L4M2 Chapter 1

Question 1

What is the 3 types of business needs
or
What is the 3 different types of purchases can be made?
or
Summarises the 3 types off purchases with a example

Answer 1

Straight re-buy
(Approved supplier list)
* Utilities (gas,water,electricity)
* MRO (maintenance,repair and operating items)
* Raw Material (steel,coal,chemicals)
Modified re-buy
(Buyer must have procurement solving skills)
* Consultancy Services
* Components and semi-finished products
* ICT (software for a number of users)
New purchases
(Legislation and Technology changes)
* Capital Items
* Finished products
* Products from re-sale
Chapter 1: Pages 2,3,4

Question 2

What is the definition of Straight re-buy and what is the procurement task?

Answer 2

The purchase of something that an organisation has bought before
* Business need has already been defined
* Specifications are already in place
* Generally, suppliers will already be contracted to agreed terms and conditions.
* Low value and low risk
* Call off or framework agreements
* Purchasing cards (P-Cards)
The procurement task is to:
* raise a requisition and place a purchase order
Chapter 1: Pages 2,3,4

Question 3

What is the definition of Modified re-buy and what is the procurement task?

Answer 3

Similar to a straight re-buy but there are some changes to the specification the business need will need to be revisited, particularly if it is part of a cost-reduction
programme
The procurement task is to:
* Create a sourcing strategy
* Decide on the route of the market
* Decide how to implement the new supply arrangements
* Determine how to track results and benefits
* Define the trigger events that will restart the sourcing process
Chapter 1: Pages 2,3,4

Question 4

What is the definition of New Purchases and what is the procurement task?

Answer 4

Made when the organisation identifies a completely new requirement not purchased before.
The procurement task is to:
* Understand the business requirement
* Write an effective specification for what is needed
* Research the supply market and key suppliers
* Decide on the key capabilities that the suppliers must have
* Write invitation to tender documents
* Manage the tender process
* Negotiate
* Select the supplier
The new purchase will usually involve many people from different departments in order to mitigate risks to the organisation
Chapter 1: Pages 2,3,4

Question 5

Analyse how business needs influence procurement decisions

Answer 5

• Sourcing requirements from external suppliers commits an organisation to a cost
  and a liability
• By sourcing from external suppliers, it is assumed that the purchase will help to create value over and above the cost
• Prior to making very large purchases, it is best practice to evaluate the costs and benefits of the proposed procurement and obtain agreement of senior management through a business case.
  Note: A business case is never written by a procurement team in isolation.
  Chapter 1: Pages 5,6

Question 6

Which model can be use to identify business needs?
or
Which model takes six (6) themes and ranks them in a specific order?

Answer 6

RAQSCI
(pronounced rack-ski)
RAQSCI model can be used to identify business needs:
o Regulatory (regulatory bodies)
o Availability
o Quality
o Service requirements
o Cost
o Innovation
Chapter 1: Pages 5,6

Question 7

Why is the order of the six (6) themes important

Answer 7

The order in the RAQSCI model is crucial as it focuses attention on potential improvement.
Chapter 1: Pages 5,6

Question 8

What is the implications for business needs on the types of purchases? (explain them separately)

Answer 8

Straight re-buy – if the following apply:
* A list of approved suppliers exists, and terms and conditions have already been agreed
* New suppliers are not considered
* The process for ordering is procurement approved and routine
* Buyers have relevant buying experience and require little to no new information
Chapter 1: Pages 7,8,9

Question 9

What is the implications for business needs on the types of purchases? (explain them separately)

Answer 9

Modified re-buy – creation of a sourcing strategy through:
* Define the scope of spend and the requirement
1.Identify:
 Any geographical boundaries
Time period of the strategy
Any organisational boundaries
2.Output of the process should be a simple statement
of no more than 2 sentences
* Assess the current spend
* Assess the supply market
* Analyse the total cost
* Identify suitable suppliers
1.Typical capabilities:
 Specialist skills
World class processes
Qualifications from regulatory bodies (i.e. ISO)
Leading-edge software
Specialist capital equipment
Unique or dormant access to rare resources
(i.e.human skills)
* Develop a strategy
* Decide the route to market (tendering exercise)
* Decide how to implement new supply arrangements
* Decide how to track results and benefits
* Define trigger events
Chapter 1: Pages 7,8,9

Question 10

What is the implications for business needs on the types of purchases? (explain them separately)

Answer 10

New purchase – will involve many people from different departments and involves risks, i.e.
* Marketing
* Engineering
* Manufacturing
* Finance
* New purchase characteristics include:
1. The need is for a new product or service
2. No existing experience of buying this item
3. A lot of information is required before purchase
4. A review has already been carried out to identify different ways of meeting the need
5. May be requirement for subsequent follow-on straight re-buy
Chapter 1: Pages 7,8,9

Question 11

Identifying business requirements is critical to a successful sourcing outcome to ensure

Answer 11

• Development of appropriate evaluation criteria
• Appropriate sourcing options are tested and selected
• Relevant performance measures are developed
• Updating of the sourcing strategy
  Chapter 1: Pages 8,9

Question 12

What considerations needs to be taken when defining business requirements?

