit ie the total costs is the same as the revenue.
breakeven = Fixed costs / Marginal profit
marginal profit needs to be calculated. This is the sales price minus the variable cost value answer is number of items need to sell to breakeven
The margin of safety
is the difference between the planned sales level and the breakeven sales level. E.g. in the above example, the company is planning to sell 4k motors. The breakeven is at 1000 motors. So, the margin of safety is 3000 motors i.e. the company can fall short of the 4k goal by 3k before losses are made (shown below as the gap between the dotted lines).
BUYER TYPES
Suppliers may charge different prices for different items dependent on :
how attractive the customer is
what the value of the contract is.
- Nuisance – not attractive or of value in terms of business.
- Exploitable – not attractive but of high value.
Development – highly attractive but have low value. T
Strategic/core – highly attractive and have high value.
Approaches to total costs of ownership/whole life cycle costing
• Acquisition costs – initial costs of transportation, installation, training, initial spares etc
• Operation costs – manpower/supervisors, fuel, waste disposal, insurance, maintenance, downtime, spares etc
• Disposal costs – depreciation, value when disposed of, costs of disposal
All of the costs (except the purchase price) have to be estimates (the buyer won’t know exactly how many spares they will need until the end of the lifespan) and as such are subject to bias, mistakes, and incorrect assumptions. Other departments may be able to help improve the accuracy the figures..
The process of total cost of ownership has three stages :
• Stage 1 – planning – the objectives of the assessment need to be established eg is the aim to better understand costs in order to reduce them, clarify the specification, create a budget for the ownership period etc.
• Stage 2 – preparation – the buyer tests the various models to work out which one will be the best one to provide an accurate value for the total costs of ownership
• State 3 – implementation – the chosen model is used, and regular recalculation is planned.
Benchmarking
The options can be generated by brainstorming (a group coming together and suggesting lots of ideas on a subject) or benchmarking (comparing the activity or company to other leading activities/companies).
Benchmarking requirements
Benchmarking is the comparison of products, processes or strategies against a recognised leader. . The aim is to match or improve on the current leading methods. It requires research in order to understand what is possible, assessment of how that could be used to develop the company and implementation of change. The process can increase motivation and create breakthrough change.
There are 4 main types of benchmarking –
Internal –
Competitive benchmarking – where the company compares performance to rivals
Functional benchmarking – looks at similar functions across different industries eg how the procurement department operates in the public and private sector.
Generic benchmarking – comparison to unrelated business processes in any industry eg a supermarket may look at how a bank operates its financial transactions to improve flow of customers through stores.
Analyse the criteria that can be applied in the creation of a business case
costs, benefits, options, alignment with organisational needs and timescales
Objectives – the person reading the business case will want to see that there are clear objectives, which link to the needs of the company and that the business case meets the objective.
5whys
Issues management is the process of identifying and resolving problems
External trends could include changes in markets, political factors, economic changes
Performance trends could include changes to profitability, operational efficiency
Any issues found can then be categorised by how urgently they need action and whether they are impacting in a way which is critical to the business
Internal trends could include role changes, management changes
Cost benefit analysis – this is the assessment of all of the costs and benefits of the proposed strategy to check that the benefits outweigh the costs. The principle is that all costs and benefits are listed as financial values, which allows the net gain or loss to be calculated for any scenario.
intangible benefits eg lower environmental impact, improved working conditions
payback calculation - considers how long it takes for cash returns to equal initial cash outlay? The payback period is the time taken to recover the initial investment. E.g. a £1m investment makes a profit of £200,000 a year. Thus within 5 years the initial payment has been covered – it has a payback period of five years. Investments with a shorter payback period are preferred to those with a long period. Many companies using payback period as a criteria will have a maximum acceptable period.
Risk assessment – the process of identifying and dealing with potential issues. Senior staff will want to see that risk has been assessed and that where possible risks have been mitigated (reduced). Risks are quantified by giving them a score based on likelihood and impact. The likelihood is the probability of it happening and the impact is how negative it would be if it did.
