L1.3 Describe the categories of spend that an organisation may purchase Flashcards
Typical breakdown of organisational costs represented by procurement of goods, services or constructional works
1. Fixed and variable costs
2. Direct and indirect costs
*from eLearning, 4 categories of expenditure recognised within procurement:
- direct and indirect
- capital (CAPEX) and operational (OPEX)
!! Cost does NOT have to be MONETARY.
- could be time, material, effort, opportunity
!! The FIXED costs of an organisation do not change {remain the same) with the output of an org.
VARIABLE costs do change as they are LINKED to the OUTPUT of the business {no. of goods produced/sold or the no. of services supplied}.
- TOTAL COSTS of an org = fixed costs + variable costs
- fixed eg. salaries of mgmt team, insurance, office/factory rent
- variable eg. raw materials, haulage costs, wages for hourly-paid workers
!! Direct costs are DIRECTLY ASSOCIATED with the job.
Indirect costs (aka OVERHEADS) are NOT directly associated with the job.
- direct eg. iPhone manufacturing -> glass screen, semiconductor chips
» savings that can be negotiated on direct costs become REPEATED SAVINGS, impacting GROSS PROFIT
- indirect eg. iPhone mfg -> salary of SUPPORT STAFF, rent of head office
» savings impact NET PROFIT, more of cost avoidance
Typical breakdown of organisational costs represented by procurement of goods, services or constructional works
3. 9 roles of the procurement department (their influence upon costs within an org.)
+ define economies of scale
- CAPITAL PURCHASES - proc. professionals will…
i) evaluate potential suppliers
ii) be involved in preparing SPECIFICATIONS
iii) review quality and standards
iv) assess ethical requirements
v) compare buy or lease options
vi) investigate transport
vii) review packaging options
viii) research TOTAL LIFE COST
ix) calculate currency differences
x) BENCHMARK prices
xi) ensure ASSETS are fit for purpose - INSURANCE
- proc. professionals have negotiation skills and sourcing strategies etc. to buy insurance services - MARKETING
- proc. work with marketing depts to ensure costs are as LOW as possible when sourcing promotional materials - RAW MATERIALS, COMPONENTS & CONSUMABLES
- manage inventory to maximise value for money
- and economies of scale (=COST SAVINGS made as a result of increased levels of PRODUCTION, OR the financial benefit gained from PURCHASING MORE units of an item resulting in LOWER UNIT COSTS) - RESEARCH & DEVELOPMENT (R&D)
- proc. involvement through sourcing PROTOTYPES or new materials for trials within the org, to achieve value for money
- may have existing supplier relationships - SALARIES
- if the co. uses TEMPORARY LABOUR - SUNDRIES (=miscellaneous goods/services, usually of low value)
- buyers will know which suppliers offer the best value on such items - TRAINING
- buyers can NEGOTIATE cost reduction of training for group of employees rather than org. paying full price per person - VEHICLES, TRANSPORT & HAULAGE
- similar to capital purchases, proc. can advise on best OPTIONS, incl. negotiating CARRIAGE DEALS to obtain the best cost or comparing with working IN-HOUSE
Stock and non-stock procurement
+ 6 general features of goods & services
+ the CIPS Procurement Cycle
Stock procurement - linked to INVENTORY COSTS, need to be managed as cost-effectively as possible
1. Raw materials (primary sector products)
eg. cotton, fish, rubber
2. Components (secondary sector products)
eg. nuts and bolts to hold a car engine in place, light bulbs, plastic fittings
» minimally processed
3. Finished goods
eg. shoes, clothes, tinned food
Non-stock procurement
!! not stored within an org. as inventory, and are USUALLY SERVICES.
ie. ONE-OFF or CAPITAL purchases
- may be intangible, eg. Internet contract, belonging to tertiary sector
Goods vs Services
1. tangible vs intangible
2. can repeat orders vs one-off orders
3. a lead-time vs immediate, consumed as they are supplied
4. quantifiable specification (eg. quantity, quality) vs qualitative specification (eg. description of finished state)
5. can be stored for later use vs stops once delivered, no shelf-life
6. direct purchases vs indirect purchases
The CIPS Procurement Cycle
- followed for both stock and non-stock procurements
Direct and indirect procurement
1. Definitions and overview
Direct procurement
= the purchasing of large quantities of RAW MATERIALS needed for PRODUCTION, at the best possible rates
- directly related to a specific job (i.e. raw materials) and INTEGRAL to an organisation
eg. buying components to make a car
Indirect procurement
= services, tools and equipment that DO NOT FORM PART of the FINISHED PRODUCT but are required to MAINTAIN the business and production process
eg. repairs, stationery, consultancy - referred to as MRO (Maintenance, Repair, and Operations) in some org.s
- often sourced from SEVERAL SUPPLIERS, hence supplier relationships can be very diff. from those of direct and core proc.
