Qs 8 Flashcards
LICO Steel Ltd is a global company based in California, US that contributes to the local economy. It has employees worldwide, mostly in the US, and serves many countries. LICO has gained a unique competitive advantage by outsourcing globally. The company’s website states that “it is an integrated steel producer with major production operations in the U.S., Canada and Central Europe and an annual raw steel making capability of 27 million net tons” (Corporate Profile, 2012). LICO has production facilities in Canada, which is near shore outsourcing, and in the Slavak Republic, which is far shore outsourcing. It usually sends raw materials for production and finishing overseas where labor rates are lower.
Describe the benefits and disadvantages delivered of global outsourcing.
The good answer demonstrate a good understand of why an organization outsources, what the benefits and disadvantages are. Students will achieve high scores if they provide an detailed answer to the benefit and disadvantages based on the scenario.
Some of the benefits from LICO outsourcing its production activities are that it has cut down on direct labor costs, allowing the company to focus directly on core activities that provide a competitive advantage. Additionally, LICO is almost forced to outsource its labor to maintain a competitive advantage over rival firms within the steel industry. According to Clott (2004), “the basic business idea of outsourcing is that if a firm does not specialize in a certain function it will be beneficial to transfer control of the function to a specialist organization that will be able to offer better cost and quality”.
Some of the disadvantages of using offshoring or outsourcing are a decline in operational efficiency. Even though labor may be cheaper overseas, the company may have to hire additional workers due to the fact that lack of technical know-how and education can create problems in the process. There is also an increased risk of product defects and lower quality because of the inexperienced workforce. In turn, the company may have to hire on additional managers and quality control tests that could negate most of the cost savings introduced by outsourcing the activity. Another downside that could be introduced by outsourcing is the public opinion of the company’s culture. LICO is known for hiring many American employees, and if they shift most of their workforce overseas, it could create resentment towards the company. The public’s opinion of outsourcing is very negative in light of the recent market crash and higher unemployment rates, making it almost a social responsibility issue.
Explain, with examples, the benefits of contract management in procurement and supply.
Contract management in procurement and supply is the process of managing the contracts between an organization and its suppliers, from the initiation to the termination of the agreement. It involves ensuring that both parties fulfill their obligations, such as delivering goods on time and maintaining agreed-upon quality standards, while also mitigating risks and resolving disputes. Effective contract management can help organizations reduce costs, improve efficiency, and maintain good relationships with suppliers.
Some of the benefits of contract management in procurement and supply are:
· Cost savings: Contract management can help organizations negotiate better prices and terms with suppliers, monitor their performance and compliance, and identify opportunities for savings and improvement. For example, by using contract management, an organization can track the spending and savings of each contract, compare the actual costs with the budget, and generate reports and alerts to optimize the procurement process.
· Risk reduction: Contract management can help organizations identify and mitigate potential risks, such as legal disputes, contractual breaches, fraud, and non-performance. When the organization streamlines the process in a software system, it can store and access all the contract documents and data in a centralized and secure location, enforce the contract clauses and obligations, and track the changes and amendments of each contract. This can help prevent errors, omissions, and misunderstandings, and ensure compliance with the relevant laws and regulations.
· Supplier relationship management: Contract management can help organizations build and maintain good relationships with their suppliers, based on trust, transparency, and collaboration. By using contract management, an organization can communicate and interact with the suppliers in a timely and efficient manner, provide feedback and recognition, and resolve issues and conflicts. This can help improve the supplier performance and satisfaction and foster long-term partnerships.
To sum up, contract management in procurement and supply is a vital process that can bring many benefits to an organization, such as cost savings, risk reduction, and supplier relationship management. By using contract management software, an organization can automate and streamline the contract management process, and enhance the value and outcomes of each contract.
Wiley Airport Authority, which operates a bustling international airport, has a need to acquire a new baggage handling system for its Terminal 2. This system is a large and complex item that involves the design, installation, and operation of conveyor belts, scanners, sorters, and other equipment that transport and process passengers’ luggage. As the procurement manager, Grover is responsible for developing a plan to purchase this system in a cost-effective and timely manner. There are many stakeholders who may have the interest in this project, such as:
· The airport authority’s executive management, who approve the budget and oversee the strategic direction of the project.
· The airport authority’s engineering and operations teams, who provide the technical requirements and specifications of the system, as well as monitor its performance and maintenance.
· The airport authority’s finance and legal teams review the financial feasibility and contractual terms of the project.
· The potential suppliers and vendors of the baggage handling system, who offer their proposals and bids for the project, as well as negotiate prices and terms with Grover.
· The contractors and subcontractors who are responsible for the design, installation, testing, and commissioning of the system.
· The passengers and airlines who use the airport’s services and facilities, and who expect a smooth and reliable baggage handling process.
Grover needs to communicate effectively with all these stakeholders, understand their needs and expectations, and manage any conflicts or issues that may arise during the procurement process. He also needs to ensure that the project is delivered on time, within budget, and meets quality standards.
Describe a tendering process that Grover can use to select the best supplier for Wiley Airport Authority.
Overall explanation
Tendering is an effective way to select a supplier, especially in complex project like the one at Wiley Airport Authority. Grover can leverage this process to get the best value for money for his employer. The process for procuring the baggage conveyor is described below:
- Select the appropriate strategy. In this case, restricted tendering may prevail, as it allows Grover to limit the number of potential suppliers to those who have the experience and capacity to deliver such a complex and large-scale project. Restricted tendering can also save time and resources, as well as ensure the quality and reliability of the bids.
- Develop the document: Grover needs to prepare an invitation to tender (ITT) document that outlines the scope, objectives, specifications, and requirements of the project, as well as the evaluation criteria, submission guidelines, and timeline. The ITT should also include a draft contract that specifies the terms and conditions of the project, such as the payment schedule, performance standards, warranties, and dispute resolution mechanisms.
- Pre-qualify the suppliers. Grover needs to identify and invite a shortlist of qualified suppliers who have the relevant experience, expertise, and resources to undertake the project. He can use various sources of information, such as previous projects, references, testimonials, certifications, and accreditations, to assess the suitability and capability of the suppliers. He can also conduct site visits, interviews, or presentations to verify the information provided by the suppliers.
- Send the document: Grover needs to send the ITT document to the pre-qualified suppliers at the same time, to ensure fairness and transparency. He should also provide a reasonable deadline for the submission of the bids, as well as a contact person for any queries or clarifications.
- Receive the bid. Grover needs to receive and record the bids from the suppliers in a secure and confidential manner. He should ensure that the bids are complete, compliant, and responsive to the ITT document. He should also acknowledge the receipt of the bids and inform the suppliers of the next steps.
- Open and evaluate the bids. Grover needs to open and evaluate the bids in accordance with the evaluation criteria and methodology specified in the ITT document. He should use a scoring system or a weighted matrix to compare and rank the bids objectively and consistently. He should also document the evaluation process and results, as well as the strengths and weaknesses of each bid.
- Negotiate and notify other bidders. Grover needs to negotiate with the highest-ranked bidder to finalize the contract terms and conditions, as well as to resolve any outstanding issues or concerns. He should also notify the other bidders of the outcome of the tendering process and provide feedback on their bids. He should then sign the contract with the selected supplier and initiate the project implementation.
Analyse the TWO advantages and TWO disavantages of Early Supplier Involvement (ESI).
This question requires students to define “Early Supplier Involvement (ESI)” and list two advantages and disadvantages of ESI. Students can get higher marks if they give examples based on the scenario for each point.
ESI is a type of vertical collaboration where the manufacturer involves the supplier early in the product development process. The degree of collaboration can vary. The buyer may only ask the supplier for advice on the product specification, but make the final decisions by themselves. Or both parties may form a project team where they share information, technology and jointly decide on the designs and specification.
ESI brings potential advantages and disadvantages as below:
- Potential Advantages
Reduce costs to develop a product: Product development is a costly process because it requires extensive knowledge and skills in marketing, engineering, technology and finance. By adopting ESI, the buyer essentially extends its capacity by leveraging supplier’s technical skills. This will reduce the development costs on the buyer’s side. However, not every ESI project will automatically realise this benefit as not every competent supplier is willing to share confidential information and technology to its customer. To maximise this advantage, the buyer should develop a good relationship with the supplier, show trust in them and share benefits equally.
Reduced lead-times, faster time-to-market: With helpful information and extended capacity provided by ESI, the buyer can shorten development time, and therefore, deploy the product in timely manner. For example, SME is a medium LNG company in North America. As it is cheaper to transform natural gas into Liquefied Natural Gas (LNG), and also due to long distances, the transportation is generally done using ocean-going LNG carriers. In order to become a pioneer in addressing this new market, the buyer’s company Corporate Executive Committee, including the global Purchasing Director, decided to develop a new solution. This solution is a combination of two new technologies (one from buyer company and one from supplier), new services and new products jointly developed with the supplier. For thirty years, the supplier’s company has been specialised in the conception, detailed design and building of Industrial Piping and Process, also of boiler pressure vessels. During the relationship with the buyer’s company, they succeeded to insure an ability to react technically in various industrial challenges. This allows SME to deploy the services early and gain competitive edge over the competitors.
Availability of expert knowledge: The supplier can identify potential problems up front, eases communication and information exchange and provide extra personnel to shorten the critical path. They can also contribute with their operational capabilities, their know-how in technology and operating in their particular business and their innovativeness and development capabilities. This results in a feasible and better solution by combining companies’ knowledge and capabilities.
