Chapter 1.1

Question 1

What is procurement and what does it involve?

• need
• ISAM
• cavpqs

Answer 1

Procurement begins with identifying a need - tangible or intangible. It is a strategic business function which ensures finding the best possible outcome for suppliers and customers through identification, sourcing, access and management of external sources.

The procurement process involves aspects such as added value, cost, purchasing, quality and supply.

Question 2

Purchasing vs. Supply?

Answer 2

Purchasing is the act of physically ordering and buying a good or service.
Supply is the infrastructure which ensures products and services get from the supplier to the customer.
Remember: without procurement there can be no purchasing, without purchasing there can be no supply.

Question 3

Organisational costs: fixed vs. variable

Answer 3

Costs do not just relate to those which are monetary - costs can be defined in time, material, effort and opportunity.
Fixed costs do NOT change with the output of an organisation, they remain the same and must be paid regardless of the performance.
Variable costs do change with the output of an organisation. Variable costs relate to the number of goods sold or produced or the number of services supplied.
Examples of fixed: rent, salaries.
Examples of variable: raw materials, hourly wages.

Question 4

Organisational costs: direct vs. indirect

Answer 4

Direct costs are those directly associated with a job or service or the finished products. Examples of fixed costs are bricks for a construction job, nuts and bolts needed to make a car or smartphone.
Indirect costs are those indirectly associated with a job or product but still plays it’s part in ensuring it is completed. For example, salaries for the employees, work phones.

Question 5

Associated costs within an organisation MOMET!

Answer 5

Time, effort, material, opportunity, money.

Question 6

Breakdown of organisation costs

Answer 6

• capital purchases
• insurance
• marketing
• raw materials
• research & development
• sundries
• training
• vehicles, transport & haulage

Question 7

Organisational costs: capital purchases/insurance

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Answer 7

Responsibilities of procurement:

• compare buy/lease options
• calculate currency differences
• assess ethical requirements
• review quality & standards
• review packaging options
• research total life cost
• investigate transport
• be involved in preparing specifications
• benchmark prices
• ensure assets are fit for purpose
• evaluate potential suppliers

Question 8

Organisational costs: marketing

Answer 8

Procurement depts. source promotional materials used by marketing depts.
Procurement depts. work with marketing to ensure when they go on promotional stands/trade fairs etc., costs are kept low for accommodation, transport, stands by getting best prices possible.

Question 9

Organisational costs: raw materials

Answer 9

Raw materials make up a large part of company expenditure, around 60%.
Procurement dept. need to source (EOS) and arrange supply of product and manage stock to maximise company profits.
Stock that arrives is stored as inventory - this ensures cost is kept low without cutting quality.

Question 10

DEFINITION: economies of scale (EOS)

Answer 10

TREND OF COST PER UNIT BEING REDUCED AS OUTPUT INCREASES DUE TO FACTORS SUCH AS INCREASED BARGAINING POWER AND COST OF TOOLING BEING SHARED AMONGST A LARGER NUMBER OF UNITS.

Question 11

Organisational costs: R&D (research and development)

Answer 11

Ensures organisation stays up to date with current trends.
Procurement dept. source prototypes for trials.
Procurement aim: value for money.
Procurement dept. may have existing relationships with relevant suppliers beforehand to supply what is needed at a fair cost.

Question 12

Organisational costs: salaries/sundries

Answer 12

Salaries: keep overall costs lower throughout the organisation so the relevant dept. can offer higher salaries to employees/potential employees.
Sundries: procurement dept. will have knowledge of which suppliers can offer best value for money.

Question 13

Organisational costs: training

Answer 13

Procurement dept. cannot provide specific training needs but can offer reduced costs through negotiation.

Question 14

Organisational costs: vehicles/transport/haulage

Answer 14

Procurement dept. can negotiate best options for vehicles as they would capital purchases.
Haulage rates or carrier deals (best price through negotiation) can be negotiated to obtain the best cost.

Question 15

Stock procurement

Answer 15

Stock procurement links to inventory costs and needs to be managed carefully to keep inventory costs as effective as possible. Well managed inventory=higher profits.
Raw materials: Products in their natural form, they come from the primary sector. Primary products may be sourced, purchased & supplied then stored for future use.
Components: manufactured in the secondary sector, the industry that manufactures things. Secondary sector products are used to create finished product. Example: nuts and bolts to make car engine.
Finished goods: some procurement professionals work within a manufacturer/production organisation. Buyers buy finished products.

Question 16

Non-stock procurement

Answer 16

Not stored within an organisation. They may be intangible and one off purchases.
They are not listed in inventory and are often capital purchases (CAPEX).
Non-stock belongs to teritiary sector - the industry sector which provides services.

Question 17

Direct procurement

Answer 17

Purchasing of large quantities of raw materials needed for production at the best possible rate.
Sourcing or supply of a product or service that is related to the end result.
it is integral to an organisation as without it there are no end products to sell to consumers.

Question 18

Indirect procurement

Answer 18

It is needed to continue functioning but not essential. An example is the repair of broken products.
It can be sought from many different suppliers so supplier relationships do not need to be as strong.
The importance and risk is assessed using the Kraljic matrix.
Procurement may just pay for service rather than build relationship with supplier.

Question 19

Kraljic matrix

Answer 19

It is used to help manage supplier relations.
The risk is assessed in relation to how essential the product is. Failure to supply high risk products could result in a stop in trading.
High risk should be managed more closely.

Question 20

Leverage suppliers

Answer 20

High cost impact yet low risk impact.
There is vast competition.
It is low cost to move suppliers.
They are often utility services.

Question 21

Strategic suppliers

Answer 21

They are the highest risk on the matrix.
They have both high risk and high cost impact.
They are responsible for core products and critical to an organisations success.

Question 22

Routine suppliers

Answer 22

Low value and low risk.
Usually provide supplies such as stationary.
Products which could be supplied by several suppliers.

Question 23

Bottleneck suppliers

Answer 23

Low cost and high risk impact.
They hold a monopoly in the marketplace, meaning there is little or no other option.
Despite the low value, it is highly sought after.

Question 24

Operations expenditure

Answer 24

Procurement made by an organisation to ensure the efficient day to day running of the business. The costs associated with running an organisation such as rent, salary, insurance etc.
This along with capital purchases are linked with organisational budgets.
It is split into 2 types of budgets - capex & opex.

Question 25

Organisational budgets

Answer 25

Budget is the primary tool used to monitor income & expenditure.
Without it, organisations would be unaware of how much they can afford vs. how much they are spending.
The budget within organisations is split between OPEX and CAPEX.

Question 26

Capital purchases (CAPEX)

Answer 26

Capex relates to capital expenditure and includes capital purchases.
Relates to the assets of an organisation and are usually one off purchases.
Purchased to help a business develop long term, make money & keep up with trends.
Spend money to make money.
Usually a one off payment/goes on longer than tax year.
High value.
Seen as depreciating over time, before purchasing procurement will liaise with accounting dept. to calculate the depreciation cost/how quickly it will depreciate.

Question 27

Operational expenditure (OPEX)

Answer 27

Relates to the operations expenditure of a company.
Ensures the efficient day to day running of a company.
Examples: salary, rent, insurance.
Usually an ongoing cost.
Low/mid value.
Accounted for monthly/within tax year.

Question 28

Service procurement

Answer 28

Usually intangible.
An organisation does not physically own a service procurement.
Services can be one off or ongoing.
It cannot be evaluated the same way a tangible service can.
Specifications need to be very detailed as samples cannot be sought as they can with tangible products.
Ensuring quality of service is very important.