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D2 Cips D2 CIPS Q4
by MoonyMoon, Nov. 2016 Subjects: Chartered Institute of Procurement and Supply D4 CIPS Q3
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• An organisation needs certain


inputs in order to perform its
activities and pursueits objectives
• The planners of business
activities, and theusers of inputs,
typically notify the procurement
What are business needs? need, initiator notify, fulfill input
function of theserequirements, in
various ways • Thetask of
procurement is to fulfil the input
requirements, by achieving what
areoften called the five rights of
procurement

• Passive
• Independent
Development ofprocurement
• Supportive
• Integrative

A generic procurementcycle

• Straight re-buy of items already


sourced from asupplier • Modified
re-buy, where some of the
Type of purchase requirement haschanged • New
buy, where the requirement has
not previously beenspecified or
sourced

• Systematicappraisal of the
benefits, costs and risks of the
investment, and likely‘payback’
period of the investment
• Balancing the whole life costs
and performance,functionality and
quality of the asset
• Negotiation, specification and
contracting with thechosen
Capital procurements
supplier for a total ‘package’ of
benefits sought over the
asset’slifecycle
• Analysis andmanagement of
lifecycle costs • Management and
maintenance of the asset in such
a wayas to prolong its useful life
and maximise its residual value
on disposal d

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The Kraljic procurement portfolio
matrix

• Fostering strategic, business-


focusedthinking • Improving the
efficiency and quality ofdecision-
making
• Enabling management to
evaluate proposals forfeasibility,
suitability and acceptability
• Enabling management to
compare alternatives andoptions
• Establishingmeasurable
yardsticks by which the
Thebusiness case process
subsequent performance,
deliverables oroutcomes of
projects can be evaluated
• Is the project or asset achieving
the business casebenefits
anticipated?
• Are the assumptions made in the
business case turningout to be
accurate?
• Is the business case justification
for the projectstill valid?

Informal businesscase structure

• Executive summary
• Reference
• Context
• Value proposition
• Scope
Elements of a comprehensive • Deliverables
formal business case • Impacts
• Work planning
• Resource requirements
• Risk management
andcontingency plans
• Commitments

Business benefits

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• Fulfilment of aspecific business
objective
• Increased revenues
• Reduced costs
• Enhanced profitability
• Enhanced value formoney
• Enhanced shareholdervalue
• Competitive advantage
• Leverage of keyresources
• Increased capacity,capability or
flexibility
• Improved brand orreputational
equity t

1. Total costis low, compared to


rental
2. The userhas total control over
the use of the asset
ADVANTAGESOF OUTRIGHT
3. The assetmay have residual re-
PURCHASE
sale value at the end of use
4. Capitalallowances may be set
against tax, and government
grants may be available

1. Highinitial expenditure ties up


capital
2. User bearsall costs and risks of
maintenance, operation and
DISADVANTAGESOF OUTRIGHT disposal
PURCHASE 3. Risk oftechnological
obsolescence
4. Wasteful,if equipment is
needed only for a short period (eg
a particular project)

1. No initialinvestment to tie up
capital
2. Protectsagainst technological
obsolescence 3. Costs areknown
and agreed in advance
ADVANTAGESOF LEASING
4. Fewercomplex tax and
depreciation calculations
5. Hedgeagainst inflation, as
payments are made in ‘real’
money terms

DISADVANTAGESOF LEASING

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1. Long-termcommitment to pay
instalments
2. User doesnot have total control
of asset
3. Total costmay be higher than
purchase
4. Largeorganisations may get
better terms by securing their own
finance to purchase(benefiting
from capital allowances)
5. Contractterms may favour the
lessor (eg limitations to use,
liability for risks andcosts)

• Secure supply within the


timescales required by
widerproduction, marketing or
project plans
• Secure adequate levels of
performance and processcontrol
within the timescales required by
Alignment withtactical objectives
wider organisational and
and timescales
projectplans
• Be feasible withinexisting
resource constraints
• Be capable of fulfilling agreed
specifications andachieving
agreed objectives, standards,
targets and KPIs

• Price is what a seller charges for


a package ofbenefits offered to a
buyer.
• Cost is what the buying
Market data on costs and prices
organisation pays to acquirethe
goods or services purchased. This
may be much more than just the
purchaseprice paid to the seller.

