L2.1 Explain each stage of the CIPS Procurement Cycle Flashcards
PRE-contract award stages
Stage 1: Define business needs and develop the specification
= having KNOWLEDGE of what the customer REQUIRES
1. a need can be tangible/intangible, ie. a product/service
2. must have 4 details of DESCRIPTION, QUANTITY, DELIVERY TIME & PLACE, QUALITY of what is required
3. within the description, there should be a PERFORMANCE or CONFORMANCE SPECIFICATION
- this stage may take a SIGNIFICANT amount of TIME, but…
- …is VERY IMPORTANT as can add value or incur costs if wrong items/services supplied
PRE-contract award stages
Stage 2: Market analysis & make or buy decision
+ 3 situations to evaluate when reviewing the market & availability of goods/services required
+ MAKE OR BUY DECISION
- buyers assess if need can be fulfilled internally
- if not, REVIEW MARKET to decide where to source
- even if need can fulfilled internally, buyers should still explore external market to decide whether making IN-HOUSE is the most effective method
3 situations to evaluate
1. ECONOMIC SITUATION
- if economy of one country is weaker than buyer’s country, buying from an OVERSEAS supplier may offer better value
2. CURRENCY FLUCTUATIONS
- consider EXCHANGE RATE
3. SUPPLY & DEMAND
- if supply > demand, price will be more favourable than if demand exceeds supply.
- if the need is NOT CRITICAL to success of customer/their org, then BUY IN GOODS/OUTSOURCE SERVICES -> but reduces the level of CONTROL the org. has & thus increases RISK
PRE-contract award stages
Stage 3: Develop the strategy and plan
i) What 3 things should the plan outline?
Case study: Vodafone’s potential monopoly after proposing to acquire Liberty Global’s operations in continental Europe.
- Deutsche Telekom’s CEO {DT is market leader in German mobile and broadband provision} strongly criticised it
- industry associations are also worried due to inevitable massive shift in negotiating position & the economics of TV distribution via cable
- Which TYPE of SUPPLIERS to approach - LOCAL, NATIONAL or GLOBAL
- buyer should research the capabilities of local suppliers if the org. has a policy to award biz to local suppliers to strengthen the local economy
- if no such policy and no restriction on suppliers, the buyer may decide whether to use local/national/global suppliers - An evaluation of the COMPETITION
- if potential supplier has HIGH competition, buyer is more likely to be able to NEGOTIATE prices (as several org.s competing to win biz)
- if potential supplier has a MONOPOLY, may not be able to negotiate and seen as unfair - Which is the most suitable method to obtain prices - an ITT or RFQ, depending on nature of the need
- RFQ if the need is a ONE-OFF product, eg. spare part for a machine
- ITT if the need is a COMPLEX SERVICE, eg. provision of ongoing health and safety training for individuals within an org.
PRE-contract award stages
Stage 3: Develop the strategy and plan
ii) Define Invitation to tender (ITT)
iii) Define Request for quotation (RFQ)
iv) 5 differences between ITTs and RFQs + define Bid + define Quotation
Invitation to tender (ITT)
= a FORMAL invitation sent to suppliers INVITING them to make an offer to supply goods or services
Request for quotation (RFQ)
= an invitation to suppliers to BID on specific products or services
Differences between ITTs and RFQs
1. Document sent out to invite BIDS vs to invite QUOTATIONS
bid** = offer of a price, may be a response to an ITT
**quotation = a formal statement from a supplier detailing the cost to provide goods or services.
» May often include other consideration, eg. minimum order and lead times.
- FORMAL vs INFORMAL
- Suppliers are often PRE-EVALUATED vs NOT usually pre-evaluated
- Used when purchasing COMPLEX products or services vs Used when purchasing STANDARD, REGULARLY USED products or services
- Used when purchasing HIGH-VALUE products or services vs Used when purchasing LOW-VALUE products and services
PRE-contract award stages
Stage 4: Pre-procurement market testing
+ 4 stages of product life-cycle
- conduct market tests and consider market engagement (=a process to gain advance understanding of the market prices or trends)
- market engagement process involves seeking information/feedback on proposed need from internal and external STAKEHOLDERS
- consumers can help identify where a product is in its LIFE-CYCLE, based on the no. of SALES
» when a product is reaching the maturity stage, initial quantity of proposed need may need to be increased
» if a product is in decline, demand will be reduced & may not need originally stated quantity
-> testing the market helps ASSURE the buyer that the CORRECT QUANTITY is sourced
Product life-cycle (# of sales over time vs Time)
i) INTRODUCTION
ii) GROWTH
iii) MATURITY {with possibility of an Extension}
iv) DECLINE
- consider if a product has SEASONAL TRENDS, eg. charcoal for summer barbecue, winter clothing
- buyer could benefit from WAITING {until the right time} to obtain a more competitive cost when the product becomes readily available
- however, buyer should not simply make the customer wait if the need is required soon
PRE-contract award stages
Stage 5: Develop documentation and detailed specification
+ define Service level agreement (SLA)
+ development of KPIs
- the ITT or RFQ prepared to send out to POTENTIAL SUPPLIERS to should include {similar to Stage 1 biz needs requirements}:
1. Description and specification
2. Quantity
3. Delivery details
-
Service level agreement (SLA)
= document outlining the EXPECTED MINIMUM LEVEL of service between a SERVICE PROVIDER and a CLIENT. It clarifies the SCOPE of the service, RESPONSIBILITIES of each party, and how to escalate among other factors.
