CHAPTER 2 Flashcards
Increasing importance of services
The procurement to sales ratio (how much of a company’s sales revenue) *Industrial companies (factories, manufacturers) spend a lot (60-80%) on materials and parts because they make physical products.
*Service companies (hotels, IT firms, consulting) spend less (10-50%) because they don’t need as many physical materials.
- For service providers the largest part of their total cost is related to personnel
Procurement professionals working in the service categories need to be more service-driven (focusing on quality and value) than cost-driven (cutting costs in process of buying physical goods) in relation to professionals working in sourcing goods.
Services
Managing different actions and tasks that happen when a customer and a company’s employees interact. These actions can be physical (like delivering a product) or intangible (like providing customer support or consulting).
Sometimes, these services are offered alone (like IT support), and other times they come with physical products (like when you buy a phone and get customer service with it). The goal is to provide a complete solution that solves the customer’s problem.
Differences between goods and services
SERVICES/ PRODUCTS
-Intangible/ Tangible
-Production, distribution and consumption are simultaneous processes/ Production and distribution are separated from consumption
- More difficult to demonstrate/ Can be demonstrated
- Cannot be transported/ can be
-Is an activity or a process/ is a physical entity
-Is produced in interaction between buyer and seller/ is produced in a specialized remote facility
-Customers participate in production process/ Customers in general do not participate in the production process
-Cannot be stored/ can be stored
CLASSIFICATION OF SERVICES
Functional vs Procurement portfolio
Functional: Focuses on the top 10 services a company needs to operate efficiently.
Example: IT support, facility management, legal services, HR services.
Procurement Portfolio (Kraljic Matrix): Helps companies strategically manage purchasing based on risk and impact.
Example: Dividing purchases into strategic, leverage, bottleneck, and non-critical categories (e.g., raw materials vs. office supplies).
Business-critical vs Non-business critical:
- Business- critical (Directly impact customers; if they fail, customer experience suffers) operates in the interface between buyer and its customers, service provider’s performance immediately affects customer satisfaction
Airline maintenance services (if planes aren’t maintained, flights get canceled).
Customer support for an e-commerce company (bad service = unhappy customers). - Non-business critical (Important for operations but don’t directly affect customers)
Delivered to the buyer, Do not directly affect the end-customer satisfaction
Office cleaning services (nice to have but won’t ruin customer experience if delayed).
CONTRACTING FOR SERVICES
Important to agree upon criteria that will be used for assessing the quality of the service.
Some suggestions:
- Specify performance or outcome rather than activities
-Describe when and where the service needs to be provided
-Describe who will benefit from the service and in what way
-Check the supplier’s reputation, qualitifactions
-Prepare for detailed inspection and quality procedures
-Discuss and agree on dispute resolution procedures
POST- CONTRACTING STAGE
The contract manager is responsible for selecting the right contract, contract negotiation and contract compliance by both the buyer and the seller
- The buying organization and the service provider should actively collaborate to establish a successful service delivery
- Involving operational staff early means asking the people who will actually do the work for their input before making plans, so everything is practical and works as expected.
SUMMARY SOURCING business services
Traditionally, services spend was limited to contracting facility services
In the past, companies mainly spent money on basic services like cleaning, security, or building maintenance.
Buying services requires specific expertise and close collaboration with internal experts
Purchasing services isn’t as simple as buying goods—it needs experts who know the service well and must work closely with people within the company who understand what’s needed.
This is especially important if someone in the company already has a strong personal relationship with the service provider, which could influence decisions.
Challenges in buying services:
Deciding on the specification of services
It’s hard to decide exactly what services are needed and how to describe them clearly to avoid misunderstandings.
Example: Do you need full-time IT support, or just help during business hours?
Objective selection criteria
Choosing the right service provider requires setting clear, fair criteria that everyone agrees on, to avoid bias or personal preferences.
Example: You might look at past performance, cost, and expertise when picking a provider.
Service-level agreements (SLAs) stimulate internal customers to express key performance indicators (KPIs)
SLAs are formal agreements between the company and the service provider that clearly state the expected level of service.
These agreements help internal customers (like department heads or managers) express exactly what key performance indicators (KPIs) they want to track (e.g., response times, service quality).
CORPORATE SOCIAL RESPONSIBILITY
A self-regulating business model that helps a company be socially accountable to itself, its stakeholders and the public
The pyramid of corporate social responsibility
PHILANTHROPIC RESPONSIBILITIES (BE A GOOD WORLD CITIZEN)
ETHICAL RESPONSIBILITIES (BE ETHICAL)
LEGAL RESPONSIBILITIES (OBEY THE LAW)
ECONOMIC RESPONSIBILITIES (BE PROFITABLE)
how to drive CSR in supply chain relationships
Driving Corporate Social Responsibility (CSR) in supply chain relationships involves creating a sustainable, ethical, and responsible approach to how your company interacts with its suppliers and partners. Here’s how you can do it, along with the CSR models and tools often used in the process:
CSR Models and Stages of Maturity
There are different stages of maturity when implementing sustainability practices in your organization and its supply chain, ranging from basic awareness to full integration of CSR practices. These stages often follow these models:
Passive CSR:
The company does nothing about CSR unless forced to by law or customer demand.
