L4M1: Scope and Influence of Procurement & Supply

Question 1

1.1 Definitions of Procurement and Supply

Answer 1

Procurement: A strategic function of a business used to obtain goods and services by methods such as purchasing or hiring. It is a broad, careful, and usually documented process beyond just buying.

Supply: the infrastructure which enables products and services to get from supplier to customer. This involves turning raw materials into products and distributing them to customers efficiently.

Question 2

1.1 Breakdown of organisational costs represented by procurements of goods, services, or constructional works.

Answer 2

Fixed Costs: Costs which do not change with output (Salaries, rent, insurance)

Variable Costs: Costs which change with output (Materials, Wages)

Direct Costs: Costs associated with production (raw materials, man power)

Indirect Costs: Costs not directly associated with production (stationery, mobile phone contracts, maintenance works)

Question 3

1.1 Stock and Non-Stock procurements

Answer 3

Stock: Items which are listed as inventory, such as materials, components and finished goods.

These need to be managed carefully for a good balance between costs and continuity of supply. Too much stock incurs costs due to time value of money, storage costs. However, lack of inventory causes disruption in the manufacturing process.

Non Stock: Not stored within the organisation. This can include intangible services such as training and security.

Just-In-Time (JIT) components are materials supplied directly in line with procurement schedules, so they are not help in inventory but do not affect continuity of supply.

Question 4

1.1 Direct and Indirect Procurement

Answer 4

Direct: Products or services directly related to a specific job - without these there would be no finished product.

Indirect: Goods and services the organisation needs to function, but don’t directly contribute to the final product:

The Kraljic matrix: used to assess risk and importance associated with procurement. It has two axis: profit impact and supply risk.
Leverage items Stategic items <- Mostly Direct Procurement

Non-critical items Bottleneck items <- Mostly indirect

Non-Critical items: Low financial impact and abundant supply (office supplies, sundries). Handling costs often outweigh the cost of the products themselves. To help you can delegate purchase authority to departments.

Leverage items: High financial impact, Low supply risk. Negotiate price frequently and switch supplier when necessary to reduce prices.

Bottleneck items: Low financial impact, high supply risk. Establish long term contracts with suppliers to ensure continuity of supply. Adapt and investigate alternatives.

Strategic Items: High financial impact, high supply risk (e.g. a scarce metal you are highly dependent on). If Private procurement, you could create strategic partnerships to ensure supply.

Question 5

1.1 Capital Purchases and Operational Expenditure

Answer 5

Capital Expenditure (CAPEX): Items procured to develop the business, make money, and keep up with market trends. The value of capital purchases often depreciates with time.

Operational Expenditure (OPEX): Ongoing expenses that ensure the efficient day-to-day running of the business. These are usually paid monthly/annually and have a low to medium value.

Question 6

1.1 Services Procurement

Answer 6

This is intangible and can include cleaning, insurance and utilities. They cannot be evaluated in the same way as tangible assets, so specifications for sourcing should be very detailed.

Question 7

1.2 The five rights of procurement

Answer 7

1. Right Price: Price can be affected by quality, quantity and urgency of requirement.
2. Right Quality: Suppliers must comply to relevant quality standards (e.g. ISO 14000 for Environmental Management and ISO 22000 for Food Safety).

Buyers must aim to achieve value for money and consider the cost implications of quality that is too high or low.

3. Right Quantity: Refers to economies of scale, inventory approach and levels.
4. Right Time: Items should be delivered during opening hours and on the right day. Too early can lead to storage/logistics issues and too late will affect manufacturing.
5. Right Place: Goods to be delivered to the correct address, be able to reach site entrance and unload.

Question 8

1.2 Defining Total Life Cycle costs or Total Cost of Ownership

Answer 8

Total Cost of Acquisition (TCA): Relates to the amount of money an organisation has to pay to acquire a product incl. sourcing, delivery and installation. Takes into account purchase price, quality (potential for defects), delivery cost and lead time.

Total Cost of Ownership (TCO): Relates to the total cost over the lifetime of a product incling TCA, insurance, maintenance, storage and disposal. This is usually used when buying assets.

