L1.2 Analyse the diff. sources of added value in P&S Flashcards
5 rights of procurement
1. The right QUANTITY
*the 5 rights should always be considered when making a purchase; the rights are interlinked and be used to achieve value for money.
- involves ensuring that the most COST-EFFECTIVE AMOUNT of a product/service is procured, to avoid unsatisfactory consequences
- production could stop, eg. ordering too few engines -> cars can’t be completed
- retail consumers’ needs could be unfulfilled -> retailer LOSES OPPORTUNITY to make $$
- warehouses could be OVERSTOCKED -> org. needs to store goods in alternative location, which could cost $$ -
economies of scale
- ordering in larger quantities to reduce price
5 rights of procurement
2. The right QUALITY
+ 2 methods: quality standards
- ensuring that the product/service is FIT FOR PURPOSE; meeting the needs and expectations of customers (not always necessary high quality)
-
QUALITY STANDARDS ie. ISO 9000 family
- a set of quality mgmt & quality assurance standards that help co.s maintain an efficient quality system
- not specific to any one industry
- can be applied to large or small org.s
!! ISO is a globally recognised standard for quality.
5 rights of procurement
2. The right QUALITY
+ 2 methods: product specification
- ensuring that the product/service is FIT FOR PURPOSE; meeting the needs and expectations of customers (not always necessary high quality)
-
PRODUCT SPECIFICATION - to ensure the std of quality demanded is met
+ advantages & disadvantages
i) Performance spec
» outlines what the product/service is to do/achieve
+ can be a SHORT document, quick to prepare, cheap
+ can be SIMPLE TO PREPARE
+ allows suppliers to INNOVATE
+ allows SUPPLIER COMPETITION
ii) Conformance spec
» details exactly what the product/service will consist of
- usually a long document, takes time to prepare, expensive
- usually difficult to prepare
- does not allow supplier to innovate
- limits supplier competition
!! PERFORMANCE SPECIFICATIONS open up the supplier market & promote innovation and competition by letting suppliers offer their solution to the required need.
!! CONFORMANCE SPECIFICATIONS ensure that the product/service is EXACTLY AS REQUIRED and that there is no variance. eg. recipes, chemical formulae, engineering drawings.
5 rights of procurement
3. The right TIME
-
ensuring that orders are PLACED ON TIME & DELIVERED ON TIME, to avoid…
1. STOCKOUTS
2. ADDITIONAL COSTS
eg. having to purchase replacement goods to keep production going; paying staff overtime if deliveries arrive at wrong time and staff need to return to work out of hours; if deliveries will be unloaded immediately but buying org. cannot accept immediately so the delivery vehicle must wait
3. NEGATIVE IMPACT on SUPPLIER RELATIONSHIPS
*kind of similar for service providers
!! Procurement professionals should be aware of REQUIREMENTS INSIDE their org, as well as the MARKET CONDITIONS OUTSIDE of it, to determine the right time to place and receive an order.
eg. price trends and availability, competitor activity, customer demand
5 rights of procurement
4. The right PLACE
- ensuring that goods/services are delivered to the right place, to avoid…
1. STOCKOUTS
2. DISSATISFIED CUSTOMERS who fail to receive their goods may take their biz elsewhere in the future
3. ADDITIONAL COSTS <- if a delivery vehicle has to be redirected after being sent to wrong destination
5 rights of procurement
5. The right PRICE
+ 4 main ways procurement professionals can influence price
*RFQs need to be issued to suppliers if you are challenging existing contracts for price competitiveness
- the price of a product/service must be FAIR AND REASONABLE
-
SOURCING
- the process of ensuring the needs of your org. are satisfied by using SUITABLE SUPPLIERS…
- …who are then able to react to the changing needs of the org. -
AGGREGATION OF SPEND
- {economies of scale}
- combining spend into a larger bundle allows negotiation of better prices with suppliers -
OBTAINING PRICE COMPARISONS, in a standardised format to easily compare
i) CURRENCY
- good practice to ask potential suppliers to clearly state the currency used in the requests for quotations (RFQs)
ii) NET or GROSS PRICE
- quotations are most commonly presented as the NET PRICE (w/o tax)
!! Net price excludes taxes. Gross price includes tax. When reviewing a quotation, important to CHECK this point, if the info is not clearly stated.
