BEST VALUE

INTRODUCTION The Best Value concept was developed as part of a wide reaching modernisation agenda for government at all levels. Best Value came into force in April 2000 and although the rules are not as prescriptive as those surrounding CCT, allowing Local Authorities to develop their own policies, methodologies and toolkits, there is a requirement for every service to be reviewed at least once every five years. The reviews are to take place against the background of the four Cs of Best Value: Consult; Compare; Challenge and Compete and the outcomes will be rigorously evaluated by government appointed inspectors. Best practice is beginning to emerge as Local Authorities begin their five year review programmes. The Chartered Institute of Purchasing & Supply (CIPS) believes the following in respect of Best Value. PURCHASING AND SUPPLY MANAGEMENT PROFESSIONALS AND BEST VALUE 1. Local Authorities should undertake a review of the effectiveness of their purchasing and supply management - a key aspect of their Best Value appraisal. 2. Local Authorities should ensure that purchasing and supply management professionals are involved in every single procurement decision at the earliest opportunity, and where possible, lead the challenge to deliver Best Value, so that value for money can be increased and higher quality services can be provided. 3. Best Value demands key professional purchasing competencies such as market scanning, specification development, the development of purchasing and supply management strategies for whole life costs, sustainability, and improved quality, project and contract management. Well trained and qualified purchasing and supply management professionals have the skills and techniques to assist Local Authorities to embrace Best Value and deliver continual improvement such as improving the value for money which Authorities receive from existing contracts and external service providers. 4. Best Value involves reviewing each service provided by the Local Authority against the four Cs of Best Value. Purchasing and supply management professionals should contribute to each of these, in particular those which involve addressing the marketplace. 5. CIPS encourages purchasing and supply management professionals within Local Authorities to work together in the development of Best Value, supporting colleagues and sharing knowledge and progress. The Society of Purchasing Officers in Local Government (SOPO) is active in this area. 6. CIPS encourages purchasing and supply management professionals within Local Authorities to include specialists from other disciplines in the development of Best Value, working together to share knowledge and progress. STAKEHOLDERS, SUPPLIERS AND PARTNERING 7. Stakeholders need to understand Local Authorities' objectives in order to enable them to deliver Best Value services. Local Authorities should involve as many people as possible in the supply chain in designing Best Value solutions in order to develop a culture of innovation and collaboration. 8. A challenge of Best Value is to develop marketplaces to take advantage of contemporary advances in relationship thinking and eCommerce. Stakeholders, such as suppliers and service providers, need to embrace other issues like equal opportunities, eCommerce, true partnering and economic development of a local area, in order to support Best Value. 9. Best Value needs to balance the strategic importance of a service against the maturity of the market and its ability to deliver the level of service required. It is difficult to have a strategic alliance or partnering arrangement with a contractor that does not have substantial experience of the marketplace. 10. Purchasing and supply management professionals must be involved in the development of partnering arrangements. It is best practice to select a partner following a comprehensive competitive tendering process with an outcome-based specification in order to invite innovation in for example, ways of providing a service. 11. The criteria for selecting a true partner can be fundamentally different to that employed when selecting from a traditional supply base and so the existing supply base may have to change to meet new requirements. Suppliers should be selected for partnering on the basis of their competencies. 12. The purchasing and supply management professional must work with the marketplace, developing suppliers simultaneously, whilst entering into true partnerships with key suppliers. Some suppliers will not be able to change from their traditional approach of profit maximisation and short term gains. Best Value will require more of them.

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13. True partnering involves for example trust, openness, frankness, common joint objectives, balance of risk e.g. a gain share/pain share basis. They require skills such as project management and cost control. True partnering bears little resemblance to traditional adversarial purchasing and cannot be implemented without a change in culture. LOCAL AUTHORITIES AND BEST VALUE 14. Best Value provides an opportunity to pursue cross cutting i.e. organisation-wide purchasing and supply management reviews which will lead to improved services and repositioning. It facilitates Business Process Re-engineering and Re-design by encouraging challenge, innovation and collaboration. 15. There are hidden costs in relationships between Local Authorities, their customers and their suppliers which will become more obvious in the scrutiny of best

value. Best Value is about outcomes not just outputs and inputs and should take into account the whole cost to the local economy. 16. There may be some conflict between PFI and Best Value in that PFI facilitates an asset and services as a combined package whereas in some cases it may be better to view them independently. PFI should not be confused with being a means to obtaining Best Value. It is merely an option for funding. 17. Best Value is concerned with customer needs and these often include sustainable employment. It is a longterm concept which should fit a wide range of government organisations at every level. It is as much about effectiveness and quality as it is about efficiency and cost. 18. The public consultation envisaged in the Best Value regime will frequently challenge traditional thinking about how services are provided and by whom they are provided.

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WHOLE LIFE COSTING

INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case Whole Life Costing (WLC), as they relate to purchasing and supply management. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Further information on WLC is available from CIPS. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on WLC has been written primarily for the benefit of full time purchasing and supply management professionals i.e. those in the purchasing and supply management function. This document is one of a series summarising the CIPS view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document which supports this series entitled Background Purchasing and Supply Management Practice Positions. CIPS is expressing beliefs on WLC as it is a best practice tool for evaluating options for any substantial procurement. CIPS views, opinions and beliefs are stated throughout the document; however the broad practice statements which underpin the text are as follows: CIPS believes Whole Life Costing to be the same as Life Cycle Costing. CIPS considers that all purchasing and supply management professionals should be competent in the theory and application of WLC. CIPS advocates the use of WLC in making 'make or buy' decisions; also when establishing which source of supply offers the best value for money. CIPS takes the view that purchasing and supply management professionals should take the lead in the WLC process, involving other colleagues on a cross-functional basis as appropriate. CIPS believes that purchasing and supply management professionals should be prepared to involve key suppliers in the implementation of WLC. CIPS believes that purchasing and supply management professionals are under an obligation to ensure that high value/high risk purchasing decisions are not made on the basis of price alone. CIPS takes the view that there is no single approach to WLC. WLC tools used by an organisation will vary according to circumstances and individual requirements. CIPS recommends that, when making WLC calculations, expected usage life rather than expected physical life should be the preferred parameter. CIPS considers that the selection of an appropriate discount rate is critical. Traditionally WLC is associated with high-value procurement decisions but there is no reason, in principle, why it should not also be applicable to relatively low-value purchases - refer to CIPS Position on Sourcing Strategy as a means to identify where WLC is appropriate. CIPS accepts that financial criteria such as depreciation rates and resale values come into the equation and that therefore purchasing and supply management professionals should be prepared to seek assistance/advice from Finance. DEFINITIONS There is some confusion in respect of terminology relating to Whole Life Costing and so for the purposes of clarity - CIPS supports the use of the following definitions: CIPS believes Whole Life Costing to be the same as Life Cycle Costing. WLC is a technique to establish the total cost of ownership. It is a structured approach which addresses all the elements of cost and can be used to produce a spend profile of the product over its anticipated lifespan. The results of a WLC analysis can be used to assist management in the decision-making process when there is a choice of product. The accuracy of WLC diminishes as it projects further into the future, so it is most useful as a comparative tool when long term assumptions apply to all the options and consequently have the same impact. Total Acquisition Costs - The total of all costs in acquiring goods or services from the inception of the demand for them until their safe and satisfactory delivery at the point required. Total Cost of Ownership - The purchase price of a product and its transportation cost plus indirect handling inspection quality, re-work maintenance, and all other follow on costs associated with the purchase including costs of disposal.

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Terotechnology - A combination of management, financial, engineering, building and other practices in pursuit of economic life cycle costs. Its practice is concerned with the specification and design for reliability and maintainability of machinery and equipment Important though it is as a technique, WLC needs to be seen in the context of other cost analysis approaches such as target costing, absorption costing and activity based costing. Target costing - A product cost estimate derived from a competitive market price. Used to reduce costs through continuous improvement and replacement of technologies and processes. Absorption costing - A method of costing designed to ensure that total costs, fixed and variable, direct and overhead are recovered in the price of goods etc. ABC Activity Based Costing - A cost attribution to cost units on the basis of benefit received from indirect activities such as order processing and setting up quality procedures. WLC also involves the use of a discounted cash flow calculation which is defined as the process of evaluating the future net cash flows generated by a project or plant during its expected life cycle by discounting them back to their present date value. Finally, value analysis, which is a systematic interdisciplinary examination of design and other factors affecting the cost of a product or service in order to devise a means of achieving the specified purpose most economically at the required standard of quality and reliability, is a key component in WLC especially in the case of plant. USING WLC CIPS advocates the use of WLC, at least, when deciding whether a requirement should be 'made or bought' and also when determining the source which offers the best value for money. UK domestic policy requires central government departments to base procurement decisions on whole life costs and not on initial price alone. Local authorities are encouraged to do the same as best practice under the Best Value regime. The following three basic principles are fundamental to WLC: 1. An analysis of the cost structure - any such analysis should ensure that all the cost elements are readily identifiable. 2. Cost estimating - having produced a cost structure, it is necessary to work out the costs for each category. Various techniques are available, one being the use of CERs (Cost Estimating Relationships).

3. Discounting - is the application of a selected discount rate such that each future cost is adjusted to present time, i.e. the point at which the purchase decision is made. Inflation - this is listed here only to emphasise that it should not be confused with discounting. As long as inflation affects aspects of the purchasing decision more or less equally, it is usual to exclude it from a WLC analysis. WLC takes account of the total costs of making or purchasing and then owning (or leasing), operating, maintaining and managing the requirement's end of life (whether that involves de-commissioning, disposal or re-sale) over a specified period of time. These costs are assessed to provide a rational comparison of alternative means of meeting the requirement. Some suggestions of the types of individual costs to consider in WLC, in particular in relation to the purchase of supplies and services, include: Pre-acquisition costs For example: investigation of the marketplace specification and design budget allocation preparation and issuing of invitation to tenders cost of tender evaluation cost of letting contract preparation for receipt of the requirement e.g changes to room size for accommodation purposes Acquisition costs For example: purchase price delivery charge insurance and taxes installation and commissioning training and support internal costs of changing from the incumbent supplier (which should be identified prior to tenders being received) Operating costs For example: labour materials consumables energy supply and consumption contract and supplier management transaction costs environmental costs cost of change e.g. using an alternative material with equipment Maintenance costs For example: specialist labour specialist tooling spare and replacement parts

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reduced output with age frequency of maintenance and recommended downtimes servicing and inspection regimes Downtime costs For example: lost profits extra costs of overtime or sub-contracting costs associated with breakdown of equipment claims resulting from non-performance End of life costs For example: safe disposal re-sale ongoing liabilities decommissioning removal for sale or scrap re-instatement of land or buildings for alternative use (based on Chadwick & Rajagopal, 1995) There is no single approach to WLC. WLC tools employed by an organisation may vary according to the specific nature of the requirement. For instance, the tool used to determine the best value for money in a software procurement might be very different from that used to evaluate capital equipment. There are several 'tools' available involving spreadsheets and discounted cash flow calculations. Purchasing and supply management professionals can either purchase such a tool or develop their own. At its simplest level, a spreadsheet could be produced for the requirement with all the elements of cost individually listed along the rows and the suppliers listed down the columns. These costs can be as detailed as required but at the very least they should cover: acquisition and all its components (delivery costs, installation costs, commissioning costs, etc) operating costs and all its components such as energy, spares, costs of maintenance end of life costs such as de-commissioning and removal costs the timing of cost incurral CIPS suggests that the cost elements can be weighted according to the degree of impact on the organisation or their importance to the organisation. These weightings should be reviewed on a case-by-case basis along with other variables such as lifespan or the discounting method used. CIPS recommends that the expected usage life rather than the expected physical life of the asset should be employed in WLC. This is particularly important when undertaking Net Present Value (NPV) or discounted cash flow calculations. The selection of an appropriate discount rate is critical. CIPS suggests that, as a rule of thumb, the current long-term expected interest rate less the current long-term expected inflation rate should be the discounted rate employed. Purchasing

and supply chain professionals should be very careful if considering moving away from this method of ascertaining the discounted rate. INFORMATION REQUIRED The information required to undertake WLC may not be readily available and research may be required involving for example, the supplier and other customers of the supplier particularly for information about their experience of using the requirement in question. However, once such information is obtained it can be used in other WLC exercises for similar procurements. The time and effort involved in data collection to make WLC effective and useful can be so considerable that it could be argued that WLC is most appropriate for high value and high risk procurements. However, where data is readily available, and so WLC is not therefore highly resource consuming, there is no reason, in such cases, why it cannot be applied to lower value purchases as a means of determining the best value for money option. CIPS suggests that Invitations To Tender (ITT) should include a template, or questionnaire, for suppliers to complete which shows the costs associated with the requirement for which they are submitting bids. This is good practice both for the negotiation stages and also for WLC. Cost information required should include a breakdown of overheads, margins, production and operating costs, energy consumption, maintenance costs, disposal costs etc. Suppliers may of course be unwilling to provide such information especially if the buying organisation does not place regular business with them. Such information is usually more readily obtainable from suppliers with whom the buying organisation has a partnering style relationship (see the CIPS practice document on Partnering and Open Book Costing). Costing information can also be sought from existing customers of the supplier in question, by contacting them to obtain for example, details of running costs. Similarly, the actual costs incurred during the life of the requirement should be monitored and recorded to inform future purchasing decisions. This is particularly important in high-value procurements such as construction. CIPS advocates the development of a WLC database so that costing information can be re-used as appropriate. Depreciation and re-sale are particular issues that need to be addressed and as such purchasing and supply management professionals may require the expert guidance of colleagues in Finance. For example, similar solutions may not have similar depreciation curves although their re-sale value may be the same. Cost/time graphs can be drawn to illustrate when different costs impact over the life of the requirement. There are several different approaches and colleagues who are qualified accountants are best placed to provide guidance on the appropriate use and application of discounted cash flow techniques. Liaising with col-

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leagues in Finance and Internal Audit for example, may assist purchasing and supply management professionals employed in organisations with devolved budgets, to overcome the problem whereby different parts of the organisation are responsible for costs at different points in the life of the requirement. In such circumstances there is sometimes a tendency for a budget centre to consider its own costs to the detriment of another budget centre rather than deciding on the best overall value for money for the organisation.

BENEFITS OF LIFE CYCLE COSTING WLC is particularly important at the present time when the rate of technological change is continually increasing. Some products may become outdated within, say, a year or less of acquisition. Clearly this period of obsolescence will vary from one industry to another. In the field of IT it will be considerably shorter than in, say, the foundry industry. Wherever it is employed, however, the use of WLC ensures that the pitfalls of using initial cost as the sole criterion are avoided. There are four key benefits associated with WLC: 1. Evaluation of competing options - WLC is relevant to most equipment purchasing decisions, whether simple or complex. The technique is also applicable to leasing decision. 2. Better awareness of total costs - WLC has been shown to provide buyers and decision-makers with a better awareness of the factors governing cost and the resources required associated with the purchase. 3. Better forecasting - WLC allows the full cost of a purchase over a period of time to be calculated with reasonable accuracy. This is obviously of considerable importance when major investment decisions need to be made. 4. Performance trade offs against cost - using WLC it is relatively straightforward to assess the reliability characteristics of a piece of equipment in the context of its cost profile. DISADVANTAGES OF WLC 1. Whilst it is usually straightforward to ascertain the initial cost of a product, WLC can, at least in theory, also identify and quantify subsequent ongoing costs. In practice this is often easier said than done, not least because as a product goes through its life cycle a whole range of cost considerations come into play, including initial product design development costs, marketing, advertising, product redesign and product replacement. 2. In strategic purchasing decisions WLC suffers from the problems that in such cases future costs are in reality approximate being as often as not based on projected sales figures which are frequently over-optimistic. 3. Using WLC analysis can involve considerable expenditure in terms of manpower. This can be the case even when computerised procedures are employed.

