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L4M2 Defining Business Needs > Chapter 1 > Flashcards

Chapter 1 Flashcards

1
Q

What is liability

A

Responsibility for a financial payment

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2
Q

What is a business case?

A

A document that sets out the justification for undertaking a project on commercial grounds.

A business case is written to evaluate the costs and benefits of relevant procurement and obtain the agreement of senior management.

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3
Q

What are the corporate goals?

A

The targets set by an organization or company that will achieve the organization’s mission or objectives

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4
Q

MRO purchases (straight re-buy)

A

Routine items that are used for the running of an organization and includes services, such as cleaning and spare parts for machinery.

MRO purchasing is indirect spend related to maintenance, repair, and operations (MRO). These purchases ensure a company can keep working but are not directly related to the products and services provided by the company.

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5
Q

Straight re-buy

A

Low value and low risk to the organization if there is a disruption in supply
Many alternative suppliers
Low cost of switching
Often done as call off from an existing contract or framework agreement or P cards

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6
Q

P-Cards

A

A Purchasing Card (P‑Card) is a type of Commercial Card that allows organizations to take advantage of the existing credit card infrastructure to make electronic payments for a variety of business expenses (e.g., goods and services). In the simplest terms, a P-Card is a charge card, similar to a consumer credit card.

Purchasing cards have no interest rates because they’re required to be paid in full monthly.

P Cards are used to make purchases (usually low value) without having to use a formal purchasing process.

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7
Q

Call-off

A

Purchase of an item using a framework agreement that has already been through a procurement process.

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8
Q

Framework agreement

A

An agreement that sets out the terms and conditions under which a call off can be made

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9
Q

What is a business case and what should it include?

A

A business case is a justification for undertaking an action. It’s purpose is to seek approval and possibly finance for the recommended action plan.
It should clearly identify:
- the problem it’s looking to solve or the opportunity it’s looking to exploit.
- the benefits of that action
- the associated risks and how to mitigate them
- the timescales for completing the project
- the roles and responsibilities of those involved
- why it needs to be one

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10
Q

Invitation To Tender

A

A written invitation for a supplier to submit a bid containing a description of the information the buyer required in order to select the best offer and award a contract

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11
Q

Identification of business needs

A

Using the RAQSCI model:

  1. Regulatory: covers any legal requirements or requirements of regulatory bodies
  2. Availability: continuing supply of goods and services when required, based on factors such as capacity, financial stability and risk
  3. Quality: consistency, repeatability and how fit for purpose goods and service are
  4. Service requirements: factors associated with the way services are supplied
  5. Cost: to consider after other factors have been met, target cost, TCO, benchmarked prices, continuous improvement
  6. Innovation: in terms of improving customer’s experience.

Order is CRUCIAL, as it focuses attention on potential trade offs that may have to be made

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12
Q

Sourcing strategy

A

Plan for creating an advantage by continually reviewing current needs against purchasing opportunities

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13
Q

Regulatory bodies

A

Public authorities or government agencies that have responsibility for overseeing and supervising a specific activity

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14
Q

Things to consider when defining business requirements

A
  1. Collect information relating to the organization’s desired future state
  2. Categorize all potential stakeholders (prioritize their needs)
  3. Identify individuals who contribute to the acquisition, manufacture or use of product/service
  4. Summarize the analysis and share with stakeholders
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15
Q

How to determine if a purchase is a straight re-buy?

A
  • A list of approved suppliers exists and terms and conditions have previously been agreed
  • New suppliers are not considered
  • The process for ordering is procurement approved and routine
  • Buyers have relevant buying experience and require little to no new information
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16
Q

How to draft a sourcing strategy?

A
  • Formulate a plan engaging with all the relevant stakeholders
  • Be creative when defining the scope of the procurement
  • Consider whether a broader range of related products and services can be included to increase your spend and therefore your leverage
  • Present the strategy to your stakeholders in a clear and concise statement of one or two sentences
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17
Q

Risks involved in a new purchase

A
  • marketing needs to agree that the attributes of the product or service are in line with the required levels of quality, service and cost
  • engineering needs to ensure the item meets all technical requirements
  • manufacturing needs to ensure the item can be used in the existing manufacturing process
  • finance needs to ensure the cost of the item enabled the price of the end product
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18
Q

Reasons why a business case is prepared in procurement

A
  • contract coming to an end
  • cost reductions required as well as changes in the way the organization operates
  • an alternative product or service has been found that potentially delivers benefits
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19
Q

