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L4M1 Procurement & Supply > Chapter 1.2 > Flashcards

Chapter 1.2 Flashcards

1
Q

5 rights - description of purpose

A
  • added value in business & monetary sense.

- takes into account all costs that contribute towards making product or service.

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2
Q

5 rights - what are they? 1-5

A

-right quality
-right quantity
-right time
-right place
-right price
They should all be considered when making a purchase as they are interlinked.

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3
Q
  1. The right quantity
A
  • ensuring the most cost effective amount is procured.
  • ordering too little: unhappy stakeholders.
  • ordering too much: may not have enough storage & may need to look for alternate storage which increases costs.
  • quality needs to be evaluated when ordering to obtain best price.
  • often best to order products in one big orders as lower price will be paid for larger orders due to: running machinery for longer rather than setting it up several times, sending one vehicle rather than several.
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4
Q

Ordering the wrong quantity consequences

A

When wrong quantity is procured, the following can occur:

  • production could stop
  • retail consumers needs could be unfulfilled
  • warehouses could be overstocked
  • the price the org./service pays could be too high
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5
Q
  1. The right quality
A

This is essential to achieve value for money.

  • It is not always necessary for quality to be high, but it must always be fit for purpose.
  • procurement role is to define the standard of quality that is required through stating quality standards & procuring a product specification.
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6
Q

Quality standards

A

Most common set of standards for right quality is ISO 9000.
ISO - International Organisation for Standardisation
ISO standards promote quality in both manufacturing & service organisations.
ISO 9000 is known as the ‘address’ for the family of standards that feature within in.
ISO 9001:2015 is the current quality management standard within the ISO 9000 family.

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7
Q

Product specification - conformance & performance

A

There are two types of specifications.
A CONFORMANCE SPEC:
-details exactly what the product/service will consist of.
-supplier not always aware of what product will be used for or how.
-only importance is that the supplier conforms to spec.
-unusually long document, time consuming, expensive, limits supplier competition, does not allow suppliers to innovate.

A PERFORMANCE SPEC:

  • outlines what the product or service is to do or achieve.
  • covers its output requirements, tolerances & any functions it may have to perform.
  • performance specs are shorter & less complex than conformance specs.
  • short document, quick to prep, cheap, allows suppliers to innovate, allows supplier competition.
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8
Q
  1. The right time
A

Procurement dept.’s need to ensure orders & contracts state the time the org. requires them. If not:
-stockouts - may be forced to stop production.
-additional costs - may have to purchase replacement goods
-additional costs - staff paid overtime to receive deliveries
-additional costs - if supplier has waiting time in contract then the buying org. may need to pay penalty if unable to accept delivery.
-relationships with suppliers may be negatively affected.
Procurement professionals should always determine the right time before agreeing to contracts or placing orders.

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9
Q
  1. The right place
A
  • have to be delivered to the right place
  • failure to deliver to the correct destination could cause stockouts, dissatisfied customer who may take business somewhere else
  • additional costs may be incurred if a delivery vehicle is sent to the wrong destination.
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10
Q
  1. The right price
A
  • must be fair & reasonable or it could push customers away

- important to evaluate: currency (if purchasing from overseas suppliers), whether the price incudes tax, incoterms

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11
Q

INCOTERMS DEFINITION

A

International commercial terms of sale that assign costs & responsibilities between the buyer & seller when delivering products.

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12
Q

The right price - currency

A
  • purchasing from suppliers abroad may save on costs compared to home country suppliers.
  • with global trading, procurement often send out requests for quotations (RFQ*) to overseas suppliers.
  • every quotation should be checked on receipt to ensure it is the correct currency.
  • RFQ - an invitation to suppliers to big on specific products or services.
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13
Q

The right price - net or gross

A

NET - excludes tax
GROSS - includes tax

  • quotations are usually provided in a net form
  • important to check whether the quote provided is net or gross
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14
Q

The right price - incoterms definition

A

-shipping or delivery methods in which a supplier intends to supply goods to the buyer.

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15
Q

INCOTERMS - EXW

A

(ex works) - procurement dept. arranges collection & delivery of the goods from the supplier. This will result in an on cost (additional cost besides quote) to the buyer.

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16
Q

INCOTERMS - FCA

A

(free carrier) - supplier delivers the goods to a chosen destination where a courier chosen by the buyer collects & delivers them to a final point.

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17
Q

INCOTERMS - CPT

A

(carriage paid to) - goods delivered with no official carriage bill to a destination agreed with buyer.

  • Carriage charge absorbed in the product price
  • Buyer is responsible for goods throughout journey
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18
Q

INCOTERMS - CIP

A

(carriage & insurance paid to) - goods delivered with no official carriage bill to a destination agreed with the buyer.
-the carriage & insurance is absorbed in the product price.

19
Q

INCOTERMS - DAT

A

(delivered at terminal) - goods are delivered to a sea port, airport or train station by supplier.
-responsibility then passed to buyer to arrange the rest of the journey.

20
Q

Total life costs/cost of ownership

A

TCO (total life costs) - used to analyse the total costs incurred over the lifetime of a material or service.
TCA relates to the amount of money an org. has had to budget in order to physically receive a product on site.

21
Q

TCA

A

Total cost of acquisition - total cost incurred in acquiring a product from sourcing to receiving & installing.

22
Q

TCO

A

Total cost of ownership - total cost incurred by owning a product throughout its useful life including acquisition, use, maintenance & disposal.

