L3.3 Examine the different structures of a procurement or supply chain function Flashcards
The role and status of proc and supply chain management within diff. orgs.
» depends on the type of goods/services supplied to customers & overarching objectives of the biz,
ie. private sector/public sector/third sector organisations (TSOs)
*TSOs = charities, non-profit orgs, …
- private sector orgs: main objective is to make PROFIT on the goods/services they provide; hence effective proc and SC mgmt allows goods/services to be procured COST-EFFECTIVELY
- public sector orgs: objective is to provide services to the public; proc function is focused on ensuring both VALUE FOR MONEY and quality objectives are met/spending taxpayer funds in a responsible and ethical way
- TSOs: objective is to achieve VALUE FOR MONEY from chains that can be altered as the value of donations (which fund them) may change at short notice; proc function’s key role is securing goods/services that deliver value for money, good quality, supply chain flexibility, while maintaining high ethical standards
» {similar to public sector org.s}
The role and status of proc and supply chain management within diff. orgs.
1. …in meeting customer service needs
*customers can be internal and external
!! EVERYONE in an organisation is responsible for customer service.
Internal
- good CS within org. can promote a happy working environment -> aids productivity + also ensuring perception of proc within the org. is positive
- eg. IT departments seeking proc of new software
External
- customers don’t place orders based on price alone
- good CS has no financial implications but strong intangible benefit
- proc teams may consider CS metrics in supplier selection and award criteria
The role and status of proc and supply chain management within diff. orgs.
2. …in securing value for money (see L1.2 for what constitutes value for money)
+ 4 main elements of ^
Case study: the UK government’s £23bn Renewable Heat Incentive (RHI) came under scrutiny for failing to provide value money & unacceptably high levels of fraud and non-compliance.
- govt will need to find other ways to make up for the carbon emissions reduction shortfall, and introduce/extend other policies
Elements
1. 5 rights of procurement
2. Innovation
3. Whole-life cost
4. Customer service
» all benefits of which can be passed down ultimately onto the end consumer
eg. cost advantage over competitors, supplier innovation -> product/service differentiation
- failing to offer value for money can result in bad publicity, or open to an investigation
- essential for PUBLIC SECTOR as it is directly funded by taxpayers
The use of centralised and decentralised structures
!! There are 3 types of procurement structure.
- Centralised structure
+ 3 advantages
+ 3 disadvantages
*from eLearning, national fast food chains often implement centralised approach
= Entire org’s procurement Activities conducted at ONE CENTRAL LOCATION
- this strategy is often implemented by LARGE ORG.S that have considerable spend to manage across MULTIPLE SITES
Advantages
1. promotes ECONOMIES OF SCALE
2. more EFFICIENT USE of skills and resources
- {using fewer staff}
3. REDUCTION in expenses
- {using fewer staff}
» {supplier relationships can be stronger}
Disadvantages
1. NOT SUPPORTIVE of LOCAL ECONOMY
eg. if it is a large co. spread over diff. geographical locations; centralised suppliers are rarely close to the sites supplied
2. increased BUREAUCRACY
- {a lot of red tape}; deliveries might take longer to reach destination b/c orders might be delivered to a central point and then distributed internally
3. LESS ACCOUNTABILITY and sometimes a LACK OF CONTROL
» from eLearning, can also reduce no. of product specialists within proc as a whole
- changing to centralised structure could bring huge savings, eg. if org. expands / acquire another biz within same sector
The use of centralised and decentralised structures
2. Decentralised structure
+ 5 advantages
+ 6 disadvantages
= procurement Activities carried out at LOCAL LEVELS
- aka devolved structure
Advantages
1. DIRECT COMMUNICATION with suppliers
- w/o going through several processes as with centralised proc
2. FAST DELIVERY
3. LOCAL suppliers supported
- any problems can be resolved quickly also
4. FEWER PROCEDURES
5. SPECIALIST product knowledge
Disadvantages
1. PRICES may not be negotiated to the best value
- as individuals responsible for making the purchases may not be procurement professionals
2. economies of scale NOT used
3. supplier relationships not valued
- and risk of suppliers not working to KPIs / not being regularly evaluated
4. TOTAL COST OF OWNERSHIP may NOT be MONITORED
- {w/o centralised monitoring, there may not be a uniform methodology to calculate or track TCO}
- {local procurement teams may focus on immediate needs rather than aligning with broader organisational strategies that optimise TCO}
5. DETRACTS from core activities
6. higher RISK of fraud and embezzlement
- moving from centralised to decentralised structure could also reduce costs, eg. if an org. is reducing its operations / significantly reducing delivery locations
The use of hybrid structures in proc and supply chain functions
- What are the roles typically undertaken within an org. by the
i) local procurement function
ii) central procurement function?