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OTHER ISSUES TO CONSIDER Other issues to consider in WLC include a risk assessment and sensitivity analysis. CIPS suggests that the larger the commitment, the more sophisticated should be the analysis. Construction in particular requires close attention to exit strategies, including the costs of decommissioning at the end of the life of the building. CIPS recommends that the life of the construction should be determined in terms of the purpose for which the construction is procured rather than how long the building is expected to remain standing. WLC in construction is addressed in the CIPS Construction Client's Policy in which CIPS states its support of the Construction Clients' Charter produced by the Construction Clients' Confederation. WLC is a key aspect of environmental purchasing and reference should be made to the CIPS practice document on Environmental Issues in Purchasing and Supply Management. CIPS suggests that WLC is also a useful tool to determine the most appropriate choice of business processes. An analysis of an existing business process using whole life costs in terms of staff time, processes and timescales in general can lead to the development of a more viable and more cost effective alternative. An example would be the replacement of a fuel expenses reimbursement system with the adoption of fuel cards. The resultant value added benefits such as improved management information and contented colleagues, not least cost savings e.g. reduced fuel and better allocation of resources, can be apportioned over the life of the new process i.e. year on year savings resulting from the decision to adopt the new process. CIPS also suggests that when applying WLC to Private Finance Initiative projects, or similar complex procurements, WLC should be employed in a more sophisticated manner than that used for capital purchases, for instance. This would require a review of the whole commercial deal including assessment of important 'soft' issues such as culture, dependability, ultimate aims and strategy.

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PURCHASING AND SUPPLY MANAGEMENT PROFESSIONAL'S ROLE The CIPS position is that purchasing and supply management professionals should be competent in the theory and application of WLC. It can be a complex commercial process which, when used properly, can enable purchasing and supply management professionals to demonstrate a significant and visible contribution to their organisations' financial standing and thereby raise the profile of the profession. CIPS believes that the purchasing and supply management professional should lead the WLC process and involve appropriate colleagues by means of a crossfunctional team. Purchasing and supply chain professionals should openly share their WLC approach and invite others to contribute towards its development. CIPS suggests that purchasing and supply management professionals should actively promote and educate colleagues in the concept of value generation for example, providing road shows or training seminars to demonstrate that price is just one element of cost. They should begin by marketing the concept to the Chief Executive Officer, Board of Management and Internal Audit with the aim of obtaining a top down visible policy, applicable to the whole organisation, on the use of WLC and other approaches to costing as appropriate to different procurements. Further, the purchasing and supply management professional should involve key suppliers in the WLC policy with a view to engaging them in the process and extracting relevant costing information from them in due course. This may lead to closer working relationships and, potentially, partnering style relationships in which suppliers can be developed for mutual benefit between both parties e.g. the buying organisation and the supplier can work together to take cost out of a product, service or construction. (Reference should be made to the CIPS practice document on Supplier Development and Innovation.) CIPS believes it is not sufficient to simply persuade colleagues and others within supply chains as to the value of WLC, it is necessary to ensure its implementation and appropriate use within an organisation. It is a key responsibility of the purchasing and supply management professional to endeavour to prevent high value and high risk purchasing decisions being made on the basis of price alone.

CONCLUSION WLC is a key purchasing and supply management tool and is very effective in decision-making processes. However, it is just one aspect of good practice purchasing and supply management and other elements should be considered in the procurement process. Examples of other considerations include the supplier selection criteria such as a supplier's financial standing, capacity, and track record and the quality and integrity of the product in question.

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BUYING ALLIANCES
INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case Buying Alliances, as they relate to purchasing and supply management. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Further information on buying alliances is available from CIPS. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on buying alliances has been written primarily for the benefit of full time purchasing and supply management professionals i.e. those in the purchasing and supply management function. This document is one of a series summarising the CIPS view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document which supports this series entitled Background to Positions on Purchasing and Supply Management Practice. CIPS is expressing beliefs on buying alliances, which are forms of collaborative purchasing, as these are becoming increasingly prevalent and a key resource for purchasing and supply management professionals. The CIPS practice document on Strategic Sourcing provides an approach which should help identify opportunities for buying alliances. CIPS views, opinions and beliefs are stated throughout the document; however the broad practice statements which underpin the text are as follows: There are many different forms of buying alliance and CIPS encourages purchasing and supply management professionals to continue to develop collaborative purchasing to suit their specific needs. Buying alliances are increasingly common which may reasonably be expected to continue. If appropriate, organisations can collaborate on any type of purchase. Purchasing and supply management professionals should be cognisant of legal implications when considering entering into a buying alliance. The buying alliance should not be so big that its power distorts the marketplace - a reasonable rule of thumb is 15% of the relevant market. Buying alliances (collaborative purchasing) is an important element within the purchasing and supply management toolkit. There are many benefits to collaborative purchasing over and above the obvious advantage of leverage. Purchasing and supply management professionals should, ideally, obtain approval from their Board, or equivalent, before entering into longer term collaborative arrangements such as buying consortia. Purchasing and supply management professionals should be cognisant of legal issues related to collaborative purchasing. It is good practice to have a charter or memorandum of understanding between members of a buying alliance which sets out goals, objectives, plans and decision making authority, whether or not it is a formal longer term contractual arrangement. DEFINITION Buying alliances are becoming increasingly common and are manifested in several different forms. The CIPS definition of a buying alliance is: "Two or more organisations, or groups within organisations, collaborating on certain aspects of their spend in order to generate leverage and better value for money for all." Opinions vary as to what the main forms of buying alliance are. Buying alliances generally fall into two broad types: consolidated buying which is where separate organisations purchase together, and joint ventures which include partial equity ownership. Within these two broad categories there are, at least, a further four forms: vertical, horizontal, intra- and inter- organisational buying alliances. There are several definitions of what is meant by vertical and horizontal buying alliances. CIPS' preferred definition is that 'vertical' means the same industry sector buying things specific to that sector whereas 'horizontal' cuts across industry sectors and would include activities such as the purchase of office equipment to be found in all sectors of industry. This does not prevent organisations within the same industry sector purchasing things that are not specific to them - indeed this practice is very common in the public sector with the use of consortia which purchase, amongst many other products and services, PCs, stationery and furniture.

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Intra organisational buying alliances are groupings within the same organisation, or group of companies, buying together. Inter organisational buying alliances apply across different (and indeed often competing) companies, industries and organisations. Clearly, there are various combinations of the above e.g. inter-organisational vertical buying alliances would include for instance, universities purchasing scientific equipment together. In all cases however the driver is the requirement for similar products and services.

KEY ISSUES There are a few issues that need to be managed carefully when entering into buying alliances including the risk of the relationship with other members breaking down. This can be minimised by selecting partners whom one knows well or gradually building up a relationship through an activity such as benchmarking. Sometimes potential buying alliance members cannot join because they are tied into an existing contract for the supplies in question. The supplier will often agree to release the buying organisation provided they can then compete for the buying alliance's business. Other issues include customer buy-in - this is a perennial problem in those organisations where purchasing is decentralised as end users who are empowered to contract with suppliers must be willing (or mandated) to purchase from the contracts that have been let via the buying alliance. Another issue is whether the organisations which collaborate on purchasing have to have a similar level of spend for the category in question i.e. would a larger organisation always allow a smaller organisation to obtain the same prices as them? It is easier if all organisations have the same spend but major volumes are required from at least one. There are ways around this issue by using differentiated pricing for the different members of the alliance provided that the alliance enables better value for money than if the members had purchased alone. In addition to price, other factors such as service levels come into consideration - thus some participants might be offered more frequent deliveries than others, based on factors such as geography or size of order. There is also the risk of finding oneself trapped in an existing arrangement when one wants to take advantage of new technological opportunities but others do not. A further aspect to consider is geography. Buying alliances are often formed between organisations in one geographical region for obvious benefits such as supplier distribution, use of local suppliers and travelling to meetings. However, it might be better for two organisations in distant regions to collaborate if they are to purchase from a global supplier - specialist equipment for instance i.e. one delivery each of an expensive item. Record keeping and co-ordination are also important issues in buying alliances. For example, someone needs to be responsible for co-ordinating details of the total volume of business from each of the participants, or the achievement of order levels which secure higher levels of discount. For bodies within the public sector, the EU Directives also need to be taken into account; one effect of joining an alliance is possibly to make an organisation more aware of current contract threshold levels.

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Purchasing and supply management professionals should not be constrained by the above definitions and instead be creative, as far as is practicable, in developing buying alliances to suit their needs. Indeed, one new method of collaborative purchasing is the where organisations come together and set up a separate company to buy on their behalf; this not only aggregates requirements but minimises duplication and shares resources. This approach is not strictly a buying alliance, but can provide a service based on the buying alliance principle. BENEFITS OF BUYING ALLIANCES CIPS considers that the benefits of buying together, in addition to the obvious purchasing power through leverage, are: reduced acquisition costs shared market intelligence and product knowledge shared resources - people/time, management information investing together in supplier development and R&D so enabling improvements can be shared increasing the suppliers' interest as a greater value is placed on the group e.g. suppliers provide excellent service; their commitment reduces risk of interruptions to supply presenting a united front to suppliers e.g. to ease communication releasing time to concentrate on more strategic procurement inter-member trading can be set up to cover for shortages; inventory can be managed more effectively supplier benefits from greater market penetration. CIPS would however advise buyers in the public sector contemplating entering into an alliance, to be aware of the regulatory factors that prevent some public bodies working with the private sector and indeed with certain other bodies in the public sector as well.

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LEGAL CONSIDERATIONS Some buying alliances involve third parties and a legal arrangement underpins the relationship. An example of this is a public sector buying consortium which has a legal arrangement with its member organisations to leverage their spend in certain categories. Other buying alliances are more like gentlemen's agreements to purchase in a partnering fashion. CIPS believes it is good practice, especially in respect of the latter, to have a charter or memorandum of understanding which may consist of just one side of paper but which states the principles under which the parties have agreed to collaborate. This charter or memorandum of understanding should set out the goals, objectives, process, plans and decision making authority of the buying alliance. Those entering into alliances should be mindful of the fact that they are subject to competition law; it is a widely held misconception that this applies only to suppliers. CIPS has identified a number of other legal implications of buying alliances, such as: who contracts with whom - for instance the suppliers may have individual contracts with each member of the buying alliance or may have just one with the buying alliance as a single legal entity competition - the buying alliance should not be so big that its power distorts the marketplace - a reasonable rule of thumb is 15% of the relevant market. However buyers, particularly those in the public sector, need to be alert to the increasingly robust nature of competition law as it applies to this area. Many suppliers too will be interested in such developments confidentiality - the members of the buying organisation must agree to respect the confidentiality of their respective information resources as well as those of their suppliers intellectual property rights - the members must come to an agreement on which member(s) hold IPR on any product development work GENERAL RECOMMENDATIONS Buying alliances should ideally focus on markets that are fragmented (i.e. there are many buyers) - so that even a small market percentage gives buyers market leverage. CIPS believes it is important that the organisations within a buying alliance are able to work together and have mutual trust and respect. Ideally the organisations should have a similar strategic fit and culture - for example, it would be awkward if one member had a very adversarial 'arms-length' approach to supplier relations whilst another was keen on supplier development and implementing partnerships. Similarly - if one member organisation places sustainability high on

their list of criteria for selection of suppliers and offers - this might not be seen as being compatible with another organisation which does not subscribe to such values. The traditional category of spend subject to buying alliances is the leverage (low risk - high aggregate value) category on Kraljic's four-box grid with commodities such as stationery, PCs, furniture and other standard goods and services generally required by all businesses. However, buying alliances are increasingly common in security/bottleneck categories (low value-high risk) as, by aggregating requirements, the members of the buying alliance become a more attractive customer to the supplier who may not otherwise be particularly interested in supply security and continuity considerations. The CIPS view is that in practice there is no reason why organisations cannot collaborate on any type of purchase. An example of innovative collaborative purchasing is where three banks (competitors in the same industry) all had to renew some expensive machinery that they had in common so they formed an alliance and bought the manufacturer of the machinery. Occasionally, suppliers suggest to customers that they purchase collaboratively in order that the supplier receives more business and their contract/customer management costs are reduced. Buying alliances between competitors may be appropriate for commodities and non-strategic items where margins are very low and/or where there is another dominant buyer in the marketplace. However, some competitors may choose to create a buying alliance for specific items where the objective is to exclude some of their competitors. Buying alliances encourage standardisation of specification. The process of selecting suppliers and a range of standard specifications helps to challenge organisational perceptions of acceptability. However, standardisation is not necessarily a pre-requisite of buying alliances (there is no necessity for all members to specify the same products) - as long as the required products are available from one or more suppliers - all members' preferences can be satisfied. CIPS considers it is advisable to obtain permission from the Board before embarking on a buying alliance, whether or not it has a formal legal standing. Buying alliances have a higher chance of success if they have senior executive support and commitment from the start. The Board will need to be satisfied that there is no risk to reputation from such alliances and that they do not, for instance, conflict with or compromise any other strategy the organisation is trying to pursue e.g. partnering on R&D with the competition of the proposed buying partner.

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CONCLUSION Buying alliances take time, commitment and effort to put in place but can deliver value for the members. CIPS believes that buying alliances will become increasingly common in the future due to the need to keep gaining leverage but also because of developing technology. eCommerce and eProcurement technology are drivers and enablers of buying alliances as they allow electronic orders to flow through defined portals to suppliers, facilitating internal compliance and demonstrating volume movements to suppliers. Similarly, buying alliances are increasingly making use of eAuctions to drive down costs. The increase in buying alliances may result in price range differentials between larger and smaller companies and suppliers may respond with defence strategies, such as creating supplier alliances with their competitors. CIPS believes that all purchasing and supply management professionals should explore buying alliances as a means of leveraging spend and obtaining the other benefits outlined in above. It is a valuable component of the purchasing and supply management professional's toolkit. In particular, this should be a preferred route for low-value, high-volume goods and services which has the significant consequence of allowing the purchasing and supply management function to concentrate on more complex value-add procurement activity. As with other aspects of purchasing and supply management, relationship management skills are a key feature of working in collaboration with others.