• Communication with suppliers


• The buyer’s database of market
data
• The marketing communications
of suppliers • Online market
exchanges, auction sites and
Primary sources of market data
forums
on costs and prices
• Advisory and information
services
• Trade fairs, exhibitions and
conferences
• Informal networking and
information exchange

Secondary sources of market data


on costs and prices
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• Financial and tradeor industry
press
• Published economicindices •
Published and onlinemarket
analysis
• Published statistical surveys
compiled by thegovernment •
Price listing andprice comparison
websites

• Pricescharged by competitors
• Extent of competition(market
structure)
• The nature ofcompetition in the
market
• Marketconditions
Factors in supplier pricing • Customerperceptions of value
decisions (External factors) • Priceelasticity of demand • What
a particular (desirable, powerful)
customer isprepared to pay
• Environmental factors affecting
the cost of rawmaterials
• Environmental factors affecting
demand andaffordability

• Costsof production and sales


• Howbadly the supplier needs the
business
• Riskmanagement
• How attractive aparticular
customer is
• Financialposition and product
Factors in supplier pricing
portfolio
decisions (Internal factors)
• Where the product isin its
‘lifecycle’
• Shareholders’expectations and
managerial objectives in regard to
profit margins
• Thestrategic objectives of the
organisation

• Full-cost pricing
• Cost-plus or mark-uppricing •
Supplier pricing strategies-Cost- Marginal pricing
based pricing • Rate of return or‘target return’
pricing
• Contribution pricing

Supplier pricing strategies

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• Price volume
• Market share pricing(or
penetration pricing):
• Market skimming
• Current revenuepricing (or
contribution pricing)
• Promotional pricing
• Market segment pricing (also
called differentialpricing or price
discrimination)
• Competition pricing(or dynamic
pricing)

• Raw materials (and/or


components, subassemblies
Components of thecost base andconsumables)
• Labour
• Overheads

Total cost ofownership includes


not just the price of the items
being purchased, but also:
• Various transactioncosts •
Finance costs
• Acquisition costs
Lifecycle costing
• Operating costs
• Costs of storage and other
handling, assembly orfinishing
required
• Costs of quality
• End of life costs

• Enablingthe fair (like-with-like)


comparison of competing options
• Enabling realistic budgeting over
the life of theasset
• Highlighting, at an early stage,
risks associated withthe purchase
Benefits of WLC • Promotingcross-functional
communication on cost and asset
management issues,
andimproving awareness of total
costs
• Supportingthe optimisation of
value for money

Limitationsof WLC

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• It isnot an exact science, and
future cost estimates are
subjective
• Manycosts are incurred through
the life of a product or asset, and
not all of thesewill be easy to
forecast
• Awide range of intervening
factors may affect costs over the
lifecycle of aproduct or asset
• A systematic WLC exercise can
be time-consuming,labour-
intensive and costly

• Simple moving average


• Weighted average
Statisticalforecasting techniques (orexponential smoothing)
• Time series (trend)analysis
• Regression analysis

1. What are the direct or variable


costs of sales?
2. What are the indirector fixed
costs or overheads?
• Premises costs
• Labour and staff costs • Utilities
• Printing, postage andstationery
• Equipment costs
Estimating orpredicting costs
• Fleet and vehiclecosts
• Advertising, promotionand sales
activities
• Financing costs
• Legal andprofessional costs
(including insurance)
• What are the one-off capital
costs for the period orproject?