Question 9

1.2 Achieving quality, timescales, quantities, and place considerations in procurements from external suppliers

Answer 9

Buyers use contracts, SLA’s and KPI’s to ensure suppliers meet appropriate standards.

KPI’s (Key Performance Indicators) may be included in the contract. These can be qualitative (reducing materials wastage, ISO accreditation) or quantitative (reducing % of late/incorrect deliveries, competitive prices).

SLA’s (Service Level Agreement) define what services will be provided and what level or standard is required. It incentivises the company to maintain a high level of performance.

Question 10

1.2 Other sources of added value such as innovation, sustainability, and market development

Answer 10

Improves supplier relationships, providing unique resources, knowledge and experience of the suppliers.

Can recommend on quality improvement, and reduce costs through innovation.

Evaluate suppliers, compare buy/lease options, benchmark prices, help prepare specifications.

In the supply chain, buyers can participate in product development, conduct supply chain analysis and help optimize production.

Question 11

1.2 Defining Value for Money

Answer 11

Best value for money is defined as the most advantageous combination of cost, quality and sustainability to meet customer requirements.

Cost: Considers both TCA and TCO
Quality: Must be fit for purpose and sufficiently fit customer requirements.
Sustainability: Fit the sustainability policy of appropriate government bodies and company policy.

Other areas which affect value for money include: flexibility, time, ROI, quality-to-price ratio, efficiency and effectiveness.

Question 12

1.3 Definitions of procurement, supply chains, supply chain management and supply chain networks

Answer 12

Supply Chain: A network of individuals, organisations, tech & resources that aid flow of goods/services.

SCM (Supply Chain Management): The management of relations between these participants, to reduce costs & risk.

Supply Network: Multiple supply chains that cross-link organisational structures. These are usually designed around 5 areas:
1. External Suppliers - materials provision
2. Manufacturers - produce the end product
3. Distribution Centres - manage storage/transport
4. Logistics - aids with above
5. Consumer demand

Downstream Supply Chain:
Part 1: Procurement process
Raw material -> Inbound logistics -> Goods in warehouse -> Manufacturing->
Part 2: Operations process
Outbound warehouse -> Outbound logistics -> Consumer

Question 13

1.3 Comparisons of supply chain management with procurement

Answer 13

Procurement (simplified) is the process of getting goods your company requires, whereas supply chain management is managing the extensive infrastructure needed to get you those goods, and also includes the operational processes following procurement (manufacturing, outbound logistics, final product reaching consumers).

SCM can aid the procurement process and make it more efficient.

Benefits of SCM:
1. Reduced costs by eliminating waste activities.
2. Improved responsiveness to customer requirements
3. Access to complimentary resources and capabilities
4. Enhanced product and service quality
5. Sharing demand forecasting and planning information enables JIT supply.
6. Faster lead times for product development and delivery (If it is an agile supply chain that focuses on flexibility and receptiveness)

Question 14

1.3 Complex Supply Chains

Answer 14

Complex Supply Chains have tiers of suppliers. The lower the tier, the closer to the buyer the supplier is.

                 Buyer
 T1               T1         T1
   |            |     |         |
  T2          T2   T2       T2

1. Every supplier tier is managed and has to conform to the same ethical and sustainability standards.
2. The buyer will audit suppliers across the entire supply chain from time-to-time, but relies on T1 suppliers to ensure the lower parts of the supply chain are well managed.

Question 15

1.3 Definitions of logistics and materials management

Answer 15

Logistics: The control of flow of goods or services between two points. Logistics can be external or internal.

Demand Planning: Knowing what is required and when

Materials management: Covers handling, storage, inspection and issuing of materials.

Question 16

1.4 Defining Stakeholders

Answer 16

Stakeholders: Any individual or group that have an interest in the organisation, or who can be affected by the organisations objectives. These can be external or internal.

Question 17

1.4 Examples of stakeholders for a procurement or supply chain function

Answer 17

External Stakeholders: Producers, shareholders (care about ROI), suppliers, local communities affected by the company, CIPS, customers.

Internal Stakeholders: Colleagues with a buying need, accounts department, company owners, sales department.