Local proc. function
1. SMALL ORDER ITEMS up to an agreed value
2. Items used only by the local division
3. EMERGENCY PRODUCTION to avoid run outs or production stoppages
4. Items SOURCED LOCALLY as per CSR policy to use regional products/services
Centralised proc function
1. Determination of MAJOR proc and supply chain policies
2. Preparation of STANDARD SPECIFICATIONS
3. NEGOTIATION of BULK CONTRACTS for a no. of divisions
4. Stationery and office equipment which is GENERIC across the org.
5. Procurement RESEARCH
6. Procurement of CAPITAL ASSETS
The use of hybrid structures in proc and supply chain functions
1. CONSORTIUM structures
+ 6 forms
!! A hybrid structure is a COMBINATION of centralised and decentralised structures.
- formed when SIMILAR org.s/org.s with same needs COLLABORATE for their mutual benefit {ie. combine their buying power, to gain ECONOMIES OF SCALE}
- consortia are often formed when…
» public bodies form a single-buying agency
» private sector org.s (typically SMEs) want to bid and win large public sector contracts
Types of consortia
1. Loose
- formed to obtain better PRICING and share related INFORMATION
- usually INFORMAL structure
-
Voluntary
- more FORMAL; involves a purchasing manager procuring ON BEHALF of the org.s within the group -
Regional
- type of CENTRALISED structure based on GEOGRAPHICAL area
- to benefit from group buying -
Profit-making
- using strength in numbers to achieve EoS -> lower buying prices -> then enhance their PROFIT MARGIN by selling the goods/services -
Member-owned
- org.s belonging to the consortia have to pay a JOINING FEE/annual SUBSCRIPTION; can then take advantage of EoS created by collective members -
Non-profit
- lower prices achieved due to EoS used to keep OVERHEADS LOW, rather than to make a profit
The use of hybrid structures in proc and supply chain functions
1. CONSORTIUM structures
+ 8 advantages
+ 5 disadvantages
Advantages
1. economies of scale
2. additional NEGOTIATING skills
3. lower prices
4. reduced WORKLOADS
5. improvement of BEST PRACTICES
6. shared and increased KNOWLEDGE
7. enhanced QUALITY
8. reduced levels of RISK
Disadvantages
1. reduced CONTROL
2. internal CONFLICT
3. reduced COMPETITION {among suppliers?}
- {consortium typically agrees on a single/limited set of suppliers}
- {suppliers not included in the consortium might lose out on biz, & the consortium itself may lose bargaining power in the long run if supplier options become limited}
- {lack of competitive pressure might also lead to complacency amongst selected suppliers -> potentially impacting quality and lack of innovation}
4. INCREASED SUPPLIER LEAD TIMES
- {consortia often place larger, bulk orders; suppliers might require more time to process and deliver large orders}
- {could impact consortium members if they need the goods urgently / have seasonal demands that need to be fulfilled quickly}
5. supplier relationships lost
The use of hybrid structures in proc and supply chain functions
2. SHARED SERVICES structures
+ 3 objectives
+ 6 advantages
+ 5 disadvantages
!! A hybrid structure is a COMBINATION of centralised and decentralised structures.
- a form of centralised structure often used in hybrid structures {but ≠ centralised}
- when an org. CENTRALISES its SUPPORT FUNCTIONS
» human resources, administration, ICT, finance
Objectives of shared services
1. to create UNIFORMITY in policies, procedures and standards
2. continuous IMPROVEMENT
3. to save COSTS
Advantages
1. reduces costs
2. provides high level of SKILL & KNOWLEDGE -> increasing efficiency
- {and high quality of services provided, due to access to wider pool of skilled staff}
3. puts focus on CORE ACTIVITIES {and profit-generating objectives}
- {reducing amount of individual administration}
4. pools RESOURCES
5. avoids DUPLICATION of work
6. information all held in ONE CENTRAL LOCATION
Disadvantages
1. RISK of breaching departmental CONFIDENTIALITY is increased
2. RESISTANCE to change from workforce
3. new processes and procedures take TIME to adopt
4. AUDITING more challenging
5. information not readily available within dept.s
The use of hybrid structures in proc and supply chain functions
3. LEAD BUYER structures
+ 3 advantages
+ 7 disadvantages
!! A hybrid structure is a COMBINATION of centralised and decentralised structures.
