l4m1 chapter 1.1

Question 1

What is procurement and what does it involve?

Answer 1

Procurement is the strategic business management function that ensures identification, sourcing, access and management of the external resources that an organization needs or may need to fulfill its strategic objectives.

Procurement exists to explore supply market opportunities and to implement resourcing strategies that deliver the best possible supply outcome to the organization, its stakeholders and customers.

Procurement manages supply chain risks through the effective negotiation of contracts, cost and price models, quality and other essential supply characteristics.
it involves the following aspects.

• added value
• cost
• inventory
• logistics
• purchasing
• quality
• supply
• waste management

Question 2

what is purchasing

Answer 2

purchasing is the act of physically buying a good or service. this is usually carried out by organizational buyers (Those buyers of goods and services for the specific purpose of industrial or agricultural production or for use in the operation or conduct of a plant, business, institution, profession or service.)

Question 3

What is supply?

Answer 3

supply is the infrastructure that ensures that products or services get from the supplier to the customer.

Question 4

What are the different types of organisational costs? Explain.

Answer 4

• direct- costs that are directly associated with a project (bricks, mortar, labour)
• indirect- costs that are not directly associated with the project (rental of head office, salaries of support staff, telephone plan cost)
• fixed- costs that do not vary with the level of production (rent, utilities, manager salaries)
• variable- costs that vary with the levels of production (raw materials, hourly staff wages, haulage and transport costs)

Question 5

What is the Relationship between procurement, purchasing and supply?

Answer 5

purchasing and supply are functions of procurement, with out procurement there can be no purchasing, without purchasing there can be no supply.

Question 6

What are the costs within an organisation usually comprised of?

Answer 6

• money
• time
• effort
• material
• opportunity

Question 7

What are the total costs within an organisation?

Answer 7

the total costs comprises of fixed and variable costs.

Question 8

What is the breakdown of typical costs within an organization?

Answer 8

• capital purchases
• insurance
• marketing
• raw materials
• r&d
• salaries and pension
• services
• sundry items
• utilities
• training
• vehicles and transport

Question 9

breakdown of organizational costs- capital purchases

remember CCARRRIBBEE

Answer 9

capital purchases should be undertaken by a procurement professional so they can do the following; 
▪compare buy or lease options
▪calculate currency differences
▪assess ethical requirements
▪review quality and standards
▪review packaging options
▪research total life cost
▪investigate transport
▪be involved in preparing specifications
▪benchmark prices
▪ensure assets are fit for purpose
▪evaluate potential suppliers

Question 10

breakdown of organizational costs- marketing

Answer 10

▪ source promotional items

▪ensuring costs are low as possible when booking stands and arranging transport and rentals

Question 11

breakdown of organizational costs-raw materials

Answer 11

▪accounts for 60% of expenditure in a typical organization.
▪the role of the procurement department is important in sourcing at a low cost (economies of scale) and inventory management at a low cost.
▪inventory costs should be as low as possible without compromising the stock.

Question 12

breakdown of organizational cost- research and development

Answer 12

▪sourcing prototypes or new materials for trials within the organization
▪to ensure value is achieved
▪ uses existing relationships to supply what is needed at a fair cost

Question 13

breakdown of organizational cost- salaries

Answer 13

▪lower overall costs within the organization which will enable the employer to offer staff higher salaries than if cost were higher

Question 14

breakdown of organizational costs- sundries

Answer 14

▪buyers within an organization will have knowledge

Question 15

breakdown of organizational costs- training

Answer 15

through the negotiation of professional development courses, buyers may reduce the cost through negotiation

Question 16

breakdown of organizational costs- vehicles, haulage, and transport

Answer 16

▪procurement can work within the organization to negotiate the best options for vehicles in the same way as with capital purchases.
▪haulage and transportation can be negotiated to obtain the best cost and can be compared to the cost of a suitable in house fleet

Question 17

What is stock procurement?

Answer 17

stock procurement involves the procurement of components needed for an end product. it is stored in a company’s inventory. It involves;
▪ raw materials (From the primary sector)
▪components (from the secondary sector)
▪finished goods
it links directly to inventory costs and needs to be managed carefully to ensure that inventory is as cost-effective as possible

Question 18

What is non-stock procurement?

Answer 18

these are not stored within an organization and maybe a one-off capital purchase. They are not listed on an organization’s inventory.
▪ it may be intangible
▪examples of non-stock, intangible procurement;
cleaning service, telephone systems, internet contracts, organizational insurance, advertising campaign.
items falling into the category of intangible and non-stock belong to the tertiary sector.

Question 19

What is the primary sector and primary sector products?

Answer 19

the primary sector is the industry that extracts raw materials, primary sector products are products that are extracted from their natural sources such as lumber and iron ore

Question 20

What is the secondary sector and what are the secondary sector products?

Answer 20

the secondary sector is the industry that manufactures components and finished products. secondary sector products are products converted in the manufacturing or assembly process eg cars

Question 21

What is direct procurement?

Answer 21

▪the sourcing and supply of a product or service that is directly related to a specific end result
▪it usually involves the purchasing of large quantities of raw materials needed for production at the best possible rates.
▪it is integral to an organization

Question 22

What is indirect procurement?

Answer 22

▪the goods or services an organization needs to continue operating but don’t contribute to the bottom line eg. repairs stationery and consultancy
▪indirect + intangible procurement is likely to be sourced from a leverage or routine supplier as these are seen as low risk

Question 23

What is the Kraljic Matrix?

Answer 23

▪this is a tool used to help manage supplier relationships associated with each type of procurement
▪the relationship with the supplier will be established according to the importance, cost and associated risk
▪there are four types of suppliers
leverage, routine, strategic, bottleneck
▪cost impact- the amount of money paid for a particular product or service
▪risk impact- the assessment of the potential risk to an organization

Question 24

What is a leverage supplier?

Answer 24

▪low-risk, high-cost
▪vast competition
▪low cost to move suppliers
▪often utility services

Question 25

What is a strategic supplier?

Answer 25

▪high-cost, high-risk
▪critical supplier to an organization
▪responsible for core products

Question 26

What is a routine supplier?

Answer 26

▪low-cost, low-risk
▪low-value items
▪lots of work associated with these suppliers, lots of variety available

Question 27

What is a bottleneck supplier?

Answer 27

▪low-cost, high-risk
▪hold a monopoly in the marketplace
▪little to no other options, low-value items

Question 28

organizational expenditure

Answer 28

the cost associated with the running of an organization such as electricity, labor, and waste collection

Question 29

organizational budgets

Answer 29

these are tools used by an organization to monitor income and expenditure.without this the company would not be aware of how much it could afford to spend and could lose control of spending.
▪there are two types- capex and opex
they run independently of each other

Question 30

capital purchases

Answer 30

▪related to assets in the organization and are purchased to last a long time
▪paid out as a lump sum or through a bank loan
▪referred to as spending money with the view to make money/ high value
▪their value decreases and is accounted for as depreciation over time
▪part of a procurement professional’s skill if to deduce how quickly an asset will depreciate. this can be done by working cross-functionally with the accounts department

Question 31

operations expenditure

Answer 31

▪Is procurement made by an organization to ensure the efficient day-to-day running of a business
▪it includes; rent, raw materials, salary, insurance and transport
▪is an ongoing expense to an org
▪paid monthly or annually
▪accounted for in the current month or year
▪low to medium value

Question 32

service procurement

Answer 32

▪this is intangible, an org does not physically own a service procurement.
it cannot be evaluated in the same way as tangible procurement
▪specifications for service procurement needs to be very detailed and what is needed needs to be explained exactly.