Example: Only meeting the legal requirements without any additional efforts to be sustainable.
Reactive CSR:
The company reacts to external pressure or crises but doesn’t take proactive steps to improve CSR.
Example: Addressing environmental concerns after negative press or customer complaints.
Active CSR:
The company actively engages in CSR practices, looking to improve sustainability and ethics within its operations.
Example: Actively working to reduce waste or using sustainable materials in production.
Proactive CSR:
The company integrates CSR into its core business strategy, constantly looking for ways to innovate and lead in sustainability.
Example: Becoming a leader in ethical sourcing and reducing the overall carbon footprint of the entire supply chain.
Key Activities, Tools, and Techniques for Driving CSR
Here are some common tools and techniques used in driving CSR within supply chain relationships:
Supplier Sustainability Codes of Conduct
A code of conduct outlines the ethical, environmental, and social standards your suppliers must meet.
Example: A supplier must comply with specific labor laws, environmental practices, and anti-corruption policies.
Supplier Sustainability Assessments
These are evaluations where you assess your suppliers’ sustainability practices to ensure they align with your CSR goals.
Example: Reviewing whether a supplier has waste management systems or fair labor practices in place.
Supplier Sustainability Follow-Ups
Regular checks and audits are conducted to ensure suppliers are continuing to meet the CSR criteria after an assessment.
Example: Conducting annual audits on how a supplier is progressing in reducing their carbon footprint.
External Sustainability Standards
Using third-party certifications or standards (e.g., ISO 14001 for environmental management, Fair Trade certification) to ensure your supply chain meets global sustainability norms.
Example: A supplier may be required to be certified by an external standard that ensures they meet certain environmental or labor rights guidelines.
SUSTAINABILITY: PEOPLE, PLANET, PROFIT
Finding solutions without harming the needs of future generations
- People: providing good labour conditions and climate to employees
-Planet: focused on an efficient use of natural sources of energy, raw materials and other natural resources
-Profit: sustainable financial development of a company
WEIGH DECISIONS BASED ON THESE THREE CRITERIA
TOWARDS A SUSTAINABLE ENVIRONMENT
Sustainable procurement (or procuremetn with purpose) is about buying for a better future world
The traditional shareholder focus has made way for a stakeholder focus
Sustainable profitability can be achieved if a company is able to balance the interests of customers, employeers, society, the environment and its shareholders
Traditional Shareholder Focus: In the past, companies mainly focused on maximizing profits for shareholders—the people who own the company. The goal was to increase the company’s value and profitability at any cost, sometimes ignoring the impact on workers, the community, or the environment.
Stakeholder Focus: Today, many companies are shifting toward a stakeholder approach. This means they consider not just shareholders, but also employees, customers, suppliers, society, and the environment when making decisions. It’s about balancing social, environmental, and economic interests.
UNILEVER
Driving carbon footprint down in the value chain
CIRCULAR SOURCING
Circular sourcing is a business model where companies focus on purchasing or sourcing products at the end of their life cycle to reprocess and reuse materials instead of relying on new raw materials. This approach promotes sustainability by closing the loop of production and consumption, helping reduce waste, conserve resources, and minimize environmental impact.
For example philips reprocessed vacuum cleaners by collecting them after consumers took them to the waste deports to dispose of them to use the specialized plastic needed for new ones
Circular sourcing has been part of new business models where the new product is based on the recycled materials
for example interface uses abandoned fishing nets gathered and sold to them by emerging countries to make carpet tiles which they lease to B2B customers. After the lease period interface reprocesses the tiles
Currently in its infancy, circular sourcing will benefit the world and future businesses and will change the nature of traditional procurement
A linear economy follows a “take-make-dispose” model, while a circular economy focuses on minimizing waste by reusing, recycling, and regenerating resources.
BUSINESS INTEGRITY AND ETHICS
As companies become more dependent on each other, they need to have strict ethical principles and procedures
Procurement is sensitive to ethical issues
To increase uniformity in behaviour towards the business community, a number of large companies have become explicit on their policies with regard to “business integrity” explaining their company’s business values and regulations on matters such as conflict of interest
RULES OF CONDUCT:
- International Federation of Purchasing and Supply Management
SUMMARY
The idea behind CSR is to meet the needs of current generations without sacrificing the resources of future generations
Suppliers operational processes need to be controlled and monitored for ethical compliance
Large manufacturers require that the first-tier suppliers transfer their environmental policiess to their second-tier suppliers
- this encourages supply chain integration which can only be built upon constructive, long term supplier relationships
The ethical code of the International Federation of Purchasnig and Supply Management is one example of this
