Scope And Influence Of Procurement And Supply Flashcards
What is procurement?
Procurement involves something which may be tangible (goods) or intangible (services).
Procurement process is a strategic function of a business and involves a high level of skill. The procurement process begins by identified a need and is completed once the goods or services that meet that need are delivered.
Procurement takes place in almost all organisations; everything that needs sorting and buying for an organisation involves procurement. Therefore, the cost of an organisation can be linked to procurement.
Procurement Elements
Added value
Costs
Inventory
Logistics
Purchasing (ordering and expediting)
Quality
Supply (delivery)
Waste management
Categories of spend
Capital purchase and insurance
Marketing (promo materials/hotels at trade shows)
Raw materials (inventory and EOS)
Research and development (sourcing prototypes / new materials)
Salaries/pensions (if proc keep costs down org maybe able to offer better pricing)
Services
Sundry items
Training (negotiation when booking)
Utilities
Vehicle/transport (haulage rates/carriage negotiated)
Break down of organisational costs represented by procurement.
Fixed - Do not change with the output of the company. Organisation has to payment then they matter how they performing. i.e. Salaries/pensions, depreciation, build, rent, insurance.
Variable - Changes with the output of the organisation. Relates to the number of goods produced/sold and/or number services provided. i.e. raw materials, haulage costs, wages for hourly paid workers.
Direct - Directly associated with the job i.e. hourly wages, direct labour, raw materials, components.
Indirect - Not directly sociable the job (overheads)
i.e. logistics, rent, utilities
How procurement can influence costs of capital purchases and insurance?
Evaluate potential suppliers Be involved in preparing specifications Review quality and standards Assess ethical requirements Compare buy or lease options Investigate transport Review packaging options Research total it cost Calculate its currency differences Benchmark process Insure assets are fit for purpose
Lease or buy?
Buying advantages Total cost low compare to rental Total control of assets Asset may have residual re-sale value Capital allowances may be set against tax/government grants may be available
Buying disadvantages
High initial expenditure
User bears all cost/risk of maintenance/operations/disposal
Wasteful if only need it for a short time
Lease advantages No initial investment to tie up capital Protects against technical obsolescence Costs are known and agreed in advance Fewer complex tax and depreciation calculations Hedge against inflation
Lease disadvantages
Long-term commitment
User doesn’t have total control over assets
Total cost may be higher
Large organisations may get better Thomas by securing their own finance to purchase
Contract terms me a favour the lessor
Stocked procurements and non-stocked procurement
Stocked procurements: Raw materials (primary sector) i.e. coal, fish, oil,
Components (secondary sector) i.e. nuts/bolts, castings, light bulbs
Finished goods i.e. shoes, jewellery, confectionary
Non-stocked procurements (Not stalled within an organisation i.e. one off or capital purchases): Maybe intangible (advertising campaign, cleaning service, Internet contract, belonging to tertiary sector)
Procurement cycle followed for both stock and nonstock procurements.
Situations for stock
Independent demand Staple predictable demand – low value/non-perishable Long lead time Critical operations Legal requirement to hold stock Where inventory appreciates in value over time We are prices are expected to rise Where demand is essential
Procurement cycle 13 steps
Understanding need Market/commodity Develop strategy Pre-procure The flip documentation Supply selection Issue I TT/RFQ Bid tender Contract award Warehouse logistics Contract performance SRM and SCM Asset management
Kraljic Matrix
Leverage Suppliers (High Cost/Low risk)
Vast competition
Low cost to move suppliers
Often utility services i.e. electricity
Routine Suppliers (Low cost/Low risk)
Low value items
Lots of work associate with the suppliers
Lots of variety available i.e. stationary suppliers
Strategic suppliers (High cost/High risk)
Critical supplier to an organisation
Responsible for core products
Bottleneck suppliers (low-cost/high risk)
Holds monopoly marketplace
Little or no other options
Low value items
What are the organisational budgets?
CAPEX - Capital purchases - Assets of the organisation Help the business develop Spend money to Make money Continue market trends
Often land, property or machinery.