23
Q

TOTAL COST OF ACQUISITION (TCA)

A
  • getting good prices is a huge part of procurement, not just concerning the actual product/service.
  • must consider TCO & TCA, not just purchase cost.
  • Must consider:
  • quality: lower quality could mean cheaper price but may cause defects due to being unfit for purpose.
  • cost of carriage & insurance: transporting product to its destination & ensuring there is valid insurance.
  • lead time: amount of time it takes for product to arrive, inc. manufacturing & transportation.
24
Q

TOTAL COST OF OWNERSHIP (TCO)

A
  • relates to costs throughout entire life of product
  • takes into account the estimated costs before purchasing
  • costs include storage, training, maintenance, operation, TCA, insurance etc.
  • when calculating costs & basing it on price alone, it may not actually be best cost/value.
25
Q

Internal suppliers

A
  • when a product/service comes from the same org., it is an internal supplier.
  • linked by either working on the same site or for the same company.
  • may be colleagues who manufacture a component for finished product or colleagues who run the catering facilities.
  • don’t have to work on same site as buyer to be considered internal.
26
Q

External suppliers

A
  • separate business entity from buyers org.
  • procurement dept.’s use contracts, SLA’s & KPI’s to ensure external suppliers meet quality, timescales, quantity & place considerations (4/5 rights).
27
Q

Contracts

A

procurement = negotiating strong contracts with suppliers.

  • enforcement by law.
  • without a contract the procurement dept. & supplier wouldn’t know:
  • when things should happen
  • what should happen
28
Q

Contract requirements

A

For a contract to exist & be valid:
-intention: all parties must have the agreement that civil law can be enforced if the contract is broken by one of the parties involved.
-consideration: bargaining aspect of the contract, it is a promise by one party for an action by the other party.
-agreement: in contract law, the agreement is created through offer & acceptance.
The contract has to include details of the quantity, quality, timescales & place required by the buyer.

29
Q

Contract contents

A

-sets out quality expectations
-where & when deliveries are to be made
-time required to make & deliver orders
-no. of items required
-price per item
-payment - when & how invoices are paid
-length of contract
-packaging details
-currency
-notice period of termination
-potential dispute resolution
Must include name & addresses of parties involved,
inc. date & signature.

30
Q

KPI’s (key performance indicators)

A
  • may be included in a contract with the buyers org. in order to achieve 5 rights.
  • used to monitor performance of supplier.
  • can be qualitative or quantitative but must be measurable.
  • during meetings KPI’s will be discussed & assessed
31
Q

KPI’s - qualitative KPI

A
  • time/quality/quantity/place
  • reduces no. of factory rejects
  • achieve ISO accreditation
  • reduce material wastage during manufacturing
32
Q

KPI’s - quantitative KPI

A
  • reduces % of late deliveries
  • increases no. of orders received with correct quantities
  • increase % of deliveries to correct location
33
Q

KPI - benefits & limitations

A

+improved supplier motivation
+improved communication
+improved relationships
+sharing of common goals

  • reduction in quality by suppliers rushing to meet quantitative KPI’s
  • reduction of team work as suppliers focus on their own KPI’s instead of common goals.

If handled correctly, KPI’s can achieve 5 rights.

34
Q

Sources of added value

A
  • added value can set product apart from competitors

- for procurement, achieving value is more than an advantageous monetary deal.

35
Q

sources of added value - additional features

A
  • when there are several similar product, something is needed to make it stand out to consumers.
  • could be tangible or intangible
36
Q

sources of added value - brand

A
  • referring to an org’s identity - logo, name, packaging etc.
  • a strong brand identity adds value in the form of:
  • awareness: instantly recognisable to customer, can cost money initially but gives considerable long term value.
  • engagement: strong brand identity reaches out to target market. Adverts=effective advertising strategy promotes added value as more people aware of product/service.
  • communication: telling customers about latest developments/offers promotes added value as it keeps interest high & encourages purchases.
37
Q

sources of added value - convenience

A

-consumers will pay more than the cheapest price when there is an increase in convenience.

38
Q

sources of added value - excellence of service

A
  • attention to detail
  • considering aspects from buyers perspective
  • going beyond requirements
  • these can be limited cost to an org. but make a huge difference & can encourage customer loyalty.
39
Q

sources of added value - market development

A

finding new markets for products/services & acquiring new customers/target markets.
-may be able to use economies of scale to offer buyers lower costs as volumes increase & inputs reduce.

40
Q

sources of added value - reduced input costs

A

-input costs lower with selling price the same= monetary added value higher.

41
Q

sources of added value - a good reputation

A
  • adds value when buyer is deciding who to work with
  • buyer more likely to purchase from a well respected org.
  • reputation can include ethical values.
42
Q

sources of added value - innovation

A

-suppliers may work with buyers who provide new concepts
Examples:
-discovering news ways to produce/supply
-protecting the buyer from substitutes or new entrants by staying one step ahead.

43
Q

sources of added value - sustainability

A
  • value for money, minimising risk while ensuring positive outcomes in relation to the environment.
  • a sustainable org. will have a plan to deal with potential risks - preparation adds value.
  • risk matrix & risk register are effective planning.
  • working with sustainable suppliers is good practice - shows buyers that org. cares about sustainability & improves reputation.
  • org. can include it in its CSR* (corporate social responsibility) that its supply chain respects the environment/economy/gives back to local community.
  • CSR - a business approach that contributes to sustainable development by delivering social, environmental & economic benefits for all stakeholders, CSR policy may cover fundraising, ethical behaviour, social & environmental policies.

L4M1 Procurement & Supply (2 decks)

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