Chapter 1.2 Flashcards
5 rights - description of purpose
- added value in business & monetary sense.
- takes into account all costs that contribute towards making product or service.
5 rights - what are they? 1-5
-right quality
-right quantity
-right time
-right place
-right price
They should all be considered when making a purchase as they are interlinked.
- The right quantity
- 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.
Ordering the wrong quantity consequences
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
- The right quality
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.
Quality standards
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.
Product specification - conformance & performance
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.
- The right time
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.
- The right place
- 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.
- The right price
- 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
INCOTERMS DEFINITION
International commercial terms of sale that assign costs & responsibilities between the buyer & seller when delivering products.
The right price - currency
- 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.
The right price - net or gross
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
The right price - incoterms definition
-shipping or delivery methods in which a supplier intends to supply goods to the buyer.
INCOTERMS - EXW
(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.
INCOTERMS - FCA
(free carrier) - supplier delivers the goods to a chosen destination where a courier chosen by the buyer collects & delivers them to a final point.
INCOTERMS - CPT
(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
INCOTERMS - CIP
(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.
INCOTERMS - DAT
(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.
Total life costs/cost of ownership
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.
TCA
Total cost of acquisition - total cost incurred in acquiring a product from sourcing to receiving & installing.
TCO
Total cost of ownership - total cost incurred by owning a product throughout its useful life including acquisition, use, maintenance & disposal.
TOTAL COST OF ACQUISITION (TCA)
- 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.
TOTAL COST OF OWNERSHIP (TCO)
- 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.
Internal suppliers
- 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.
External suppliers
- 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).
Contracts
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
Contract requirements
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.
Contract contents
-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.
KPI’s (key performance indicators)
- 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
KPI’s - qualitative KPI
- time/quality/quantity/place
- reduces no. of factory rejects
- achieve ISO accreditation
- reduce material wastage during manufacturing
KPI’s - quantitative KPI
- reduces % of late deliveries
- increases no. of orders received with correct quantities
- increase % of deliveries to correct location
KPI - benefits & limitations
+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.
Sources of added value
- added value can set product apart from competitors
- for procurement, achieving value is more than an advantageous monetary deal.
sources of added value - additional features
- when there are several similar product, something is needed to make it stand out to consumers.
- could be tangible or intangible
sources of added value - brand
- 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.
sources of added value - convenience
-consumers will pay more than the cheapest price when there is an increase in convenience.
sources of added value - excellence of service
- 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.
sources of added value - market development
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.
sources of added value - reduced input costs
-input costs lower with selling price the same= monetary added value higher.
sources of added value - a good reputation
- 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.
sources of added value - innovation
-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.
sources of added value - sustainability
- 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.