• To express organisational
objectives as operationaltargets
• To communicate plansand
targets to stakeholders
• To motivate people to attain
performance and costtargets • To
motivate managersto identify risks
and problems
• To measure unit orproject
Objectivesof preparing a budget
performance
• To help evaluatemanagerial
performance
• To pre-authorise estimated
levels of expenditure
forprocurement activities
• To co-ordinateoperations
• To control procurement activities
and costs

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• Incremental budget
Types of budget
• Zero-based budget

• Entering actual income or


revenue figures againstestimates
• Analysing the reasons for lower
than expected turnover •
Analysing the reasons for higher
Actual income entries
than expectedturnover • Taking
action to prevent further shortfalls,
orrevising the budget to reflect
more realistic expectations

• Entering actual costs or


expenditures as they occuragainst
the budgeted amounts • Analysing
how fixed costs differed from the
budgetedamount
• Verifying that variable costs were
in line with thebudget
Actual cost entries
• Analysing any reasons for
changes in the
relationshipbetween costs and
turnover
• Analysing any differences in the
timing of actual andbudgeted
expenditures

• Forecast sales
• Forecast the time-lagon
converting debtors to cash
• Determine
purchaserequirements
Operating the cashbudget • Forecast the time-lagon paying
suppliers
• Incorporate othercash payments
and receipts
• Collate this information so as to
find the netcashflows

• Purchases
• Staff salaries or wages and
benefits, rents and dailyoperating
expenses
Cash outflows
• VAT, National Insurance
contributions, corporation taxand
similar payments
• Loan repayments

The role of aspecification

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• To define therequirement
• To communicate therequirement
• To provide a means of
evaluating the quality
orconformance of the goods or
services supplied

• Specifications
• Supplier pre-qualification,
selection and appraisal
Zero defects
• Quality control
• Costs
• The buyer’s quality management

• The process of drawing up


specifications is a usefuldiscipline
• If items are to be purchased
from more than onesource, the
use of conformance specifications
may be essential to
Advantages of using ensureuniformity
specifications • Specifications provide useful
criteria for measuringthe quality
and acceptability of purchases
once delivered
• Specifications provide evidence,
in the event of adispute, as to
what the purchaser required

• Detailedspecification is an
expensive and time consuming
process
• The costs of inspection and
quality control aregreater for
complex specifications than if
Disadvantages ofusing
simple specification is used
specifications
• Specificationscan become too
firmly embedded
• Specificationscan create a
temptation to over-specify, adding
cost and increasing stockvariation
and proliferation

Types of specification
Conformance

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The buyer detailsexactly what the
required product, part or material
must consist of. This maytake the
form of an engineering drawing or
blueprint, a chemical formula
or‘recipe’ of ingredients, or a
sample of the product to be
duplicated, forexample. The
supplier may not know in detail, or
even at all, what function
theproduct will play in the buyer’s
operations. The supplier’s task is
simply toconform to the
description provided by the
buyer.46\

The buyer describes:what it


expects a part or material to be
able to achieve, in terms of
thefunctions it will perform and the
level of performance it should
reach; or whatoutputs or
Types of specification outcomes (results) it expects to be
Performance delivered by a service. It is upto
the supplier to furnish a product or
service which will satisfy
theserequirements: the buyer
specifies the ‘ends’, and the
supplier has relativeflexibility as to
‘means’ of achieving those ends.

Technical or designspecifications

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• The scope of the specification
(its objectives andcontent)
• Definitions: explanation of any
technical orspecialised terms
used
• Thepurpose of the equipment or
material that is the subject of the
specification • Referenceto any
related documents (such as
standards or legislation) which
apply
• Materialsrequirements,
properties, tolerances and
permissible variability
• Desiredappearance, texture and
finish requirements of the finished
product
• Drawings, samples ormodels of
the required product (where
available)
• Conditionsunder which the item
or material is to be installed, used,
manufactured orstored
• Maintenance and reliability
requirements
• Specification of packaging and
protection
• Information to be provided by the
supplier for users

• Technical or designspecifications
• Specification bychemical or
physical properties
Typesof conformance
• Specification by brand
specifications
• Specification bysample
• Specification bymarket grade
• Specification bystandards