An SLA is LEGALLY ENFORCEABLE if it is referred to in a contract. - Terms and conditions
- all potential suppliers should be given IDENTICAL documentation to ensure the process is FAIR and TRANSPARENT
Key performance indicators (KPIs)
- advantage of introducing KPIs at this earliest stage is it COMMUNICATES CLEAR CONCISE EXPECTATIONS of the supplier at the point of tender
- help an org. keep on target to meet their goals, company strategy, mission and vision
- should be SMART (specific, measurable, achievable, relevant, time bound)
» qualitative KPIs are often harder to measure due to personal perception and opinion
PRE-contract award stages
Stage 6: Supplier selection to participate in tender
+ 4 things buyers may do to gather information from potential suppliers and assess their suitability
+ define PQQs and RFI
(see RFI // Carter’s 10 Cs in next flashcard)
*supplier evaluation is approached differently by public sector and private sector org.s
» public sector org.s are regulated and have most stringent policies and procedures to follow
- an OPTIONAL step relating to the decision about which suppliers should be sent an ITT or RFQ
1. Undertake SITE VISITS
2. Conduct audits
- Ask potential suppliers to complete pre-qualification questionnaires (PQQs)
= a document sent to potential suppliers to find out their SUITABILITY to be included in the procurement process
- typically request for info on company history, financial activity, insurance, membership of professional bodies, quality accreditations, capabilities, health and safety, CSR policy, code of ethics, conflict of interest (COI) (=where an individual is unable to remain impartial due to a personal, professional or public interest)
- PQQs also help to ENCOURAGE COMPETITION, as it can be sent to as many potential suppliers as the proc function wishes and thus, adding more potential suppliers to an org’s database - Ask potential suppliers to complete requests for information (RFI)
= a document used to gather information about suppliers and their CAPABILITIES prior to a formal procurement process
- RFIs may refer to Carter’s 10 Cs, a useful method to determine whether a supplier meets the desired criteria -> potential suppliers who won’t meet the buyer’s minimum standards are eliminated
PRE-contract award stages
Stage 6: Supplier selection to participate in tender
+ RFI and Carter’s 10 Cs
!! Carter’s 10 Cs include:
1. Competency
- can the supplier supply the goods/services required?
2. Capacity
- does the supplier have the machinery, time and resources to supply the goods/services?
3. Commitment
- does the supplier have a commitment to supplying QUALITY products?
4. Control
- is the supplier in control of their SUPPLY CHAIN?
5. Cash
- is the supplier in a good FINANCIAL POSITION?
6. Cost
- is the supplier offering a FAIR cost? consider the TCO
7. Consistency
- is the supplier able to deliver the same product time after time?
8. Culture
- does the supplier’s culture fit with the customer’s culture?
9. Clean
- is the supplier ‘GREEN’ and do they do their best to be ENVIRONMENTALLY FRIENDLY?
10. Communication
- is the supplier able to communicate with the buying organisation as needed?
^both TANGIBLE (financial status, capacity to manage contract) and INTANGIBLE factors (eg. reputation, culture) should fit with those of buying org.
- buyers also have responsibility to ensure potential suppliers have a good reputation, otherwise may also face reputational damage by association
PRE-contract award stages
Stage 7: Issue tender documents {ITT/RFQ}
- ITT or RFQ issued to SHORTLISTED potential suppliers
- important for all docs sent to potential suppliers at the SAME TIME
- ITT will include a DEADLINE vs RFQ does not include a deadline for quotations to be returned, given it is a less formal process
!! RFI is used to gather information BEFORE SELECTING which suppliers will be asked to bid.
RFQ is the formal INVITATION asking a supplier to submit a bid.