Closed problem

A

When something happens that should not have happened.
Example:
Price of key raw material suddenly increases and makes a product less profitable
Level of buying off-contract increases quickly and incurs unnecessary cost for the organization
Employee is under performing
Unusually high level of purchase invoice errors

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20
Q

Open ended problem

A

Something is stopping the achievement or blocking progress
Examples:
Agreement from management required to hire new people
Emerging monopoly in a key market requieres competition to be stimulated
Cost reductions required across all purchases to meet new corporate objectives

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21
Q

Problem solving techniques

A

5 why’s
Eight step process
1. What is going on
2. What do we know
3. What are the underlying issues (issues map)
4. What could we do (SCAMPER, method to generate options)
5. What is the best thing to do
6. How do we go about it (RACI, tool to define roles and responsibilities)
7. Have we achieved our objectives (6 steps process: create team, create project plan, create dashboard for tracking progress, communicate progress to stakeholders, adapt plan to circumstances, document results and share them upon completion or project)
8. Can we improve on what we have
Kepner Tregoe approach to define the problem (step 1)
What is the problem
What is not the problem
What is distinctive about it
Where is the problem
Where isn’t the problem
Who/what does the problem involve
Who/what doesn’t the problem involve
When did/does the problem occur
When didn’t/doesn’t it not occur

22
Q

Cost-out approach

A

Elimination of a cost in the manufacture of a product or the delivery of a service by means of removing an item from the specification

23
Q

Cost-down approach

A

Reduction of a cost in the manufacture of a product or the delivery of a service by means of changing an item in the specification

24
Q

SCAMPER

A 
Substitute 
Combine
Adapt
Modify
Put to other uses
Eliminate 
Reverse
25
Q

Sections of a business case for procurement.

A
  1. Executive summary
  2. LT strategy considerations
  3. Business requirements
  4. Price and cost analysis
  5. Market analysis
  6. Supply analysis
  7. Technical developments
  8. Vulnerability analysis
  9. Sourcing objectives
  10. Implementation plan
  11. Competitive advantage
26
Q

Elements of business case appealing to senior management

A 
Return on investment 
Time to market
Customer satisfaction 
Improving productivity 
Managing risk
27
Q

Ways to collect information for market data

A

Field research (primary data): collection of original or raw data directly from the relevant source
-quantitative (statistical)
-qualitative (about people’s feelings)
Desk research (secondary research): gathering information already available from published sources

28
Q

Direct costs

A

Associated directly with the production of a good/service
Examples
Raw material, sub-assemblies, consumables

29
Q

Indirect cost

A

Any other cost needed to run the business that cannot easily be attributed to the product or service
Example
Building costs, equipment, business rates

30
Q

Value chain model (Michael Porter, Harvard)

A 
Primary activities / Support activities classification in the value chain
Primary activities: 
- inbound logistics 
- operations
- outbound logistics 
- sales and marketing
- service
Secondary activities 
- firm infrastructure 
- HR management
- technology development 
- procurement
31
Q

Fixed cost

A

Business cost that remain the same irrespective of the volume of activity of a business
Example: cost of machinery for production

32
Q

Variable cost

A

Cost that varies with the level of output of an organization. If no products are made, the variable cost is zero.
Example: raw material

33
Q

Break even point

A 
The point where the sales revenue value is equal to the value of the cost
Q x (R-V) = F
R sales revenue 
V variable cost
R-V marginal profit 
F fixed cost
34
Q

Different types of cost analysis

A
  • break even analysis
  • purchase cost analysis
  • purchase price analysis
35
Q

Purchase cost analysis PCA

A

Tool used to analyze the costs of things bought so that strategies can be developed for reducing cost and improving supplier relationship.

It helps answer the question: is the price paid for goods and service the best it could be?

Kraljic matrix adapted to segmentation model to prioritize which supplier cost to analyze

Nature of purchase (one-off, recurrent) vs. type of supplier relationship needed (arms length or strategic)
1 leverage (cost analysis)
2 strategic (continuous improvement: open book costing, target cost analysis, tear down, TCO, TCof modeling the DC)
3 low impact (use price analysis for this)
4 critical projects (life cycle costing)

Sources for price analysis:
Prices paid in the past
Published prices
Price formulas
Competitive bidding
36
Q

Quality function deployment QFD

A

Method to transform qualitative user demands into quantitative parameters (engineering specification)
Alternatively, we can use PUGH analysis (compared multiple options against a baseline and answers the question “which solutions are better and which are worse?”