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PURCHASING AND SUPPLY MANAGEMENT COLLABORATION BETWEEN

ORGANISATIONS
INTRODUCTION The CIPS' practice documents are written as a statement in time. They are a collection of views on good practice within a particular subject area, in this case, collaboration between organisations as it relates to the purchasing and supply management function. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own purposes, such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice with some guidance for context and interest. Further information on collaboration between organisations is available from CIPS. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management discipline. However, this particular practice statement has been written primarily for the benefit of full-time purchasing and supply management professionals. This document is one of a series summarising the CIPS view(s) on a wide range of purchasing and supply management (P&SM) subjects. CIPS is expressing views on P&SM collaboration between organisations because it is an increasingly common activity in both public and private sectors and one that P&SM professionals should lead in their organisations. The use of technology has increased the ability of organisations to collaborate not only in their supply or value networks but also in the use of collaborative planning, forecasting and replenishment methodology (CPFR). D EFINITION Colin Cram defines collaborative procurement as being when two or more groups of people or organisations engaged in procurement, work together for mutual benefit.1 This definition can be extended to create a new dimension known as cCommerce or "collaborative commerce". A simple definition of cCommerce is "performing commerce collaboratively with trading partners." BACKGROUND The concept of collaboration is not new. Professor Maria Rey2 explains in her report "Supply Chain Collaboration" that Japanese companies in structures called sogo-shoshas are "clusters of related companies with common ownership and strong single leadership that offer each other privileged access to products, services and personnel." This concept is similar to that of a virtual organisation and derives from another Japanese concept Keiretsu, an organisational collective of manufacturers, suppliers, trading and finance companies that is based around mutual shareholding and cooperation. The virtual organisation is defined3 as: "A temporary network of independent organisations linked by information technology to share skills and costs in pursuit of a common goal." Virtual organisations are based on co-operation facilitated by technology and underpinned by trust, core competencies, equality and a shared vision. COLLABORATION IN THE SUPPLY CHAIN Business today involves a far greater degree of collaboration and this is largely the result of technology enablers such as the Internet and the reduction of communication costs. Collaboration is also seen as a new enabler that can help business create competitive advantage. Today's technology is undoubtedly one of the principle enablers at the application level as it facilitates the integration of business processes but this must be supported by both information systems and people based decisions. The CIPS therefore believes that there are two fundamental requirements for collaboration to work: 1. Technology must deliver the right information to the right people at the right time and in the appropriate context to make quality decisions, and, 2. Technology must enable people to use information effectively, so that this can be used at the appropriate points in the business process. There is no doubt that today's technologies facilitate process integration that enables disparate companies to collaborate and yet still achieve their company objectives. Interdependency between supply chain partners is continually increasing and this means that information, such as forecasting and planning, must be shared between organisations so that market expectations can be met. Global competition is forcing companies to form alliances and to collaborate so that they can differentiate themselves in an increasingly standardized market. The National Procurement Strategy (NPS) for Local Government has identified that "the strategic objective of collaboration is to obtain better value by bringing councils and other public bodies together at local, regional and national levels to combine their buying power and create shared services." A number of collaborative models that are identified under the NPS are the use of shared services, joint procurement and commissioning models including purchasing consortia, open framework agreements and the use of eMarketplaces. SHARED SERVICES This is a form of public-public partnership and is of particular interest to smaller public bodies who have less capacity to deal with procurement and back office functions in a corporate way. An example of a shared services partnership is the South East London Shared Services Partnership4 (SELSSP). The SELSSP is an Executive Agency of Lewisham Primary Care Trust responsible for providing a wide range of non-clinical support services to a number of Primary Care Trusts. The services provided include information and communications technology, human resources and financial services, amongst others.

central.nih.gov/articlerender.fcgi?artid=28605 J OINT P ROCUREMENT AND COMMISSIONING There are a variety of models for joint procurement including but not limited to purchasing consortia and centre led action networks (CLAN). Mary M Aylesworth in her paper "Purchasing Consortia in the Public Sector Models and Methods for Success" identified five structural models of purchasing collaboration operating across Canada, the United States and the United Kingdom. The "Local Network" is usually a relatively informal relationship often between a mix of public entities. They join together to obtain better pricing, share information and in some cases share resources. The "Voluntary Co-operative" is the most common form of purchasing consortia and can range from informal groupings to highly structured groups. In this model purchasing managers source products and services based on needs defined by the participating organisations. The Central Buying Consortium (CBC) is an example of this model and is a loose confederation of seventeen local authorities members. The work of the CBC is carried out by a Management Committee and Technical Panels. More information can be found on the CBC web site5 . The third model is the "Regional Purchasing Agency". This is a pseudo-cooperative type of consortium where central government bodies receive services from the Agency but their control and input is limited. OGC Buying Solutions is a refined version of this model as it is an Executive Agency of the Office of Government Commerce (OGC)6. Its remit is to offer a dedicated, professional procurement service to central government and the wider public sector. The fourth model of collaboration is the "Member-owned Service Bureau". Participating organisations set up a separate entity to provide common services to the participants. A board of representatives from the member organizations set the policy; the operations are carried out by paid staff. The fifth model is the "For-Profit Enterprise", and this model generally takes one of two forms. Both forms are based on the aggregate demand of clients. In the first, the enterprise purchases the goods on the basis of client demand and resells them at cost plus a profit margin. In the second the enterprise acts as an agent of the client and negotiates the contractual terms based on the aggregate demand. The enterprise then charges a commission for its services. Regardless of the form of the model they are generally based on market specializations such as energy or on common operations. Centre led action networks (CLAN) is a procurement model that exists in a variety of forms but one of the most common is employed within federal structures that have highly devolved decision making procedures. A core team of procurement professionals identify collaborative opportunities and may negotiate framework agreements for organizationwide requirements. They may also provide core expertise to the devolved parts of the organisation that may have little or no procurement expertise. Whilst this model is not, strictly speaking, a collaborative model it is worth mentioning in this practice statement as it is an enabler of collaboration. There has also recently been a growth in commissioning models. The word "commissioning" denotes a strategic as well as operational involvement in service planning and an example of this is Northern Ireland where since 1972 community health and social services have been provided by integrated trusts. This is an example of commissioning based on an area or locality. Health and social service commissioning can also be based at practice or patient level and examples of these can be found at: http://www.pubmedPublic, private partnerships and the public finance initiative are models of partnering where the objective is the "delivery of better services to citizens through the creation of sustainable partnerships between councils and suppliers in the public, private, social enterprise and voluntary sectors for the delivery of services and the carrying out of major projects, including construction".7 Other examples of partnering models include local authority companies, joint venture companies and concessions or franchises. There are many different service delivery models and equally there are many different reasons why organizations might want to enter into partnership with one another. Some of these reasons include access to new technology, wider markets, new skills and investment. In the public sector, strategic partnerships, (whether public-public, public-private or public-voluntary sector), can forge strong links that can help to improve service delivery and to deliver the community plan. More information can be found on the Office of the Deputy Prime Minister's (ODPM's) website under strategic service delivery partnerships section.8 E-MARKEPLACES E-marketplaces are web-based marketplaces whose early evolution was led by dot-com start-ups. The concept started as a new way to procure products, especially indirects. The scope of this concept has now widened dramatically and the true value is now as a mechanism that enables greater collaboration and synchronization between organisations. The use of eMarketplaces, eCatalogues and eAuction systems is fuelling the development of open sourcing environments, and it is these environments that will facilitate collaborative commerce solutions. This however, is not the whole picture and the CIPS believes that in order for collaborative commerce to continue to evolve more attention must be paid to the development of business intelligence tools so that critical business data can be extracted from all parts of the value chain. William M. Adams, et al identifies four categories of commerce that are transacted over the Internet. The four categories are:1. Consumer-to-Consumer (C2C) 2. Consumer-to-Business (C2B) 3. Business-to-Consumer (B2C) 4. Business-to-Business (B2B) For the purposes of this document we will look more closely at the development of the last category as this model is based on simultaneous buyer and seller eMarkeplaces and has experienced phenomenal growth and development in the last few years. The development started with passive websites with minimal product information and limited interaction with customers and suppliers. This has now progressed to the eCommerce stage where Internet based transactions and integration are common but there is a heavy dependency on technology. The next stage of development identified by Adams et al, is the eMarket stage where Internet based transactions and integration are common but the technology has advanced to allow vertical and horizontal collaboration. The final stage is cCommerce (collaborative commerce), where Adams et al9 identify a further stage of development, "where enterprises are formed that are hypercompetitive participants in both mature and emerging markets". This they describe as being the Agile Virtual Enterprise (AVE). The AVE has been defined as, "A temporary yet structured alignment of independent companies linked by information technology to share skills, capacity and innovation for mutual market success. Each company contributes only what it regards as its core competencies. The network has little hierarchy and focuses on

functionality along the value chain.10 An AVE is a collaborative infrastructure that is leveraged with technology and is a dynamic alliance between companies that bring in "complementary competencies, resources and capacity scaling that are collectively available to each other, with the objective of delivering a product or service to the market as a community with mutual shared interests."11 Jeffrey H Dyer12 recognises that over the last ten years there has been a shift away from vertical integration as original equipment manufacturers (OEM's) have increasingly outsourced their in-house parts divisions. Dyer also believes that "competitive advantage will [increasingly] be created by teams of companies." This will mean a fundamental change of mindset from today's executive norm. Dyer explains that the traditional executive perspective focuses on the individual firm's economics whereas the focus of competitive advantage is channelled through the economics of the entire value chain, thus benefiting all the parties within that value chain. Dyer concludes that creating extended enterprises requires firms to recognize their interdepence on each other and illustrates this by citing examples of collaboration in the automotive industry. Chrysler and Toyota, he suggests, have been the first in their industry to recognise and exploit this interdependence, therefore gaining competitive advantage over rivals Ford and GM through the creation of integrated teams of companies. These integrated teams deliver huge performance advantages, even though Ford has more modern plants. Another example of collaboration is Wal-Mart, the biggest retail chain in the U.S. Wal-Mart allows its suppliers to access its internal information management system in order to get an overview of its stock situation. Suppliers therefore know when it is time to make a replenishment delivery. The apportionment of intellectual property (IP) rights is also vital to a successful collaboration, and can have a significant impact on the structure of the deal. A number of schemes have been worked out for apportioning IP rights between collaborating partners, the simplest of which is to designate all IP as jointly owned. In most collaborations, however, IP rights either remain with the inventor or are allocated based on technology, and the choice is dependent largely on the structure and goals of the collaboration. Extended enterprises require a high level of resources to generate value through partnerships, and therefore the organization wishing to establish an extended enterprise may need to focus on partnering those suppliers that bring high value, customized inputs that interact with other components and systems. However as J. Dyer suggests, "collaborative advantage does not materialize overnight"; it takes time to develop strong relationships and make investments in dedicated assets and not all partnering relationships will survive and therefore the CIPS believes that is it necessary to integrate an exit strategy at the developmental stage of the extended enterprise so that all parties involved have a clear understanding of the business risks and benefits. As new ideas and technologies continue to blur functional and organisational boundaries the CIPS believes that supply management is moving away from the collection of operational disciplines that it was once associated with. Organisations of the future must be flexible and adaptable and able to respond to change using new innovations and collaborative techniques to achieve their strategic objectives.

Cram C. Two Heads: Always Better Then One, Government Opportunities, September 2003 2 Rey M.Supply Chain Collaboration, Business Briefing: Global Purchasing and Supply Chain Strategies, 2002 3 Lysons K, Gillingham M, Purchasing and Supply Chain Management, Chapter 5, Part One, Page 144, Pearson Education Ltd, Sixth Edition, 2003 4 http://www.selssp.nhs.uk/index.php 5 http://www.cbconline.org.uk/public/home.htm 6 The OGC merged the procurement services previously provided by The Buying Agency (TBA), the Central Computer and Telecommunications Agency (CCTA), Property Advisers to the Civil Estate (PACE) and procurement units from the Treasury to create OGCbuying.solutions on 1 April 2001. http://www.ogcbuyingsolutions.gov.uk/default.asp 7 National Procurement Strategy for Local Government, Partnering and collaboration, Chapter 4, page 27 8 http://www.odpm.gov.uk/stellent/groups/odpm_control/documents/contentservertemplate/odpm_index.hcst?n=3991&l=2 9 William M Adams, Raymond M Wallace, Arpan Sengupta, Pushing the Digital Frontier: Collaborative Commerce: The Agile Virtual Enterprise Model, Ch. 12 , 2001 10 O.Arnold and M. Hartling, Virtuelle Unternehmen; Begriffsbildung und discussion. Arbeitspapier der Reihe "Informations und Kommunikationssysteme als Gestaltungselement Virtueller Unternehmen" (Nr.3/1995) 11 William M Adams, Raymond M Wallace, Arpan Sengupta, Pushing the Digital Frontier: Collaborative Commerce: The Agile Virtual Enterprise Model, Ch. 12 , 2001 12 J H Dyer, Collaborative AdvAntage:Winning Through Extended Enterprise Supplier Networks, Oxford University Press 2000

PURCHASING AND SUPPLY MANAGEMENT PROFESSIONALS' COMPETENCE WITH THE LAW

INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case the extent to which purchasing and supply management professionals should be competent with the law. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on the extent to which purchasing and supply management professionals should be competent with the Law is specifically written for those entering the purchasing and supply management profession. This document is one of a series summarising the CIPS view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document which supports this series entitled "Background to Positions on Purchasing and Supply Management Positions. CIPS views, opinions and beliefs are stated throughout the document; however the broad practice statements which underpin the text are as follows: x CIPS considers it is essential that purchasing and supply management professionals assume responsibility for protecting their organisations from entering into contractual arrangements which may be prejudicial to the corporate interest CIPS believes that purchasing and supply management professionals should possess (or acquire) a working knowledge of the legislative framework in which they are employed CIPS encourages purchasing and supply management professionals to make an honest assessment of the extent/limitations of their own knowledge, thereby identifying those areas where legal advice needs to be sought occurring from within or outside their organisations. This is why CIPS believes it is essential for purchasing and supply management professionals to have a working knowledge of the legislative framework in which they are employed. For instance UK purchasers should have an overall appreciation of: English Law (or Scottish Law or Northern Ireland Law as appropriate) EC Law relevant to purchasing International Law relevant to purchasing such as - Mercantile Law - Competition Law - E Commerce Law Further, they should have an understanding of any other Law, or general obligation, that specifically or indirectly, relates to, or impinges on procurement in their particular sector. For example, a purchasing and supply management professional employed in a local authority should also have a working knowledge of: EC procurement rules (in addition to other aspects of EC Law as stated above) Transfer of Undertakings and Protection of Employment (TUPE) regulations in relation to outsourcing Best Value legislation Environmental legislation Health and Safety legislation Powers to trade with other organisations and set up partnerships Powers and duties of auditors, inspectors, ombudsmen and monitoring officers Qualified purchasing and supply management professionals have all studied Contract Law as part of their course; this is regarded as the minimum knowledge of the Law required by practising professionals. Furthermore, the CIPS position is that purchasing and supply management professionals take refresher courses, as part of their CPD programmes. Different industries do, of necessity, have very contrasting characteristics in the interface that they have, or need with their external supply base. This requires different approaches to purchasing and supply management and so purchasing and supply management professionals need to adapt and deploy their expertise accordingly. This leads to different "labels" for the purchasing and supply management function including for instance "Procurement", "Sourcing", "Supply Chain Management" or "Commerce". The key point is that purchasing and supply management professionals can, and should, offer a broader range of higher level commercial skills to organisations.

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Purchasing and Supply Management Professionals Competence with the Law A key responsibility of purchasing and supply management professionals is to protect their organisations from imposing or being on the receiving end of unfair and disadvantageous contracts and commercial practices

CIPS encourages purchasing and supply management professionals to assess their own knowledge and be honest with themselves about the extent of their legal knowledge. This should then identify those matters for which expert legal advice should be sought. As a minimum, purchasing and supply management professionals should be able to read and understand legal documentation so that they can competently negotiate changes to terms and conditions of contract. Ideally, purchasing and supply management professionals should be able to appreciate the implications on the contract of changing any individual clause. CIPS appreciates that some standard contract documentation used in certain industries is very complex. CIPS encourages purchasing and supply management professionals to ensure they understand the contract documentation that they use. Further, on those occasions where purchasing and supply management professionals cannot avoid contracting on the supplier's terms and conditions; they must understand these, in particular their implications, obligations and the particular legal system to which they relate. This is particularly important as, in these days of global purchasing, purchasing and supply management professionals are increasingly required to contract on suppliers' terms and conditions of sale and thereby the Law of the supplier's country. CIPS would encourage purchasing and supply management professionals to insist on using their own terms and conditions of purchase so that they understand their responsibilities and liabilities in respect of the contract. Where this is not possible and the risk involved is deemed to be high CIPS recommends that purchasing and supply management professionals consult their legal advisers before proceeding with letting the contract. There are several ways in which purchasing and supply management professionals can maintain such awareness, including for example: - subscribing to publications such as Croner's for information on Contract Law, - contacting specialist sources such as the Improvement and Development Agency (IdeA), Local Government Association (LGA) or the 4Ps for instance for information about Best Value legislation etc. - contacting the Professional Practice Team at CIPS which can provide guidance on sources of information on legislation. 3. Conclusion

development to reflect social, economic and political changes; to try to keep up to date would simply be too time-consuming. Nevertheless, CIPS firmly believes that whether CIPSqualified or not, purchasing and supply management professionals should as the very minimum, possess a basic familiarity with the Law as it relates to purchasing and, as a corollary, have sufficient awareness of the extent of this knowledge within the legal arena as a whole to be able to determine when and under what circumstances expert legal advice becomes necessary. CIPS has developed a range of practice documents on purchasing and supply management issues but the reader may find two of these of particular use as they are related to the above subject. One is The Use of Legal Advisers in Purchasing and Supply Management and the other is Good Practice in Contracting. All are available on the CIPS web site at www.cips.org

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CIPS believes that in view of the broad spectrum of disciplines and activities embraced by purchasing and supply management, purchasing and supply management professionals cannot be expected to have the time to devote to acquiring an in -depth knowledge of the Law. There is also the fact that because the Law in the UK and indeed elsewhere is in a constant state of

CONSTRUCTION CLIENTS POLICY

INTRODUCTION: CIPS INDUSTRY
AND THE

CONSTRUCTION

P RA CTICE

Members of the Chartered Institute of Purchasing & Supply (CIPS) have acted as clients for many major projects, both public and private for over 50 years. During that period the members have led much of the purchasing and supply management innovation in the construction industry. It was in this context, that CIPS was invited to act as "Clients' Assessor" to the Latham Review. The CIPS' contribution, "Productivity and Costs in the Construction Industry", was based on contributions from over 100 clients. It recommended the establishment of a representative body for clients and first suggested the target of 30% value improvement included in the Latham Report. Although rejected as impossible at the time by much of the construction industry, this target became generally accepted and then, three years later was raised to 50% by Sir John Egan. CIPS, jointly with the British Property Federation (BPF), funded the establishment and operation of the Construction Clients' Forum (CCF) which was also supported by the Construction Industry Board (CIB). The CCF has recently been restructured and is now known as the Confederation of Construction Clients (CCC). CIPS members have contributed to the development of the CIB's Good Practice Guides, the preparation of the CCF Pact and the new Construction Clients' Charter, and have generally played a significant part in the work and management of the CCF. BACKGROUND The construction industry generates 8% of the UK GDP, yet is much less a proportion than that of our international competitors and must be expected to increase. Even so, annual purchases of construction services, equipment and materials for new works, refurbishment and facilities management amount to some 60billion. Investment in new construction or refurbishment represents a significant decision for any enterprise and should contribute to more effective business. In order to achieve this, clients increasingly need access to best practice in both briefing and purchasing and supply management skills. The Latham Report and Sir John Egan's "Rethinking Construction" highlighted the construction industry's need to improve its poor public image, its product and

its profitability. Recommendations from both authors promoted new ways of working for the industry and the wider adoption of such purchasing and supply management practices as:
x x x x

Value Management, Risk Management and Value Engineering Partnering Supply Chain Management The use of new technology and techniques such as: eCommerce, JIT, MRP, standardisation and benchmarking.