- Potential Disadvantages
The buyer will become more reliant on the supplier. The success of the project depends on the supplier’s commitment and capabilities. If the supplier lacks commitment or it is incompetent, the project is likely to be lengthened. Furthermore, supplier may suggest to use outdated technology, which prompts the buyer re-make the product later, and eventually leads to waste of time and resources. For example, Company A planned to develop and launch new product. It invited Company B to join because the Director at Company B is a classmate of Company A’s major shareholder. However, engineers at Company B were incompetent, they couldn’t translate buyer’s requirements to detailed specification. The project didn’t meet the deadline and Company A missed the opportunity. To prevent such scenario from happening, qualifying the suppliers and building trust between the parties are among the key factors that ensure the success of the project.
Intellectual property can be leaked to the competitor. In ESI project, the buyer and the supplier jointly develop a product/service/component based on the buyer’s list of requirements and supplier’s competency. Once the development is done, the information on the project can be leaked to the public and accessible to buyer’s competitors. To manage this risk, at the beginning of the project, the buyer should require the supplier and other project members to sign Non-disclosure agreement. Confidential information can be encrypted so that no unauthorised person can have access to it.
Analyse THREE advantages and THREE disadvantages of Early Supplier Involvement for the buying organization.
Overall explanation
Early Supplier Involvement (ESI) is a process where the manufacturer involves the supplier at an early stage of the product development process. ESI can have both advantages and disadvantages for the buying organization, depending on the context and the nature of the collaboration. Here are some possible pros and cons of ESI:
Advantages:
· ESI can improve the quality of the product by utilizing the supplier’s expertise, skills, and knowledge in the design phase. In an ESI project, the buyer will work collaboratively with a supplier. Mostly, the buyer will define the ideas and outputs, and supplier will use their expertise to turn those ideas into product design and prototype.
· ESI can reduce the costs of development and production by identifying potential problems, optimizing the specifications, and minimizing design changes.
· ESI can shorten the time to market by speeding up the development cycle, improving resource utilization, and enhancing communication and information exchange.
Disadvantages:
· ESI can increase the risk of losing proprietary information or competitive advantage to the supplier or other competitors. In ESI project, the buyer needs to disclose some confidential information to the supplier. It may include intellectual property or trade secrets. If the supplier is careless in handling them, the information can be leaked to the market. To protect proprietary information or competitive advantage, the buyer can use non-disclosure agreements, patents, or selective sharing of information with the supplier. The information can only be shared with some key team members from the supplier. All of them must sign the NDA.
· ESI can create dependency on the supplier, which may limit the buyer’s flexibility, bargaining power, and ability to switch suppliers. The longer the relationship lasts, the higher the dependency will become. At this time, it would be very difficult for the buyer to find an alternative supplier. To reduce the dependency, buyer should take note and learn the know-how from supplier, in case that the partners won’t work in the future.
· ESI can require more resources from the buyer, such as time, money, and personnel, to manage the relationship, coordinate the activities, and monitor the performance of the supplier. To manage the resources required for ESI, the buyer can use cross-functional teams, supplier evaluation and selection tools, or performance measurement and feedback systems. The selected supplier should have the ability to develop the products. The development project is resource intensive, the parties may share the costs accordingly.
Identify THREE characteristics each for the public, private and third sector.
Overall explanation
Public, private and third sector can be compared based on some criteria, such as:
Ownership: The public sector is owned and controlled by the government, which can be national or local. The private sector is owned and controlled by private individuals or groups, such as sole traders, partnerships, or corporations. The third sector is owned and run voluntarily by trustees, who are not paid for their work.
Funding: The public sector is funded by taxes collected from the citizens and businesses. The private sector is funded by private money from shareholders, investors, or bank loans. The third sector is funded by donations, gifts, grants, or fees for services.
Objectives: The public sector aims to provide goods and services for the benefit of the community, such as health, education, housing, and social work. The private sector aims to survive and make a profit by satisfying customers’ needs and wants. The third sector aims to help a cause or provide a service to members, such as charities, voluntary organisations, or social enterprises.
Outline THREE benefits and THREE limitations of structured procurement processes.
Overall explanation
A structured procurement process is a procurement process that follows a clear and logical sequence of steps, from identifying the need to supplier relationship management. It aims to secure the best supply for the organization and deliver value for money. It is also well documented, meaning that each step has a written record of what was done, why, how, and by whom. This way, every stakeholder involved in the process knows their roles and responsibilities. A structured sourcing process is supported by written policies and procedures that guide the decision making and actions of the procurement staff.
A structured procurement process can bring many benefits to the organization, such as:
Preventing corruption, bribery, and unethical behaviors. By having clear guidelines and transparency in each step, the organization can avoid any misconduct or favoritism that could harm its reputation and finances.
Improving efficiency and effectiveness. By following the best practices and standards in each step, the organization can save time and resources, reduce errors and risks, and achieve better outcomes.
Supporting audit and compliance. By having a clear record of each step, the organization can demonstrate its accountability and adherence to the relevant laws and regulations.
However, a structured procurement process also has some limitations, such as:
Being rigid and inflexible. A structured procurement process may not be able to adapt quickly to the changing needs and circumstances of the organization or the market. It may also limit the creativity and innovation of the procurement staff who have to follow the predefined steps.
Limiting innovation and learning. A structured procurement process may discourage the procurement staff from exploring new ideas or solutions that could improve the performance or quality of the supply. It may also prevent them from learning from their mistakes or feedback.
Being difficult to change and communicate. A structured procurement process may take a long time to update or revise when there are new requirements or changes in the environment. It may also be hard to communicate and disseminate the changes to all the stakeholders involved in the process
Outline the difference between a policy and a procedure.
Overall explanation
A policy and a procedure are two different types of documents that guide the actions of an organization. A policy is a general statement that sets out the rules and principles of the organization. It provides a framework for decision-making and helps to align the organization’s activities with its vision and mission. A procedure is a detailed step-by-step instruction that describes how to perform a specific task or process. It ensures consistency, quality, and compliance in the organization’s operations.
Policy and procedure have some key differences:
A policy is a set of rules and standards that define the organization’s expectations and requirements for its members and stakeholders. It establishes the boundaries and limits of what is acceptable and unacceptable behavior. A procedure is a set of instructions that describe how to implement the policy in a specific situation or task. It provides the steps and methods to follow the policy consistently and effectively.
A policy is usually written in a general and abstract language, while a procedure is written in a specific and concrete language. A policy states the “what” and the “why” of the organization’s actions, while a procedure states the “how” and the “when” of the organization’s actions.
A policy is usually developed by the top management or the board of directors of the organization, while a procedure is usually developed by the operational staff or the department heads of the organization. A policy requires approval and endorsement from the highest authority, while a procedure requires validation and verification from the relevant experts.
A policy is usually applicable to the whole organization or a large segment of it, while a procedure is usually applicable to a particular function or process of the organization. A policy covers a wide range of scenarios and situations, while a procedure covers a narrow range of scenarios and situations.
A policy is usually reviewed and revised periodically or when there is a significant change in the organization’s environment or objectives, while a procedure is usually reviewed and revised frequently or when there is a minor change in the organization’s operations or resources.
Identify and briefly describe the activities that could be used to evaluate a potential supplier at the pre-qualification stage.
Overall explanation
Supplier pre-qualification is an important stage within CIPS Procurement and Supply Cycle. It involves screening and evaluating potential suppliers who can meet the requirements of a specific contract opportunity. The buyer needs to assess various aspects of supplier’s performance such as capability, capacity, financial health, customer service, quality, innovation, etc.
To pre-qualify the supplier, buyer can choose one or more of the following activities depending on the nature and complexity of the contract:
Site visit: This activity involves visiting the supplier’s premises and observing their operations first-hand. The buyer must prepare a checklist of questions and criteria to verify during the visit. They’ll need to interview key personnel of the supplier such as managers, engineers, workers, etc. Data will be collected and documented to support the pre-qualification decision. This method allows the buyer to gain a deeper understanding of the supplier’s capacity, competency as well as their practices in terms of health and safety, environmental impact, social responsibility, etc. However, it is also more costly and time-consuming than other methods. Site visit should only be conducted for strategic or critical suppliers, where the potential benefits justify the expenses for travelling and accommodation.
Pre-qualification questionnaire: Another method for supplier prequalification is to use a questionnaire or survey. This is a widely used method in which the buyer prepares a set of questions and requires the supplier to answer them in writing or online. The questionnaire will cover basic information about the supplier (name, address, main business…) and some key indicators of supplier’s performance such as number of employees, production output, past contracts and projects, certifications and accreditations, etc. This method is cheaper and easier to implement than site visit. It doesn’t require the buyer to travel or spend much time on site. However, there is a risk that supplier could provide inaccurate or dishonest answers. The buyer must have due diligence and verify supplier’s responses with evidence such as references, testimonials, audits reports, etc.
Benchmarking: Another activity that buyer can apply is to benchmark different suppliers against each other or against industry standards. Buyer will select a sample of suppliers and compare their practices on various dimensions such as price, quality, delivery time, management and production processes, etc. This activity will help the buyer to identify best practices in supply industry and improve their market knowledge accordingly. On other hand, this method requires extensive data gathering and analysis. It could be resource-intensive and challenging to conduct. Suppliers may be reluctant to share their practices since they are their competitive advantages. Therefore, buyer should assure the supplier about confidentiality and mutual benefits of benchmarking.
Outline TWO advantages of using a performance specification and TWO circumstances when a conformance specification should be employed.
Overall explanation
Performance specification is a document that buyer can use to define their needs and communicate with the supplier. Performance specification normally include the functions, outputs and the outcomes of the product or service instead of the input and how the product or service should be produced or delivered. When the buyer uses this type of specification, the supplier would have the freedom over the method of production and delivery.