Answer 12

• Gather as much data on future direction of organisation as possible
• Identify and meet with all stakeholders
• Consult with as many people as possible who have a role in the acquisition
• Share analysis summary with all stakeholders
  Chapter 1: Pages 8,9

Question 13

What is the capability of a supplier important to a buyer?

List 3 examples

Answer 13

Increase the value of modified re-buy.
Results create an option for cost reduction plans.
Examples,
* Specialist skills
* Qualification from regulation bodies (e.g.ISO)
* Leading edge -software
Chapter 1: Page 9

Question 14

What is a business case?

Answer 14

A justification for undertaking an action. Its purpose is to seek approval and possibly finance for the recommended plan of action.
Chapter 1: Page 10

Question 15

When will a business case be prepared within the Procurement function ?

Answer 15

• A contract is coming to an end and the product or service needs to be procured again.
• Cost reductions need to be made
• An alternate product or service has been found that delivers benefits
  Chapter 1: Page 10

Question 16

Business case includes?

Answer 16

• Project analysis
• Choosing the best amongst projects
  Chapter 1: Pages 10,11

Question 17

Problems can be divided in to two (2) groups.

Answer 17

• Closed problems
  Something happens that should not have happened
  Finding ways to correct the situations
• Open-ended problems
  Something is stopping the achievement or blocking the progress
  Unblock the blockages
  Chapter 1: Page 11;12

Question 18

Describe the eight step (8) process for problem solving in procurement?

Answer 18

Solving the problem – 8 steps:
o Step 1 - what is going on?
o Step 2 – what do we know?
* Interviews
* Questionnaires
* Observations
* Documents and records
o Step 3 – what are the underlying issues?
* Issues map
o Step 4 – what could we do?
* SCAMPER checklist
o Step 5 – what is the best thing to do?
o Step 6 – how do we go about it (milestones)?
* RACI matrix
o Step 7 – have we achieved our objectives?
6 step process:
* Create a team
* Create a project plan
* Create a dashboard
* Communicate ongoing activity and results
* Adapt the plan to changing circumstances
* Document results when project is completed
o Step 8 – can we improve on what we have?
* Do’s and don’ts of problem solving
Chapter 1: Pages 13 to 18

Question 19

What is the sections in a business case?
or
If you have to prepare a business case what information will it contain?

Answer 19

Prepare the business case
o Typically contains:
* Executive summary
* Long-term strategy considerations
* Business requirements
* Price and cost analysis
* Market analysis
* Supply analysis
* Technical developments
* Vulnerability analysis
* Sourcing objectives
* Implementation plan
* Competitive advantage
Chapter 1: Pages 19,20

Question 20

What should the plan of action clearly identify in a business case?

Answer 20

The opportunity it seeks to exploit or the problem the business case will solve.
* The benefits of the proposed action
* Any risks involved and how they can be mitigated
* Timescales for completing the project
* The roles and responsibilities involved
(i.e. who will do what)
* Why something needs to be done and not just what needs to be done.
Chapter 1: Pages 19,20

Question 21

What will be the reason for developing business cases in Procurement?

Answer 21

• When a contract is coming to an end and the product or service needs to be procured again.
• When cost reductions need to be made which require changes to the way the organisation operates.
  Chapter 1: Pages 19,20

Question 22

What elements of a business plan that will appeal to senior management?

Answer 22

Return on investment
* Time to market
* Customer satisfaction
* Improving productivity
* Managing risk
Chapter 1: Page 20,21

Question 23

The understanding of the business requirements will help:

Answer 23

To target which market to analyse
* Identify the kind of information that needs to be collected
* Confirm the most appropriate collection from what source
Chapter 1: Page 22

Question 24

Two (2) ways for collecting further information (source)?

Answer 24

Desk Research
Field Research
Chapter 1: Page 22,23

Question 25

Desk Research is which market source?

Answer 25

Secondary Research
Examples:
* Local business reference library
* Trade associations
* Official statistics
* Business magazine and national newspapers reports
* Local authorities and Chambers of Commerce
* The internet
* Commercial publishers of market reports
* Business’ own data
Chapter 1: Page 22

Question 26

Field Research is which market source?