Question 18

1.4 Mapping stakeholders for a procurement or supply chain function

Answer 18

Mendelow’s matrix: Analyses stakeholder groups based on power (ability to influence company activity) and interest (how interested they are in the success of the company)

1. Keep Satisfied (High Power, Low Interest)
   Keep them informed and satisfied, but do not over-involve in decision making, or oversaturate with information.
2. Manage Closely (High Power, High Interest)
   Aim to fully engage and make great efforts to satisfy them. Must involve in decision making. These are usually directors, governments and block-holders.
3. Minimal Effort (Low Power, Low Interest)
   Not necessary to engage with, but monitor their levels of interest and power, incase of any changes. These are typically small customers and small suppliers.
4. Keep Informed (Low Power, High Interest)
   Adequately inform and communicate with them. They may be useful to spot areas that can be improved/were overlooked. Examples could be charities, activist groups.

Keep Manage
| Satisfied Closely
|
| Minimal Keep
| Effort Informed
—-Interest——————->

Question 19

2.1 The CIPS Procurement Cycle

Answer 19

1. Identify and Understand the need: Usually communicated to buyers through a requisition.
2. Identify market commodity options: The buyer determines whether the organisation should make/buy/hire to meet need. Research and identify potential suitable suppliers.
3. Develop a strategy: Outline whether to approach local/national/global suppliers. Evaluate using Porter’s five forces and state whether ITT (Invitation to Tender) or RFQ (Request for Quotation) is more suitable).

Porter’s Five Forces:
1. Competition in the industry
2. Potential of new entrants into the industry
3. Power of suppliers (how easily suppliers can drive up prices)
4. Power of customers (how easily customers can drive down prices)
5. Threat of substitute products (how many close substitutes are available)

4. Pre-procurement market test: engage with market to establish how best to develop the specification.
   What are the cost implications and optimum contracting terms?
   Is it the right time to act upon the need? Consider the product life cycles and seasonal trends.

A simplified Product Life Cycle:
1. Intro - beginning, low sales and high cost per customer
2. Growth - increasing sales, decreasing cost per customer
3. Maturity - high sales, lowest cost per customer
4. Decline OR extension - either sales decline or continue to hold/increase.

5. Develop appropriate documentation to send out to potential suppliers.
   ITT is usually used if going to an open market, RFQ is used if going to a known number of suppliers.
   ITT/RFQ should include spec, quantity, delivery details, SLA’s and T&C’s.
6. Supplier Selection: use Carter’s 10 C’s to select appropriate suppliers. Information can be gathered through supplier site visits, conducting audits, pre-qualification questionnaires.

Carters 10 C’s:
1. Competence
2. Costs: comparison of production costs
3. Capacity: sufficient capacity to meet needs?
4. Consistency
5.Commitment: actively working to ensure quality?
6. Control: consistent policies and procedures
7. Cash: is the supplier strong financially
8. Culture: similar values to prevent tension
9. CSR (Corporate Social Responsibility)
10. Communication

7. Issue ITT/RFQ to suppliers
8. Tender/Quotation evaluation
   For tenders, cross-functional teams are all involved in the evaluation.
   Quotations are less formal - decisions can be made faster with less involvement than others.
   It is important to consider the TCO, not just the price.
9. Contract award and implementation: Once the supplier agrees to the terms, a contract is signed. If an existing supplier is being replaced, you need to ensure that supply will not be disrupted.
10. Warehouse, logistics and receipting: Advise relevant parties when to expect new goods, so that warehouses can be prepared etc.
11. Contract performance reviews: Set up periodical meetings with the supplier to review their performance against KPIs specified in their contract and address any concerns.
12. SRM (Supplier relationship management) and SCM (Supplier contract management): Evaluate and monitor suppliers and their performance.
    Only the most important contracts need to be actively managed (Mendelow’s matrix).
13. Asset Management: Reviewing the contracts that are in place to check they still meet business need.
    Decommission any assets that have come to the end of their life.

Question 20

2.1 Defining the stages of a generic sourcing process from identification of needs to contract award, implementation and end of life disposal.