The advantages of performance specification may include:
Enhance the innovation of the supplier and buyer may get the opportunity to get optimal product or service. By focusing on the desired results rather than the prescribed methods, performance specification encourages the supplier to use their creativity and expertise to find the best solution for the buyer’s needs. This can lead to improved quality, efficiency, and customer satisfaction. For example, a buyer who wants to install a water treatment system can use performance specification to define the water quality standards and let the supplier decide how to achieve them 1.
Reduce the time to develop the specification because the buyer can utilize the supplier’s expertise. Performance specification can save time and resources for both parties by avoiding unnecessary details and allowing flexibility in design and implementation. The buyer does not need to specify every aspect of the product or service, but only the essential requirements and criteria. The supplier can then use their knowledge and experience to propose the most suitable solution for the buyer’s needs. For example, a buyer who wants to buy new computers for a school can use performance specification to define the minimum specifications and features of the computers and let the supplier offer different options.
However, performance specification is not suitable for every purchase. There are some circumstances where conformance specification, which defines the exact requirements and standards for the product or service, is a better option. For example:
The buyer already has a standard or specification for the product or service that they want to follow, and any deviation from it would make the product or service unfit for their use. For instance, if the buyer needs to buy a spare part for an existing machine, they would need to use conformance specification to ensure compatibility and functionality.
The product or service is a key component or material for the buyer’s core business, and the buyer wants to have more control over the quality and performance of the product or service. Using performance specification would give more freedom and flexibility to the supplier, which might compromise the buyer’s quality standards and expectations. For example, if the buyer is a pharmaceutical company that needs to buy active ingredients for their drugs, they would need to use conformance specification to ensure safety and efficacy.
The buyer needs to purchase a product or service that fits into an existing system or process, and any variation from it would cause problems or inefficiencies. Using performance specification would allow the supplier to propose different solutions that might not be compatible or consistent with the buyer’s system or process. For example, if the buyer is a school that needs to buy new computers for its classrooms and labs, they would need to use conformance specification to ensure interoperability and uniformity.
Explain how clearly defining the need, at the first stage of the CIPS Procurement Cycle, can help ensure a positive outcome in a procurement process.
Overall explanation
The first stage of the cycle is defining business needs. This stage is very important because it helps the organization identify and understand the problem or opportunity that it wants to address. By defining the business needs clearly, the organization can:
First, clearly defining need will assist the organization produce a specification. A clear specification is a crucial document in the procurement and supply process. It communicates effectively what the buyer needs to the supplier and helps the organization define their needs. It can also be used in the supplier selection process by providing a benchmark to compare different bids. Moreover, it serves as the standard for accepting or rejecting the goods during delivery. In case of contract disputes, the specification is also evidence to argue about the seller’s and buyer’s obligations before court.
Second, a clear definition of the need can help the organization save costs by avoiding over- or under-specification. Over-specification means that the product or service purchased has more features or quality than necessary, which increases the processing costs and wastes resources. Under-specification means that the product or service purchased does not meet the minimum requirements, which leads to rework or failure to solve the problem. Both scenarios result in additional costs for the organization. Therefore, by understanding and defining the need clearly, the organization can avoid these costs and achieve value for money.
Another benefit of defining the need clearly is that it helps to achieve the right quality and value for money. Quality is one of the Five Rights in procurement and supply, which means that the product or service purchased should be fit for purpose. By defining the need clearly, the organization can specify what fit for purpose means and communicate it to the suppliers. This way, the organization can avoid over- or under-specification and ensure that the product or service meets its expectations and requirements.
Forth, a clear definition of the need can help the organization address the stakeholders’ problems effectively. The need arises from a problem or an opportunity that the organization wants to solve or leverage. To do this, procurement professionals need to understand the root cause of the problem and the possible solutions. Then, they can help the stakeholders achieve their desired outcomes and improve their satisfaction.
To define the need clearly, the procurement professional can follow these steps:
Engage with the internal stakeholders who will use or benefit from the goods or services. Ask them about their problems, needs and expectations. Listen to their feedback and suggestions.
Research the possible solutions that can address the need. Consult with standards, suppliers, technical experts or independent consultants. Learn about the best practices, innovations and trends in the market.
Discuss the solutions with the stakeholders and reach an agreement on the preferred option. Consider the costs, benefits, risks and opportunities of each solution. Make sure that the solution is realistic, achievable and aligned with the organizational goals.
Write and refine the specification that describes the need and the solution in detail. Use clear, concise and consistent language. Avoid ambiguity, jargon and technical terms that may confuse the supplier. Include the relevant standards, legislation, quality criteria and performance indicators that will apply to the goods or services.
By following these steps, the procurement professional can ensure that the organization’s needs are well-defined and aligned with its strategy and goals. This will help create a solid foundation for the rest of the procurement cycle.
Fleming Hospital is looking for a new Computed tomography (CT) scanner to replace its old one, which has reached the end of its life. The hospital wants to upgrade its scanning capabilities and improve its patient care. The new scanner should be able to process 64 slices, compared to the 16 slices of the old one. This would allow for faster and more detailed imaging of the internal organs and tissues.
The new scanner should also comply with the relevant healthcare regulations and standards, such as the FDA approval and the CE marking. The hospital needs to ensure that the scanner is safe and reliable for the patients and staff. Additionally, the hospital requires after-sale services from the supplier, such as an extended warranty and regular maintenance. These services would help the hospital reduce the risk of breakdowns and malfunctions, and extend the lifespan of the scanner. The buyer at Fleming hospital has conducted a market analysis and found that there are several suppliers who can offer this type of equipment. The buyer will have to compare the suppliers based on various criteria, such as price, quality, delivery time, and after-sale service. The buyer will also have to negotiate with the suppliers to get the best deal for the hospital.
a) Describe the pre-contract award stages of the tendering process that Fleming hospital may go through to purchase the CT scanner.
b) Describe the post-contract award stages of the tendering process that Fleming hospital may go through to purchase the CT scanner.
The tendering process is a way of choosing the best supplier for a contract. It can help procurement get the best value for money by creating competition and innovation among suppliers. Buyers need to follow the tendering stages to ensure fairness and efficiency in the selection. This is especially important for capital assets like CT scanners, which require high quality and reliable suppliers. The suppliers should not only deliver the asset, but also provide after-sale services. The buyer can use these stages:
a) Pre-contract award
Selecting the type of process: There are four common processes for tendering: Open, Restricted, Negotiated and Competitive Dialogue. The choice of each process depends on the specific situation. In this scenario, Restricted tendering process is the most suitable because:
The asset (CT scanner) is expensive and complex
The specification can be defined clearly by referring to relevant standards
There are enough qualified suppliers in the market
The purchase involves multiple criteria
The supplier needs to have the right skills and resources to fulfil the contract obligations.
Preparing the documents: The buyer should prepare clear and comprehensive documents that provide information for the potential bidders. Since the Restricted tendering process is used here, Fleming hospital should prepare these documents:
Pre-qualification questionnaire (PQQ) for shortlisting the suppliers. This document should contain some criteria to assess the suppliers’ suitability. The criteria can include quality management system, financial position and working capital, personnel qualifications, and previous experience.
Invitation to tender (ITT): This document should describe the contract opportunity and the requirements. It should include:
A brief introduction to the buyer and the contract scope
A timeline for the tendering process, such as deadline for submission, notification of award, delivery date, etc.
Award criteria such as total cost of ownership, quality, after-sale services, delivery time, etc.
Methods for evaluating the bids
Draft contract terms and conditions
Possible contract management framework, KPIs and SLAs
Supplier selection for the tendering: Before inviting the suppliers to tender, Fleming hospital must pre-qualify them using the PQQ. The buyer will send the document and ask the suppliers to submit their responses. Based on the responses, the buyer will select a shortlist of qualified suppliers and invite them to the next stage.
Sending the invitation to tender: After creating a shortlist, the buyer can send the ITT and other documents to the bidders. The ITTs should be sent at the same time to ensure fairness. The documents should be consistent and complete for all suppliers. The buyer should also provide a communication channel where the suppliers can ask questions about the opportunity.
Receiving bids from suppliers: The buyer will receive the tenders from the suppliers after sending the ITTs. The buyer should follow some principles when receiving the bids:
The buyer should only open the bids after the deadline has passed. It should not reveal any information about one supplier to another supplier.
The supplier can submit more than one bid. But only the last one will be considered.
The buyer should not accept any bids that are late.
Evaluating bids: The buyer will evaluate the bids based on the criteria that were specified in the ITT. Since this purchase involves criteria such as total cost of ownership, quality, delivery and after-sale services, the buyer will use a weighted score method. This means that each criterion will have a different weight depending on its importance.
Awarding contract and giving feedback: The buyer should communicate with the suppliers in a formal and official way, such as by mail or email. The buyer will notify the supplier with the highest score first. If the supplier declines, the buyer can notify the next highest score supplier until it finds one that agrees. After a supplier accepts, the buyer will notify the other suppliers about their unsuccessful bids and give them feedback. Feedback is an important part of the tendering process to maintain transparency and rapport with the suppliers. The winner can enter into a post-tender negotiation. The buyer can use this opportunity to get better terms and conditions from the supplier.
b) Post-contract award
Some possible post-contract award stages of the tendering process that Fleming hospital may go through to purchase the CT scanner are:
Contract management: After the contract is signed, the supplier will start delivering the goods or services. The buyer will monitor the supplier’s performance and give feedback accordingly. The buyer will also ensure that the supplier complies with the contract terms and conditions, such as quality, delivery time, and warranty. The buyer will also handle any issues or disputes that may arise during the contract execution.
Warehouse, logistics and receipt: The buyer will arrange for the transportation, storage, and installation of the CT scanner. The buyer will also inspect the scanner upon arrival and verify that it meets the specifications and requirements. The buyer will also record the receipt of the scanner and update the inventory system.
