Learning Outcome 1 Flashcards
What is the definition of procurement?
It is Strategic Planning which includes setting direction and long term goals.
What are the elements of procurement?
- Added value
- Cost
- Inventory
- Logistics
- Purchasing
- Quality
- Supply
- Waste management
What is the definition of purchasing?
The act of physically ordering and buying something.
What is the definition of supply?
The infrastructure which ensures that products or services get from supplier to customer.
What organisational costs are
represented by procurements of goods, services or
constructional works?
Capital purchases – Machinery, buildings or land. One of purchases.
- Insurance
- Marketing
- Raw materials
- Research and development
- Salaries/pensions
- Services
- Sundry items – Stationary, uniforms
- Training
- Utilities
- Vehicles/Transport
What are classed as stock procurements?
Raw materials – coal, cotton, oil, wheat - primary sector
* Components – Light bulbs, nuts and bolts, metal housing - secondary sector
* Finished goods – shoes, beds, clothes.- tertiary sector
What are classed as non stock procurements?
Not listed in inventory
- Often capital purchases
- Often intangible like services
can include:
* Cleaning service
* Internet contracts
* Telephone systems
* Organisational insurance
What are direct procurements?
The sourcing and supply of a product and service that is directly related to the end result - primary activities such as raw materials, components.
What are indirect procurements?
Services, tools and equipment that do not form part of the finished product but are required to maintain the business and production process - support activities such as repairs, stationary, consultancy.
What are fixed costs?
Fixed costs don’t change with output. Things still have to be paid such as rent, staff salaries, insurance.
What are variable costs?
Variable costs are dependant on output. Things such as staff hourly wages, raw materials.
What can we use to help manage supplier relationships associated with each type of procurement?
Kraljic
Low risk/low cost - Routine suppliers
Lots of work
Lots of variety available
Stationary suppliers
High risk/low cost - Bottleneck suppliers
Holds monopoly
Little or no other options
Low value items
High cost/low risk - Leverage suppliers
Vast competition
Low cost to move suppliers
Often utility services
High cost/high risk - Strategic suppliers
Critical supplier to an organisation
Responsible for core products
Reasons to hold stock?
Independent demand
Stable demand - low value/non perishable
Long lead time
Legal requirement to hold
Critical for operations
Appreciates in value over time
Seasonal demand
If prices are expected to rise
CAPEX Budgets?
Manage capital purchases.
Asset purchased to last a long time
Often paid as a lump sum or through a bank loan
Accounted for and depreciates over time
High value
Usually land, property and machinery
OPEX Budgets
Manage operations expenditure (costs associated with the running of an organisation
- Ongoing expense to the organisation
- Paid monthly or annually
- Low to medium value
- Accounted for in the current month or year
Can include the following:
- Rent
- Utilities
- Raw materials
- Salary
- Insurance
- Transport
What are service procurements?
Services are intangible, heterogenous, non perishable and inseparable.
Can be a one of requirement - car valeting or last years - IT contracts
Difficult to measure as cant be evaluated to verify conformity.
Specifications need to be precise -usually conformance,
What are the five rights of procurement?
Quality – satisfactory and fit for purpose. Essential for getting value for money. ISO 9000 is the globally recognised standard for quality – promotes quality in manufacturing and service organisations.
2 ways to define the standard:
* Stating quality standards
* Producing a product specification – talk about conformance and performance specifications.
Conformance - detailed, long and expensive
- Does not allow for supplier innovation
- Limits the supply market
Examples - food recipes or chemical formulaes.
Performance - Includes Outcome, output and statement of works specifications
- Less detailed, short and cheap
- Allows for supplier innovation
- Opens up the supply market
- Place – Goods delivered to the appropriate place and packaged and transported in such a way as to secure safe arrival.
What can happen if not: - Stockouts
- Angry customers if failure to get goods, May go elsewhere
- Additional costs to redirect
- Time – Securing delivery of goods at the right time to meet demand but not so early as to incur unnecessary inventory costs
Consequences if not: - Stockouts
- Additional costs – purchasing replacement stock
- Deliveries arriving out of hours could cause spoilage so cant be used or staff having to come in resulting in overtime pay
- Supplier relationships may be affected
- Quantity – Obtaining goods in sufficient quantities to meet demand and maintain service.
Where the quantity procures is wrong the following can happen: - Production could stop
- Retail consumer needs could be unfulfilled
- Warehouses could be overstocked
- The price payed could be too high.
- Price – securing all the above at a price which is reasonable, fair and competitive and affordable.
- Consider the currency if purchasing overseas
- If the price includes tax
- Incoterms – international commercial terms of sale that assign costs and responsibilities between the buyer and seller when delivering products.
What is the TCA?
Total Cost of Acquisition
- Is the cost associated with acquiring a product from sourcing to receiving and installing
TCA includes: - Purchase price
- Quality
- Lead time
- Carriage and insurance
What is the TCO?
Total Cost of Ownership
*Is the total cost of a product over its entire life cycle. This includes TCA
TCO includes:
- Disposal
- Training
- Storage
- Maintenance
- Operation
- Insurance
- Tools
The Benefits and Limitations of WLC/TCO
Benefits:
Like with like comparison of competing options
Realistic budgeting
Highlighting risks associated with ourchase
Cross functional communication, and improved awareness of total costs
Limitations
Cost estimates are subjective
Not all costs easy to forecast
Intervening factors may effect costs over the life cycle
Time consuming, labour intensive and costly
How do procurement ensure external suppliers meet quality, timescales, quantity and place considerations?