Performance specifications

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A performance specification would
typically include:
• The functionality, performance,
capabilities, outputsor outcomes
to be achieved, within specified
tolerances
• The key process inputs which
will contribute toperformance
• The operating environment and
conditions in which
theperformance is to be achieved
(and extreme or unusual
conditions in which it isnot
expected)
• How the product is required to
interface with otherelements of
the process
• Required quality levels (including
any relevantstandards)
• Required health and safety
levels and controls
• Required environmental
performance levels and controls
• Criteriaand methods to be used
to measure whether the desired
function, performance oroutcomes
have been achieved p

• Economic sustainability (Profit) •


Environmental sustainability
The ‘Triple BottomLine’ concept
(Planet)
• Social sustainability (People)

An effective specification is one


that is:
• Clear and unambiguous as to
what is required
• Concise
• Comprehensive
• Compliant with all relevant
Drafting specifications standards, and health,safety and
environmental laws and
regulations
• Up-to-date
• Expressed in terms which can
be understood by all
keystakeholders
• Value-analysed

Cross-functional contributions to
specification

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The contribution of procurement
professionals:
• Supply marketawareness
• Supplier contacts
• Awareness ofcommercial
aspects of purchases
• Awareness of legalaspects of
purchases
• Purchasing disciplines

• Early buyerinvolvement (EBI) •


Formal committeeapproach •
Approachesto specification
Informal approach
development
• Purchasingco-ordinator
approach

• Understanding the needs of


users
• Liaising with users
The buyer’s role inspecification:
• Minimising tolerances
• Understanding thelegal
implications of specification

• Input to make/do orbuy


decisions
• Policy formulationfor supplier
involvement and internal
purchasing
• Monitoringof supply markets
• Pre-selectionof suppliers
• Supplierrelationship
management
• Ordering andexpediting of
Purchasing experts may provide
samples and prototypes from
the followingcontributions:
suppliers
• Information on newproducts and
technologies
• Suggestion ofalternative
suppliers, products or
technologies
• Evaluationof product designs
• Promotion ofstandardisation,
variety reduction and
simplification

Technicalrequirements

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• Intended function orperformance
• Conditions under which the
product or service will berequired
to operate, be transported,
handled and stored
• Measures of qualityand
performance
• Tolerances for reliability, quality,
dimension,strength and other key
properties
• Features: texture, colour,
aesthetics, finishing andother
external properties
• Durability andserviceability •
Information provided with the
product or service

The buying organisation may


have a wide range ofpolicies
embracing areas such as:
• Itsintention to comply with all
relevant laws, regulations,
standards, codes ofpractice and
best practice benchmarks • Its
Company policy
aspirations for environmental
sourcing andmanufacture
• Its aspirations for corporate
social responsibilityand ethical
trading
• Sourcing policies
• Quality, cost andpricing policies

Standardisation is a voluntary
process, based onconsensus
among different stakeholders such
as:
• National and international
standardisationorganisations, led
globally by the International
Standards Organisation (ISO)
Standardisation
• National publicauthorities •
Industry and business
associations,
includingrepresentatives of SMEs
• Non-governmentalorganisations
(NGOs)
• Scientific andacademic
organisations

Unnecessary stockproliferation

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• Unnecessary stockholding and
handling costs, asadditional
variants are stocked •
Unnecessaryspecification costs
and transaction costs
• Multiple small ordersof variant
items
• The risk of lowerquality
• The risk of waste

• Specification
• Purchasing
Benefits ofstandardisation • Transport
• Inventory
• Quality management

• Location in relationto the buyer


and lower tiers of supply • The
use of less, and‘greener’,
materials and packaging
• ‘Green’ design and innovation
capability; reverselogistics and
recycling capability; and so on
• The development and
Environmentalcriteria enforcement of
strongenvironmental policies
• Robust
environmentalmanagement
systems
• Compliance with environmental
protection and emissionslaw and
regulation in the country of
operation