THE CIPS' ROLE CIPS exists to promote best purchasing and supply management in all respects. It sponsors four University Chairs to stretch the boundaries of purchasing and supply management practice and provides continued professional development including the CIPS Graduate Diploma. The CIPS believes that the development and promotion of best purchasing and supply management practice in the construction industry is in the interests of clients, the industry and the UK as a whole. Led by its Construction Clients' Purchasing Group, the Institute will:
x x x

CIPS P OSITIONS

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expand its services to all clients, large and small provide additional benefits for members consult and inform the industry.

In line with Sir Michael Latham's key recommendation, CIPS will encourage clients to take the lead. To do so, CIPS will facilitate their gaining the necessary skills and knowledge of industry practice. THE PRESENT POSITION A fair proportion of major clients, leading designers and innovative contractors are benefiting from the Latham/Egan initiatives. However the multitude of medium and small clients as well as many large ones together with their suppliers, remain untouched. Indeed, complaints against the construction industry overtook those against the car industry for the first time in 2000. Improving the performance of the industry offers great benefits for everyone involved as well as for the UK economy.

CIPS CONSTRUCTION INDUSTRY POLICY CIPS subscribes to and supports the "Construction Clients' Charter": produced at the behest of HM Government, by the Construction Clients' Confederation. CIPS will promote the benefits of the Charter, paying additional attention to the needs of small and occasional clients. The CIPS recommends that clients should prepare a business case for any construction project. The case should identify the lifetime added value expected and use whole-life costing to demonstrate that the added value adequately exceeds the costs. The CIPS also recommends that clients should develop skills for measuring how their projects perform in practice. CIPS believes that clients of the construction industry have a responsibility to set clear, realistic and quantifiable objectives and to define priorities for their projects. In particular, the CIPS recommends that clients should:
x

CIPS believes that there is scope for improving the calculation of fees for professional advisers and that these should be more aligned to value of services provided (as provided by the NEC Professional Services Contract which was produced in co-operation with the CIPS) rather than a percentage of total cost. CIPS believes that the construction industry should become increasingly transparent and fairer to all parties. All parties should adopt the principles of the CIPS Practice Document on Business Ethics. For example, suppliers at all levels in the supply chain should be paid within the agreed period. CIPS recommends that suppliers be selected through a competitive process within a value for money framework and that quality, service and other factors should be considered along with price. In addition risks should be allocated to those parties best able to manage them and to the extent they are able to carry the risk. CIPS believes that clients and their professional purchasing and supply management advisers should audit the construction supply chain from a social responsibility perspective. This includes: human rights; health & welfare; working conditions; workplace safety; equal opportunities; training & personal development and also global issues such as use of child labour. CIPS believes that the use of sustainable materials and components, the minimisation of wasteful processes and wasted materials will lead to both a better environment and greater value for money. CIPS believes that the construction industry should be more oriented towards the needs of the client. BENEFITS The CIPS commends the adoption of these policies for the following reasons:
x

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take time to produce excellent briefs. Only then can optimum designs be developed leaving the improved fitness for purpose and greater lifetime value. recognise that the direct cost of repairing defects is reported as 1Bn a year and that their consequential costs are much higher. Clients also bear the costs of the time so often lost on site due to inadequate management. understand the purchasing options available as the method of selection and contracting process for the engagement of project managers, designers, other professionals and the construction supply chain is crucial to the success of the project. Early appointment of any one of these may limit the client's options and control. take care in assembling the team including all the necessary skills and experience for their project and promote a non-adversarial approach amongst client, advisers and the supply chain. use the more modern and less-adversarial forms such as the New Engineering Contract (NEC) family that encourages the resolution of risk allocation and programme before contracts are awarded.

CIPS P OSITIONS

x x x

x x

reduced exposure to commercial risk (greater certainty of cost, programme and quality) increased value for money and availability of assets (right first time) fewer contractual disputes being an attractive client increases the competitiveness of offers reduced risk to reputation regarding social and environmental issues better working environment leading to increased employee satisfaction.

The NEC family includes conditions for the appointment of professionals, the Engineering and Construction Contract, its sub-contract form and a separate form for appointing adjudicators, that together provide the only complete and homogeneous terms and conditions for an entire project.

CONCLUSION To achieve these objectives the CIPS recommends that professional purchasing and supply management input should be involved from the outset of any construction project.

CONTRACT MANAGEMENT
INTRODUCTION CIPS practice documents are not written to be an end in themselves. They are a collection of views on good practice within a particular subject area, in this case contract management as it relates to purchasing and supply management. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Further information on contract management is available from CIPS. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on contract management has been written primarily for the benefit of full-time purchasing and supply management professionals. This document is one of a series summarising CIPS' view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document, which supports this series entitled Background to CIPS Positions on Practice. CIPS is expressing beliefs on contract management, as it is a fundamental part of the procurement process and should form part of the overall procurement strategy. The key positions in this paper are summarised below. Good contract management promotes good practice and professionalism. Qualified and experienced purchasing and supply management professionals have the skills required for effective contract management. Purchasing and supply management practitioners should possess at minimum, the knowledge and understanding requirements relating to contracts management embodied in the CIPS Graduate Diploma. Contract management applies to a whole gamut of procurements from a simple order to a complex construction or service contract. Multi-disciplinary teams with a mix of skills should be established to enable contracts to be managed effectively and risks minimised. DEFINITION Contract management can be defined as: the activities of a buyer during a contract period to ensure that all parties to the contract fulfil their contractual obligations. An important aspect of this is managing the relationships between all parties in the most effective way so as to ensure the contract meets the optimum combination of cost, time and quality. Contract activities can be split into two distinct but interdependent phases: 'upstream' (pre-award), 'downstream' (post-award). Contract management is a downstream activity but can only be effective if upstream activities are properly carried out. 1.

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For purposes of clarity, upstream would include the following activities which are all pre-contract: assembling the project team developing contract strategy assessing risk developing an exit strategy developing the contract management plan drafting specifications and requirements establishing the correct form of contract setting pre-qualification, qualification and tender procedures drafting the Invitation to Tender documentation evaluating tenders awarding contracts.

ON

Downstream contract management includes managing: change within the contract administration of the contract continuous assessment and re-assessment of risk within the contract the parties' contract performance closure of the contract and performance feedback the purchasing organisation's performance and effectiveness contractor relationships. Contract management applies to the whole gamut of procurements from a simple order to a complex construction or service contract. An essential feature in both the upstream and downstream aspects of contract management is effective project and programme management, skill sets which as often as not are lacking or at least underdeveloped as far as purchasing processes are concerned. Other key functions are team management (leading teams as appropriate, both internally, and with supplier participation) and setting

and managing SLAs, a function which is particularly appropriate in outsourcing or critical supply environments. CIPS PRACTICE STATEMENTS CIPS recognises that contracts can go wrong. It is essential that purchasing and supply management professionals work with other stakeholders to deal with any problems or other issues and also to assess any commercial risks that might arise before and during the execution of the contract, in order to limit any detrimental consequences to the organisation. Purchasing and supply management professionals must therefore be involved at the earliest possible stage in the contract process. SKILLS REQUIRED Commercial agreements are increasing in complexity and supply chains are often inter-dependent, thus the potential for organisations to be exposed to risk is concomitantly greater. Multi-disciplinary teams with a mix of skills should therefore be established to enable contracts to be managed effectively and these risks minimised. The professional purchasing and supply manager should possess, as a minimum, the 'knowledge and understanding' requirements relating to contracts management embodied in the CIPS Graduate Diploma. The list below outlines other key skills that are required:

P RA CTICE

the proper and continuous assessment of risk the ability to use benchmarking techniques and continuous reassessment in order to ensure continuous improvement the development of clear change control procedures and a professional approach to change management the ability to disseminate procurement skills and knowledge to other parties the minimisation of cost the identification and apportionment of risk as appropriate i.e. to the party best placed to manage the specific risk limiting a company's exposure to unnecessary risk putting in place measures to control the circumstances under which risk will be borne. allowing for the development of the strategy with regard to certain other procurement issues, such as social responsibility, environmental responsibility or ethical trading.

All of which lead to the overriding objective of the optimum combination of cost, time and quality. CIPS recognises that these points represent good procurement practice and should be applied when undertaking different forms of procurement. Good contract management promotes good practice and professionalism. CONCLUSION Effective contract management, which is a downstream activity, is highly dependent upon sound upstream work and the application of professional skills. CIPS believes that qualified and experienced purchasing and supply management professionals have the skills required for effective contract management and it would encourage all organisations to take advantage of such skills. By doing so, organisations should see significant bottom-line benefits. This Practice Document has set out CIPS' beliefs on contract management and further information is available from CIPS.

ON

CIPS P OSITIONS

strategic partnering skills e.g. co-operation with common goals relationship management skills - knowing when to intervene listening skills facilitation skills influencing skills change management and change control skills dispute resolution skills risk identification and risk management skills the ability to interpret and understand contracts.

Also desirable is the ability to recognise that the rate of business change is accelerating and that therefore there is an increased emphasis on the need for the effective management of contract change, along with the growing importance of building greater flexibility into the contract as far as upstream activities are concerned. Outcomes of effective contract management include: a more disciplined and structured approach to contracting the development of appropriate strategies early in the process the production of a robust plan the clear definition of the outcomes to be established at the outset of the contract the establishment of the right form of supplier relationship

COUNTERTRADE
INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case countertrade. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on countertrade is written for those purchasing and supply management professionals engaged in significant overseas business. This document is one of a series summarising the CIPS view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document which supports this series entitled Background on Purchasing and Supply Management Practice Positions. CIPS has formulated viewpoints on countertrade as it is becoming increasingly prevalent due to today's greater ease of global sourcing. CIPS views are stated throughout this practice document but the key statements are summarised below:
x

isations - 1) assessing product value; 2) developing the supply base; and 3) exploiting reverse countertrade when appropriate. CIPS POSITION CIPS believes that purchasing and supply management professionals should be familiar with countertrade, like other aspects of international trading, and should provide guidance to their organisations when faced with the prospect of countertrade. Reference should also be made to the CIPS practice document on Ethical Business Practices, in particular Reciprocal Trading, which is a form of countertrade. The relevant paragraph reads: Reciprocal Trading, which makes being a customer of an organisation, a condition of being a supplier is generally unacceptable business practice. It is acceptable only when: There is no coercion Both parties are in agreement There is mutual benefit and transparency. CIPS believes that countertrade arrangements can be professional and ethically acceptable provided that all parties involved enter into such arrangements freely and transparently, without any form of coercion and are to the mutual satisfaction of both parties. WHAT IS COUNTERTRADE? Countertrade can manifest itself in several forms but always involves payment being made, at least partially, in goods or services instead of money. It often occurs when multi-national companies sell to a customer abroad and that customer pays by providing goods to the multi-national company i.e. selling goods out of their own country. This is because, in some countries, countertrade is a condition of the buying organisation importing goods from elsewhere. There are a number of key variations in countertrade including: Barter - which is the simplest form of countertrade as no money changes hands and so the transaction is a straight exchange of goods Buyback - is usually associated with a turnkey type project in that it involves the provision of the means to deliver a good or service in exchange for raw materials or some other product, usually to be supplied at a later date in the contractual arrangement. As the time scales can be quite lengthy there are obvious risks which need to be managed to ensure that the contract is concluded satisfactorily. An example is a construction company which builds a plant or factory and once it is on stream takes an agreed percentage of the output as payment.

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CIPS believes that purchasing and supply management professionals should be familiar with the principles of countertrade and be able to provide guidance to their organisation when the occasion demands. CIPS takes the view that countertrade arrangements are only ever an acceptable aspect of a buyer/seller relationship when neither party has been coerced into entering into such a relationship. CIPS warns against underestimating the often very complex issues which can arise in counter trade-based relationships. CIPS believes that purchasing and supply management professionals should provide practical assistance to their organsiations if and when they enter into countertrade situations. CIPS recommends that if an organisation is contemplating entering into a countertrade agree ment purchasing and supply management professionals should be involved in the discussions/ negotiations at the earliest opportunity. CIPS would identify three key areas in particular where purchasing and supply management professionals can be of assistance to their organ-

Counter-purchase - the seller agrees to buy goods from the importer the value of the goods is a percentage of the price of the goods exported - the majority of the goods are paid for in cash.

Offset - is where a percentage of the goods countertraded are paid for in goods as opposed to money. A direct offset is one where the goods traded are associated with one another whereas indirect offset is for example accepting tomato paste in part payment for the sale of cabling.

of a better word, underhand. Certainly, a few companies do steer clear of publicising the fact that they are engaged in it. Partly for this reason the true extent of countertrade is difficult to establish. Suffice to say, the potential of countertrade in helping an organisation realise its strategic objectives has not been fully explored. The UK government tends to take the view that goods or services should be paid for in the usual way. The Department of Trade and Industry have produced a booklet on countertrade which can provide further detail and guidance. The UK Government shares an international commitment to an open cash-based multi-lateral trading system (DTI, 1996 page 8). CIPS does not intend to oversimplify the issue of countertrade: it can be a very complex commercial transaction. There is much anecdotal evidence that the goods received are often not as stated, or not quite as expected, and in some cases are completely different. Therefore, there is great risk of inferior foreign goods being unloaded onto the home market. There is also the likelihood of more protracted and complex negotiations and the uncertainty that this can generate, not to mention slow and unpredictable deliveries. As most countertrade occurs when the buying organisation's economy is not sufficiently strong to support the foreign currency demands which the purchasing and supply management professional would require, or government restrictions are in place, CIPS would encourage purchasing and supply management professionals to be cognisant of the political reasons why countertrade may be desirable. Another issue with countertrade in the case of small firms for instance who often find it difficult to take on board the additional costs which are involved. Nevertheless offset is frequently seen in procurement of military equipment from foreign suppliers, particularly when there is a need (as is often the case) to avoid possible economic and political repercussions from not choosing a domestic supplier. One benefit of countertrade is that it can sometimes provide access to production materials which might otherwise be unavailable; it can sometimes provide an efficient channel for the disposal of obsolescent goods which might otherwise be difficult to sell.