Direct and indirect procurement
2. the Kraljic matrix
- a STRATEGIC portfolio analysis tool used to identify SUPPLY RISKS and develop STRATEGIES to mitigate against disruption of suppliers
- the 2x2 matrix represents ‘risk impact’ (horizontal axis) and ‘cost impact’ (vertical axis) and offers four product classification quadrants
- classifying the importance of suppliers’ products and services can highlight SC weaknesses and support STRATEGY DEVELOPMENT
- determining the type of relationship by positioning suppliers by risk and profit impact will support proc professionals to build the right type of SUPPLIER RELATIONSHIPS and mitigate supply risk
- A good principle is to work toward keeping non-critical and bottleneck quadrants as empty as possible
Capital purchases and operational expenditures
^coming under organisational BUDGETS
+ 6 differences between CAPEX and OPEX
Case study: Google’s high spending in capital purchases (infrastructure and facilities, acquisition of New York’s Chelsea Market shopping mall, hardware-related costs and YouTube content acquisition) reflects its commitment to GROWTH and long-term VALUE MAXIMISATION
Budget = FINANCIAL PLAN for a set period of time on how much can be spent
!! CAPEX budgets manage capital purchases.
OPEX budgets manage operations expenditure.
!! Capital purchases are ONE-OFF PURCHASES of machinery, land or property.
- ASSETS of an org; often referred to as ‘the spending of money with a view of making money’
- DEPRECIATION = the reduction in value of a tangible and fixed asset over time
» proc. professionals have the skill to assess how quickly the asset may depreciate, by working CROSS-FUNCTIONALLY with the accounts dept
OPEX
- procurement made by an org. to ensure the EFFICIENT DAY-TO-DAY RUNNING of the biz
eg. rent, raw materials, salary, insurance, transport
Differences between CAPEX and OPEX
1. An asset purchased to last a long period of time vs An ONGOING expense to an org.
2. Often paid out as a lump sum or through a bank loan vs Paid monthly/annually
3. Accounted for and depreciating over a period of time vs Accounted for in the current month/year
4. High value vs Low to medium value
5. The purchase can be postponed if it suits the biz to buy at another time vs Required on an ongoing basis, cannot be deferred
6. Requires a business case to demonstrate the ROI vs Business as usual, does not require any extra investment
Services procurement
+ define services
+ challenges when procuring services (ref. to Case study: Olga’s office cleaning)
Types of services incl.
1. contracts for specific tasks, eg. cleaning and catering services
2. mgmt contracts, eg. waste mgmt, event mgmt
3. maintenance contracts, eg. on-call emergency response when sth breaks down
4. professional services, eg. legal, financial, IT
“Services are activities or benefits from one party to another that do NOT result in the OWNERSHIP of anything TANGIBLE.” {ie. intangible}
- follows the procurement cycle; however, can be HARDER to manage and evaluate THAN TANGIBLE items
» services proc. usually refers to DIRECT services, but can be indirect eg. cleaning (if not by cleaning co.)
!! Stock and non-stock procurement all need to satisfy the 5Rs.
Challenges {discussed in workshop}
1. Requirements usually more SUBJECTIVE b/c open to interpretation; mostly HUMAN PERCEPTION instead of tangible measures
2. HARDER to MEASURE QUALITY due to human perception
» hence important to include a very DETAILED SPECIFICATION in services procurement contracts
Services procurement
+ features of Goods and Services against the 5Rs
Quantity
- Any quantity, low to high vs One-off, or very low
Quality
- Measurable against standard/specification vs Quality is often set by or with the service provider
Time
- Regular demand vs As required
Place
- Supplier can ship to anywhere, from anywhere vs Have to be delivered in person at set location
Price
- Low to high vs Generally high
Utility procurement
+ define monopoly
+ define oligopoly
- the procurement of SERVICES required to SUPPORT the BASIC INFRASTRUCTURE of an org.
eg. electricity, gas, mains water, telephone/broadband, rent, transport - often controlled by higher levels of LEGISLATION, eg. Utilities Contracting Regulations 2016, to ensure transparency, equal treatment and non-discrimination
- DIFFICULT for buyers to control utility COSTS as utilities are particularly sensitive to DEMAND & SUPPLY
- in some countries, utility procurement is a monopoly (=a situation where one supplier has the entire market share and there is no competition)
- in others, countries may have an an oligopoly market where there are a few, state-regulated providers (=a market structure in which A FEW FIRMS DOMINATE)
Commodity procurement
+ define commodity
+ Commodity trading
Commodity
= a RAW MATERIAL that can be bought or sold, eg. oil, gas, coffee
- 3 categories: energy, agriculture, metal
- buyers can utilise commodity prices as a BENCHMARKING TOOL for COST ANALYSIS of wider products
eg. checking if supplier’s price increase of product containing copper is in line with actual inflation - buyers can monitor trends and commodity prices to arrange contracts at times of FAVOURABLE PRICES, eg. by locking into a fixed-price contract for an agreed period
- commodity pricing is influenced by many FACTORS
eg. supply and demand, currency fluctuations, political instability, war and weather conditions - forecasted prices available for biz to view within a futures exchange (=a marketplace where the seller of a commodity agrees to SELL/BUY a certain amt of a commodity to a buyer at a PARTICULAR PRICE on a SPECIFIC FUTURE DATE)
- commodities can also be procured using SPOT PRICING, ie. the current cost of any commodity listed on an exchange
Commodity trading
- RELATIONSHIP MANAGEMENT is an important skill for commodity traders, to get priority access to best deals as there is HIGH COMPETITION in this area