Supplier relationship management: The buyer will maintain a good relationship with the supplier throughout the contract period. The buyer will communicate regularly with the supplier and provide feedback on their performance. The buyer will also seek opportunities for improvement and collaboration with the supplier. The buyer will also evaluate the supplier’s performance at the end of the contract and decide whether to renew or terminate the relationship.
Assets management: The buyer will manage the CT scanner as an asset of the hospital. The buyer will ensure that the scanner is properly maintained and serviced by the supplier or a third-party provider. The buyer will also monitor the usage and performance of the scanner and track its depreciation and value. The buyer will also plan for the disposal or replacement of the scanner when it reaches the end of its life.
a) Define market testing and explain the benefits of market testing.
b) Forwards Co., Inc. wanted to modernize its plant and warehouse. It chose Automatic Guided Vehicle System (AGVS) over counterbalanced fork trucks for two main reasons: to save labour costs and to reduce inventory. The AGVS could track unit loads of material and update the Shop Floor Control and Corporate MRP systems in real time.
The company formed a project team with a Manufacturing Engineer (the Project Leader), a Systems Engineer, a Plant Engineer, and the Assistant Manager of Operations, who was a management champion with a stake in the project. There was no purchaser in the team, so the Systems Engineer took on most procurement tasks because he knew the most about the system.
The team developed two concepts, one using Unit Load AGVS and one using Forklift AGVS. The Unit Load AGVS needed fewer vehicles but required some Pickup and Deposit stands. The Forklift AGVS were more expensive but could pick up and deposit loads from the floor. Both options were feasible and had similar costs of $720,000.
The team prepared a performance-based Request for Quotation (RFQ) with a requirements statement, design constraints, a 10-month schedule (with six weeks for procurement), and some General Construction Terms and Conditions. They used the same contractual terms and conditions as the ongoing plant modernization project.
The Systems Engineer, Brian, had to find and send the RFQ to suppliers. He thought that market analysis and testing were unnecessary and time-consuming, so he contacted the first three suppliers he found online and asked them to tour the plant. They had four weeks to make their proposals. Only two proposals came in. The first one was just over $550,000, but it did not meet most requirements and suggested a different option that lacked the essential material tracking function. The second one was $875,000 and fully complied with the specification.
The project team was puzzled by the proposals. They could not decide based on these two proposals alone, but they had to install the system in two weeks. Under pressure from the tight deadline, the team chose to negotiate with the higher-priced supplier.
Propose THREE market analysis and testing methods that the project team should have done before sending out the RFQ.
a) Part a of the question requires students to write the definition and benefits of market testing. You won’t find this definition in L4M8 study guide, but on CIPS website, which reads as follows:
Market Testing
Assessment of the level of competition and the capabilities of suppliers within a defined area of competence, industry sector or geographical area.
You don’t need to learn the definition by heart, but at least remember the following points:
Assessment of competition level
Assessment of suppliers’ capabilities
The second part asks about the benefits of market testing. Again, the study guide provides no information on this, but you can write your own answer based on your experience or analysis. Though the question uses the word “benefits”, but in fact, you can write the reasons why procurement should do market testing. The following points are our suggestions:
Market testing provides information about the market, so that procurement can choose the right strategy to select suppliers (i.e., open tendering or restricted tendering or request for quotation)
From market testing, procurement professionals can decide whether to make or buy the product. If there are little to no competitions in the market, and the organisation has capabilities to produce, ‘make’ is a possible choice.
Market testing helps the organisation assess its market power and prepare plan for negotiation.
Market testing helps the procurement know whether it is the right time to purchase. If the signs are positive (commodity prices are low, currency exchange rates are favourable, there are fierce competitions in the industry…), the organisation can decide to buy to leverage its advantages. On the other hand, if the signs are negative, it is better to wait or review the specification.
b) This is a scenario-based question. As rule of thumb, you should write no more than 3 suggestions and link back to the scenario. Below are our suggestions on the answer:
The scenario shows the importance of market analysis testing. Without undertaking that strategy, Forwards Co. faces serious problems: the actual costs rise above the planned budget and overdue project. The project team at Forwards could have done the following actions to analyse and test the market (I am writing more than 3 options for you to select):
STEEPLE analysis: STEEPLE is the acronym for Social, Technological, Economic, Environmental, Political, Legal/Legislative, and Ethical. It is a tool to analyse the macro environment in which a business is operating. Forwards project team can use it to analyse the industry which it sources from. This can be done by asking the following questions:
How does new project impact on social objectives of the company?
What are the latest trends of technology in the industry? What are the technological standards in the field?
What are the recent prices of some commodities that will be used in the project (i.e., steel, copper, electronic devices,…)? If the company needs to borrow to finance the project, how much is the interest rate? If the company needs to purchase from overseas, how much is the currency exchange rate?
How does the project impact on environment? How to mitigate negative impact?
Does the project cause controversy in politics?
What are latest and upcoming regulations in the industry? These regulations may include:
Regulatory technical standards
Regulatory occupational health and safety standards
Regulatory standards on the environment,
Competitive forces analysis: The project team can also use Porter’s Five Forces model to analyse the market. This analysis will show how the suppliers are competing, and other forces forming their industry. The analysis is done by asking the following questions:
How many suppliers are there in the relative segment? Who is the market leader? What are their competitive strategies?
How high are the market entrance barriers? Are there any potential new players right now?
What are the substitutes for the products used in the project?
Who are the buyers? Do the buyers have great bargaining power?
Assessment of supplier competition (this point is quite overlapped with Porter’s Five Forces. To maximise your chance, you should better choose either one of them): The level of competition may affect the price that the buyer takes. To identify the level of competition, the project team should know the following information:
How many suppliers are there in the industry? In the segment?
Who is the market leader? Market leader’s share?
What are the strategies in the market? Do companies produce standardised products or each one differentiates its own brand?
Do the suppliers deal with each other to stifle the competition by rising the entry barriers?
Product Life Cycle: Another method to analyse and test the market is product life cycle analysis. The relative position of the product in the life cycle will decide the availability in the market and the level of profit taken by the suppliers. With the rise of automation, especially in warehouses and logistics, AGVS market seems growing. It is likely that this product is on the growth stage of Product Life Cycle. At this stage, the demand is rising. Though there are not many available suppliers, but new players will enter the field. The supplier’s problem may be to attract customers’ loyalty. The project team may leverage this point and offer benefits like long-term contract or providing testimonials on the quality.
Daina baby and child company is one of the largest companies in the US that sells toys and baby gear. It targets middle and upper income consumers who want high quality products. It only imports goods from suppliers who have the ISO 9002 certification or a similar international quality certificate.
Daina aims to meet all customer needs, so it has a wide range of products and a large inventory. According to Daina’s report, its inventory is one of its most expensive assets, accounting for 40% of its total capital investment. John, the operation manager, realizes that good inventory management is crucial, so he suggests using a new Warehouse Management Software to replace the old and outdated one. Anna, the procurement manager, agrees to discuss his requirement with him, because she knows how important it is to define the business need.
Based on the scenario, explain activities should be done in the stage “Defining Business Need”.
The first stage of the procurement cycle is defining the business need. This stage can save a lot of money if the procurement department works with users and other stakeholders to question the need. It helps to understand the real demand for warehouse management software and its maintenance service and find the best way to meet it.
Need assessment can reduce costs. Instead of just fulfilling the requisition, the buyer can think of how to meet the needs in an efficient and sustainable way. To do this, you should follow these steps:
- Communicating with users
You should differentiate the user and buyer. In the case, the users are people who use the software. They are personnel in warehouse and distribution department…To avoid unnecessary purchase, you should do the following:
- Conduct a questionnaire or online survey to determine user needs and preferences
Identify some features that warehouse department would like to have from the new WMS. Below are example they could prefer
Real-time inventory tracking
Real-time inventory value
Reorder points and low-stock alerts
Unlimited SKUs
Proper inventory reporting
…
- Observation and analysis of existing WMS with users
Which WMS was Daina previously using for their warehouse management needs?
Ask him more information around the current WMS
Is his current system has trouble handling large quantities of data? Is he experiencing delays? You can check based on some information below
His current system is finding it difficult to handle high amounts of data making it harder to use his system during busy times because of the heavy influx of data (Yes/No)
Every one in a while, his system slows down and causes delays while he track goods in and goods out. (Yes/No)
His system is incapable of processing orders for fulfilment. He often feel the need to reboot your system. (Yes/No)
Is he facing substantial amount of errors when processing orders? How high are the losses that these errors result in?
Dose his current system have high lag times in-between processes?
Would it be cost-effective for him to update the WMS? This is an important question to consider is, will changing his current system help Daina save costs? A WMS should be able to track his inventory which can tell him exactly how much of each product he are storing and also where they are located.
- A review and planning meeting to which all relevant stakeholders are invited: a cross-functional team will be built, it may consist of finance department, management team, technical department…
- Based on the information gathered during the user consultation, it should be possible to formulate a simple needs statement which describes:
- The reason for the purchase: manage the warehouse effectively, easily to pick items, tracking orders…
- Any alternatives to purchasing which have been taken into account: there are some ways to manage the warehouse effectively. Sometimes you just need to change somethings which will result in better outcomes.
Using Excel or Google sheet
Plan your warehouse space
Arrange the warehouse appropriately
Use bin locations
Implement cross docking
…
- Based on the user consultation and needs statement, you will develop a specification. There are two types of specification: conformance specs and performance specs.