Answer 26

Primary research
Examples:
* Quantitative – provides statistical information
* Qualitative – examines people’s feelings and attitudes towards an organisation or service
* Advice for field research
Chapter 1: Page 23

Question 27

Which document can be used to gather information about suppliers in the procurement process?

Answer 27

Request for information (RFI)
A document used in the early stages of buying a new product or service
* Used to test the supply market to see what is available in terms of supplier capability
* Does not imply that any procurement will subsequently be made, or contract awarded
* Often used to create a potential shortlist of suppliers for the next stage
Points to consider:
* Questions should be framed appropriately
* The purpose of the RFI is to gather information,
document should be brief
* Not a promise of work, but should be worded to gain
interest
* Questions should focus on supplier’s understanding
and interpretation of the organisations problem
* Suppliers should be encouraged to ask questions
Chapter 1: Page 24

Question 28

What is price and cost?

Answer 28

Price
* Is what supplier charges for a package of benefits offered by the buyer
Cost
* Is what the buyer pays to acquire the goods or services purchased
Chapter 1 Chapter 1: Page 25

Question 29

When estimating cost there are different categories/ classification of costs to consider.

Question to ask
Can it attribute to the production of the specific goods or services or not?

Answer 29

Direct costs
* Directly related to producing and selling products
* Cost directly linked to final product
Example: Bakery
Cost of the ingredients
Labour (wages- staff mixing the ingredients)

Indirect Costs
* Other costs involved in running a business
* Overhead costs
* Cost to multiply activities, don’t attributed to any one product or service
Example: Running Bakery
Building costs, business rates
Stoves,baking pans,utensils
Supervisors,Managers
Salaries of the Supervisors,Sale Staff
Chapter 1: Page 25

Question 30

Two (2) Classification of the Value Chain created by Porter’s in 1985

Answer 30

Primary activities (direct costs):
* Inbound logistics
* Operations
* Outbound logistics
* Sales and marketing
* Service
Secondary activities (indirect costs):
* Organisation infrastructure
* Human resource management
* Technology
* Procurement
Chapter 1: Page 25,26

Question 31

Other methods to classify cost

Answer 31

Fixed costs
* Do not change (constant/do not vary) with the level of output
Examples:
Warehouse worker salary to be paid regardless how
many deliveries he takes in (per day/per month)
Variable costs
* Do change (do vary) with changes in the number of products made (units made)
Example: Raw material
The more products made, higher cost
The less products made, lower cost
No products made, variable cost = zero Total cost of output
Semi-variable costs
* Those costs that show characteristics of both fixed and variable costs
Example
Cellphone contract 1 GB p/month (fixed cost), over the
1 GB buy more data (variable cost) .
Semi-variable cost = Fixed cost + variable cost
Chapter 1: Pages 26,27

Question 32

What is cost estimate?

Answer 32

• Approximation of the cost of the program,project or operation
• Cost Estimate is the product of the costing estimating process
• Cost estimate has a single total value and may have identifiable component values
  Chapter 1: page 28

Question 33

Three (3) ways to produce estimated costs and budgets

Question
How to use this information for the above cost?

Answer 33

• Break even analysis
• Purchase price cost analysis
• Purchase price analysis
  Chapter 1: Page 28

Question 34

Break-even analysis (break even point)

Answer 34

Break-even analysis
* The point at which sales and total costs meet
(sales value = total cost value)
* Calculating break-even point
* Understanding the break-even point for a key supplier
can be extremely useful in negotiations
(‘win-win’ outcome)
* Above break-even point results in ‘super-profits
* Calculating break-even point
Formula: F/(R-V) = Q
Fixed cost /(Revenue-Variable Cost) = Units (Quantity)
Chapter 1: page 28,29

Question 35

Purchase cost analysis (PCA)

Answer 35

Purchase cost analysis (PCA)
* A tool used to analyse the costs of things bought to identify strategies to reduce costs and improve supplier relationships

✔ Use a Segmentation model for PCA to consider the nature of the businesses _ongoing or a once-off.
(refer to model on page 31)

✔ Use a Segmentation model for PCA Arms-length relationships (desired relationship with the supplier)
✳ Produce 4 quadrants
* Leverage
* Strategic
* Low impact
* Critical projects
Strategic suppliers
* Careful handling of the relationship using cost
analysis
* Work co-operatively to find ways to reduce costs to
achieve ‘target cost’
✳ Sales - Profit = Target Cost

