Chapter 1 Flashcards
What is the definition of an Internal Supplier?
An internal supplier is one which is owned by the company. Similar to a sister company/ division etc. Internal supplier are most often used by the company to support ‘core activities’
CIPS suggest internal supplier selection and relationship management should be treated the same external supplier. All aspects.
What are the advantages of using an internal supplier?
Greater control and continuity of supply
Less dependent and parties external to the business
Both parties share common goals, culture and values, this likely to maintain a long term relationship
Higher quality control. Can influence it more
Potential for lower cost as internal supplier shouldn’t usually charge margins
Greater IP, copy right protection
What are the disadvantages of Internal Suppliers?
Internal Supplier could be more expensive vs external supplier. Procurement need to benchmark costs
Argued that Internal supplier will charge fixed cost as well as variable cost. External may only charge variable cost as the goods/ services are being produced for other customers already.
If internal supplier does not charge for services or does charge without margin, where is there incentive to meet standards/ expectation of company?
Company may need to invest/ fund internal supplier to acquire machinery/ assets/ capital where an external supplier would already have these. No up front cost and the associated opportunity cost of working capital or money being spend elsewhere. Cash flow would also take a hit.
What does CIPS consider to be the 3 main reasons Procurement department exists?
Selecting, having a contract with and managing external suppliers
What is the first step in actively managing supplier relationships?
Classify the supplier base to understand what type of relationships should exist. This will inform procurement of which supplier need more resources than another. Should the relationship be development or left as is etc.
One of the first model used to understand relationship should be formed is the Relationship Spectrum. It starts with adversarial to collaborative relationships.
Make sure you can draw this.
Can you explain the relationship spectrum verbally? All of it’s components? Remember the mnemonics? Can you draw it?
There are three reasons for supplier conflict according to Cornelius & Faire 1989. What are they?
Win/Lose - One party gets the bigger piece of pie. The other party will be dissatisfied.
Lose/ Lose - neither party gets what they want.
Win/ Win - both parties were collaborative, understood each other needs etc and both gained beneficial outcomes. They ‘expanded’ the pie.
What is the definition of TUPE?
Transfer of Undertaking (Protection of Employment)
Additional protection of existing employees in the event of a buy out or switch of supplier.
Does buyer/ supplier power influence relationship development?
Yes, imagine buyer wants to develop a Co Destiny relationship because it is in their interest but the supplier is so large that the small buyer if of no interest to them and will remain arms length. Thus powers of either party can be positive or negative. Buyer might not be interested in supplier etc
How would you describe the Relationship Life Cycle? Can you draw this and name the stages?
All supplier relationship will pass through the same stages of the life cycle but at different paces for various factors.
Stage are:
Onboarding Qualification - cips link carter 10 Cs here are part of building selection process i.e. RFI, RFPs etc Segmentation and risk management Performance management Development and innovation Phase - out (if required)
What is the Definition of Supplier Development?
Process of working with supplier to improve supplier performance/ processes. The aim is to gain additional commercial advantages/ benefits, however, this could also benefit the supplier too. It will involve measurable benefits. With the ability to measure result, you won’t know if it is worth while or if target have been reached.
What is the definition of Material Breach?
Failure of performance by the other party which enables a termination of contract or sue for damages.
What are the main three type of portfolio analysis to support supplier sourcing and relationship strategies?
Supplier positioning - Kraljic matrix
Supplier preferencing model
Market management matrix
As procurement resources are limited, these model can used to help procurement understand which suppliers they should spend most of their time on. This would involve developing the relationship in order to obtain greater value.
Advantage of this include:
Leverage available resources by identifying sourcing and relationship opportunities that add value
Identify opportunities for competitive advantage
Provide a framework for decision making and action planning i.e. using a methodical process of models to set an example going forward
Reduce risk by identifying vulnerabilities in relationship or products
Disadvantage of these are that they are time consuming for procurement and other internal stakeholders. Time spent vs benefits gained must be assessed.
What are three examples of procurement objectives achieved by portfolio analysis?
Move non contract spend on to contract - use of pareto principle and ABC analysis should show that 80% of spend is based on only 20% of volume. This enables a clear section to target for spend reduction and helps to know where to allocate limited time resource. Section A should be focused on and specifically the type of relationship that’s needed. This will give the best return on time invested. Some argue that ABC. Pareto shouldn’t be a portfolio analysis because it doesn’t not take into account specific categories or market complexity and does not provide strategic recommendations. ABC allows easier plotting of supplier financial axis plotting. Important link to remember!
Identify organisation strategic product/ services
Develop added value relationships
What does CIPS consider using when applying Risk Management?
STEEPLE (Social, Technology, Environment, Ethics, Political, Legal, Economics)
CCISS (Customers, Competitors, Intermediaries, Some public, Suppliers)
Risks should organised in ranked order by the likelihood of occurrence. This could also be known as a risk register.
Formula for risk is: Tot Risk = Likelihood x Impact
For example, a flood could be catostrphic for a company so 4 Impact score, but chance in local area is very low, 1 Likelihood score. Tot risk is 4.
Buyer will use this score to highlight what risk needs mitigating.
What is the purpose of the Kraljic matrix?
It distinguishes between different procurement strategies on goods/ service value and risk. It aimed to maximising buying power whilst minimising risk.
Make sure you can draw this.
It enables segmentation of category management.
Cost Impact axis refer to impact on profit
Supply Risk axis refers to number of supplier in marketplace , delivery risk, technology risk etc. Plotting on Supply Risk axis can be supported by PF5. Important link!
What relationship strategies should be applied to the Kraljic Matrix?
Routine suppliers - adversarial/ arms length
Bottleneck suppliers- single source, long term contract
Leverage suppliers - closer tactical, outsourced
Strategic suppliers - Strategic alliance, performance based relationship with single or sole source, co destiny
What does Lysons and Farrington 2006 suggest doing to complete segmentation analysis?
Make a list of purchases in descending order - highest values first
Evaluate supply risk and market complexities of each purchase
Using the above points, plot the purchase on the Kraljic matrix
Regularly review to expose risks and opportunities
What does the Supplier Preferencing Model show us?
It helps the buyer understand how suppliers view the buying organization.
Allows the buyer to map where the perceived supplier view of buying origination, which helps understand the buyer current power of weakness. i.e. if a Nuisance classification is given, the buyer need to act to mitigate this and move into another quadrant.
Like the Kraljic matrix it supports the buyer to understand which relationship should be formed. Both models can be used in tandem.
It can make the buyer aware of shocking truths such as the supplier seeing them as exploitable
What is the definition of Consortia Procurement?
A group of different buyer organization group together to buy in larger quantities leveraging their size and power a.k.a consortium/ syndicate