Features of Capital Purchases
An asset purchased to last long period of time
Often paid as a lump sum or through a bank loan
Accounted for and depreciating over a period of time
High value
OPEX- Operations expenditure
Procurement made by organisation to ensure efficient day-to-day running of business i.e. Rent, raw materials, salary, insurance, transport
Features of operational expenditure I’m going expense to an organisation Paid monthly/annual leave Accounted for in the current month or year Low to medium value
Services procurements - (Intangible i.e. cleaning contracts, insurance, utilities)
Follows procurement cycle; however, can be harder to manage and evaluate intangible items (SLA’s)
Service can be a one-off requirement (car Faletti) or can be something at last for years (electricity contract)
Because services are intangible harder to evaluate. No samples can be analysed to verify conformity. For this reason specifications for sourcing services need to be very detailed to explain exactly what is required.
Heterogeneity/variable - service is not always the same
Ownership – Uncertainties in contractual agreements
Five rights of procurement
QQTPP
Price – fair and reasonable (competitive)
Currency (if purchasing from overseas suppliers) inclusion of tax (net or gross price)
Inco terms (Eliminates Ambiguities or inconsistencies of country-specific sales and shipping contracts.)
– Easier for sellers and buyers to identify and manage costs and liabilities of transporting cargo in between source and delivery destinations.
Quantity – ensuring that the most cost-effective amount of product or service is procured to avoid unsatisfactory consequences i.e. Product shortages, excess stock-waste. Leverage economies of scale.
Quality – quality does not have to be high but fit for purpose, Five for money. About a product/service meeting then needs and expectations of the customer.
ISO9001
Product spec – ensure standard of quality is met
Conformance spec/performance spec
Time – orders and contract should state the time and date order is required to avoid:
Stockouts
Additional costs
Negative impact on supplier relationship
Place – ensuring that goods or services are delivered to the right place avoids:
Stockouts
Non-delivery of goods to customer
Additional cost
Performance Spec
Advantages
– Short document that is quick to prepare
– simple and cheap to prepare
– encourages supplier innovation
– allows supplier competition
– Risk of nonconformance to performance squarely with supplier.
Conformance specification
Disadvantages – Usually long document and it takes time to prepare – difficult to prepare – does not allow supply to innovate – limits supplier competition
What is added value?
Designed to set a business’s Products or services apart from those of its competitors, in order to attract consumers attention and encourage them to buy.
Additional features, brand, convenience, excellent service, market development, reduced input cost, reduced waste.
TCO
The total cost incurred by owning a product throughout its useful life: TCA Tooling Insurance Operation Maintenance Training Storage Disposal (end of life).
Often used went for Procuring assets instead of regularly bought items.
TCA
Total cost of acquisition
The total cost incurred in acquiring a product from sourcing to receiving and installing.
(TCA is a part of TCO)
What needs to be covered to achieve value for money?
Purchase price (needs to be competitive)
Quality of product (Fit for purpose)
Cost of carriage and insurance
Lead time
Internal and external suppliers
Internal Supplier
Suppliers within an org. that are linked by either on the same site or for the same company as the buyer.
External Supplier
Organisations that are separate business entities from the buying organisation.
P&SC Department use contracts, service level agreements (SLA’s) and KPI’s (Qualitative or quantitative) to ensure quality, timescales and quantity considerations are met.
KPIs Qualitative and Quantitive examples
Qualitative KPIs
Reduce number of factory rejects
Achieve ISO accreditation
Reduce materials wastage during manufacture
Quantitive KPIs
Reduced percentage of late deliveries
Increase number of orders received with correct quantities
Increase percentage of deliveries to correct location
Advantages of KPIs
Improved supply motivation
Improve communication
Sharing of common goals
Limitations of KPIs
Reduction in quality by suppliers Russian to meet quantitive KPIs
Reduction of teamwork as suppliers focus on their own KPIs instead of common goals
Contracts
Legally binding agreement between two or more parties in which one pie agree an action in return for something. A contract is enforcible in law and exist in every commercial transaction.
For a contract to exist there needs to be:
Intention: all parties must have intention but their agreement can be in forced by civil law. Means that if something goes wrong, one party can take legal action against the other.
Consideration: this is the Barkham/exchange aspect of contract. It is a promise by one party for an action by the other party.
Agreement: in contract law the agreement is created for offer and acceptance.