Answer 20

These are 5 key stages taken from the CIPS procurement cycle, which fit any generic sourcing process:

1. (CIPS Stage 1) Identify and Understand the need: Usually communicated to buyers through a requisition.
2. (CIPS Stage 5) Develop appropriate documentation to send out to potential suppliers.
3. (CIPS Stage 6) Supplier Selection: use Carter’s 10 C’s to select appropriate suppliers.
4. (CIPS Stage 9) Contract award and implementation: Once the supplier agrees to the terms, a contract is signed.
5. (CIPS Stage 12 & 13) SRM and SCM: Evaluate and monitor suppliers and their performance. Review contracts that are in place to check they still meet business need - decommission any assets that have come to the end of their life.

Question 21

2.1 Differentiating between pre contract award and post contract award stages

Answer 21

Pre-award Stage: CIPS Procurement Cycle Stages 1-8
Contact award Stage: CIPS Procurement Cycle Stage 9
Post contract award stage: CIPS Procurement Cycle Stage 10-13

Why do you need the Post-Contract Stage?
1. Avoid warehouse issues such as non arrival of goods, inability to book in, no storage etc.
2. Avoid lack of awareness of supplier performance issues and failure to improve processes.
3. Avoid incorrect disposal of assets

Question 22

2.1 Differentiating between pre contract award and post contract award stages

Answer 22

Pre-award Stage: CIPS Procurement Cycle Stages 1-8
Contact award Stage: CIPS Procurement Cycle Stage 9
Post contract award stage: CIPS Procurement Cycle Stage 10-13

Question 23

2.2 Stages of the sourcing process that relate to defining needs, creation of contract terms, supplier selection, contract award and supplier management.

Answer 23

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Question 24

2.2 The purpose and added value that is created by each stage of the sourcing process

Answer 24

Why do you need the Post-Contract Stage?
1. Avoid warehouse issues such as non arrival of goods, inability to book in, no storage etc.
2. Avoid lack of awareness of supplier performance issues and failure to improve processes.
3. Avoid incorrect disposal of assets - could result in fines or additional unexpected costs.

Question 25

2.3 E-requisitioning, e-catalogues, e-ordering, e-sourcing and e-payment technologies
&
2.3 The impact of electronic P2P (purchase-to-pay) systems on the sourcing process

Answer 25

E-requisitions: raising and sending requisitions online
Makes process faster and lowers chances of req getting lost. Full traceability of who raised it.

E-catalogues: up-to-date display of a suppliers product range which buyers refer to.
Saves time as information is readily available and easier to search through.

E-ordering: using an electronic system to place orders.
Reports can be automatically transferred into an e-order. Saves time and reduces chance of human error.

E-sourcing: developing spec, sending and receiving tenders online.
Can evaluate tenders automatically and create and store electronic contracts.

E-payments: Sending and receiving invoices electronically and paying via bank transfer.

Question 26

2.4 Organisational needs for structured sourcing processes
&
2.4 Relationship between compliance and the achievement of added value outcomes.

Answer 26

Benefits of CIPS process:
1. They help to ensure consistency, transparency and compliance.
2. Ensures tenders and quotes are evaluated fairly, and that suppliers are all dealt with in the same way.
3. Reduces risks by providing guidelines for decision making, which aids compliance.
4.Makes the process more efficient, saving time and money.
5. Helps professionals identify which suppliers should be engaged with/avoided.

Achieving compliance helps:
Achieve CSR and national legislation compliance.
Reduce operational risk
Compliance results in added value

Lack of compliance can result in:
Unethical behaviour
Unsuitable suppliers
Product shortages
Damage to reputation (CSR)
Potential legal action

Question 27

3.1. Conflicts of interest

Answer 27

Corporate governance: The rules, policies, processes and structures (RiPPS) by which the organisation is operated.

Conflict of interest: Occurs when a person’s involvement within an org has multiple opposing interests.

To identify a potential conflict:
Do you gain financially?
Do you have personal relationships?
Do you have an identical role with a competitor?

Question 28

3.1 The need for documented policies and procedures for procurement
&
3.2 The use of procurement policies, procurement strategies and procurement manuals

Answer 28

Organisations may create a procurement manual for their buyers to follow: This would include information on competition, ethic, KPIs, quality, sustainability etc.