• The development of robust CSR


policies and ethicalcodes •
Location in relationto the buyer
• Evidence of responsible and
ethical labour policiesand
practices
• Evidence of, and commitment to,
conformance torelevant legislation
and regulations
CSRand social sustainability
• Compliance with International
criteria
Labour Organisationstandards
• Evidence of ethicaltrading
policies and practices
• Compliance with Fair Trade
standards, or membership ofthe
Ethical Trading Initiative
• Commitment to transparency
and improvement, incollaboration
with the buyer

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Sustainable specification across • Vehicles Fuel efficiency • Paper
sectors andindustries Recycled, chlorine-free,
sustainable forestrymanagement
• Office Energy efficient,
cleanmanufacturing processes,
equipment safety, end-of-life take-
back
• Energy Renewable
• Food and Organic, fresh or
seasonal, hygienicprocesses,
beverage minimised packaging,
sustainable water management

• Corporate governance:
regulatory standards
compliance,internal controls and
auditing in regard to data
protection, IT systems andfraud
prevention
• Contingency, business continuity
What is informationassurance?
and disaster recoveryplanning in
relation to key systems risks
• Strategic development and
management of IT systems tofulfil
the current and future needs of
the organisation (and supply
chain)

• Risks to the organisation’s


intellectual capital
• Risks to the integrity and
security of data
• Risks to the integrity and value
of specification data
• Risks and inefficiencies in the
design andimplementation of
management information
systems, specifications
databases,inventory systems,
Information-relatedrisks
extranets and other relevant
systems
• Turnover of key personnel and
loss of theirintellectual property
and/or knowledge of the
organisation’s procurement
needs,supply market, stock or
technical specifications
• Loss of organisational
knowledge, information
andcapabilities

What is performance
measurement?

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Supplier performance
measurement is the assessment
andcomparison of a supplier’s
current performance against:
• Defined performancecriteria
• Previous performance
• The performance of other
comparable organisations
(egother suppliers) or standard
benchmarks

• Specific
• Measurable
SMARTperformance measures • Attainable
• Relevant
• Time-bounded

• Internal benchmarking
• Competitor benchmarking
Four types ofbenchmarking:
• Functional benchmarking
• Generic benchmarking

• Performance
• Features
• Reliability
• Durability
Measures of quality
• Conformance
• Serviceability
• Aesthetics
• Perceived quality

Benefits of effectiveSLAs

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• Theclear identification of
customers and providers, in
relation to specificservices
• The focusing of attention on
what services actuallyinvolve and
achieve
• Identificationof the real service
requirements of the customer, and
potential for costs to bereduced
by cutting services or levels of
service that (a) are unnecessary
and(b) do not add value
• Bettercustomer awareness of
what services they receive, what
they are entitled toexpect, and
what additional services or levels
of service a provider can offer
• Bettercustomer awareness of
what a service or level of service
costs, for realisticcost-benefit
evaluation
• Support for the ongoing
monitoring and periodic reviewof
services and service levels •
Support for problem solving and
improvement planning
• Thefostering of better
understanding and trust between
providers and customers

• What services areincluded •


Standards or levelsof service
expected from the provider
• Other expectations ofthe
supplier
• The allocation of responsibility
for activities, risksand costs
• How services and service levels
Contents of an SLA
will be monitored andreviewed,
what measures of evaluation will
be used, and how problems (if
any)will be addressed
• How complaints anddisputes will
be managed
• When and how the agreement
will be reviewed andrevised

General examples of purchasing


service KPIs

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• Number of complaints made to
purchasing by internalcustomers,
external customers or suppliers
(and found to have merit)
• Number or proportion of supply
orders deliveredon-time-in-full and
of specified quality
• Number of stockoutsreported
• Value of costreductions or
savings achieved per period
• Number of projectscompleted to
customer satisfaction
• Lead times to fulfilthe purchase
cycle
• Qualitativeassessments of
desired values