The specification will need to contain a more detailed technical specification of what you are buying if you want to use conformance specs. The specification should reflect the information gathered from the needs assessment. You can list some must-have features that WMS need to have (In the real exam, if you meet this type of question, you can choose one or more features below to analyse. The following is just our suggestion. Don’t worry if you can’t remember all)
- Receiving:
Dock scheduling: materials will be entered or exist the warehouse through the receiving door or shipping door. In some organisation, both activities occur in the same door. WMS helps warehouse workers arrange the door for the coming shipment, personnel or warehouse techniques for unloading as well as arrange the stage lane for packing, assembly load for outbound logistics.
Appointment scheduling: arrange and allocate personnel, warehouse techniques to handle scheduled carrier arrivals or delivery.
Return management: WMS assists warehouse manager control return volume, arrange the store space for reversed items, repair and reshipment to the end customer
…
- Inventory management
Replenishment: Helps maintain optimum inventory levels by calculating when and how many new supplies need to be ordered
Lot tracking: Assigns identification numbers to items before grouping them into pallets, helping users keep track of inventory as it moves through the warehouse
Task interleaving: Reduces workers’ travel time within the warehouse by assigning an ordered sequence of tasks based on location
…
- Shipping
Picking zone: divide the picking floor in different zones, assign workers in each zone, allocate warehouse technique to create a picking assembly line
Packing list and invoices: generating a list of items in a box and invoices attached to the box to reconcile the ordered items and shipped items.
…
- Order fulfillment
Purchased order: Automate generating purchase order for new supplies and put the approved purchase order into the expected shipment
Inventory availability: WMS create a Available-To-Support (ATP) to let people know the level of inventory available. If the number of ATP is negative, it notifies that time is replenishment. If the number of ATP is positive, it refers to the number of available inventory to sell.
…
- Transportation Management
Automated carrier selection: WMS automates choose the best carrier and mode option that suitable for the delivery based on the availability of carrier, the price, the quantity, distance…
Shipment consolidation: Based on the number of expected shipping, WMS arranges the customer orders to maximise their load consolidation with each delivery
…
Besides these features, you should also point:
- The type of deployment model. Is the system on cloud or on premises?
- What integration do you need? for example, WMS has to integrate with your ERP, accounting…
- How many people will use the software? Based on the number of personnel working in warehouse department, you should choose the WMS that allow your workers access at once time or may choose the software that set no limit of number of users access.
- The technical support and training: When you buy the software, you should break the cost in detail: the software license, the implementation cost and the maintenance cost. You should ask the provider that dose the software supplier provide the maintenance support or training for workers? Is it free? If not, how much is it?
- The security feature: Dose the software has the firewall or back up data online?
…
One approach to defining technical specifications is to use performance-based or functional specifications. Instead of describing the inputs or standards to which products must conform, these define the outcome you are looking for.
- How much we are buying
In the stage “Define Business Need”, you should ensure that the purchased software is appropriate, users will deploy all functions in the software and minimise the waste. From that, you will choose the WMS that in in expected budget. If the cost is over than your plan, you have to ensure that it is justified.
Besides some steps that we analyse above, you can consider the purchase pooling if you work in multi-international company…
The more specific you analyse each point, the higher score you will achieve.
Hyvinkää, a small municipality in southern Finland with about 46,500 residents, has set various Environmental Aims to guide its strategy from 2013 to 2020. These aims include eco-efficient construction and maintenance, effective energy use and climate protection, and public procurement.
In 2022, Hyvinkää decided to build a new pre-school that would be the first ecolabelled one in Finland. This would ensure that the building was healthy and comfortable for children and staff, as well as aligned with their environmental goals.
To get the Nordic Swan ecolabel for small houses, apartment buildings and buildings for schools and pre-schools (Version 3.2), the building had to meet standards for energy use, chemical products, building products/goods and several indoor environmental factors related to health and the environment. It also had to follow quality management requirements in the construction process. The ecolabel assessed the building using a lifecycle perspective, and required low energy consumption, high environmental and health standards for building products, materials, and chemical products, good indoor environment and low emissions, and quality-assured construction process.
The project was ambitious and challenging. The procurement department had many concerns to address:
They lacked familiarity with the technical requirements for eco-friendly buildings.
They had no experience with such projects; they did not know any suppliers who could meet their requirements or how many suppliers were in the market.
They worried about supplier performance. How could they ensure that the supplier delivered what they promised?
The procurement manager at Hyvinkää municipality knows about models like the CIPS Procurement Cycle. She thinks that using such a model will help her department solve the problems more easily.
Describe FIVE stages of the CIPS Procurement and Supply Cycle which may have impact on Hyvinkää municipality pre-school project.
The question requires students to discuss FIVE stages of CIPS Procurement and Supply Cycle. You can choose any five stages, as long as you can prove that these stages will help Hyvinkää address their current problems. For each stage, to gain maximum point, you need to write the objectives of the stage, how to conduct that stage and refer to the scenario. To make more impress on the assessor, an opening paragraph should be written, too. Below are my opening and chosen five stages:
Hyvinkää municipality is planning an ambitious project which promotes the sustainability objectives. Procurement can add much value to this project through well-defined process. CIPS Procurement and Supply Cycle is a strategic tool that Hyvinkää municipality should use. The Cycle consists of multiple stages, each stage has different contributions to the outcome. The five stages that may impact on the success of the project are analysed below:
Defining business needs: Defining needs is the first stage of the Procurement and Supply Cycle and it is among the most important stages. To capital project like pre-school, this stage is even more crucial because any wrong in the design can lead to costly errors or reworks when the project is finished. To minimise the risks of errors and reworks, in this stage, the procurement team should identify the relevant stakeholders, consult their ideas on the outcome of the project. The conversation should start with asking some questions: ‘Is this building really necessary?’ ‘What are the outcomes that stakeholders want to achieve?,… Then a performance specification can be drafted. The team can also use existing standards. This practice will not only reduce the length of the specification but also expand the supply base.
Market analysis: Market analysis is another important stage of the procurement cycle. The objective in market analysis is to identify the number of potential suppliers in the market, from which the buyer can decide the strategy to engage with the suppliers. As the municipality does not know any suppliers, market analysis should be conducted rigorously. To a public authority, the procurement team can publish prior information notice to check how many suppliers are interested in the project.
Develop documentation: Clear and precise documentations can add value to the procurement process. They indicate what supplier must do, how to do and provide indicative information for buyer to manage and monitor the process and suppliers. The procurement team at Hyvinkää municipality should at least develop the following documents:
The specification: As aforementioned, the specification for this project can be performance one. Well-recognised standards may also be included in this document. The team should write the document in clear and unambiguous language to avoid any misunderstanding from the suppliers. Some outcomes must be specified, including level of energy consumption, environmental and health requirements, level of emissions, etc.
Contract terms and conditions: The project is quite risky. Contract is a tool to manage the potential risks arising from the project. Procurement team should seek advice from the legal professionals or use modal forms of contract.
Request for information/Pre-qualification questionnaire: Supplier for a complex project should be rigorously checked. RFI/PQQ is a way to qualify the suppliers before allowing them to submit the bid. The procurement team can ask potential suppliers about their capability, past projects, current available capacity, financial information… The selected suppliers should meet some criteria so that the project can be undertaken successfully.
Contract notice: This document will provide the suppliers with information regarding the contracting authority and the project. It also dictates how the process will be going, which criteria are used to determine the contract award and the deadline to submit bids…
Performance framework, including Key performance indicators and service level agreement: These documents are needed to monitor the performance of supplier after the contract is awarded. The supplier should know how they will be assessed beforehand. In this scenario, the following KPIs can be used: percentage of sustainable materials used, level of safety in the construction site, …
Bid/Tender evaluation: After the suppliers submit their bids, Hyvinkää municipality must assess them and decide who will be awarded the contract. Normally, an evaluation panel is established, and assessment criteria are agreed beforehand. If Hyvinkää municipality uses weighted score, the evaluation panel will assess the bids and decide how much point should be given to each bid. The contract will be awarded to the bidder with highest score.
Contract management: good bid does not automatically translate to successful implementation. Performance management is required to ensure that the supplier delivers exactly what they commit in the prior stages. The team must rely on the agreed KPIs and SLA. Furthermore, they should regularly meet with supplier’s representatives and address any problems arising from the project implementation. When the construction is finished, a thorough check on the conformity of the building must be completed. This work can be done by Hyvinkää team or by independent auditors.
Explain how clearly defining needs can help ensure a positive outcome in a procurement process.
One of the most important steps in the procurement process is to identify the needs of the business. This means clearly defining what goods or services are required, why they are needed, when they are needed, how much they are needed, and what quality standards they must meet. By doing this, the business can ensure a positive outcome in the procurement process for several reasons:
· It can help avoid unnecessary or wasteful purchases that do not align with the business goals or priorities. For example, if the business needs to buy new computers, it should specify the type, model, features, and quantity of the computers that suit its needs, rather than buying random or outdated computers that may not be compatible or efficient.
· It can help select the most suitable supplier that can meet the specific needs and expectations of the business. For example, if the business needs to hire a consultant, it should define the scope, objectives, deliverables, and timeline of the project, as well as the qualifications, experience, and reputation of the consultant, rather than choosing a random or unqualified consultant that may not deliver the desired results.
· It can help negotiate the best price and terms of purchase that reflect the value and quality of the goods or services. For example, if the business needs to buy raw materials, it should determine the quantity, quality, and delivery requirements of the materials, as well as the market price and availability, rather than accepting the first or highest offer that may not be fair or reasonable.
· It can help reduce the risk of delays, errors, disputes, or dissatisfaction that may arise from unclear or incomplete specifications. For example, if the business needs to order a custom-made product, it should provide detailed and accurate specifications of the product, such as the size, shape, color, and material, as well as the quality standards and testing methods, rather than leaving room for ambiguity or misunderstanding that may lead to defects or complaints.