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Other examples include inter-company trading and reciprocal trading. All purchasing and supply management professionals should take care to observe the constraints of competition law and be wary of entering into anti-competitive agreements or abusing a dominant position in the marketplace. There is also a phenomenon known as reverse countertrade, a practice whereby organisations advise foreign trading partners of their existing and future sourcing needs. Only after availability has been confirmed do they set about selling their own products abroad. EXTENT OF COUNTERTRADE Developing countries tend to have two reasons for using countertrade: in order to export e.g. they use their purchasing power to encourage foreign countries to take some of their exports. in order to import e.g. when they have problems financing imports through more traditional means. Despite the difficulty of establishing the extent of countertrade a certain amount of statistical information is available. For instance one source states that over 140 countries are engaged in it; the truth is however that the extent of countertrade is difficult to establish with any accuracy. Some figures are mutually contradictory. It is not even clear whether countertrade is growing or decreasing in popularity. One change on the world stage which clouds the issue is the collapse of the former Soviet empire. Under the Soviet regime the countries of Eastern Europe were compelled to countertrade with the USSR. A typical arrangement would be for Czechoslovakia to use domestically-manufactured machine tools to pay for imports of Russian grain. ISSUES OF COUNTERTRADE Some international organisations such as the WTO (World Trade Organisation) consider that countertrade constitutes a distortion of the free trade process; in particular, in countertrade situations the true value of transactions is difficult or impossible to establish. Furthermore, it is considered by some to be, for want

PURCHASING AND SUPPLY MANAGEMENT PROFESSIONALS AND COUNTERTRADE

CONCLUSIONS CIPS encourages purchasing and supply management professionals to investigate the extent to which their organisations are involved with countertrade arrangements and offer their services accordingly. purchasing and supply management professionals should assist in broadly three ways: assessing product value, quality, delivery and disposal possibilities developing the supply base through countertrade e.g. working with these suppliers post transaction exploiting reverse countertrade when sourcing in globally. Countertrade is a minefield of complex commercial issues and purchasing and supply management professionals are best placed to steer their organisations through these transactions whilst ensuring that relationships remain ethical and that potential advantages of countertrade.

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CIPS believes that purchasing and supply management professionals should assist their organisations in their sales involving countertrade by: negotiating the fee to the banks or other bodies facilitating the transaction valuing, and evaluating, the goods and services offered by the buying organisation evaluating and minimising the risks involved with the countertrade transaction or contract ensuring that their own organisation can use the goods and services to be received and that they are an economical source compared to alternative sources ensuring that if the organisation has no use for these goods or services, that they can be sold on at a cost which not only generates a profit but which also covers the administrative cost of the countertrade transaction negotiating a more suitable offer of goods and services from the buying organisation if it transpires that those offered are not a viable option challenging the perceptions of colleagues in sales and marketing finding new potential customers for these products working with suppliers post transaction if appropriate e.g. in supplier development projects exploiting reverse countertrade as appropriate. CIPS believes that purchasing and supply management professionals should be involved with countertrade agreements at the earliest opportunity and that this should be made a component of the organisation's international trading policy and procedures. One forum for the exchange of countertrade information is the LCR (London Countertrade Roundtable). Based on the personal contact principle, this group meets from time to time to discuss matters of mutual interest. RESEARCH FINDINGS Not surprisingly, research suggests that organisations with knowledge or experience of countertrade make more international purchases than those who do not. More generally, research has indicated that purchasing professionals are broadly sympathetic to the practice of countertrade, tending to consider that its benefits outweigh its disadvantages. Not surprisingly perhaps, the buyer's knowledge in choosing what products to counterpurchase is important, as is the ability to monitor quality delivery performance, etc. One interesting fact to emerge from one of the academic studies of countertrade is that top management only turn to Purchasing after it has been decided that a countertrade arrangement proposal is acceptable. Studies have also established that the role of purchasing acquires particular significance in those cases where the incoming products within a countertrade deal are for use in-house.

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DEVELOPING AND IMPLEMENTING A STRATEGIC SOURCING STRATEGY

INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case strategic sourcing. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on strategic sourcing is written specifically for the head of the purchasing and supply management function. This document is one of a series summarising the CIPS view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document which supports this series entitled Background on Purchasing and Supply Management Practice Positions. CIPS views are stated through-out this practice document but the key statements are summarised below:
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CIPS believes that strategic sourcing options should be assessed in terms of the benefits which they actually deliver as opposed to those which they may have been expected to deliver as set out in the original business case.

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CIPS has formulated positions on strategic sourcing as this is a key activity for purchasing and supply management professionals. Traditionally, sourcing was considered to be the identification of new or potential suppliers. This is of course still a fundamental aspect of strategic sourcing but this practice document aims to illustrate how the function has developed and expanded in recent years. This practice document describes best practice purchasing and supply management; for many it will remain simply an aspiration; however CIPS encourages purchasing and supply management professionals to endeavour to move purchasing and supply management in their organisations towards strategic sourcing as described below. However, CIPS appreciates that some organisations are bound by legislative requirements that demand a different, (or in some cases, a complementary approach) to that proposed in this practice document; the public sector for example must comply with the EC Procurement Rules. CATEGORIES OF SOURCING: REACTIVE, TACTICAL STRATEGIC REACTIVE SOURCING CIPS defines reactive sourcing as being the procurement approach where no proactive sourcing strategies have been put in place and so the purchasing and supply management function has an entirely reactive role e.g. responding to requisitions or other unexpected requirements from the business. CIPS encourages purchasing and supply management professionals to move away, wherever possible, from this type of sourcing. However, some organisations still operate entirely on the basis of unexpected demand responding to individual needs as and when they arise. This response may be professional, but CIPS believes that such buyer behaviour is transactional, low level and will not necessarily enhance or promote the purchasing and supply management profession. TACTICAL SOURCING Tactical sourcing is to some extent reactive as it covers those business requirements that cannot be planned in advance, but are provided within a framework of strategic sourcing. It is however, proactively managed and so resources and processes are set aside to manage it within the purchasing and supply management strategy. An example of tactical sourcing is working with

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x x

CIPS considers strategic sourcing to be a pivotal activity for purchasing and supply management professionals. CIPS believes it is important to draw a distinction between strategic, tactical and reactive sourcing. CIPS considers that each organisation should as a priority develop an overall sourcing strategy, of which strategic sourcing should be seen as a key element. CIPS advocates the formation of a Sourcing Board or Panel for discussing strategies and assisting with decision-making. CIPS considers an 'As Is' analysis to be a key stage in the implementation of a strategic sourcing policy. Once the relevant data has been gathered and consolidated, and appropriate options generated, CIPS recommends that the outcomes be presented to senior management for their consideration. In developing, analysing and comparing a range of strategic sourcing options CIPS recommends the use of weighted evaluation criteria rather than simply using cost/price as the sole basis for arriving at a decision. Once the preferred strategic sourcing option has been finalised, CIPS believes that the purchasing and supply management function should have a key role to play in its implementation.

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colleagues in Marketing and Sales, providing a bid support activity within fast-moving technology areas. Notwithstanding the above, CIPS suggests that there should be no unplanned or unexpected capital expenditure as all organisations have capital investment plans which purchasing and supply management professionals should obtain and incorporate in the strategic sourcing strategy. If an unexpected requirement is ad hoc, low risk and low value, purchasing and supply management professionals should not be involved with obtaining the requirement anyway. All low-value requirements should have been aggregated into call off contracts for use by end users; those that are low value, yet high risk, are precisely those that require strategic sourcing plans. STRATEGIC SOURCING Strategic sourcing is a core activity in purchasing and supply management. It is a complex commercial process requiring extensive knowledge and competence. It can be defined as satisfying business needs from markets via the proactive and planned analysis of supply markets and the selection of suppliers with the objective of delivering solutions to meet pre-determined and agreed business needs. Developing the strategic sourcing strategy is a fundamental part of the purchasing and supply management process. Strategic sourcing is a logical process involving the application of tools by skilled, competent and knowledgeable people; however - developing and implementing strategic sourcing is a functional process. Since it is such a broad area, it is advisable to sub-divide the subject into a number of sections as follows. a) Positioning Purchasing and Supply Management for Strategic Sourcing

In order to sustain the high level position, resources and influence, CIPS recommends that purchasing and supply management professionals responsible for strategic sourcing create a suitable governance structure so as to: illustrate where the purchasing and supply management functions sits within the organisation e.g. alongside Finance, Legal, Human Resources illustrate the role of the function itself and those people that carry it out - the purchasing and supply management function's terms of reference, scope of responsibility and objectives. CIPS also recommends that the purchasing and supply management function creates a Sourcing Board (sometimes referred to as a Procurement Board/Panel) comprising, for instance, decision makers, opinion leaders and influencers. The Sourcing Board should be used to discuss strategies, policies, approaches, assist with decision making and to help influence others in the organisation on behalf of the purchasing and supply management professionals. b) As is Analysis The second, and very resource-consuming stage in strategic sourcing involves the As is analysis stage which includes: Customer and business requirements x what do our customers need and what does the business need? Spend analysis x historical usage analysis of goods or services x supplier positioning x supplier historical analysis x transaction cost analysis x critical nature of products. Future spend analysis x forward/expected usage of goods and services x trends in the market. Market analysis x assessment of the market capability x analysis of power dependency in supply chains x analysis of individual marketplaces x supplier preferencing x relative positioning of your organisation x supply chain cost analysis x the nature of the market - appropriate type of sourcing strategy - global, regional or local x potential size (and actual size) of the supply base. Several analytical tools are appropriate for this stage including Porter's Five Forces, PEST (Political, Economic, Social, Technological) and SWOT (Strengths, Weaknesses, Opportunities and Threats). Further information on such tools is available from CIPS.

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CIPS strongly recommends that every purchasing and supply management function develops a written, and regularly updated, overall strategy which states their objectives and activities over a given timeframe. The strategic sourcing activity should form one part of the overall purchasing and supply management strategy. The first stage in implementing strategic sourcing is the positioning of the purchasing and supply management function within the organisation. In order to undertake strategic sourcing, purchasing and supply management must be positioned at the appropriate level (senior) within an organisation and should report to the Board (or via an appropriate Board representative) and it must possess suitable human resources. Strategic sourcing requires the application and interpretation of sophisticated strategic sourcing tools and techniques such as relationship management, by suitably authorised and competent professionals.

c) Mapping Supply Chains The process of mapping supply chains can be complex and the extent to which it is undertaken is dependent on the value and risk of the procurement in question and limited by the resources allocated to strategic sourcing by the organisation. The As-is analysis and Mapping stages can take typically between three and six months. CIPS recognises this timeframe is too long for some organisations and moreover impracticable for some procurement situations. However, the longer term benefits of such proactive strategic sourcing are invaluable.

all stages in strategic sourcing but where this is not possible, it is better to attempt some aspects of it than not undertake it at all. Options should be perceived as baskets of opportunities. In summary, this stage involves brainstorming options to fulfil the requirements, such as identifying the offering of suppliers and identifying whether there are other ways to fulfil the requirement e.g. instead of purchasing PCs i.e. goods, rather purchase a desktop service i.e. outsource the PC desktop provision. Another example would be instead of buying meters, buy a billing service including meter reading and customer billing. A public sector example would be the PPP/PFI which is a sourcing option that can offer value for money in appropriate circumstances. The process of generating options is an iterative process in that colleagues examine, discuss and criticise options and their feedback stimulates the production of further options. Having brainstormed a list of potential options the strategic sourcing team should subject each to a SWOT analysis and where appropriate, a detailed risk analysis. The options which seem to be the most favourable are then prioritised on the basis of the benefits and savings that they can deliver. Clearly, any proposed strategic sourcing plan must fully support the organisation's objectives. Examples of options include make/buy options; dual/single source decisions; feasibility of starting up partnerships with suppliers; benefit sharing etc. SELECTION OF OPTIONS CIPS suggests that once a range of suitable strategic sourcing options has been identified, these should be presented by senior purchasing and supply management professional(s) to the organisation's directors or Sourcing Board to be considered in the light of where the business currently stands and what the customers require. Occasionally, the strategic sourcing teams will be required to investigate further, or support their suggestions with business cases, ROI (return on investment models) and so on. Equally, the organisation may require further options, or clarification or changes to those options preferred. If a purchasing and supply management function is insufficiently resourced, the presentation of such strategic sourcing options can be a means of securing more appropriate levels of resource from senior directors. Equally, where the purchasing and supply management professional's impact on spend is limited, or where bought out expenditure is only 20% of turnover, the presentation of strategic sourcing options to senior directors, may be seen as a method of: increasing the strategic sourcing remit increasing other value-add of the purchasing and supply management function i.e. not simply price reduction penetrating aspects of the business which can be transformed into bought out expenditure, via out sourcing for instance.

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CIPS considers that best practice supply chain mapping includes: x identifying profit and gross margins in supply chains x understanding interdependencies in supply chains e.g. power dependency x mapping the required products and services onto these supply chains x analysing spend by each supplier in respect of category and business unit x buying patterns by product, service, supplier, and business unit x sourcing patterns x pricing patterns - both past and forecasted, and also purchase price analysis x historical performance of suppliers x historical market trends and associated cost drivers (there are specialists in various fields) x value chain analysis x identifying and addressing dominant players in the supply chain x critical asset analysis (i.e. identify your critical assets which should be borne in mind when out sourcing) x technical analysis - alternative solutions to specification of requirement x risk assessment x cost modelling x portfolio analysis x PEST analysis x complexity reduction i.e. standardisation x ascertaining the demand e.g. formulating the requirements x demand challenge - does the organisation need the requirement (Defer, Diminish, Delete) x market potential/market modelling x determining the policy areas which need to be accounted for in sourcing - environmental and ethical policies for example x determining funding e.g. PPP/PFI. CONSOLIDATE DATA AND GENERATE OPTIONS Once the analysis has been undertaken and supply chains have been mapped, the next stage is to consolidate the data and to generate options. Although not ideal, where resources are tight, in terms of time and skills availability for instance, it is possible to omit some of the analysis stages and go direct to the brainstorming of options. It is good practice to undertake

SOURCING PLANS Once the preferred strategic sourcing options are agreed, these are developed into sourcing plans which should be innovative and creative solutions to the organisation's requirements in support of the organisation's mission and objectives. Strategic sourcing plans should generate work-streams i.e. clear milestones to be achieved with resources e.g. project teams allocated appropriately. This is where the process of acquisition begins involving design teams, outcome-based specifications, market development, advertisements, policy compliance for instance.

MEASUREMENT CIPS believes that all strategic procurement, including the design and implementation of sourcing plans, should be measured in terms of the benefits that they are delivered compared with what they were expected to deliver as set out in the original business case. This might take the form of a post-contract audit perhaps one year after the contract had been let. The findings should be reported to and discussed by the purchasing and supply management professional(s) and their Sourcing Board in order to learn from experiences and build on current commercial arrangements. CONCLUSION

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Strategic sourcing plans include determining processes for tenderer and supplier selection and performance criteria ensuring the supplier continues to meet customers' expectations. CIPS advocates the use of weighted evaluation criteria when determining the preferred options as this is one method of persuading internal colleagues that purchasing and supply management is not focused on price and cost alone but considers issues such as speed to market and other appropriate and relevant criteria. Therefore strategic sourcing plans include producing and managing the ITT process, conducting negotiations and everything up to the recommendation of contract award. IDENTIFYING NEW SUPPLIERS Traditionally, sourcing has been perceived as the identification of new or alternative suppliers e.g. sources of supply. Methods of identifying suppliers have included: Internet e.g. suppliers' own pages and B2B trade bulletin boards trade associations and trade directories business directories like Kelly's, Sell's etc. supplier exhibitions networking with other buyers talking to specialist end users. This process is now part of the strategic sourcing work streams i.e. only part of the sourcing process. Following the development of strategic sourcing plans and the identification of work streams, the purchasing and supply management function should facilitate the implementation of the strategic sourcing strategy. This may involve helping with, or leading, the contracting process, educating the internal customer or order placer; enabling the supplier e.g. getting the supplier ready to deliver by developing and managing them etc. In many larger organisations, the strategic sourcing part of purchasing and supply management is what purchasing and supply management professionals are primarily involved with. They are rapidly becoming less involved with the other aspects of contracting; i.e. purchasing and supply management professionals have trained colleagues to manage the less strategic and more straight-forward aspects of purchasing and supply management.