A contract is basically a statement


of:
• Exactly what two or more parties
have agreed to do orexchange
• Conditions and contingencies
which may alter thearrangement
• The rights of each party if the
What is a contract?
other fails to do whatit has agreed
to do
• How responsibility or ‘liability’ will
be apportionedin the event of
problems
• How any disputes willbe
resolved d

• Express Terms –explicitly stated


(whether written or oral) • Implied
Terms – not expressly included in
thecontract, but nevertheless
assumed to exist The‘importance’
of the term is distinguished as:
• Conditions – vital terms of the
contract, such that abreach will
Contract Terms entitle the injured party to cancel
or ‘repudiate’ contract andseek
damages in addition
• Warranties – non-vital terms, the
breach of which willnot collapse
the contract and the injured party
can only seek damages, but
bothparties must continue to
honour the contract

Terms may be implied into a


contract by virtue of:
• The nature of thecontract
Implied terms
• The need for businessefficacy
• Statute law
• Custom of the trade

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Legal principles relating to


contracts for the sale of goods:•
Sale by description
• Satisfactory qualityand fitness
Sale of Goods Act 1979 (UK) for purpose
• Sale by sample Supplyof Goods
and Services Act
• Care and Skill
• Time of performance

• CIPS has published a range of


model form contracts andcontract
clauses
• The Freight Transport
Association has developed
amodel form of conditions of
carriage, for carriage of goods by
road in the UK
• The Chartered Institute of
Building has developed amodel
form contract for the
Model form contracts
commissioning of facilities
management services
• The Joint Contracts Tribunal
(JCT) publishes aStandard Form
of Building Contract
• TheInstitute of Civil Engineers
(ICE), the Association of
Consulting Engineers andthe
Federation of Civil Engineering
Contractors issue standard forms
for civilengineering

1. Helps reduce time and costs of


contract development
2. Avoids ‘reinventing the wheel’
Advantages of model form
3. Industry model forms are widely
contracts
accepted
4. Designed to be fair to both
parties

1. Terms may not be as


advantageous to a powerful
buyeras if contract was negotiated
2. Terms may not include special
Disadvantages of model form clauses
contracts 3. Legal advice is still required if
significantamendments or
variations are to be made
4. Costs of training buyers to use
modelforms

Interpreting keyterms

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• What type of clause they are and
what they aredesigned to achieve
• The legal and operational effects
or implications ofthe clause for the
buyer and the supplier
• Whether the example clause, as
given, expresses thebuyer’s
requirements (and best interests)
clearly

• Time of Performance
“timely deliveryof….. Shall be of
the essence of the contract” •
Passing of title/property
Retention of title /Romalpa clause
• Liquidated damages
Interpreting basiccontract terms: Liquidated,unliquidated, and
penalty clauses
• Force Majeure
• Exclusion clause
Incorporation
Negligence and UCTA
• Subcontracting

• When a party fails to perform an


obligation under thecontract: is in
breach of a condition; improperly
repudiates (ends) thecontract; or
prevents completion of the
contract on his own side or by
theother party, during
performance. These are examples
A breach of contract occurs: of ‘actualbreach’.
• When, before the time fixed to
perform an obligation,a party
expressly or by implication
repudiates the obligations
imposed on himby the contract: ie
shows an intention not to perform.
Thisis called ‘anticipatory breach’.
ur.kua-繵

• Destruction of thecontract
subject matter
• Non-occurrence of the event on
which the contract wasbased
• Incapacity to providepersonal
Examples of‘frustration’
performance
• Extensive interruption which
makes further executionof the
contract impracticable or different
from that originally agreed

Insurances

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• Employer’s liability insurance •
Public liability insurance
• Professional indemnity
insurance
• Product liability insurance