Implementation plan – is the plan to make it happen realistic and carefully assessed regarding resources etc. The senior staff will want to see evidence of roles and responsibility allocation, a communication strategy to keep all key stakeholders informed, a clear specification and procurement route, time allocated to managing the process eg for supplier assessment/tender process/negotiation/contract formation etc, is there a schedule showing the timeline of all required tasks etc.
INterventions in business case
- Market interventions – competitive bidding or tendering, deciding whether to make it in house or buy it from suppliers, supplier rationalisation (reducing the number of suppliers), encouraging new suppliers or existing suppliers to create new products
- Technical interventions – simplifying specifications, creating or using new technology, protecting intellectual property (eg through using patents, design rights etc)
- Cost structure interventions – using total cost of ownership, lean (a process which reduces waste in a company), value engineering (building maximum value into a product at design stage)
- Work process interventions – streamlining operations, working jointly with suppliers to smooth processes eg joint planning of requirements
- Supplier relationship intervention – changing relationships eg becoming closer to a supplier, to improve supplier performance
- Supply chain intervention – removing unnecessary intermediaries eg distributors may be removed if the buyer approaches the manufacturer directly, or outsourcing (moving an activity which was done internally to a supplier on a long-term basis) eg using a IT specialist company to provide IT support.
Types of budget incremental and zero based
- Incremental budget – starts with previous period figures which are adjusted to give figures for current budget e.g. seasonally adjusted figures. This is the most common type of budget and is generally quick to create as it just requires alteration of a previously created budget. However, it may increase complacency and reduce innovation or creativity.
- Zero based budget – starts from scratch ignoring previous figures e.g. a brand-new project. This forces every aspect of the budget to be considered and build from the ground up (from zero). This can improve innovation and make staff question each area of spend but can take a lot longer to produce and increases the risk of key spend areas being accidently left out of the budget, creating overspend issues later.
Markets - how to analyze markets SEGMENTS
product / customer / industry
A market is where buyers and suppliers meet to trade products/services
Industries are classified into three main groups –
- primary (extractive industries such as mining),
- secondary (manufacturing and construction) and- tertiary (services).
Product/service segments
– groups of related products can be bundled together eg a car may be sold with additional warranty cover, insurance, breakdown cover etc.
- The pack size or make up of the product eg industrial size packs versus smaller consumer sized packs.
- The price eg discounts for students.
- Features or performance eg mobile phones with different cameras, operating systems etc.
- The design of the product eg brands of cars often have distinctive designs.
Customer segments
- demographics eg age, wealth, education level etc.
- by lifestyle eg health eating,
- language which may affect instructions and marketing etc
- use of the item eg is it for a present or for the person to use themselves.
Industrial markets
- the buyer’s strategy if its strategy is to make premium products, they are more likely to be focused on the quality and innovation from suppliers rather than price.
- The size of the buyer requirements (volume or value) can change the bargaining power
- How the company is owned can also affect the buyer eg they may be bound by rules set by the head office or may be publicly owned and bound by government set rules.
- The order patterns of the buyer can affect how the supplier views them eg regular customer or one off.
- Distribution channels
- Geography
RACI model
Another way to assess them is to use the
– who is
responsible (will do the task),
accountable (has control),
needs to be consulted (asked before actions take place), and
informed (told once actions have occurred).
Threat of Entry
The threat of new entrants tends to be high if – there are many smaller companies in an industry with no dominant ones, there is no differentiation of products or brand recognition, little capital is required to enter the market, there is easy access to distribution, there is little threat of retaliation from existing companies. The threat would be lower in the reverse of any of the above.
New entrants reduce the profitability of existing companies in that market, but to gain the profits from the market they need to be able to set up and take customers from the suppliers already in the market. Some barriers to achieving that include –
● Economies of scale – where existing companies have a very dominant position, new companies may not be able to gain the economies of scale they need to be competitive on price
● Product differentiation – existing companies may have established brand names, differentiation or reputations, which can make it hard for unknow companies to secure customers
● Capital requirements – some industries require a lot of money to set up in eg car manufacture, but securing that money may not be easy for a company which is unproven in that industry
● Access to distribution – may be limited for some industries or affected by taxes, seasonal trends, weather etc, so it is likely to already be secured by the companies in that industry
● Cost advantages – the learning curve is a measure of the difference in ease/costs of making a product/service for the first time and subsequent occasions. Experienced companies will have found cost effective ways to produce items, but new entrants may not know the efficient ways of operating
Analyse different types of specifications
A specification is the statement of needs for the products, processes etc required.