CIPS holds that sound and effective sourcing expertise is a key element in the purchasing and supply management professional's tool kit. Increasingly, the term Sourcing is incorrectly replacing the terms Procurement or Purchasing or Supply Chain Management. Strategic sourcing encompasses aspects of all of those activities and is not a replacement activity. CIPS believes that strategic sourcing is a skill set which must be learned, developed and refreshed. Strategic sourcing, as described in this policy, is a relatively new skill set for purchasing and supply management professionals. It requires great resource and excellent management information and so only some organisations are currently in a position to implement it. Further, strategic sourcing should only be Carried out by competent and knowledgeable professionals. This practice document makes a clear distinction between reactive, tactical and strategic sourcing and encourages purchasing and supply management professionals to move away from the former and to take a more proactive and strategic approach. CIPS believes that strategic sourcing, and as appropriate tactical sourcing, have a vital role to play in the overall corporate plan with the potential to make a significant and positive contribution to the bottom line. Inevitably this begs the question as to how to measure the effectiveness of any strategic sourcing policy. This is an area which is briefly touched on in this practice document; a more comprehensive analysis of the theory and practice of purchasing performance measurement as a whole may be found in the various publications available from CIPS Bookshop.

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ENVIRONMENTAL PURCHASING AND SUPPLY MANAGEMENT

SUMMARY The Chartered Institute of Purchasing & Supply (CIPS) position on practice on Environmental Purchasing and Supply Management starts from the fundamental assertion that purchasing and supply management professionals have a pivotal role in developing and implementing environmental best practice and policies together with wider issues of sustainability in their own organisations and in the wider supply chains of which they are a part. CIPS also firmly believes that the benefits of environmentally responsible purchasing policies generally outweigh costs. CIPS states that purchasing and supply management professionals should: have a significant specialist influence and role in improving the environmental performance of their organisations and that of their suppliers and contractors seek to reduce the environmental impact of their own day-to-day activities seek to develop the environmental purchasing policy and practices of their employers and carry out their professional duties in an environmentally responsible manner, compliant with all relevant legislation and cognisant of the objectives of their organisation aim to reduce the adverse impact on the environment of their own activities and that of their suppliers work with colleagues and suppliers, as appropriate, to ensure that goods, services and works (including maintenance) purchased can be manufactured, delivered, used and disposed of in a safe, socially and environmentally responsible manner To support professionals in these objectives, CIPS continues to work with other organisations to develop and disseminate environmental purchasing best practice and to influence the content of educational courses. Environmental purchasing is encouraged or mandated by many legislative developments at national and international level. There are also aspects of legislation that constrain the freedom of some purchasing and supply management professionals to specify and purchase on environmental grounds. CIPS will continue to influence the development of policy and legislation to ensure that the global significance of environmental purchasing is recognised and the principles of best practice are used to inform legislation. CIPS recognises that detailed strategies for achieving the objectives of environmental purchasing will vary from case to case and as legislative and other developments progress. It will continue therefore to support purchasing professionals in keeping abreast of current and anticipated developments, and in their knowledge and understanding of how to reconcile environmental purchasing and supply management strategies with the other cultural, procedural, organisational and financial circumstances of their employing organisations. CIPS is monitoring the development of the sustainable agenda and will update this paper accordingly. BACKGROUND CIPS has been working for several years to raise awareness of the importance of environmentally responsible purchasing and supply management with the following organisations

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Business in the Environment (BiE) Environmental Supply Chain Forum co-ordinated from the Manchester School of Management, (UMIST) The Green Supply Chain Network co-ordinated by the Centre for Environment and Safety Management for Business at Middlesex University Institute of Environmental Managers and Assessment (IEMA) Improvement and Development Agency (IDeA) London Remade Environment Agency NHS Purchasing and Supply Agency The Cross Governmental Sustainable Procurement Group

This CIPS document summarises and reflects the work of these groups and other purchasing and supply management professionals who have contributed to the development of the CIPS position on practice on Environmental Purchasing and Supply Management. INTRODUCTION The CIPS position on Environmental Purchasing and Supply Management stems from the beliefs that: purchasing and supply management professionals have a significant specialist influence and role in improving the environmental performance of their organisations and that of their suppliers and contractors

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purchasing and supply management professionals should seek to develop the environmental purchasing policy and practices of their employers and carry out their professional duties in an environmentally responsible manner, compliant with all relevant legislation and cognisant of the objectives of their organisation purchasing and supply management professionals should aim to reduce the adverse impact on the environment of both their organisation's and their suppliers' operations. They should work with colleagues and suppliers, as appropriate, to ensure that goods, services and works including maintenance purchased can be manufactured, delivered, used and disposed of in a safe, socially

agreed to be bound. More recently the Earth Summit held in Johannesberg in 2002 reiterated these values and extended their reach. The UK government committed to extend beyond the Kyoto agreement. In the UK's view, the Kyoto Protocol, with its legally binding targets and timetables, remains the only workable basis for taking forward international action on climate change. This approach has been agreed by most of the developed world and developing countries. The UK intends to ratify the Protocol along with our EU partners shortly." Statement by Rt Hon Margaret Beckett MP, 19 February 2002 Energy White Paper published The Government's White Paper, Our Energy Future Creating a Low Carbon Economy, was launched on 24 February. It sets out ambitious targets to reduce harmful carbon emissions over the next 50 years, with major increases in renewable energy and energy efficiency. The White Paper is available on the Department of Trade and Industry's website. See also Defra news release 66/03. Margaret Beckett and Secretary of State for Trade and Industry Patricia Hewitt will lead a joint ministerial group to implement the Energy White Paper. In March 2003 Defra published final 2001 emission estimates for greenhouse gases and other air pollutants for the UK, and provisional estimates by DTI and Defra of total carbon dioxide and greenhouse gas emissions in 2002. Key points to note are: Greenhouse gas emissions Emissions of the 'basket' of six greenhouse gases, weighted by global warming potential, fell by 12.3 per cent between the base year and 2001. (The base year is 1990 for carbon dioxide, methane and nitrous oxide, and 1995 for fluorinated compounds.) To meet its commitment to the Kyoto Protocol, the UK has agreed to reduce total greenhouse gas emissions by 12 per cent relative to the base year over the period 2008-2012. There were slight increases in greenhouse gas emissions between 1999 and 2001. These were mainly due to increased use of coal in power stations because of higher gas prices at the end of 2000 and during 2001, and because of lower nuclear output and lower outside temperatures. However the provisional 2002 estimates show a fall in emissions (see below). Emissions of carbon dioxide, the main greenhouse gas, fell by 5.3 per cent between 1990 and 2001. Emissions of carbon dioxide for 2002 are provisionally estimated at some 150 million tonnes (carbon equivalent), 8 to 9 per cent lower than in 1990. Emissions decreased by about 3 per cent between 2001 and 2002, reversing the increases of the previous two years. This was mainly because of reduced energy consumption per unit of economic output, warmer weather, and a decrease in use of coal relative to oil and

and environmentally responsible manner

CIPS recognises and supports policies to reduce the adverse environmental impact. It will continue to work with others to develop and disseminate best environmental purchasing practice. CIPS education is aware of the importance of environmental purchasing, and will ensure its appropriate incorporation into the CIPS qualifications as they are developed and updated. CIPS will seek to raise the awareness of the importance of environmental issues with other professional bodies where appropriate. CIPS will seek proactively to exert its influence in the development of public and private procurement policy and legislation to ensure that the global significance of environmental purchasing is recognised and best practice is facilitated. This document states CIPS' position on Environmental Purchasing and Supply Management. It does not suggest how this should be undertaken as this is the subject of a separate handbook 'Environmental Purchasing in Practice - guidance for organisations' which is available on the CIPS website (www.cips.org). CIPS recognises that environmentally responsible supply chain management also involves logistics, inventory management and other business functions. However this document concentrates on the purchasing responsibility only. ENVIRONMENTAL RESPONSIBILITY TO PURCHASING AND SUPPLY MANAGEMENT PROFESSIONALS? WHY
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International obligations There are international obligations on the environment to be met; for example the Kyoto Earth Summit 1997 not only raised governments' awareness of environmental issues but created legally enforceable objectives by which many governments (including the European Union as a whole) have

gas. Total greenhouse gas emissions in 2002 are estimated to have been between 14% and 15% below the 1990 level, taking this provisional carbon dioxide estimate into account The UK aims to move beyond its Kyoto target towards its goal of reducing emissions of carbon dioxide by 20 per cent below 1990 levels by 2010, and to put itself on a path to reduce carbon dioxide emissions by 60% by 2050.

the Rio Declaration that requires the UK to reduce and ideally eliminate unsustainable patterns of production and consumption

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The updated climate change 'headline' sustainable development indicator is shown below.

An illustration of an international obligation is Agenda 21 which emerged from the Earth Summit at Rio de Janeiro in 1992 where participants (178 governments worldwide, including the UK) signed up to Agenda 21. This is an action plan to achieve sustainable development in the 21st century. It identifies a role for all sectors of society - businesses, industry, commerce, non-governmental organisations (NGOs), governments, academia, individuals and communities. It also provides for local authorities to assist individuals and communities through the development of local programmes for sustainable development. All signatories are also committed to developing national strategies for sustainable development. UK Government's environmental objective This policy document uses the context of the UK Government's environmental objectives as an example; purchasing and supply management professionals living and working in different parts of the world should take account of their own government's objectives, obligations and laws.

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Climate change headline indicator Other atmospheric emissions Total emissions of sulphur dioxide fell by 70 per cent between 1990 and 2001, to 1.125 million tonnes. The UK is committed to further reductions to 585 thousand tonnes by 2010 under the EU National Emission Ceilings Directive. Nitrogen dioxide emissions fell by 39 per cent between 1990 and 2001, to 1.680 million tonnes. The UK is committed to further reductions to 1.167 million tonnes by 2010 under the EU National Emission Ceilings Directive. Emissions of non-methane volatile organic compounds fell by 45 per cent between 1990 and 2001, to 1.336 million tonnes. The UK is c ommitted to further reductions to 1.2 million tonnes by 2010 under the EU National Emission Ceilings Directive. Ammonia emissions fell by 15 per cent between 1990 and 2001, to 290 thousand tonnes. However, research is continuing to improve the inventory, including an assessment of sources that may be missing from the current total and that may be included in future. The UK is committed to reduce ammonia emissions to 297 thousand tonnes by 2010 under the EU National Emission Ceilings Directive. Data tables and charts for these and many other pollutants may be found on the Defra website Other obligations include: the EU Treaty which commits the UK to integrate environmental protection into policies

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The UK Government's objective is to put the environment at the heart of policy making. This commitment applies to all stakeholders, from citizens and non-governmental organisations to the business community and all levels of government. The 1990 White Paper This Common Inheritance committed each government department to have a strategy in place for greening their operations. This has largely been superseded by two strategies for sustainable development, first in 1994 then in 1999 and by the Framework for Sustainable Development on the Government Estate, the first parts of which were published on 23 July 2002. Part F of the Framework relates to Procurement. (http://www.sustainabledevelopment.gov.uk/sgig/improving/contextf.htm) Legislation Purchasing and supply management professionals have an obligation to their organisations to ensure compliance with environmental laws which impact on purchasing and supply management in the country in which they are contracting. Increasingly legislation is focusing on producer responsibility. The number of environmental laws (for example, aimed at controlling pollution) has increased significantly in recent years. These laws can be complex and it is the responsibility of the purchasing and supply management professional to monitor those related to purchasing and supply management. At the very least, purchasing and supply management professionals should be aware of the following legislation:

Producer Responsibility Obligations (Packaging Waste) Regulations 1997 SI 1997 648; 1999 1361; 1999 3447 The Packaging (Essential Requirements) Regulations 1998 The Environmental Protection Act 1990 Waste Electrical and Electronic Equipment Directive (WEEE)

The following extract is taken from a HM Treasury and DETR paper Environment Issues in Purchasing and describes how environmental responsibility cannot be a criterion in the selection of suppliers but it can be a requirement of the general specification when it is relevant to the contract. Specifications Contracting authorities are free under the rules to specify their requirements in environmental terms. For example, departments may specify that a product should be made out of materials which are or could be recycled or that particular materials, such as ozone depleting substances, should not be used in the product. This is subject to the general rule that specifications must be drawn up in a manner which does not discriminate against products or providers from other Member States and which is, where applicable, consistent with the provisions in the directives on technical specifications and the use of standards. Selection of Tenderers The Regulations set out detailed criteria for the selection of tenderers based on evidence of their personal position, their economic and financial standing, their technical capacity and, for services, also their ability. The nature of the evidence that may be requested with regard to technical capacity is exhaustive, so evidence on other factors may not be taken into account. In particular, questions about providers' general policies e.g. on environmental issues are not permitted. Purchasers are allowed to reject candidates who have been convicted of a criminal offence or who have committed an act of grave misconduct in the course of their business where they consider rejection to be justified. This may include infringement of environmental legislation/ regulations. However, care must be taken to ensure that decisions to reject providers are proportionate to the offence and the provider is given an opportunity to describe any steps they might have taken to prevent recurrence. Care should also be taken to ensure providers are treated equally. Private sector pressure The private sector is also under increasing pressure from a number of directions to be environmentally responsible. Examples of this pressure are BiE's Index of Corporate Environmental Engagement (for the FTSE 350 companies), Business in the Communitys Social Responsibility Index and FTSE For Good. Such indices have been key drivers of environmental and social development in recent years of which a key component is supply chain management. Customer pressure is also significant in some sectors. An example of this pressure in the automotive industry is the introduction of a mandatory requirement for Tier 1 suppliers to gain accreditation to IS0 14001 (International Standards Organisation's Environmental Management System Standard). ISO 14001 may not be the most appropriate way forward

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These additional processes to close the environmental cycle at the end of a product's life will require investment and may increase the cost of electrical goods. Similar Directives governing the end of life of other commodities, for example end of life vehicles directive, are imminent. Public procurement legislation Public procurement is governed by three distinct principles: European and international agreements e.g. Treaty of Rome (which applies also to the private sector), and procurement rules agreed under GATT (now the World Trade Organisation) EC Procurement Directives and the UK Regulations (statutory instruments) that implement them UK domestic policy which requires central government departments to base procurement decisions on whole life costs and not on initial price alone. Local authorities are encouraged to do the same as best practice under the Best Value regime Examples of such legislation include: The European Community Supplies Directive 93/36/EC The European Community Services Directive 92/50/EC The European Community Works Directive 93/37/EC Similar rules apply also to the Utilities sector which has to comply with the European Community Utilities Directive 93/38/EC. New EC Directives that simplify, clarify and update the current Directives have been agreed by Member States in Brussels. These new Directives are likely to be implemented in UK legislation in 2005. They include explicit discussion of environmental issues for the first time, providing greater clarity on issues such as eco-labels and environmental management systems, for example. Useful information is also available in an Interpretative Communication of the European Commission2 , and an accompanying FAQ document. However, these do not address the issue of UK Government procurement policy. The HMT-DETR joint note quoted below, an extensively revised version of which will be issued later this year, is more useful in this respect.

for all organisations; irrespective of the standard employed it is important to be able to demonstrate continued environmental improvement. Pressure for environmental responsibility is increasing, not just from customers and consumers, but also from: financial stakeholders e.g. lenders and insurers shareholders e.g. ethical funds employees in terms of their motivation and enthusiasm local planning authorities and residents pressure groups