• The promotion of fair, open and


transparentcompetition in
sourcing
• The use of sourcing policies to
promote positivesocio-economic
goals
• The specification andsourcing of
ethically produced inputs
• The selection, management and
development of suppliersin such a
way as to promote ethical trading,
environmental responsibility
andlabour standards at all tiers of
the supply chain
Ethical sourcing andsupply
• A commitment to supporting the
improvement of workingterms and
conditions throughout the supply
chain
• A commitment tosupporting
sustainable profit-taking by
suppliers
• Adherence to the ethical
frameworks and codes ofconduct
of relevant bodies
• A commitment to compliance
with all relevant laws
andregulations for consumer,
supplier and worker protection

The ‘right price’ for the supplier or


seller to charge(the sales price)
will be:
• A price which ‘themarket will
bear’
What is the ‘right price’ for
• A price which allows the seller to
Supplier?
win business, incompetition with
other suppliers
• A price which allows the seller at
least to cover itscosts, and ideally
to make a healthy profit

What is the ‘right price’ for Buyer?

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The ‘right price’ for the buyer to
pay (the purchasingprice) will be:•
A price which thepurchaser can
afford • A price which appears fair
and reasonable, orrepresents
value for money, for the total
package of benefits being
purchased • A price which
givesthe purchaser a cost or
quality advantage • A price
whichreflects sound purchasing
practices

• Under-estimation of costs at the


forecasting stage
• Price inflation, escalating
materials costs
• Wage inflation, escalating labour
costs
• Commodity and energy price
fluctuations
Reasons forcost/price variations
• Exchange rate fluctuations
• Overtime or incentive payments
required to ‘crash’ theschedule
• Failure costsincurred by
unforeseen quality problems •
Changes in the scope of the
contract
• Unforeseen contingencies

The calculation of average


changes in the price orcost of an
item or group of items over a
period of time can be used to:
• Estimate the current average
prices or costs of aproduct, by
using price/cost data for similar
Indexation and price adjustment items at a previous ‘base’ date
formulae • Eliminate the effects of inflation
or deflation whenanalysing price
and cost trends • Allow for
currencyfluctuations
• Compare the costperformance of
different suppliers
• Identify and defineaverage
price/cost changes

Cost-plus pricing

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• A cost plus fixed fee (CPFF)
contract includes paymentof
allowed costs plus a pre-
determined fixed amount, as the
fee for doing thework
• A cost plus incentive fee (CPIF)
contract includespayment of
allowed costs plus a higher fee for
meeting or exceeding
performanceor cost targets or
KPIs
• A cost plus award fee (CPAF)
contract includes paymentof
allowed costs plus a fee (bonus)
based on the contractor’s
performance

• Cost without fee, for non-profit-


making providers
• Cost sharing, where the supplier
stands to benefitfrom its own work
Alternativearrangements
• Time and materials, for contracts
(such as repairservices) where
the precise work to be done
cannot be predicted in advance

Payment methods
• Payment in advance (or
Payment methods payment with order)
• Payment on delivery
• Open account or credit

An unpaid seller’s remedies


against the goods include:
• The right of seller’slien (ss 41–
Statutory remediesfor an unpaid
43 SGA 1979)
seller
• The right of stoppagein transit
(ss 45–46)
• The right of resale(s 48)

Factors in make/do orbuy


decisions

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FACTORS SUPPORTING
MAKING/DOING
-Opportunity toextract value from
otherwise idle capacity and
resources
- Potential for lead time reduction
- Cost of work is known in
advance
- Desire to exert direct control
overproduction and/or quality -
Protection of confidentiality and
intellectualproperty
- Less supply risk and supplier
risk
- Desire to maintain a stable
workforce

-Quantities required are too small


for economicproduction -Avoid
costs of specialist machinery
andlabour
-Reduced inventory costs
-Financial risk shared with supply
FACTORS SUPPORTING
chain
BUYING IN
- Access tocontractor’s specialist
research, expertise, technology,
patents, designs andso on
- Augmented production capacity
- Desire to maintain a stable
workforce