Advantages of policies:
Provides guidance
Promotes ethical behaviours
Reduces risk
Promotes accountability

Disadvantages of policies:
Removes innovation
May restrict supplier base
Buyers lose individuality

Question 29

3.1 Organisational accountability and reporting for procurement roles and functions
&
3.2 Aspects that can be included in procedures for procurement and supply such as responsibilities for procurement, regulations relating to competition, levels of delegated authority, responsibilities for the stages of the sourcing process, invoice clearance and
payment

Answer 29

Because COI is common in procurement, buyers should not be afraid to disclose it.

The 4D Model:
1. Disclosure: tell organisation about the potential COI
2. Distance: the individual should distance themselves from the associated deal.
3. Delegate: delegate necessary tasks to a colleague with no conflict of interest..
4. Disassociate: If the contract is critical and COI is certain, you should disassociate from the deal to ensure complete objectivity.

Corporate governance procedures in P&S:
1. Responsibilities:
Authority to accept and process orders
Authority to make decisions (need for delegated authority)

2. Regulations (relating to competition):
   Competition policies - deter collusion and activities such as bid rigging, avoids monopolies and prevents price fixing.
3. Levels of delegated authority and responsibilities for the stages of the sourcing process
4. Invoice clearance and payment - invoices must be checked against PO and goods receipt. Must check quantity, price, transport and tax.

Question 30

3.1 The CIPS code of conduct

Answer 30

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Question 31

3.1 Code of ethics in Procurement
&
3.2 Responsible Procurement and the International Labour Organisation core conventions

Answer 31

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Question 32

3.3 The use of centralised and devolved structures

Answer 32

Centralised: Procurement is placed in the hands of a single department reporting to a single executive

De-centralised: Devolved to procurement officers in different strategic units

Hybrid: Combinations of central and devolved departments. Cost, compliance and best-practice directives come from headquarters, but daily purchasing duties are left to departments.

Question 33

3.3 Hybrid structures of a procurement or supply chain function (such as consortium structures, shared services, lead buyer structures, and outsourced) Interacting with people and building rapport

Answer 33

1. Consortium: A group of separate organisations combine together for the purpose of procurement.
   Benefits: low prices, reduced workload, shared and increased knowledge.
   Challenges: Reduced control, internal conflict, lengthy decision processes
2. Lead Buyer structure: One individual takes responsibility of procuring a specific product. This is usually a specialist.
   Advantages: Reduced workload compared to devolved structure, economies of scale, chance to develop individual skills/knowledge.
   Disadvantages: Price dependent on individual’s skills, increased risk.
3. Shared services: The organisation has central support functions (HR, IT etc)
   Advantages: reduces amount of individual admin work -> reduced cost, focus on core activities, information is all central.
   Disadvantages: risk of breaching departmental confidentiality, resistance to change.
4. Outsourced Procurement: an external provider carries out the task for an organisation.
   Can be outsourced by small orgs who lack knowledge or don’t require a full time role.
   Advantages: Reduced training Costs
   Can be outsourced by large orgs so they can focus on core activities, whilst saving resources and maximising profits.

Question 34

3.3 The need for customer service and value for money outcomes

Answer 34

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Question 35

3.4 P2P Systems

Answer 35

Procure-to-Pay (P2P) systems integrate purchasing and accounts payable systems into one - including requisitions, purchasing and payment.
Benefits:
Improves efficiency and can automate some processes such as turning reqs into orders.
Improved visibility and control over spending
Reduced amount of admin tasks means they can focus on core activities.

Question 36

3.4 Systems for inventory management

Answer 36

e-MRP (Electronic Materials Requirement planning) : Uses base information to calculate how much of each component needs to be ordered and when.
Benefits: Calculations are automated, leaving less room for error
Problems: Relies on correct information being entered or else the whole process fails.

Question 37

3.4 Enterprise Resource Planning (ERP) Technologies

Answer 37

Enterprise Resource Planning (ERP) : Processes an organisations transactions and facilitates integrated real-time planning, production and customer responses.

It consolidates many functions (materials, logistics, finance) into one system.

Question 38

3.4 Communications systems for internal and external use

Answer 38

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