PRE-contract award stages
Stage 8: Bid and tender evaluation and validation
- importance to consider the WHOLE-LIFE COSTS (WLC) when evaluating tenders and quotations
Evaluation of tenders
1. more structured and formal
2. often involves CROSS-FUNCTIONAL TEAMS, to provide feedback from all parties and make sure process is fair and impartial
eg. most important criteria is ‘shelf life of product’ -> supplier location & lead times are important -> Sales and marketing team + Production team need to ensure that deliveries can be made by a set time on the day of receiving products
Evaluation of quotations
1. less formal
2. decisions made faster, with less involvement from other individuals
POST-contract award stages
Stage 9: Contract award and implementation
*some buying org.s may introduce discussions around KPIs only at this stage, instead of during Stage 5: Develop documentation and detailed specification
- good practice to advise the winning supplier before notifying the unsuccessful ones b/c if the winning supplier changed their mind/is unable to carry out the contract, can award the word to second-choice supplier
- once winning supplier agreed to accept the contract, T&Cs can be finalised and an OFFICIAL CONTRACT drawn up and signed -> a legal agreement is in place and the contract can commence
- unsuccessful suppliers should receive FEEDBACK as to why they were unsuccessful
POST-contract award stages
Stage 10: Warehouse, logistics and receipt
Procuring services
- arrangements still need to be made prior to receipt to ensure the org. is READY to RECEIVE the SERVICE PROVIDER
eg. internal users or site managers need to be NOTIFIED
Procuring products
1. for existing products being re-sourced: already have warehouse locations and PROCEDURES in place
1. for new products/redesigned items: WAREHOUSE may need to be REARRANGED or NEW LOCATIONS created
2. DELIVERY details will be in contract, eg. delivery from supplier to buying org, buyer agreeing to arrange collection
3. the way of RECEIPTING products should be finalised before the first delivery arrives
ie. need to know whether all products need to be checked for conformance to quality standards? unpacked? counted prior to being located in the warehouse? scanned for barcodes?
POST-contract award stages
Stage 11: Contract performance and improvement
- when arranging the contract, the terms could include key performance indicators (KPIs) against which the supplier can be reviewed
- once contract is established, the supplier should be PERIODICALLY REVIEWED by the proc. dept to ensure they are performing to the REQUIRED STANDARDS
- during regular meetings, buyer and supplier can discuss the PERFORMANCE against the KPIs and address any issues to help maintain a POSITIVE RELATIONSHIP
+ consider ways of IMPROVING the contract to RUN MORE EFFICIENTLY or find any innovative solutions that may present themselves
POST-contract award stages
Stage 12: Supplier relationship management {by buyers}
+ define SRM
+ define SCM: the management of contractual performance by buyers
+ use of Kraljic matrix to help manage supplier relationships
4 main factors of SRM (pg. 97)
1. Manage relationships
2. Monitor performance
3. Maintain strategy
4. Manage change
Supplier relationship management (SRM)
= HOLISTIC MGMT of relationships formed between buyers and suppliers based on the CRITICALITY of the goods/services being procured
- relationship between buyers and suppliers depends on these criteria:
1. Type of product/service supplied
2. Length of contract
3. Stage of contract
4. The competitiveness of the marketplace
Supply chain management (SCM)
= mgmt of the FLOW of goods, services and suppliers from raw materials to the consumption by the consumer, requiring a NETWORK of SUPPLIERS that LINK the supply chain together
Kraljic matrix to help manage supplier relationships
1. STRATEGIC PRODUCT SUPPLIER
- close mgmt through regular communication and perf. reviews
2. BOTTLENECK product supplier
- relatively close mgmt
- often monopolies, so important to build a STRONG RELATIONSHIP with them as they may be the only source available for a required product
3. ROUTINE product supplier
- little mgmt
- readily available suppliers and can find another to replace if one supplier is unable to deliver
4. LEVERAGE product supplier
- often supplies HIGH-VALUE ITEMS -> worth buyer building a relationship in order to obtain the best WLC
- may be used infrequently but a +ve relationship is beneficial
POST-contract award stages
Stage 13: Asset management
- REVIEWING the CONTRACT in place and checking it STILL MEETS the org’s needs
- if the needs have changed, the contract may need to be amended with the current supplier / start the whole proc. process again - if the contract was for a capital purchase and the item has come to the end of its life, the way to DISPOSE OF/DECOMMISSION/REMOVE the asset should be assessed
- this final stage also forms part of the LESSONS-LEARNED PROCESS
- reviewing contracts nearing their end and seeking FEEDBACK from stakeholders -> to improve or amend the process to ensure more efficient ways of working in the future