Type II (ISO 14021) claims are based on self declaration by manufacturers or suppliers e.g. "made from x% of recycled material". UK government has produced a useful Green Claims Code which offers a code of conduct for the use of Type II claims at http://www.sustainable-development. gov.uk/sdig/ improving/partf/gcc/index.htm Type III (ISO 14025) claims use life cycle analysis to generate quantified product information e.g. Volvo's product profile for its S80 motor car. Single issue labelling schemes such as that of the Forest Stewardship Council (FSC) and organic food labels do not fall within any of these categories but are partially covered by ISO 14020 - General Guidelines for Environmental Claims and Declarations. The role of the purchasing and supply management professional The CIPS' position is that all purchasing and supply management professionals, irrespective of the organisation in which they are employed or their status, should lead or contribute to the development of an effective environmental purchasing and supply management policy and strategy. Environmental management through the supply chain can bring financial benefits especially when partnered with other environmental initiatives. To remain cost effective in a competitive business environment it is important to make the most of resources such as water, energy and raw materials. Businesses are starting to recognise their environmental responsibility as they are held accountable for emissions to air, land and water, and they are also aware of the costs and risks to reputation and sales that come from a poor environmental reputation. This provides purchasing and supply management professionals with an opportunity to make a significant and demonstrable difference in their organisation. Purchasing and supply management professionals are in an ideal position to introduce and implement changes in purchasing practices which benefit both the environment generally and their organisations directly. The purchasing and supply management professional is not expected to become an expert in all aspects of environmental responsibility but should have an awareness of environmental issues and have access to expert advice when necessary. Developing an environmental purchasing and supply management policy and strategy is not just about "buying green", it is about working to minimise a growing strategic business concern, reducing costs and improving added value. However, environmental supply chain management is an evolving process; as legislation and technology changes so will standards. Since it is an evolving process, purchasing and supply management professionals should not expect to reach an end point or to "be green" but rather to enable demonstrable

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Pressure for an improved environmental performance does not necessarily have to be a burden; rather it can lead to real and demonstrable competitive advantage. Environmentally responsible purchasing can create excellent marketing opportunities for example, using eco-procurement as a vehicle for product or service differentiation in the marketplace. It can also create markets for more sustainable materials and products, creating jobs in industries which process these materials and produce these products. By adopting environmentally responsible purchasing, your organisation will be demonstrating environmental leadership and be an example of good practice. Certification schemes The implementation of an Environmental Management System (EMS) is key to any organization managing its impact on the environment and is a critical part of a risk management strategy. However, much more than this, an Environmental Management Strategy can reduce costs, improve efficiency, and secure a competitive advantage. Registration to an Environmental Management Systems standard can: demonstrate high environmental standards demonstrate compliance with legislation reduce costs improve efficiency Environmental Management Systems standards include ISO 14001, the International Standards Organisation's system, and EMAS (Eco-Management and Auditing Scheme) which is applicable in Europe. Both schemes are voluntary. EMAS requires external verification of a published environmental statement. There are increasing numbers of certification schemes for products. The International Standards Organisation (ISO) has developed standards for three types of environmental product claims, termed ISO Type I, Type II and Type III. Type I (ISO 14024) claims are based on criteria set by a third party and are multi-issue, being based on the product's life cycle impacts. The awarding body may be either a governmental organisation or a private non-commercial entity. Examples include the EC Ecolabel, the Nordic Swan and the German Blue Angel.

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continuous improvement. Equally there is no single panacea for environmentally responsible purchasing and supply management as the approach to be taken depends on issues such as whether the organisation is in the public or private sector and the organisation's position in the market. BUSINESS BENEFITS OF AN ENVIRONMENTALLY PURCHASING AND SUPPLY MANAGEMENT STRATEGY The business benefits of implementing a proactive environmental purchasing and supply management strategy can be captured in several ways.
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Cost savings Environmental purchasing and supply management may lead to cost savings, especially when measured over the whole life of a product or contract. Cost savings can be achieved through adopting the principles of the 'purchasing hierarchy' outlined in Environmental Purchasing in Practice - guidance for organisations: re-think the purchase eg. service instead of product eliminate e.g. hazardous material content reduce e.g distance travelled reuse e.g. packaging recycle e.g. paper, glass, metals dispose of end of life management e.g. minimise quantities and therefore cost Pollution is another cost and can be indicative of business incompetence since it often occurs when resources have been employed incompletely, inefficiently or ineffectively. Costs of pollution that used to be borne by society as a whole, so-called "externalities", are increasingly being captured through the "polluter pays" principle and thus when pollution does occur substantial costs are incurred in some part of the supply chain. Such costs are likely to be passed onto the buyer. Organisations that use resources carefully and operate efficient processes are at a competitive advantage already. However, as resource and waste disposal costs increase, the differences between efficient and inefficient suppliers will become greater. Purchasing and supply management professionals can have confidence in the likelihood that it will be the most environmentally efficient organisations that continue to supply cost effective products in increasingly competitive markets. Further costs to be reduced or avoided through the exercise of environmental responsibility include: pollution taxes energy taxes fines legal actions higher insurance premiums the public relations costs of repairing damaged reputations Security of supply Security of supply is often a key criterion in supplier selection. However, if a supplier is selected that is not environmentally responsible and is then prosecuted it may not then be in a position to fulfil the contract. In businesses with licensing requirements, a major issue to consider is the likelihood of a supplier losing its licence to operate. A key criterion in the selection of suppliers should be "risks with which they are associated" which should include environmental as well as business risks. By selecting environmentally responsible suppliers, wherever possible, purchasing and supply

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Compliance with environmental legislation By being aware of environmental legislation, purchasing and supply management professionals in all organisations can ensure that their suppliers and service providers, as well as their own organisations, are complying with the law. For example, the Environmental Protection Act includes a Duty of Care which requires that organisations maintain records of all waste transfers. Therefore, when procuring outsourced services, such as cleaning services, the purchasing and supply management professional must ensure the service provider complies with this legislation. The same Act requires companies involved in waste transfer activities to be licensed. The purchasing and supply management professional should also check, preferably on a regular basis, that contractors handling waste are still licensed. Similarly, purchasing and supply management professionals must ensure that products purchased by their organisation have minimum impact on the environment once they are in use and at the end of their life. Legal non-compliance can lead to company fines, the possibility of imprisonment for directors, and a damaged corporate reputation. The latter can be extremely difficult and expensive to remedy. Knowledge of forthcoming environmental legislation By being aware of forthcoming environmental legislation purchasing and supply management professionals in all sectors can implement best practice in their organisations before it is required by the law. This can in itself be a source of competitive advantage. Such activity should also result in a more constructive relationship with regulatory authorities such as the Environment Agency. Environmentally aware purchasing and supply management professionals can also avoid contracting with suppliers that expose their organisations to unnecessary risks by encouraging suppliers to invest in newer and cleaner technologies. Early action enabling suppliers to keep abreast of legislative demands will help those suppliers to remain competitive on price and continue to be a supplier.

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management professionals can have greater confidence in the security of supply. Similarly, by procuring goods that are environmentally preferable the purchasing and supply management professional will minimise the risk of these goods becoming obsolete as a consequence of changes in legislation. Overall environmental performance/credibility with customers If an organisation is developing its overall environmental performance it needs to ensure that the input materials and other goods and services it procures are also environmentally responsible. Credibility with customers can be gained by marketing the fact that the organisation's purchasing and supply management professionals routinely undertake the following: specify products and services considered to be environmentally preferable verify suppliers' environmental management standards include environmental clauses in contracts e.g. to minimise packaging as far as practical rate supplier performance against environmental criteria insist on environmental improvement targets for suppliers assist suppliers to improve their environmental performance encourage environmental innovation in the supply of goods and services By working with environmentally responsible suppliers new products and services can be designed which can result in competitive advantages for both suppliers and buyers. CIPS supports a partnering approach between suppliers and purchasing and supply management professionals in terms of environmental responsibility as this can lead to a greater and more in-depth understanding of environmental causes and effects in a supply chain. Working with suppliers in this way can result in the anticipation of emerging markets for environmental products and services; access to these markets can result in an improvement to the organisation's image as well as its bottom line. Conversely, a reputation for environmental irresponsibility may result in loss of sales, damaging to the organisation and its supplier base, innocent and guilty alike. Lower volumes may force the latter to raise prices and/or to cut environmental corners itself, compounding the damage.

Improved relations and communications with suppliers Effective communications with suppliers are critical to improving suppliers' environmental responsibility. Suppliers are often more knowledgeable about the product in question and are best placed to suggest realistic ideas for improvement. Suppliers should be encouraged and, where appropriate, rewarded to continually improve their environmental performance. Working with suppliers in the development of improved environmental performance should also lead to a more mutually beneficial commercial relationship and more effective communication in all aspects of the supplier-buyer relationship. Raising the profile of purchasing and supply management As many organisations have now recognised, purchasing and supply management are central to the achievement of overall environmental and sustainable development objectives, including the implementation of environmental management systems, for example. Where the impact of operations in global supply chains overlap with issues of corporate risk and reputation, companies begin to see the need to address purchasing and supply management more strategically. The purchasing and supply policy and strategy should clearly link to the organisation's environmental policy and strategy. In particular, the environmental purchasing policy should include targets and key performance indicators. CIPS recommends that the emphasis should be on continuous improvement and therefore it is good practice to undertake annual reviews of the key performance indicators; how these support the environmental purchasing policy and in turn how this and the purchasing and supply management strategy is supporting the organisation's goals. This annual review should involve stakeholders (both internal and external stakeholders at the organisation's discretion). Progress against targets should be regularly communicated to all stakeholders. Purchasing and supply management professionals are central to the process of bringing together users, specifiers, technical and environmental staff, and suppliers in the search for environmental improvement. In doing so, purchasing and supply management professionals can demonstrate their contribution to the organisation in delivering its environmental objectives and targets as well as contributing to the success of other organisations e.g. by assisting suppliers to improve their own environmental performance. .

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PURCHASING AND SUPPLY MANAGEMENT ISSUES Organisational and cultural issues This practice document does not prescribe the way in which purchasing should be structured, managed or administered in an organisation. However, the purchasing and supply management professional should, when introducing an environmental purchasing policy and strategy, be mindful of: the culture of the organisation the need for compliance with existing purchasing policies and procedures the importance of effective communication the importance of obtaining value for money For example, many organisations have decentralised and devolved purchasing with capital and running costs often allocated to different cost centres. This can lead to a tendency to purchase the cheapest rather than the most cost-effective equipment with whole life costs, in particular environmental impact issues, not being considered. In many cases, the introduction of an environmental purchasing policy and strategy may require substantial organisational change and a consequent change management process. Therefore, the purchasing and supply management professional should consider the most appropriate way, bearing these and similar organisational and cultural issues in mind, to introduce environmental purchasing into their organisation. One effective way of beginning this process is to base the approach on the management of risk in the supply chain. Policy and practice issues The following are issues which should be included in environmental purchasing and supply management policies and practices. Buyers in the public sector must ensure compatibility with government procurement policy and EC rules. a) Consider whether the product or service is really needed. Could the need be met another way? Is a suitable product already available within the organisation? Can the requirement be met by renting or sharing rather than purchasing? Would a smaller quantity suffice? b) Select products and services that: minimise the actual amount of material used avoid the use of hazardous materials are obtained from renewable resources minimise the use of consumables minimise energy consumption in use avoid depletion of resources e.g. their component materials are obtained in a sustainable manner use and emit fewer substances that damage the environment or health can have their life extended by incorporating future proofing elements to maintain or enhance the service provided

have options for end of life management which minimise environmental impact contribute to the development of markets for recycled materials by being made from these materials are durable, can be used more than once and are repairable

Environmental issues need to be clearly identified in product and service specifications. The EC Interpretative Communication on this subject makes clear that there are numerous possibilities for taking the environment into account, especially at the beginning of the purchasing process (in defining the subject matter of the contract and in technical specifications). c) Adopt a whole life cost approach - by assessing the product's environmental impact from its production to disposal costs and these include, for example, the costs of: acquisition (Total Acquisition Costs) operation maintenance and spares support services staff costs training and training aids health and safety end of life management and disposal changes in legislation These costs can be simplified to: manufacture/construction purchase maintenance/use recycling/disposal This holistic approach should be led by the purchasing and supply management professional and become part of most purchasing decisions and thus part of the organisation's culture. Such application of whole life costs to purchases will ensure best overall value for money. By utilising whole life costs, the purchasing and supply management professional can demonstrate benefits versus cost in terms of: total operating costs quality delivery performance design improvements environmental performance impact Purchase from suppliers that can demonstrate that they have action plans and results in terms of environmental improvement rather than those that merely have an environmental policy without any strategy for applying it. Continue to collect environmental information on products and services and work with suppliers.

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f) Liaise with and support environmental and other groups which can provide further ideas for an environmental purchasing strategy along with supporting policies (e.g. income from recycling). An example is the model of environmentally responsible purchasing and supply management from the Centre for Research on Organisations, Management and Technical Change (CROMTEC) at UMIST which includes: examine the utility being delivered review alternatives analyse whole life costs of product/service reduce consumption develop environmental specifications supplier (pre)-qualification supplier development process improvement tender evaluation feedback to users and specifiers negotiate improvements internally and externally stimulate innovation Further issues The environment is an enormous and increasingly important subject and there are many issues to be considered. Further sources of information are provided in section 7 below. CONCLUSION There are many good reasons for implementing an environmentally responsible purchasing and supply management policy and strategy not least improving health and the environment and maintaining quality of life. CIPS endorses the view that the environmental probity of suppliers should be considered . Purchasing and supply management professionals in the public sector should ensure compliance with the EC procurement rules and government policy. Managing environmental issues is a key part of the process of dealing with change and part of the evolution of businesses and their products. Understanding and anticipating environmental change and its implications for products, costs, processes and markets is fundamental to the success of any business. This practice document should assist all purchasing and supply management professionals irrespective of their resources and influence to improve their organisation's approach to environmental responsibility. Certainly the purchasing and supply management strategic position enables purchasing and supply management professionals to argue most competently for the adoption of environmentally responsible purchasing. Purchasing and supply management professional can expect to play a greater role in future in stimulating innovation in global supply chains, in transforming markets for more sustainable products (and

particularly, services) and in driving more sustainable performance by suppliers and contractors. FURTHER INFORMATION Useful websites include: www.environment-agency.gov.uk www.sustainable-development.gov.uk/sdig/index.htm www. ogc.gov.uk (the joint HM Treasury and DETR note can be obtained from this site - choose 'Procurement', then 'Legal and Policy Framework') www.greensupply.org.uk (the Environmental Supply Chain Forum) www.pasa.doh.gov.uk (NHS Purchasing and Supply Management Agency) www.iclei.org (organisers of the Green Municipal Purchasers' Network Europe) www.epe.be (European Partners for the Environment) www.cfsd.org.uk/nepd (ECO design checklists from the University of Surrey) http:///europa.eu.int/ (EU Home Page) www.envirowise.gov.uk (Envirowise is the new name for the Environmental Technology Best Practice Programme) http://londonremade.com (Market development programme helping organisations to specify and buy recycled content products) Public bodies concerned with the environment include: Envirowise (formerly The Environmental Technology Best Practice Programme) tel free tel 0800 585794 or 020 7944 3000 DTI tel 020 7215 5000 Environment Agency tel 0645 333111 Environmental bodies active in the field of purchasing and supply management include: Business in the Environment (BiE) tel 020 7268 0337 Environmental Supply Chain Forum (coordinated from the Manchester School of Management, UMIST) tel 0161 275 0455 The Green Supply Chain Network (Centre for Environment and Safety Management for Business) at Middlesex University tel 020 8411 4552 European Partners for the Environment (EPE) founders of the European Green Purchasing Network (Belgium) tel +32 771 1534 International Council for Local Environmental Initiatives (Germany) tel +49 761 36892-42 (Secretariat - 0) Other sources of information include: Environmental Purchasing in Practice - guidance for organisations 2002 CIPS/IEMA/NHS PASA available free to CIPS members Purchasing for Sustainability - guidance for Higher Education Institutions 2002 Forum for the Future Buying into the Environment BiE, CD ROM 2000

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Buying into Greener Transport CIPS/BiE/EWS 1999 Environmental Purchasing Guide Society of Purchasing Officers in Local Government (SOPO) 1998 Buying into a Green Future: Partnerships for Change CIPS/BiE/BIC 1997 The Environment and Purchasing: Problem or Opportunity Lamming,Warhurst and Hampson (eds) CIPS 1996 Supply Chain - the Environmental Challenge BiE/CIPS 1995 A DIY Environmental Review for Companies BiE 1994