Target cost setting
* Carry out PCA to understand components which are
important to the customer
* Ranking of customer requirements
* Can use quality function deployment (QFD)
to capture data
✳ Convert data from QFD into percentages based
on contribution to overall customer satisfaction
* Estimate costs of each of components (price analysis)
* Identify appropriate action
Chapter 1: page 30,31,32

Question 36

Purchase price analysis

Answer 36

Purchase price analysis
* In the long-run, suppliers must cover all of their costs
* In the short-run, price is dictated by supply and demand (competition)
* Cost and price analysis are usually considered together
* Attractiveness of the market to suppliers influencing price:
✳ Strategic
✳ Develop (price concessions)
✳ Exploit (premium price)
✳ Nuisance (maximize prices)Other influences on price
(name examples)
Chapter 1: page 33,34

Question 37

Three (3) main sources of price comparator?

Answer 37

How to carry out a price analysis
* Comparing prices against a price comparator
(benchmark):
✳ Prices that have been paid in the past -account for
inflation
✳ Published prices - find in catalogues
✳ Pricing formula - square p/m for bldg between price
Chapter 1: page 35

Question 38

Criteria that can be applied in the production of a business case

Answer 38

Objectives
The first criterion is to read the business case and assess the objectives of the proposal
✳Application of the ‘5 Whys’ analysis to test whether the opportunity or problem is genuine
✳Issues management can be used to assess the importance and strategic nature of an objective (Ansoff) through:
✳External trends
✳Internal trends
✳Performance trends
Chapter 1: page 41

Question 39

What are the 3 trends that can help decide if a objective is strategic or not?

Answer 39

A
Issues management can be used to assess the importance and strategic nature of an objective (Ansoff) through:
✳External trends
✳Internal trends
✳Performance trends
Chapter 1: page 41,42

Question 40

How does the business case propose the objectives are reached?

Answer 40

Options
Can be carried out with a peer group using brain-storming or benchmarking
✳ Brainstorming interventions:
*Market interventions
*Technical interventions
*Cost structure interventions
*Work process interventions
*Supplier relationship interventions
*Supply chain interventions
✳Generating hybrid strategies
*Combining two or more (best of all) strategies in one
Chapter 1: page 42,43

Question 41

Third criteria for assessing a business case

Answer 41

Costs and benefits
✳Cost-benefit analysis – to show the financial consequence of the choice made
✳ Costs may be one-off or ongoing
✳ Benefits are usually received over time
✳Tangible and intangible costs should be identified
✳Financial and non-financial benefits
Chapter 1: pages 44,45

Question 42

The criteria named in your unit content 1.3 that can be applied to a business case are:

Answer 42

Costs, benefits,options, alignment with organisational needs and timescales
Chapter 1: pages 44,45

Question 43

Senior Management will look for evidence that what is undertaken in a business case?

Answer 43

Risk assessment
✳List all of the potential sources of risk in terms of potential impact on the organisation if the risk event was to happen
✳Assess likelihood that risk event will happen
Chapter 1: page 47

Question 44

Senior Management will assess whether or not the ……… makes sense?
or
What is the elements of an implementation plan?

Answer 44

Implementation plan
Elements of an implementation plan:
✳Allocation and agreement of roles and responsibilities
✳Communication strategy that delivers the right message in the right medium to the right people
✳Change management strategy
✳Agreed specification
✳Agreed procurement route
✳Time allowance for writing tender documents
✳Time allowance for managing the tender process
✳Time allowance to agree the criteria for choosing a supplier
✳Time allowance for negotiation
✳Time allowance for writing the contract
✳Identification of all major tasks and dependencies in a formal plan
Chapter 1: page 48

Question 45

Benchmarking requirements

Answer 45

Definitions of ‘benchmarking’
* The Department of the Navy Benchmarking Handbook
4 main types of benchmarking:
✳ Internal benchmarking
Business process is similar process in the same business
* Example: Retail stores, select the best store as the benchmark
* Benefits * Challenges (refer to table pg 50)
✳Competitive benchmarking
Direct competitor-to-competitor comparison
* Example: Public sector compares the army and prisons
* Benefits * Challenges (refer to table pg 50)
✳ Functional benchmarking
* Compares similar or identical practices from different
industries
* Example: Government my compare tax collection against a credit card company collection processes.
* Benefits * Challenges (refer to table pg 51)
✳ Generic
* Compares unrelated business processes that can be carried out in a similar way, irrespective of the industry
* Example: Bar Code system to track luggage = grocery outlet’s bar code system
* Benefits * Challenges (refer to table pg 51)
Chapter 1: Pages 49,50,51