· It can help monitor and evaluate the performance and satisfaction of the supplier and the goods or services delivered. For example, if the business needs to contract a service, it should establish clear and measurable criteria and indicators of the service, such as the quality, timeliness, and cost, as well as the feedback and review mechanisms, rather than relying on subjective or anecdotal impressions that may not be reliable or consistent.
Therefore, clearly defining needs is a crucial step in ensuring a successful procurement process that can benefit the business in terms of cost, quality, efficiency, and satisfaction. By doing so, the business can make informed and rational decisions that can optimize its resources and achieve its goals.
Herrera Laundromat Ltd, a promising family-owned business specializing in laundry services, recently clinched a significant contract with a private hospital. The stakes are high, as this contract represents a substantial revenue stream for Herrera. However, the road ahead is fraught with challenges.
The private hospital, acutely aware of the high frequency of contagious diseases within its walls, has laid out stringent requirements for Herrera:
Thorough Sanitization: All bed sheets and patient clothing must undergo meticulous sanitization. The hospital’s patients rely on these linens for comfort and hygiene, and any compromise could have serious consequences.
Allergen-Free Approach: Herrera must tread carefully, avoiding the use of strong corrosive substances that might trigger allergic reactions in patients. Balancing effectiveness with safety is paramount.
Timely Delivery: With over 1,500 patients to care for simultaneously, the hospital demands a strict delivery timeline. Delayed supplies could disrupt patient care and strain hospital resources.
The management team at Herrera Laundromat Ltd faces a conundrum. While they recognize the critical importance of this contract, they also acknowledge that delivering all the outcomes alone is an uphill battle. The sheer volume of laundry, coupled with the specialized requirements, necessitates a collaborative approach. To address this challenge, Herrera’s procurement team devises a strategic plan centered around the CIPS Procurement Cycle.
Analyse the application and added value of FIVE stages within CIPS Procurement and Supply Cycle in Herrera Laundromat Ltd.’s scenario.
The CIPS Procurement and Supply Cycle is a strategic tool for procurement professionals to map out the necessary steps in managing procurement processes. Its primary goal is to deliver value for money while ensuring effective supply chain management. By following this cycle, procurement specialists can secure added value outcomes. In the case of Herrera Laundromat Ltd., applying the CIPS Procurement and Supply Cycle can help them successfully fulfill their contract with the private hospital.
Defining Business Needs: At this stage, Herrera Laundromat identifies the need for specialized laundry services due to the newly acquired contract with the private hospital. They recognize the critical importance of meeting the hospital’s stringent requirements. By thoroughly understanding the hospital’s needs, Herrera can tailor their services to meet specific sanitization and allergen-free standards. This ensures that the linens provided contribute to patient comfort and hygiene.
Market Analysis: Meeting the customer’s requirements is important, but Herrera must still ensure the economic viability of the contract. They should understand the supply market and get the best value for money from it. Therefore, market analysis should be undertaken. Conducting market analysis allows Herrera to identify the availability of supplies, assess competition, and understand other market forces and potential supply risks. Armed with this information, the procurement team can develop a strategy for selecting the most suitable suppliers.
Documentation Preparation: All the requirements should be communicated clearly to the suppliers. Essential documents include draft contract terms, specifications, potential Key Performance Indicators (KPIs), Service Level Agreements (SLAs), and invitations to tender. Clear documentation ensures that both Herrera and the suppliers have a shared understanding of expectations. It minimizes misunderstandings and provides a solid foundation for successful contract execution.
Contract Management: The contract should be closely monitored to ensure the desired outcomes. Suppliers must be aware of the KPIs and targets. Herrera may establish KPIs such as on-time, in-full delivery rates or defect rates. Remedies for not reaching targets can also be introduced. Effective contract management ensures that Herrera consistently meets the hospital’s requirements. It allows for adjustments if challenges arise, such as delays or quality issues. Regular performance tracking ensures accountability.
Supplier Relationship Management: While stringent contract management is necessary, Herrera should not enforce the contract in an imperious manner. Constructive conversations with suppliers are essential. Understanding impediments to achieving contract targets can improve the relationship. Good performance should be rewarded through contract renewals or bonus payments. Building positive supplier relationships fosters collaboration, problem-solving, and long-term success. It encourages suppliers to go the extra mile and align their efforts with Herrera’s goals.
In summary, the CIPS Procurement and Supply Cycle enables Herrera Laundromat Ltd to strategically manage their laundry services, aligning with the hospital’s needs while maintaining quality, safety, and timely delivery. Collaboration and adherence to these stages enhance Herrera’s chances of success in fulfilling this critical contract.
Outline the differences between policies and procedures.
Analyse the potential impact of written policies and procedures on procurement activities.
(a) Differences Between Policies and Procedures
Policies are overarching principles that guide the direction of an organization. They reflect the mission and values and set the framework for decision-making. For example, a company might have a policy that prioritizes customer satisfaction, which could include commitments to quality, service, and feedback.
Procedures, on the other hand, are the specific methods employed to express policies in action. They are step-by-step instructions that help employees carry out complex tasks consistently and efficiently. For instance, a procedure might detail the steps for handling customer complaints in a way that upholds the company’s policy on customer satisfaction.
Good written procedures strike a balance between ensuring compliance with policies and allowing for creativity in achieving desired outcomes. They should be clear, concise, and accessible to all employees who need to follow them.
(b) Impact of Written Policies and Procedures on Procurement Activities
Written policies and procedures can significantly influence procurement activities within an organization.
Positive Impacts:
Better Control Over Fraud Risks: Clear policies and procedures help in mitigating the risk of fraud by establishing checks and balances.
Promote Ethical Behaviours: They serve as a benchmark for ethical conduct, ensuring that all procurement activities align with the organization’s ethical standards.
Support Legal Cases: In the event of legal disputes, well-documented policies and procedures can provide evidence to support the organization’s stance.
Better Supply Risk Management: They enable proactive identification and management of potential supply chain risks.
Support Continuous Improvement: Policies and procedures provide a basis for ongoing evaluation and improvement of procurement processes.
Support Training New Staff: They serve as training materials for new employees, ensuring they understand the procurement process.
Enable Audit Trail: Documentation allows for an audit trail, facilitating transparency and accountability.
Negative Impacts:
May Be Outdated: Policies and procedures that are not regularly reviewed and updated may become obsolete.
Access Control Problem: Without a clear communication system, the procurement team may be unaware of new or updated policies.
Ambiguous Language: If not written clearly, policies and procedures can lead to misinterpretation and inconsistent application.
Resistance to Change: Established policies can become entrenched, and stakeholders may resist changes even when updates are necessary for improvement.
In conclusion, while written policies and procedures are essential for effective procurement activities, they must be managed carefully to ensure they remain relevant, clear, and conducive to the organization’s goals. Regular reviews, clear communication, and stakeholder engagement are key to maximizing their positive impact and minimizing potential drawbacks.
Explain how clearly defining the need, at the first stage of the CIPS Procurement Cycle, can help ensure a positive outcome in a procurement process.
The first stage of the cycle is defining business needs. This stage is very important because it helps the organization identify and understand the problem or opportunity that it wants to address. By defining the business needs clearly, the organization can:
First, clearly defining need will assist the organization produce a specification. A clear specification is a crucial document in the procurement and supply process. It communicates effectively what the buyer needs to the supplier and helps the organization define their needs. It can also be used in the supplier selection process by providing a benchmark to compare different bids. Moreover, it serves as the standard for accepting or rejecting the goods during delivery. In case of contract disputes, the specification is also evidence to argue about the seller’s and buyer’s obligations before court.
Second, a clear definition of the need can help the organization save costs by avoiding over- or under-specification. Over-specification means that the product or service purchased has more features or quality than necessary, which increases the processing costs and wastes resources. Under-specification means that the product or service purchased does not meet the minimum requirements, which leads to rework or failure to solve the problem. Both scenarios result in additional costs for the organization. Therefore, by understanding and defining the need clearly, the organization can avoid these costs and achieve value for money.
Another benefit of defining the need clearly is that it helps to achieve the right quality and value for money. Quality is one of the Five Rights in procurement and supply, which means that the product or service purchased should be fit for purpose. By defining the need clearly, the organization can specify what fit for purpose means and communicate it to the suppliers. This way, the organization can avoid over- or under-specification and ensure that the product or service meets its expectations and requirements.
Forth, a clear definition of the need can help the organization address the stakeholders’ problems effectively. The need arises from a problem or an opportunity that the organization wants to solve or leverage. To do this, procurement professionals need to understand the root cause of the problem and the possible solutions. Then, they can help the stakeholders achieve their desired outcomes and improve their satisfaction.
To define the need clearly, the procurement professional can follow these steps:
Engage with the internal stakeholders who will use or benefit from the goods or services. Ask them about their problems, needs and expectations. Listen to their feedback and suggestions.
Research the possible solutions that can address the need. Consult with standards, suppliers, technical experts or independent consultants. Learn about the best practices, innovations and trends in the market.
Discuss the solutions with the stakeholders and reach an agreement on the preferred option. Consider the costs, benefits, risks and opportunities of each solution. Make sure that the solution is realistic, achievable and aligned with the organizational goals.
Write and refine the specification that describes the need and the solution in detail. Use clear, concise and consistent language. Avoid ambiguity, jargon and technical terms that may confuse the supplier. Include the relevant standards, legislation, quality criteria and performance indicators that will apply to the goods or services.
By following these steps, the procurement professional can ensure that the organization’s needs are well-defined and aligned with its strategy and goals. This will help create a solid foundation for the rest of the procurement cycle.
a) Briefly discuss the role of market analysis in procurement and supply function (9 points).
(b) Analyse FIVE market analysis tools that can be used in procurement and supply (16 points).