Conformance Specification
Technical
Output/ performance
Outcome
Conformance specifications
These give precise details of how the product is to be made or a service delivered and will provide information on functional (what it must do) and non-functional (how it should operate) requirement, assumptions made, constraints, performance requirements, dimensions, reliability etc. If the buyer is setting their own conformance specification, it can provide a product which can drive competitive advantage (as it isn’t standard), but it also comes with risks. The buyer is assuming all of the risks of it failing to perform as the supplier only has to conform, not question the design. The expertise of the supplier is not used to create a better outcome. The requirements may restrict who can provide it eg there may only be two suppliers who have the required machinery to make it in the way the buyer wants. Useful considerations include – what is the customer need, what quantity is required, how will the product compare to rival products, are there health and safety considerations, what materials will be used, are there any constrains eg dimensions, will it need to meet regulatory requirements, are there any installation or operation requirements, will users need training, how will it be disposed of. An important question is how intellectual property will be allocated and protected eg will the buyer own it.
Analyse different types of specifications
A specification is the statement of needs for the products, processes etc required.
Technical Specification
Output/performance
conformance
outcome
This type of specification is often called a technical specification
it will detail the standards which the product or service must meet, and any deviations are considered out of spec. They may be set by governing bodies, accreditation bodies eg ISO etc. They provide details of the quality of materials, production work, chemical dimensions, chemical composition or tolerances etc. Many commodities have technical standards eg petrol, steel, wheat etc. This allows buyers to know what they are receiving and to combine it with products of the same standard from other suppliers. There is usually high demand, and this allows long production runs and reduced prices due to economies of scale. Individual companies can also create technical specifications and some key considerations would be the dimensions, weight or other physical properties, what conditions the product will have to perform eg in high temperature, any tolerances, any safety requirements, the expected lifespan of the product, maintenance etc. The more detailed and bespoke the technical specification is, the fewer suppliers will be able to achieve it.
Analyse different types of specifications
A specification is the statement of needs for the products, processes etc required.
Outcome/ pefromance Specification
Output
Conformance
Technical
Output or outcome, statement of work-based specifications
The final type of specification is the performance specification where the outcome or required performance is stated, but not the methods to achieve it. The suppliers can then use their expertise to determine the best way of producing the item or service, which can lead to a more innovative outcome and lower costs as they may be able to fit it around their existing capabilities. There are different types of performance specification –
Outcome specifications – these describe the functions or performance which the product must fulfil and will clarify what must be achieved (the outcome) but will leave it up to the supplier to work out the inputs and processes. Eg the outcome required may be making sure someone is mobile after having a car accident. The supplier may offer car rental or may be more creative and offer a taxi service option. The responsibility for ensuring that the outcome is achieved is with the supplier. The outcome must be clear and detail what is required as well as what is not required.
There are some issues with outcome specifications. They can be difficult to measure as the outcome can be complex or be resolved using a wide range of solutions, which can be difficult to compare. There can be a long gap between starting the production or service and seeing the effects on the outcome eg probation services to reduce reoffending may take months or years to take effect and reduce the occurrence of reoffending. Also, more than one output can affect an outcome and some of these may be outside of the control of the supplier eg the supplier could install a heating system to provide the outcome of achieving a comfortable level of warmth for staff, but if the staff don’t use it properly, they may still complain of being too hot/cold.
Analyse different types of specifications
A specification is the statement of needs for the products, processes etc required.
Output
Outcome/ pefromance Specification
Conformance
Technical
Output specifications – these state a specific output (deliverable) which the supplier must achieve, with the buyer taking on the risks that the output will drive the outcome required. Because it is a specific deliverable, it may be much easier to measure and prove that the supplier has performed well. Considering the heating system above, the output specification may state that the supplier must fit a heating system which can heat the office space by 5 degrees in 15 minutes and has an operational cost of no more than 10p per hour.