- when one organisational dept/individual takes the responsibility for setting the framework or purchasing of a specific product/service, eg. ICT, stationery
Advantages
1. individuals w/ PROCUREMENT EXPERIENCE can develop their skills
2. ECONOMIES OF SCALE can be achieved
3. reduces WORKLOAD compared with DECENTRALISED proc strategy
Disadvantages
1. if a dept. has no procurement knowledge the prices will not be competitive
2. products/services chosen may NOT SUIT ALL parties
3. increases WORKLOAD compared with CENTRALISED proc strategy
4. ETHICAL BREACHES could occur {linked to 6.?}
5. reduced control
6. increased RISK
» if a dept lacks procurement skills, suppliers selected may not be aligned with the org’s strategy policies/procedures
» if unsustainable suppliers chosen, could lead to problems eg. poor media coverage, even legal prosecution
7. the same suppliers may get multiple orders which could’ve been collated to reduce costs
The use of hybrid structures in proc and supply chain functions
4. OUTSOURCED
+ 5 “objectives”
+ 5 advantages
+ 8 disadvantages
*outsourcing can work alongside the other strategies
!! A hybrid structure is a COMBINATION of centralised and decentralised structures.
“Objectives”
1. reduce costs
2. save time
3. enable org. to concentrate on CORE COMPETENCIES
4. reduce STAFF
5. integrate external EXPERTISE into an org.
Advantages
1. cost reduction
2. reduced TRAINING COSTS
3. lower HEADCOUNT - fewer procurement staff required
4. economies of scale
5. access to HIGHLY SKILLED buyers
Disadvantages
1. changing from internal to outsourced procurement could be DIFFICULT in terms of EMPLOYEE RELATIONS
2. lack of CONTROL
3. outsourcing needs MANAGING - does the time taken to manage the process still equate to a saving against internally buying?
4. TECHNOLOGICAL PROBLEMS w/ integration of company systems to outsourced proc function
5. RESISTANCE to change from internal staff
6. REDUNDANCIES in current proc team
7. (lack of) continuity of supply and supplier RELATIONSHIPS
8. RELIANCE on the success of another org.
The importance of INTERACTING with people and building RAPPORT in centralised, decentralised and hybrid structures
1. …with other functions {within an org.}
2. …with external customers {ie. suppliers}
3. …with stakeholders
*a drawback of decentralised structure is that multiple proc dept.s may be working in SILOS towards diff. goals and objectives
!! Rapport involves MUTUAL TRUST and UNDERSTANDING built on GOOD COMMUNICATION.
- With other functions
- to AVOID CONFLICT, as views and opinions are more clearly understood, and can reach a SHARED UNDERSTANDING to the org’s benefit
eg. having built rapport, buyer will be able to justify to finance team why they believe budget was insufficient & the finance team may agree to increase it - With external customers, ie. suppliers
- With stakeholders
- Mendelow’s stakeholder management matrix, according to stakeholders’ level of interest + power
- The Scholtes’ trust matrix for establishing trust between proc function and stakeholders
- looks at the relationship between how much a leader is perceived to care, and how competent the leader is perceived to be
» y-axis: belief that procurement leader cares
» x-axis: belief in capabilities and competence
» top L-R, bottom L-R: affection, trust, distrust, respect
{respect: global CPO since stakeholders unlikely to think that s/he care that much about them; trust: regional Proc Head as they might do site visits and get to know the ppl} - Kraljic matrix, used to manage relationship with diff. supplier types, dependent on suppliers’ overall product/service mix
» using this matrix, proc function will have very LITTLE INTERACTION and almost NO RAPPORT with some supplier types
eg. with ROUTINE SUPPLIERS, little need for investing time and effort as the product sourced is likely to come from a diff. supplier each time
eg. with STRATEGIC SUPPLIERS, relationship between buyer/supplier is critical to success of both org.s
The importance of INTERACTING with people and building RAPPORT in centralised, decentralised and hybrid structures
4. 9 methods of building rapport
*w/o interaction and rapport, there is a higher risk of non-conformance by suppliers and misinterpretation of internal documentation by and from colleagues
- positive body language
- presents an open and relaxed environment for professional discussions - make eye contact
- suggests honesty and shows interest in what the other person is saying - listen and use positive gestures for emphasis
- ask Qs
- be empathetic
- does not necessarily mean agreement but indicates genuine understanding of the situation - respect all ideas
- remove preconceptions
- ie. enter any interaction with an open mind to view the full picture without any prejudice - be honest
- justify options and feedback
- helps the other party to empathise