• ‘The management of upstream


and downstreamrelationships with
suppliers and customers to deliver
superior customer valueat less
cost to the supply chain as a
whole’ (Christopher)
• ‘The integration and
management of supply
chainorganisations and activities
Supply chainmanagement
through co-operative
organisational
relationships,effective business
processes, and high levels of
information sharing to createhigh-
performing value systems that
provide member organisations a
sustainablecompetitive
advantage’ (Handfield & Nichols)

• Quality drivers
• Cost drivers
• Business focus drivers
Drivers foroutsourcing
• Financial drivers
• Relationship drivers
• Human resource drivers

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*Supportsorganisational
rationalisation and downsizing
*Allows focused investment of
managerial,staff and other
resources on the organisation’s
core activities andcompetencies
* Accessesand leverages the
specialist expertise, technology
Advantages of outsourcing and resources of contractors
*Access to economies of scale *
Addscompetitive performance
incentives *Leverages
collaborative supply relationships,
and can support synergies(2 + 2 =
5) *Cost certainty for activities
where demand and costsare
uncertain or fluctuating

* Potentially higher cost of


services (includingcontractor profit
margin), contracting and
management
* Difficulty of ensuring service
quality andconsistency and
corporate social responsibility *
Potential loss of in-house
expertise, knowledge,contacts or
technologies in the service area
* Potential loss of control over key
areasof performance and risk:
over-dependence on suppliers
* Added distance from the
customer or end-user, byhaving
an intermediary service provider
Disadvantages of outsourcing
* Risks of ‘lock in’ to an
incompatible or under-performing
relationship:cultural or ethical
incompatibility; relationship
management difficulties;contractor
inflexibility, conflict of interest,
complacency or loss of clientfocus
*Risks of loss of control over
confidential data andintellectual
property
*Ethical and employee
relationsissues of transfer or
cessation of activities
*Potential risks, costs and
difficulties of in-sourcingif the
outsource arrangement fails

Why does it go wrong?

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• The organisation fails to
distinguish correctlybetween core
and non-core activities
• The organisationfails to identify
and select a suitable supplier
• The organisation has unrealistic
expectations of theoutsource
provider
• The outsourcing contract
contains inadequate
orinappropriate terms and
conditions
• The contract does not contain
well defined keyperformance
indicators or service levels
• The organisation lacks
management skills to
controlsupplier performance and
relationships
• The organisation gradually
surrenders control ofperformance
to the contractor

• The need for the outsource


decision to be based onclear
objectives and measurable
benefits, with a rigorous cost-
benefit analysis
• The need for rigoroussupplier
selection
• Rigorous suppliercontracting •
Key sourcing issues Clear and agreed service levels,
standards and keyperformance
indicators
• Consistent and rigorous
monitoring of service deliveryand
quality
• Ongoing contract andsupplier
management
• Contract review

• The transaction costs are low •


The relationship between
‘customer’ and ‘supplier’ islikely to
be long-term and stable
• There is (usually) no profit
Advantages ofinternal supply
motive within theinternal supplier
• Customer and supplier are part
of the sameorganisation, meaning
that they should share the same
culture and values

The business case for outsourcing

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The main criteria for making a
business case for
anyprocurement proposal are:
• Costs and benefits
• Evaluation of options
• Alignment withorganisational
needs and timescales

• The outsourcer may be unable


to keep up with the paceof
technological change in a
particular activity
• The outsourcer may simply lack
Operationalarguments for
capability or capacityto perform
outsourcing
the activity competitively
• The outsourcer may be able to
transfer the resourcesused to
make/do to another activity which
will save cost or increase revenue

• Produce the goods or services


in-house (if this can bedone
competitively)
• License the technology or
designs to externalproducers, to
make or deliver under licence or
franchise
Consideration ofoptions • Buy from a qualified external
supplier
• Establish a joint development
project with another organisation
• Enter a long-termdevelopment or
supply partnership
• Acquire a world-classsupplier
(backward integration)

• Competence (or capability) •


Capacity • Commitment • Control •
The ‘10 Cs’ model Cash • Consistency • Cost •
Compatibility • Compliance •
Communication

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