Identify sections of specifications for through-life contracts
Scope
Through-life contracts make the contractor accountable for the design, acquisition, operation, maintenance and disposal of an asset. They are common when buying machinery or IT equipment and the buyer can rely on the capability of the supplier. During the design stage, the supplier translates the needs of the buyer into a design, which is then usually approved by the buyer. This is then passed to operations to manufacture/assemble/test it. The supplier then installs it on the buyer’s premises and checks it works to the specification. It is supported/maintained regularly by the supplier and at the end of its operational life it is decommissioned/removed by the supplier.
The support from the supplier will be classed as customer support. It encourages the supplier to consider the whole life of the asset and design it in a way which creates overall cost efficiencies
Scope Definition Description of requirement Testing and acceptance Change control mechanisms and remedies Social and environmental criteria
Scope
By combining the asset and the services required to support it through its life, the buyer gains lower whole life costs, lower risks as one supplier is liable for the start to finish process, better understanding by the supplier which can lead to adapted services to suit their unique needs.
Under or over specified need
● Under specifying tends to occur because key user criteria/stakeholders were missed out of the process. This can cause the product/service to be unsuitable, the waste of resources having to either start the process again or modify what was created to incorporate the changes required, customers may not feel satisfied which can lead to complaints/returns/loss of future sales etc.
● Over specifying tends to occur where users have communicated their wishes/whims rather than just their needs. This tends to be more common where it doesn’t impact their budget, so they see no negative impact of gaining exactly what they wanted. The buyer needs to work with stakeholders to ensure that only the needs are being satisfied otherwise the outcome is likely to require more resources to secure, may have features which are not used to their full potential or at all, the buyer may struggle to find suitable suppliers or may be forced to use a single supplier etc.
Standardisation
Product standardisation
Parts standardisation
Process standardisation
Process standardisation
When looking at standardising operations, the concept of lean is often either the reason for standardising or a positive effect. Lean aims to make the same level of output with fewer resources and this is often achieved by very high levels of standardisation (of both product and processes).
Some key aspects when considering lean include –
● Lead time
● Work in progress – this relates to activities which need to be completed eg emails to answer, products to make, purchase orders which need to be sent etc
● Delays (queue time) -
● Value added/non-value add – some activities add value eg painting a car, but others may not add value eg moving a box to one side of the room and then moving it back again.
● Process efficiency – the percentage of the lead time in which value added activities take place
● Waste
Product standardisation – if a company only made one product, it could have very efficient processes with no variation, a standard range of raw materials/components, simple procurement, standard machinery, staff would understand how the product was made (or could easily be trained to do so) etc.
Parts standardisation
– another standardisation consideration is to minimise the range of parts used when creating products. A zero-based approach would start assuming no parts are required and only add the ones which add value. This can help to reduce parts which don’t add value.
Using parts on more than one product will also help to reduce the range and again increase the economies of scale, ease of operation, simplify processing etc.
Value Analysis
Value engineering
Target costing
This is the process of assessing an existing product/service in terms of the value of each component used and opportunity to reduce the costs of those components. An item would be broken down into its component parts and each part would be considered separately
This is essentially the same process, but carried out at the product design stage, rather than on an existing product. Value engineering promotes the substitution of materials and methods with less expensive alternatives, without sacrificing functionality.
A way of identifying the costs is target costing. This is based on deciding what the market will pay for a product, deciding what level of profit is required, selling price minus profit gives the target cost to make it, then finding a way to get the total costs of producing the item to be the target cost level.
SCAMPER
SCAMPER can be helpful – Substitute, Combine, Adapt, Modify, Put to other uses, Eliminate, Reverse.
Pricing analysis
Purchase cost analysis PCA
Target costing
sell and item 30
what profit 5
how much do we need to make item for - 25
Purchase cost analysis (PCA) is a tool which considers the cost of the individual materials/activities which make up an item. It allows the costs to be challenged eg are all the costs needed, reasonably priced, provide the supplier with reasonable profits etc. They should be benchmarked against some form of standard eg previous prices, market price etc.
Target cost setting is based on understanding what the customer will pay for the finished goods and what they see as critical aspects for creating customer satisfaction. The buyer can use that price to calculate a target cost, which is a realistic selling price minus the profit the company wants to make. sell an item for £30, and wants to make £5 per item, the target cost is £25