Well written Contracts - Sets out the quality specifications, number of items required along with where and when deliveries should be made.
For a contract to exist and be valid there has to be intention, consideration and agreement.
Intention – that agreement is enforceable by law.
Consideration – Must be present or future. Must have monetary value.
Agreement – Must be signed by both parties with the capacity to contract.
KPIs
Qualitative and Quantitative (quality and number based) and binary –(yes or no/ pass or fail
- KPIS measures if performance is stable, improving or deteriorating.
- Must be linked to targets
- KPIs should be limited so we only monitor and manage areas that really matter.
- Should be SMART
Specific
Measurable
Achievable
Revelant
Timebound
Quality
* Reduce number of factory rejects
* Reduce wastage during manufacture
Quantity
* Increase number of orders received with correct quantity
Time
* Reduce percentage of late deliveries
Place
* Increase percentage of deliveries to correct location.
Benefits of using KPIs
* Improved supplier motivation
* Improved communication
* Improved relationships
* Sharing of common goals
Limitation of using KPIs
* Reduction in quality by suppliers rushing to meet quantitative KPIs
* Reduction in team-work as suppliers focus on their own KPIs
SLAs
Commitment between the buyer and supplier defining the level of service to be delivered.
Other sources of added value?
Additional features
Brand
Convenience
Excellence of service
Market development – finding new markets for products and services and acquiring new customers.
Reduced input costs
Reputation
Innovation - Discovering new ways to produce or supply. Gives the buyers organisation more power because they have something unique.
Protects the buyer from substitutions or new entrants by keeping one step ahead.
Sustainability – Think about financial problems, shortages due to lack of raw materials. Conflict between countries and breakdowns in supplier relationship
Define value for money?
TCA and TCO and 5 rights of procurement should be evaluated to ensure the product or service meets the 5 rights.
Things to consider:
* Currency. Exchange rates
* Environmental factors
* Maintenance costs
* Packaging
What are supply chains?
Supply chains includes all organisations and activities associated with the flow and transformation of goods from raw materials to the end user. As well as associated information flows.
A supply chain has 3 main sectors:
Primary – raw materials such as coal, metal oils agricultural and forestry.
Secondary – Manufacturing and construction. Raw materials are converted into finished products
Tertiary – Consists of service industries such as insurance, procurement, healthcare and education.
Examples or organisations in each sector:
Primary – mining, oil rigs -drilling
Secondary – car manufactures, builders
Tertiary – procurement, retail shops
What is the role of supply chain management?
Aims to reduce costs, improve value and manage risk. It involves the management of customer relationships.
How can we achieve value in the supply chain?
Value within the supply chain is the effective management of the following:
* Price
* Delivery
* Storage
* Ethics
* Environment
* Sustainability
* Communication
* Quality
Everyone in the supply chain should work to the same standards
What are supply chain networks?
An extension of the supply chain. Includes links to organisations involved in the entire supply process.
Includes:
External suppliers
Manufacturers
Distribution/wholesale centres
Logistics
Consumer demand
Supply chain networks covers both physical and information flows.
Compare supply chain management with procurement?
Procurement is about obtaining goods and services in response to a need.
- Preparing specifications
- Monitoring quality
- Sourcing
- Buying
- Stock Control
- Disposal of waste
A supply chain is the infrastructure involved in physically getting the product and services delivered.
Supply chain management continues till the end product reaches the consumer.
The role of procurement could have ended long before this stage.
What is a complex supply chain?
Involves tiers of suppliers. The lower the tier of the supplier the closer to the buyer the supplier is. It ensures people or things are where they are supposed to be at the correct time.
What is MRP?
MRP – Materials requirement planning
- Master production scheduling
- Bill of materials
- Inventory tracking
What is MRP2
MRP 2 - Upgraded version of MRP
- Machine capacity scheduling
- Demand forecasting
- Quality assurance
- General accounting
What is ERP?
ERP – Enterprise resource planning
- Financial management
- CRM and Marketing Automation
- Supply chain management
- Material management
- Procurement management
- Order management
- Time and expense management
- Warehouse management
- HR and Payroll management
- Assets management
- Project management
- Document management
ERP includes procurement, supply chain management and materials management.
What is an internal stakeholder?
involved directly with the business – employees
- Colleagues with a need
- Accounts department - Finance, also intelligence
- Transport fleet
What is an external stakeholder?
Who have an interest and can be impacted by it or have an impact on it. - Customers, suppliers
- Suppliers
- Consumers
- Shareholders
- Producers
How do we map stakeholders for a procurement or stakeholder function?
Mendelows matrix
Low interest/low power – Minimum effort
Typically small customers or small suppliers. Require little effort. Update once in while to keep them engaged. Would be tier 4 contracts. Low value such as stationary orders.
High interest/low power – Keep informed
Involve them in low risk areas. Keep them informed on areas of their interest. Potential supports/good will ambassadors. Have lots of power externally. Could be local activist groups.
High power/low interest – Keep satisfied
Engage and consult in areas of interest. Aim to increase interest so they become key players. Mainly interested in a good return on investments.
High power/high interest – Manage closely (key player)
Focus your efforts here. Involve in governance or decision-making forums. Engage and consult regularly. Inv. involved in decision making. Likely to be senior managers or external people who have a lot of control.