Capacity: to be filed a contract must include the names and addresses of the two parties entering into the agreement, together with a date and signatures by individuals with capacity (a person who is legally able to enter into a contract because of the appropriate age and state of mind)
Other features of a contract should include:
Five rights of procurement (quality/delivery requirements/leadtime/quantities/price/payment terms/packaging/currency)
Term
Law
Notice
Dispute resolution
Sources of added value
Additional features (tangible/intangible): i.e. reversing camera or offer of a years free motor insurance
Brand:
Awareness – strong brand instantly recognisable. Building awareness can cost money initially but long-term value it gives an organisation is considerable. People like to buy products/services for brands they are familiar with.
Engagement – organisations with a strong brand reaches out to its target audience.Effective advertising strategy for its added value because more people will be aware of the organisations products or services.
Communication – telling customers about the latest development of this promotes added value as it keeps them interested/encourage them to make a purchase.
Convenience:
Excellent service: i.e. attention to detail, considering things from a buyers viewpoint, going beyond what is required to assist customer.
Innovation: Porters five forces model Buyers (want more for less) Suppliers (want to give less for more) Substitutes New entrants Existing rivals
Market development (find a new markets/acquiring new consumers)
Reduced input costs - higher profits
Sustainability (insurance something is long-lasting are not going to cease or disappear - conflict affect ability to move goods - break down of supplier relationship – risk minimising and management - use risk matrix. Effect of risk (Minus/moderate/major) vs likelihood of risk occurring (Unlikely/likely/very likely)
Reputation i.e. ethical values
What are the areas to be considered when trying to achieve five for money?
Currency/exchange rates – agree fixed exchange rate to get best value for money
Environment factors – does supply have a sustainability policy/does product meet environment policies. That practices equal products been rejected by customer/lost orders
Freight cost – is cost of transport included in quotation/what incoterms are quoted/does transport price make total cost uncompetitive?
Maintenance costs dash what maintenance costs may be incurred on top of purchase price/is maintenance included?
Packaging – is packaging Best faith money. Returnable/recyclable/single use?
Payment terms - longer payment term to give organisation more time to keep money invested. Interest can be and on improving Cashlie. Some supplies of reduction cost for fast payment.
Place - products/services must be delivered to correct location to avoid additional costs.
Product/service price – lower price/better deal, but other factors have to be considered.
Quality – needs to be good/meat specification but does not need to be superior. Inferior quality could be returned rejected or “production stop.
Quantities - Need to meet demand/should not exceed it by much. Buyers need to establish faith money by ordering an amount that will not make inventory cost too high/be the most cost-effective to buy.
Supply reputation – adaptation could reflect negatively on an organisation. Supply with bad rep could fail to deliver/supply faulty goods.
Time – products or services must be delivered at the required time to avoid additional costs/production stop
Warranty – Warranties can be a value added to cost price. Assess the value for money the warranty would give against the price it will cost.
Supply chains are integral to a well functioning procurement operation
Supply chains must be managed in order to be effective; this takes skill and may involve several methods
Supply chain maybe simple or extremely complex extremely complex
Stakeholders Are very important to all organisations, regardless of the sector or type of business
Stakeholders maybe suppliers, customers, consumers (end users) or the local community
Stakeholders are integral to procurement
What are the 3 types of industrial Sectors?
Primary – acquisition/extraction of raw materials
Secondary – transform is raw materials into finished goods (assembly, construction, manufacturing)
Tertiary – provide a service and support to the other two sectors i.e. retail, education
What is the supply chain?
All those involved in organising and converting materials through input, conversion and output phases. (Bailey et al)
Christopher coined the term supply network.
Primary sector – extract natural resources from the Earth i.e. mine in the coal/metals – Drilling for oil – agriculture – forestry– fishing
Secondary sector – manufacturing and construction industries. Where materials are converted into finished products. Secondary sector not only changes products but also assembles them are even more materials required but primary sector can be assembled to build a house
Tertiary sector – consist of service industries. Businesses that support the production and distribution process i.e. insurance, education and healthcare
Stages and a supply chain
Upstream – getting the role materials needed for production
Downstream – processing all materials into the finished product
Upstream
–Produces extracts natural resources
-Suppliers obtain raw materials from producers
Both Upstream & Downstream
-Materials are sent to the manufacture
Manufacture processes materials
Downstream
- Distributor collect materials from the manufacturer and delivers them to the customer
- Customer
