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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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Procurement Auction
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• Passive
• Independent
Development ofprocurement
• Supportive
• Integrative
A generic procurementcycle
• 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
• 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. 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)
• 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
• 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
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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)
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
• 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
• 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
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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
• 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\
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
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
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
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
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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)
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
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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
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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
• 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
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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
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
Payment methods
• Payment in advance (or
Payment methods payment with order)
• Payment on delivery
• Open account or credit
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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
• 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
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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
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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
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