37
Q

Classification of buyers as seen by suppliers

A

Attractiveness of account vs. attractiveness of the market
1 Strategic: suppliers to maintain their position (willing to make price adjustments)
2 Develop: suppliers will try to expand their business
3 Exploit: suppliers will seek to charge a premium price
4 Nuisance: low interest in this market, suppliers will maximize price

38
Q

Whole lifecycle costing

A

Technique to assess the total cost of a product or service, from production, delivery, through use, repair and maintenance

Stage 1: planning, definition of objectives (budget determination, improve spec, clarity contract contents) thought a model:
     Decision support model (identification     of problem)
     Simulation models (to determine which variable has the biggest impact on the result)
     Optimization models (calculate support costs)

Stage 2: Preparation. Testing models and identify cost components

Stage 3: Implementation.

39
Q

Criteria applied to business case creation and evaluation

A
  1. Objectives: are they clear? How strategic are they? (5 why’s and issues management)
  2. Options: review generated options and benchmark
  3. Cost and benefit analysis to show the financial consequences of the business choice (payback period = cost of implementing option/annual savings)
  4. Risk assessment: mitigation strategies ACAT model and 4Ts (Avoid-Control-Accept-Transfer; Tolerate-Transfer-Terminate-Treat)
  5. Implementation plan
40
Q

Interventions to consider when creating a procurement business case

A

Market, Technical, Cost Structure, Work Process, Supplier Relationship, Supply Chain

41
Q

Benchmarking requirements: definitions and types

A

Benchmarking is a strategic analytical process of continuously measuring an organization’s products, services and practices against a recognized leader in the studied area.

Other definitions:
It’s a tool to identify, establish and achieve standards of excellence. The practice of measuring performance against world-class organizations.

Types of benchmarking:

  • Internal (against similar process, same organization)
  • Competitive (against direct competitor)
  • Functional (against organization outside the industry sector)
  • Generic (against unrelated functions regardless the industry)
42
Q

Financial budget

A

Budget is a quantitative expression of a plan for a defined period of time. It manages a way of monitoring actual vs. estimated costs.
Variances are not only financial, it can be schedules, time scales, output, quality.

Activities involved in budgeting and managing budgets:
- Planning: how money will be spent, on what, and when
- Controlling: data analysis to show how money is spent against the budget
- Decision making: how to bring spend back under control
plan - do - review cycle

Cost entries and timing of cash flows

43
Q

Working capital

A

Funds to pay what the business owes before it receives funds from the people who owe it

44
Q

What are the key characteristics for service industries

A
  1. Services cannot be put into inventory to be sold later
  2. Services are mostly intangible, quality cannot be measured in the same way
  3. Production and consumption by a customer take place at the same time
  4. Services often result in a wide variety of products from the same cost base. businesses have to be careful that they are not paying for service providers’ overhead cost more than once if they are buying multiple service from them
  5. Customer provider interface
45
Q

Similarities between service industries and manufacturing

A

Both can be thought of as generating products

Both deliver products with processes

46
Q

Cash flow cycle

A 
Receive raw materials and components
Manufacture products
Store in inventory
Pay suppliers
Sell products
Receive funds from customers
47
Q

Cost entries categories and their impact on the timing on a business

A
  1. Revenue: total amount of income generated by the sale of goods and services related to the primary operations of the business
    Accounts receivable at the end of the year = accounts receivable at the start of the year + sales made in the year - cash received from customers during the year
  2. Direct cost
  3. Indirect cost or Overhead
  4. Depreciation: full amount used for cash flow calculations
  5. Bank loans: create cash flow at the time of draw down
  6. Investment: leasing would be a charge to an accounting period
  7. Dividends
48
Q

Accrual

A

Adjustment made to a set of financial accounts to reflect activity that has occurred but for which cash has not yet been received or paid

49
Q

Management by exception principle

A

This is a style of business management that focuses on identifying and handling cases the deviate from the norm

50
Q

Types of budgets

A
  • Incremental budget is set on the basis of what happened last year with some adjustments
  • zero-based budget: all spending needs to be justified. Budgets are reset to zero and only increase if a good case is made for the expenditure.
  • fixed budgets are based on an activity, for example producing 3000 items
  • Flexible budget is designed to change the volume of output changes
51
Q

Price and quantity variances

A

Cost variance

   (Q1-Q2)P1        +        (P1-P2)Q2 Quantity variance        Price variance

L4M2 Defining Business Needs (4 decks)

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