(a) Market analysis is the process of researching and evaluating the factors that affect the supply and demand of goods and services in a given market. It can help procurement and supply professionals to identify the best sources of supply, negotiate better prices and terms, reduce risks and uncertainties, and improve the quality and performance of the products and services they procure.
(b) Some of the market analysis tools that can be used in procurement and supply are:
· SWOT analysis: This tool helps to assess the strengths, weaknesses, opportunities, and threats of a supplier, a product, or a market. It can help to identify the competitive advantages and disadvantages of a procurement decision, and to develop strategies to leverage the strengths and opportunities, and to overcome the weaknesses and threats.
· STEEPLE analysis: This tool helps to analyze the social, technological, economic, environmental, political, legal, and ethical factors that affect a market or a supplier. It can help to understand the external influences and trends that may impact the procurement and supply function, and to anticipate and respond to the opportunities and challenges they may create.
· Porter’s Five Forces: This tool helps to evaluate the attractiveness and profitability of a market or an industry by analyzing the five competitive forces that shape it: the threat of new entrants, the bargaining power of suppliers, the bargaining power of buyers, the threat of substitute products or services, and the intensity of rivalry among existing competitors. It can help identify the competition in the supply market and other forces that are shaping it. From this information, procurement and supply function may make informed decision and opt for best supplier selection strategy.
· Supply and Demand: This tool helps to understand the relationship between the quantity and price of a product or service in a market. By looking at factors affecting the supply and demand, procurement professionals can anticipate the upcoming changes and potential impact on product price. It can help to forecast the market demand and supply, and to determine the equilibrium price and quantity that balance them. It can also help to analyze the effects of changes in demand or supply factors, such as consumer preferences, income, technology, costs, taxes, subsidies, etc., on the market price and quantity.
· Ansoff matrix: Procurement may participate in more strategic discussion within the organization, such as potential strategy for market penetration. This matrix helps to explore the growth opportunities for a product or service by considering four possible strategies: market penetration, market development, product development, and diversification. It can help to evaluate the risks and rewards of each strategy, and to select the most appropriate one based on the current and potential markets and products.
Northwest Power Generation Company Ltd (NPGC) is a major electricity company in Bangladesh. It has several power plants in the Northwest region that produce about 20% of the country’s electricity.
Bangladesh has a huge demand for power as an emerging market. NPGC wants to increase its capacity by expanding the existing plants or building new ones. The company also cares about the environment and does not want to build large hydropower or thermal power plants. Instead, it plans to use floating solar panels on its reservoirs. The project has the support of NPGC board members, employees, regulators, and the community.
However, there are some challenges. In the past, NPGC used its own contract terms for plant construction projects, which were drafted by its legal department. The terms were very strict and favored NPGC’s interests. The contractors were unhappy with the terms and often argued during the post-tender negotiation. This delayed the project start and increased the costs. Even after the negotiation, disputes still occurred during the contract execution, especially with foreign contractors. They interpreted the contract terms differently from NPGC, leading to misunderstandings and conflicts.
For the new project, NGPC is thinking of using a model form of contract such as FIDIC Yellow book.
Analyse FOUR benefits of using model forms of contract in procurement and supply.
This question asks for the benefits of using model forms of contract. It is based on a scenario, so you should relate your answer to the problems given. You should also write an introduction. You only need to give four benefits, as writing more will not get you extra marks. Here is an example of an answer:
NPGC’s new project is costly and risky. It needs a well-prepared contract. It can either ask a legal counsel for advice or use existing model forms of contract. NPGC considers the second option, which has these benefits: (I am writing more than 4 benefits so that you can learn all of them):
Helps to reduce the time and cost in contract development, particularly in detailed negotiation of terms and conditions. In the past, NPGC wrote its own terms and conditions. Though this practice allowed the company to embed specific provisions which met the requirements of the project, it took a lot of time to be done. Drafting from model forms will save time, while specificality is still available if the company carefully reviews the terms.
Avoids starting from the beginning each time, avoids “re-inventing the wheel” each time. Plant construction contract is very long and complex. It would be ineffective if NPGC writes the contract from blank in each project.
Model contract forms may be widely accepted by both buyers and sellers across the industry or sector. They are written and agreed by professionals in the industry. If NPGC uses the form in the project, it is likely that the supplier would be more comfortable to negotiate.
Model contract forms are even handed and designed to be fair to both parties in the contract. One of the problems in the past is that supplier complained about the onerousness of NPGC terms and conditions. It is because NPGC legal team focused to much on the company interest. Model forms are designed to be fair. They accommodate both buyer’s and supplier’s interest. Adopting such ‘fair’ terms will also increase the attractiveness of the buyer.
Model contract forms include standard clauses that can be selected or deleted on an as required basis. Publishers of model contracts allow their customers to edit the terms to fit with specific situation. NPGC can use this feature to ensure the specificity and relevance of the contract.
Model contract form’s standard clauses are more likely to contain the correct legal terminology without recourse to third party experts. NPGC is a Bangladeshi company, which could have different understanding of contract words. This can become an obstacle when the company works with foreign suppliers. Using model forms of contract may help both parties understand each other by providing correct terminology and exact definitions.
LINCO has a one-year contract with ONONE to supply casing pipes in five installments. However, ONONE failed to deliver the pipes on time for the first two shipments. ONONE said that their supplier could not send materials to their premises as planned because of civil unrest.
Mohan, a purchase manager, had an informal meeting with his junior manager (Tom) and a manager from the contract team. They discussed the recent problems they had with contract management. Mohan pointed out how ONONE’s delays affected LINCO’s service level. The contract manager said that the Liquidated Damages clause in the contract helped them deal with these problems. Mohan suggested increasing the percentage and the cap of Liquidated Damages from the current 5%. Tom agreed with Mohan but also said that they should pay attention to the Indemnity clause.
Explain the role of Liquidated Damages clause and Indemnity clause in the contract.
When creating a contract with a supplier, procurement professionals should include a clause that specifies the damages for breach of contract. Delivery time and date are often essential terms of the contract because they affect cost and reputation. In the scenario, ONONE failed to deliver on time twice, which means they breached the contract. Therefore, LINCO should consider the damages clause when drafting the contract.
Liquidated damage clause
A liquidated damage clause is the provision in a contract that fix the amount payable as damage for the the breaching party. Both parties make a list of actions of breaches, their relevant damage that they are likely to deal with, conduct a pre-assessment and pre-estimation for these damages so that when the breach occurs, the innocent party is titled to claim for damage as fixed in the contract without proving the actual loss
Below are some advantages that the liquidated damage clause has:
- Provide certainty to the parties. It means that when the action of breach occurs, the innocent party will receive the compensation as negotiated.
- Facilitate the recovery of damages by avoiding the requirement of proof of loss. It help both parties save time and effort.
- Simplify the dispute resolution procedure
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In some circumstances, the liquidated damage clause may be void or unenforceable if the purpose of the clause is to punish the breaching party. It can be detected when the money payable to the innocent party is higher than the actual loss incurred.
When LINCO drafts the clause, it is useful to keep the following in mind.
- Set out the specific sum of money or the formula that can be applied to calculate the compensation. In the scenario, the sum can be calculated based on the potential sales LINCO will loss if the supplier delays the delivery or the waiting time of machinery, the cost of production disruption…
- Detail the justified reason behind the amount or formula calculated in the contract. When drafting the clause in the contract, cross-functional team (production department, procurement department, contract team…) should discuss potential loss they may incur to avoid set out the sum which is much lower or higher than actual loss. In the case, Mohan want to increase the cap of liquidated damage from the current number (5%), he has to give justification for his suggestion.
- Both parties (LINCO and ONONE) has equal bargaining power and opportunity to seek independent legal advice in relation to the clause
Indemnity clause
The indemnity clause means that the other party will hold liability and risk for any loss that happen during the contract period. Specifically, an indemnity clause states the conditions under which one party has to compensate the other contractual party for claims, unintentional harms, or other liability that could befall the indemnified party. The faults may be caused by either party in the contract.
The scope and effect of indemnity clause depends on the intention of the parties. When drafting the clause, there are some points that LINCO should keep in mind:
The scope of indemnity clause. The clause states that which condition will the indemnifying party compensate for.
Put a cap on the amount the indemnifying party will pay in the event of indemnification.
Jelkala Confectionary Ltd. (JCL) is a successful company in the food industry. Its products made from cashew nuts are popular for their rich and natural taste. The demand for its products keeps growing every quarter, but its current cashew supplier cannot meet the higher quantity. Jelkala needs to find new sources of materials. The procurement department thinks that Western Africa could be a good place to get cashew nuts.
International trade has many risks, such as currency changes, disruptions, fraud and counterfeiting. The procurement department knows these risks and wants to use contract as a way to manage them. It realizes that with a new supplier, it cannot be too strict about ‘time is of the essence’. But the supplier should still pay for any delays.
A senior buyer says that the company should not tolerate poor performance from the supplier. The contract terms should allow them to end the contract if the supplier breaches it. They also need a fast way to resolve any conflicts, because they cannot afford to interrupt their business.
Describe FIVE express contract terms that procurement department at Jelkala can use in the new cashew nuts supply contract.
This question requires students to identify some common express terms in a contract for sale and supply of goods. The study guide gives some examples of such terms, but students can also use other terms that are relevant to the scenario. The answer should start with an introductory paragraph that explains what express terms are and why they are important. Then, each bullet point should include the following information:
What is the content of the term?
Why do you need this term? Which risks does this term address?
How is it written? (Extra point)
You can find my suggestion below.