-
NEGOTIATION
eg. payment terms, what’s included in the price, non-recurring costs, price revision points in a contract, discount structures, carriage costs & insurance risk
- Incoterms: the DELIVERY METHODS under which a supplier intends to supply goods to the buyer
» they cover the allocation of costs + transfer of RISKS between buyer and seller
Define total life-cycle costs (LCC), { total cost of ownership (TCO) }, whole-life costing (WLC)
+ iceberg effect of WLC
LCC
- relates to all costs of acquisition, owning and running the asset but does not include disposal
TCO
- all costs of acquisition and contract mgmt and disposal of asset, but not considering the benefits derived from the goods/services
WLC
- includes all elements of LCC + disposal + associated benefits and earnings derived from the asset
ie. encompasses all the overall costs associated with owning or using an asset/service from ACQUISITION through to END OF LIFE
- acquisition costs (eg. purchase price, inward delivery, receipt and handling) + processing and maintenance costs (eg. storage, packing, manufacturing, insurance and overheads) + end of life costs (eg. disposal, repair, recycling) + non-value adding processes (eg. scrap/rework or other disposal costs)
Iceberg effect
- where the immediate PURCHASE PRICE is the only aspect of the cost that is visible
eg. carriage costs {ie. transportation}, insurance, commissioning costs
- but HIDDEN below the surface are the MEDIUM- to LONG-TERM COSTS that contribute to the overall total cost of ownership
eg. maintenance, storage, training, research, planning, decommissioning costs, spares inventory, disposal/recycling, cost of finance
*important to consider these hidden costs in order to know upfront which product gives better VALUE
5 stages of whole-life costing (WLC)
*analogy of buying a car
- Cost of planning/preparing
- spend time browsing advertisements of cars, visiting car dealers to see what cars are available - Cost of acquiring/installing
- to acquire car at showroom, need to negotiate the price, agree on the warranty period and make the payment arrangements - Cost of owning/financing
- need to insure the car and pay road tax - Cost of operating/running
- need to refuel the car and send the car for servicing regularly, including replacing parts as they wear and tear - Cost of disposing/recycling
- When I want to sell my car, I need to pay to get the car to a saleable condition.
- Even if the car has reached the end of its life, I need to pay to get the car towed away.
What is the relation between Total cost of acquisition (TCA) and WLC/LCC?
- proc. practitioners often concentrate on analysing the SHORT-TERM COST CONSIDERATIONS of TCA
ie. the total cost incurred in ACQUIRING a product from sourcing to receiving and installing - LCC and WLC consider MEDIUM- AND LONG-TERM COSTS as well
eg. medium-: energy cost of operating asset, maintenance, post-warranty support
eg. long-term: upgrading asset, decommissioning cost, recycling
!! TCA is part of WLC/LCC.
Defining whole-life asset management
- builds on the concept of WLC; WLAM encompasses the management of the total costs & the allocation of resources required associated with an asset over its whole life
eg. acquisition, purchase price, servicing, repairs, consumables, disposal and other end-of-life costs
eg. warehousing space required, no. of trained staff members required, scheduling of maintenance
Achieving 5 rights of procurement from external suppliers
1. Internal suppliers {define}
!! When the supply of a product/service comes from the SAME ORG, the supplier is referred to as an internal supplier.