Jelkala Confectionary Ltd. is drafting its contract terms to purchase cashew nuts from Western Africa. There are some risks associated with international trade. The company can use the following terms to manage the risks:
Specification/quality: In any sale contract, goods quality is always of the essence. If the goods are under-qualified, the buyer may lose millions. To manage this risk, JCL should define the quality of the cashew nuts (i.e., colour, moisture, packaging…) and any tolerance that it accepts. Any unqualified goods need to be inspected and rejected. This term should be used together with testing and acceptance term or other remedies.
Liquidated damages: If the supplier (or the buyer) breaches some minor terms in the contract, the other party should be compensated. The compensation is known as damages. Damages can be liquidated or unliquidated. Unliquidated damages requires the court to calculate based on the facts of the case. Liquidated damages is pre-determined by the contracting parties, which can reduce the time of dispute. In this cashew nut contract, there is a risk that the supplier delivers the cargo late, which may have an impact on the buyer’s plan. In this case, the actual damages is hard to calculate, so liquidated damages is a reliable option. A financial cap can be included in the contract.
Force Majeure: International trade is risky due to long distance, long lead time and unexpected event (i.e., worker strike, hurricane, shipwreck, pandemic, etc.) Demanding supplier to compensate on every breach would be unjust because some of the factors are out of their control. Force Majeure clause can be used to exclude supplier’s liability in some specific circumstances (such as Act of God or strike). If these events occur, the supplier is not liable to pay damages or penalty. This will improve the trust and relationship between parties. However, the clause should also allow either party to terminate the contract if the event extends over long time period.
Termination: Since this is the first time JCL purchases from Western Africa, they cannot ascertain how the supplier will perform. If the performance is poor, the buyer should have the right to repudiate the contract. The conditions under which the contract will be terminated should be explicitly written in a clause. Besides the circumstances that the contract can be repudiated, this clause should also stipulate the obligation of each party after the relationship ends, for example, paying the overdue amount or receiving the dispatched goods.
Arbitration: If the parties disagree with each other during the contract performance stage, they can solve it themselves through negotiation or ask a third party to help them sort out. Arbitration is a method to solve commercial dispute. The arbitrator is a third party who has knowledge in commercial law and expertise in the industry. The arbitration process is quicker than litigation, while the decision/award is still legally enforceable. This method provides both legal certainty and timely resolution to the dispute. As in the scenario, JCL is looking for quick conflict resolution, so arbitration is suitable for them. The clause should include the name of arbitration centre, how the arbitrators are selected and how the process proceeds. The contract can refer to well-known arbitration rules.
You can also write other terms such as:
Payment term: Which payment method will be used? How long is the payment period?
Transfer of risk: At which point the risks of the goods will be transferred to the buyer?
Insurance: Should the cargo be insured? Who will pay the premium?
Laza Corporation is the leading textile company in Vietnam. It produces yarn and cloth products and also sells textile machinery and accessories, chemicals and dyes. It has three factories with modern machines and equipment from Japan, America and some European countries. Its products are sold in major supermarkets such as Coop mart, Big C, Metro, E-Mart, Aeon, and others.
The textile industry is fast-changing: cloth collections have short lifecycles and seasonal trends. Laza has to forecast the demand accurately and produce smoothly to meet the market needs and increase the sales. Any problems with raw materials, delivery or machines can disrupt the operations. So, the buyers have to choose the best suppliers carefully. They have to use some criteria that match Laza’s strategic sourcing goals.
Anna, the purchasing manager, had a meeting with the executive management team. She said that during Covid-19 pandemic, Laza should focus on supplier financial performance as well as other factors like technical and technological capability, capacity…
Based on the scenario, describe at least THREE ways to analyse supplier’s financial position.
This question asks students to explain how to evaluate supplier financial performance. It is not necessary to mention all the financial tools available. To get higher marks, students should focus on some specific and practical methods that can help Laza assess their supplier’s financial health. We have provided some suggestions below for answering the question. You can use them as a reference to complete your answer.
Supplier financial performance is a key factor that buyers should consider in the supplier appraisal and evaluation process. Financial analysis can reveal the supplier’s stability and help Laza avoid business risks such as supplier bankruptcy, late delivery, etc. The supplier’s failure can have a high cost and a negative impact on Laza’s profit and reputation. The buying organisation may face the following problems if the supplier has financial difficulties:
- Reduced quality/service: The supplier may reduce the quality level of their input to decrease the production cost…
- Delays in product deliveries: The supplier find it hard to fulfill their orders if they does not have enough money to purchase raw materials for production, pay the wages for labours and operate the machine and factory…
- Price increase: The difficulties in finance may cause the supplier increase the price to rise their margin
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In order to evaluate the financial performance of suppliers, Laza can consult some following ways:
Credit ratings
Reviewing the balance sheet and liquidity
Reviewing profitability
Requesting references from other customers
- Credit ratings
Credit rating is a quantified assessment of a borrower’s creditworthiness. Credit assessment and evaluation for companies and governments is normally performed by credit rating agencies such as S&P Global, Moody’s and Fitch Ratings. Why should purchasers consider “credit rating” to evaluate supplier financial performance? To understand the importance of credit rating, we need to know how credit rating is calculated.
The following factors may be used to calculate business credit scores. Each scoring model is different, though, so some of these factors may not carry much weight, or may not be used at all.
Payment history
Age of credit history
Debt and debt usage
Industry risk
Company size
By far, the most important factor when it comes to business credit scores is payment history: does your business pay its bills on time? Some credit scores are almost exclusively calculated based on payment history.
Higher credit score shows that this business has good cash flow to pay off its debt and reputation. To a corporate buyer such as Laza Corporation, suppliers with good financial position will contribute greatly to the bottom line. They are likely to deliver in time. Laza can also negotiate good payment terms. On the other hand, poor credit score is a bad indicators. This supplier may be liquidated soon, or they will demand shorter payment term, or they may reduce the product’s quality to save cash.
Laza can take credit rating information from credit rating agencies. Each country will have different agencies to provide such information. However, credit score may not be available all the time. It may be caused by:
The business has no credit history because borrows no money from the bank or has just established.
There is no credit rating agency in the country.
Regulations restrict the disclosure of credit information.
- Review the balance sheet and liquidity
The balance sheet helps Laza know how much value their supplier has on hand (assets) and how much money the supplier owes (liabilities). Assets can include cash, accounts receivable, equipment, inventory, or investments. Liabilities can include accounts payable, accrued expenses, and long-term debt such as mortgages and other loans. From the balance sheet, Laza can calculate some financial ratios to have an overview picture of liquidity of the supplier.
- The current ratio:
The current ratio measures the supplier’s liquidity - how easily the supplier’s current assets can be converted to cash in order to cover their short-term liabilities. The higher the ratio, the more liquid the supplier’s assets.
The formula of current ratio is:
Current Ratio = Current Assets / Current Liabilities
The supplier with a current ratio of less than 1.00 does not have the capital on hand to meet its short-term obligations if they were all due at once, while a current ratio greater than one indicates the supplier has the financial resources to remain solvent in the short term.
- The quick ratio:
The quick ratio is like the current ratio, but it only looks at the quick asset that are converted into cash quickly and easily. The quick asset does not take inventory into account as the current asset because sometimes the inventory may become obsolescence and it is very hard to convert them into cash.
The formula of quick ratio is:
Quick Ratio = (Cash and Cash Equivalents + Marketable Securities + Accounts Receivable) / Current Liabilities
The ratio is 1 which is considered to be the normal quick ratio. The number let Laza know that their supplier is fully equipped with exactly enough assets to be instantly liquidated to pay off its current liabilities. The supplier that has a quick ratio of less than 1 may not be able to fully pay off its current liabilities in the short term, while the supplier having a quick ratio higher than 1 can instantly get rid of its current liabilities.
- The debt to equity ratio
The debt to equity ratio tells Laza how much the supplier depends on equity versus borrowed money. The ratio can be used to evaluate how much leverage the supplier is using.
The formula of the debt to equity ratio is:
Debt to Equity Ratio = Total Debt / Owner or Shareholders’ Equity
If the D/E is high, it shows that the supplier has been aggressive in financing their growth with debt.
- Reviewing profitability
The supplier’s profitability is important. It tells Laza know how efficiency and effectiveness their supplier operates. To calculate the profitability ratios, Laza has to review the income statement of their suppliers. Supplier’s income statement tells you how much money they have spent, and how much it has earned, over a financial reporting period.
- Gross profit margin
The supplier’s gross profit margin is how much money the supplier makes per dollar earned, only taking into account Cost of Goods Sold (COGS). The formula of gross profit margin is:
Gross Profit Margin = (Sales Revenue – COGS) / Sales Revenue
Gross profit margin allow Laza know how efficient their supplier is at managing its operations.
- Operating Profit Margin
Operating profit margin takes EBITDA (Expenses Before Interest, Taxes, Depreciation, and Amortization) into account. The formula for the gross profit margin is:
Operating Profit Margin = Operating Earnings (EBITDA) / Sales Revenue
The supplier’s operating profit margin is usually seen as a superior indicator of the strength of a company’s management team because the formula includes the expense of salaries, cost of leasing office…
- Net profit margin
Net profit margin calculates the percentage of net profit the supplier produces from its total revenue. Net profit is calculated by deducting all expenses from its total revenue.
Net Profit margin = Net Profit ⁄ Total revenue
The ratio tells Laza know the financial health of their supplier. Laza can assess how effective their supplier’s current activities are by tracking the increase or decrease in its net profit margin
- Requesting references from other customers
In order to know the financial performance of the supplier, Laza may request purchasers in other companies who had purchased from the supplier. It’s very useful information resource because other customers have had experiences with the supplier so that Laza will know how frequently the supplier deliver lately or does not satisfy the orders in term of the quantity, the level of quality…