- internal suppliers don’t have to work on the same site as the buyer
Achieving 5 rights of procurement from external suppliers
2. External suppliers = separate biz entities from the buying org.
- Contracts
- Key performance indicators (KPIs) + 4 benefits & 2 limitations
Contracts
1. ENFORCEABLE IN LAW (=a court can compel those involved in the contract to fulfil their contractual obligations)
2. must incl. details of quantity, quality, timescales and place required by buyer
- also the names & addresses of the parties entering into the agreement, tgt with a date and signatures by INDIVIDUALS WITH CAPACITY (=ppl who are legally able to enter into a contract b/c of their appropriate age and state of mind)
KPIs
1. used to MONITOR SUPPLIER PERFORMANCE
2. either QUALITATIVE or QUANTITATIVE, but must be MEASURABLE
+ improved supplier motivation
+ improved communication
+ improved relationships
+ sharing of common goals
- reduction in quality by suppliers rushing to meet quantitative KPIs
- reduction of teamwork as suppliers focus on their own KPIs instead of common goals
eg. customer complaints reduce; deliveries arrive well-packed; good quality response to RFQs
» qualitative KPIs more descriptive and opinion-based, so often more for procuring services
eg. # of customers increase, % of on-time deliveries, average # of responses per RFQ
Achieving 5 rights of procurement from external suppliers
2. External suppliers
- 4 mechanisms for achieving the right PRICE
- need to take into account the other factors (quantity, quality, time, place) when determining the right price available
- BENCHMARKING through multiple RFQs
- NEGOTIATION
- OPEN BOOK COSTING
- buyers can request a detailed cost breakdown for the product/service from suppliers & then analyse the costs to understand whether the final cost price is fair - ECONOMIC ORDER QUANTITIES/VOLUME DISCOUNTS
- buyers can see how the price reduces if place larger volume orders
Other sources of added value: innovation, sustainability and market development + 6 others
+ define CSR
*added value sets a biz’s products/services apart from those of its competitors
*involves more than getting a good deal in relation to price and on-time and in-full delivery (OTIF)
» OTIF: the complete delivery of the whole order in line w/ the promised delivery date and time
- ADDITIONAL FEATURES
- when similar products are available at the same price
- added value can be tangible or intangible - BRAND
- an org’s identity; incl. logo, slogan, colour scheme
- adds value through awareness, engagement, communication - CONVENIENCE
- EXCELLENCE OF SERVICE, encourages buyers to consider repeat biz
- paying attention to detail
- consideration from buyer’s perspective
- going beyond the requirement to assist customer -
MARKET DEVELOPMENT
- finding new markets for products/services and acquiring new customers
- suppliers may be able to offer buyers economies of scale
- suppliers could also be introduced to new ways of achieving objectives through interaction w/ a NEW CLIENT BASE - REDUCED INPUT COSTS
- higher added value if lower input costs & same selling price - REPUTATION
- incl. ETHICAL VALUES; word of mouth promotes good reputation -
INNOVATION, eg.
- saving buyers money through suppliers discovering new ways to produce/supply
- giving buyer org. more power in the marketplace b/c they are able to offer sth unique to customers
- protecting buyer from substitutions or new entrants by keeping one step ahead
- improving supplier relationships through sharing & developing of ideas -
SUSTAINABILITY
- MINIMISING RISK whilst ensuring things last for long-term & meet the needs of the present w/o compromising the needs of future gens
- having a risk MGMT plan adds value by reassuring suppliers and customers that the org. is prepared for most eventualities <- a RISK MATRIX can be used to assess severity of potential situations and prioritise action
- working w/ sustainable suppliers also enhances reputation -> can include in their CSR policy
(=an ORGANISATIONAL SUSTAINABILITY FRAMEWORK to embed into strategy and operations and supply chains to have a POSITIVE GLOBAL IMPACT)
Defining value for money - 13 key areas to be considered (see TB for detailed ways these factors contribute towards achieving value for money when procuring goods/services!)
- when assessing value for money, the WLC and TCA should be reviewed + the 5 RIGHTS of procurement and supply
Key ares to be considered when seeking to achieve value for money
1. CURRENCY/EXCHANGE RATES
2. ENVIRONMENTAL FACTORS
3. FREIGHT COST
4. MAINTENANCE COSTS
5. PACKAGING
6. PAYMENT TERMS
7. Place
8. Product/service price
9. Quality
10. Quantities/inventory
11. Supplier reputation
12. TIME
13. WARRANTY