The Bruntland Report (1987) World Commission on Environment and Development (1987) Our Common Future; OUP In 1987 the United Nations Commission on Environment and Development ( the Bruntland Commission) drew attention to the fact that economic development often leads to a deterioration, not an improvement, in the quality of people's lives. Just because it is new does not mean that it is better - or at least not for everybody! The Commission therefore called for a form of sustainable development which meets the needs of the present without compromising the ability of future generations to meet their own needs. There are two key issues as part of this. Development is not just about bigger profits and higher standards of living for a minority. It should be about making life better for everyone and this should not involve destroying or recklessly using up our natural resources, nor should it involve polluting the environment.
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Commission Interpretative Communication on the Community law applicable to public procurement and the possibilities for integrating environmental considerations into public procurement. COM (2001) 274 final

ECommerce/ePurchasing INTRODUCTION This document is one of a series summarising the Chartered Institute of Purchasing & Supply (CIPS) view(s) on various purchasing and supply management subjects. The reader should refer to the accompanying document which supports this series entitled "Background to Positions on Practice". These practice documents express CIPS' beliefs on the subjects. They are not intended to fully explain a subject, or provide extensive guidance, except to help to put the subject in context. Subject explanations and guidance are provided in the CIPS Topic Reference Files and "How to..." series. CIPS is putting forward its views on ePurchasing as it is having a radical effect on the ways in which purchasing and supply management is undertaken. CIPS POSITION The CIPS mission is to: develop improved methods of purchasing and supply management demonstrate purchasing and supply management's contribution to prosperity represent the purchasing and supply management profession promote and maintain standards of skill and integrity educate and support the purchasing and supply management professional It is recommended the reader first reads the definitions of eSourcing, eProcurement, ePurchasing, eCommerce and eBusiness in the eCommerce and eBusiness TRF. The growth of eCommerce does not affect the CIPS mission. It does however facilitate significant new opportunities in purchasing and supply management, and also creates substantial threats, due to the rapidity of the change and because of its challenge to traditional purchasing and supply management functions. It is therefore CIPS' role, in accordance with its overall mission, to: support its members, and other purchasing and supply management professionals, in fully taking advantage of the opportunities arising from eProcurement lead the purchasing and supply management profession in developing eProcurement expertise to meet future challenges CIPS appreciates that there is a great deal of hype and also nervousness about ePurchasing. This can lead to uncertainty and self-preservation. ePurchasing should not be driven by technology but by the need for process improvement to meet the objectives of an organization and its customers. Purchasing and supply management professionals should view it as a positive opportunity to increase their value-add rather than as a threat. DEFINITION The CIPS definition of ePurchasing is: 'The combined use of information and communications technology through electronic means to enhance external and internal purchasing and supply management processes. These tools and solutions deliver a range of options that will facilitate improved purchasing and supply management'. ePurchasing enables: Evaluation of end-to-end trading cycles e.g. evaluation and possible re-engineering of trading cycles leading to reduced cycle times Improved workflow of the internal procurement process enabling end-user self service and decentralization with centralised control through company-specific catalogues New functionality such as on-line bidding in eAuctions and eRequests for Quotations (RFQs) Use of more efficient and cheaper connectivity methods such as the Internet and XML (a computer language for coding content and delivery). XML is not however a requirement for eProcurement as many solutions do not utilise it Connectivity to external sources of information e.g. portals; eHubs; eMarketplaces Connectivity to external supply chains e.g. extranets, EDI; eHubs; eMarketplaces - allowing shared real time information such as suppliers accessing real time sales

Sourcing e.g. identifying new sources via the Internet; use of intelligent search engines Content management e.g. private catalogues, public catalogues, internal inventory management; maintenance management Connectivity to internal systems and sources of information such as inventory management; maintenance management; MRP systems Payment systems e.g. purchasing cards Multimedia (although eProcurement does not necessarily contain multimedia elements) Improvements in localised supply chain mechanisms and consortia etc. leading to mutual benefit

To conduct e transactions of any sort does however require infrastructure such as; Internet, Intranet and Extranet; eHubs; information access and exchange e.g. on-line design. The CIPS holds the following viewpoints in respect of ePurchasing: STRATEGY Organisations should consider incorporating eCommerce /ePurchasing within their corporate strategies. Correctly chosen eProcurement options can be a relatively low risk eStrategy offering significant benefits. CIPS strongly recommends that organisations have a well-defined purchasing and supply management strategy and use appropriate eSourcing/eProcurement methods as a facilitator to achieve this. A progressive purchasing and supply management strategy will deliver significant business benefits maximising value for money. An eSourcing/eProcurement solution should never be implemented in the absence of such a strategy. An organisation's ePurchasing strategy should also support its eBusiness strategy including the eCommerce strategy (eSelling) and vice versa. EPURCHASING PROGRAMME Purchasing professionals should, ideally, lead and drive the procurement part of any eCommerce project and work cross-functionally with colleagues. Where this is not practicable, a purchasing and supply management professional must ensure he, or she, is consulted by the eCommerce Project Team involved in decision making and kept abreast of developments. New technology is not a substitute for good professional knowledge and abilities. PROCESSES AND SYSTEMS Organisations should not simply automate existing procurement processes and systems but should consider improving ways of working and re-engineering business processes prior to the implementation of eSourcing/eProcurement. Purchasing and supply management professionals should challenge established procurement practices to test whether these have evolved around a paper-based system and as such can be replaced. CIPS strongly recommends that, wherever possible, processes should be re-engineered prior to implementing ePurchasing. ePurchasing is not a discrete systems application, but rather an ongoing program which should be continually developed as technology and purchasing and supply management expertise evolves within an organisation. CHANGES AND BENEFITS Many of the benefits predicted for eProcurement have been over-optimistic as they include procurement benefits which many organisations will have realised without introducing eProcurement. They have often been based on organisations in which the benefits of professional purchasing and supply management strategies have not yet being realised or where purchasing and supply management solutions have been implemented and the outcomes are being incorrectly attributed to eProcurement. Few organisations have implemented eProcurement for long enough to have realised tangible business benefits. ePurchasing will change the dynamics of the purchasing and supply management profession as for example there will be a greater emphasis on knowledge management. It is suggested that ePurchasing will change the culture of purchasing and supply management in an organisation and may lead to a greater emphasis on cost and prices. ePurchasing will also facilitate purchasing from global sources. Such changes will present purchasing and supply management professionals with enhanced career opportunities. ePurchasing will release time to be spent on more value-add aspects of purchasing such as the development of end users' purchasing competencies and the development of suppliers. It is an opportunity to deploy competencies to the greatest effect.

ePurchasing can enhance transactional purchasing by providing end users with quick and easy to use electronic systems such as electronic catalogues for selecting and purchasing their requirement from preferred suppliers. This should reduce transactional costs by improving speed and efficiency and provide greater commitment to contracts by the reduction of "maverick purchasing" i.e. purchases made outside an organisation's contractual arrangements. CIPS believes that ePurchasing will continue to develop with new technologies becoming available for the more sophisticated aspects of purchasing and supply management. ePurchasing has the potential to facilitate communication between purchasers, their customers, suppliers and employees. It can encourage suppliers to become more efficient and more focused on meeting the organisation's needs. ePurchasing will also provide added value to the procurement function and as such will improve procurement strategy as it will, for example: generate accurate and detailed management information which should enable strategic insight into organisation's buying patterns enable improved sourcing, supplier management, improved scheduling, reduced stock holding, demand management and supplier performances. To optimise these and other benefits, companies should focus on overall supply chain eProcurement solutions. CIPS suggests that the most significant benefits gained (as opposed to predicted or expected) from ePurchasing to date are improved management information, reduced cycle times and reduced transaction costs. In order to reap the benefits of ePurchasing, purchasing and supply management professionals should ensure that they undertake appropriate training and ensure their skills, knowledge and competencies are continuously developed. Such skills relating to ePurchasing include wider management skills such as those involved with change management. BENEFITS TO SUPPLIERS Engaging in the eBusiness process also brings potential benefits to suppliers. These include: Time savings in re-inputting orders Reduction in errors e.g. from re-inputting returns, deliveries Reduced transaction costs and cycle times Holding less stock as a result of more efficient communications with customers i.e. real time sales data, information for use in forecasting Improved supplier performance by sharing supplier measurement information Faster payment Improved management information The resulting benefits to buyers will be: Reduced transaction costs and cycle times Possibility of developing Vendor Managed Inventory Improvements in Just in Time deliveries More accurate deliveries due to reduced input order errors by suppliers Shared performance measurement data which encourages improved supplier performance Potential for less expediting by the buyer as the supplier acknowledges orders by exception which automatically updates the buyer's system Reduced stock due to shared sales/forecast information

IMPLEMENTATION ISSUES There are also issues to overcome when implementing ePurchasing including: Ensuring that by deploying eProcurement, organizations are not simply passing costs or process inefficiencies on to another part of the organization or on to suppliers

Competition issues e.g. in exchanges using collaborative purchasing Possible negative perception from suppliers e.g. their margins reduced further from eAuctions Website and information control lost to exchange administrators Negotiated procurement benefits may be shared with other exchange users who may be competitors Creation of catalogues can be a long process and costly to suppliers Catalogue management can be costly Product coding and classification can also be costly The cost of changing suppliers once they have invested in catalogue production may inhibit competition and lead to inertia Culture profile within organisations e.g. resistance to change

FUTURE CIPS encourages the ongoing development of technology based-solutions for more complex procurements. It encourages purchasing and supply management professionals to learn about eCommerce and then provide leadership on all facets of ePurchasing projects in their organisations in order to, for example: Identify all the procurement needs for direct and indirect materials and services prior to developing an appropriate eProcurement solution Carry out due diligence on potential suppliers Persuade suppliers to join the market Suggest improvements to business processes CONCLUSION CIPS encourages organisations to fully understand how ePurchasing can be of benefit to their business. It suggests that purchasing and supply management professionals ensure their organisations have a comprehensive eCommerce strategy. Purchasing and supply management professionals should evaluate eSourcing/eProcurement options in order to ascertain the most appropriate solutions for their own organisation. CIPS believes that there is nothing unethical or unprofessional about the use of information technology e.g. to facilitate eAuctions. The ability of the procurement function to effect change will depend on the company, the industry sector and the maturity of purchasing and supply management within an organisation, its resources, culture, nature of business and markets within which it operates. ePurchasing will impact on people, processes, and procedures as well as on financial performance. CIPS strongly encourages and supports purchasing and supply management professionals in their pursuit of the ePurchasing challenge.

EETHICS INTRODUCTION

CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case ethics in e commerce, as they relate to purchasing and supply management. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Further information is available from CIPS. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on ethics in e commerce has been written primarily for those engaged in e procurement. This document is one of a series summarising the CIPS view(s) on a wide range of subjects. The reader may wish to refer to the accompanying document which supports this series entitled "Background on Purchasing and Supply Management Positions on Practice". This position on practice should be read in conjunction with two CIPS Positions on Practice, namely Ethics and eProcurement. CIPS is expressing beliefs on ethics on e commerce because some purchasing and supply management professionals fear that aspects e procurement in particular - such as reverse auctions for instance create ethical issues. CIPS views, opinions and beliefs are stated throughout the document; however the broad practice statement which underpins the text are as follows: An individual should behave ethically whether transactions are electronic or of a more traditional nature - eCommerce reinforces the need for organizations to put in place policies that engender a greater discipline, diligence and self protection in all dealings with the outside world CIPS supports the PMMS Limited Consulting Group's Ethics Code for hosting eAuctions (summarised below) The purpose of this position paper is to consider whether the world of e commerce has raised new ethical issues. This paper endorses the CIPS position statement of how an individual should act in a business environment, which also incorporates the personal code of ethics. An individual should behave ethically whether dealing with paper transactions or electronic transactions or any other kind of transactions. The Internet means that the scope, reach, reciprocity, transparency and speed of communication have all grown exponentially and this is creating a new environment in which unethical behaviour has far greater implications for companies than was previously the case. The ethics issue has therefore been brought into sharp relief and companies need to take the appropriate steps to deal with it. In fact companies are advised to put in place policies that recognise the greater need for discipline, diligence and self-protection in all dealings with the outside world. The threat of damage from external unethical behaviour has increased significantly and an attack by hackers or the spread of a virus can do untold harm. eCommerce has not as yet created many new issues, but that there is a new context in which transactions are taking place. There are two subjects which this position statement attempts to cover : the ethics of eCommerce (what we should do to meet ethical standards)and the risk of fraud in e-commerce (i.e. the risk of other people not behaving ethically). The higher speed and transparency means that any unethical behaviour inside a company is more likely to be exposed, for example by accidental routing of emails to the wrong addressee. An email is now considered to be of equivalent status to a written letter in terms of liability and evidence of unethical behaviour - hence the need for companies to implement a best - practice policy for all communications. A good example of how the stakes have been raised is the recognition that e business means being potentially able to act ethically or unethically across the entire supply chain. This statement focuses primarily around the Internet - EDI transactions are a lot more secure. The balance of power in e trading relationships is shifting in favour of the purchaser - e auctions are seen as an example of this. This raises the question of what companies should be doing to ensure that their suppliers are treated ethically, but as in all examples, this is nothing new - just an extension of the enlightened self-interest already driving corporations to understand that ethics is good for business. The speed and efficiency of e auctions has increased the chances of suppliers being asked to take part in on-line auctions which are almost like sealed bids but suppliers can keep on coming back with new prices within an established time scale and criteria. There has been a lot of debate and nervousness about eAuctions amongst suppliers, who feel that this will erode their margins and that unique selling propositions will be lost. There may also mistrust as to how the auction may be conducted for example, if the buyer does not make completely clear to participating suppliers what the criteria is for selecting the final supplier - how do they compete effectively or improve their bid for the next auction? There may be concerns that the buyer has entered in `rouge' suppliers into the auction who will put in an artificially low bid to try and get the other participating suppliers to lower their bids as well. Another source of concern could be that in a ranked order

auction whereby the supplier will only see their bids plus their position in the overall ranking. There will be concerns about the transparency of the information shown i.e. the supplier may mistrust the rank they are given. Using an independent intermediary auction site to host eAuctions may reassure suppliers who are concerned about the process as they can enforce the rules agreed, stop the auction if anything unethical is going on and adjudicate in disputes from a nonpartisan viewpoint. It is also essential that buyers train all suppliers and make aware all the rules of the auction and provide them all with a full specification, so they are all starting from a level playing field. This will go some way to gaining the confidence from suppliers in the e auction process. The following list can be used as an Ethics Code for buyers hosting e auctions: Communicate the rules early to all suppliers(including `What if's') Stick to them Provide all suppliers with the same information atthe same time Circulate questions and answers to questions to all suppliers Give all suppliers an equal opportunity to bid Ensure all suppliers are briefed and trained Avoid any exceptions for any supplier Provide object and anonymity in the process Be honest about predicted volume Avoid revealing the names of suppliersparticipating Accept bids by any other means before, during and after PMMS Limited Consulting Group Improving supplier relationships means protecting the longer-term sustainability of the business and market. Ensuring not to exclude smaller suppliers who do not yet have the capabilities to trade electronically is just good business sense. With B2B eCommerce the issues of trust, access, identity, security, privacy, property, confidentiality take on new implications. Global eCommerce overturns boundaries that were put in place over centuries of trading. For example: how does a potential buyer spot whether a company trading on the web is acting ethically? And turning that round, how does a bona fide and honest company let people know that they are just that and act with integrity? Brand reputation has a big part to play here but domain names can be misleading. This brings out issues of authentication of identity and the difficulty of trading remotely, but the real issues are legal and regulatory - cross-border legislation for instance. The ethics issue is no different to that when telephoning a company from the Yellow Pages. Over time, familiarity reduces the 'fear factor' and people begin to accept the small risk of encountering unethical behaviour from a company. Consumer surveys show that it takes between 18 - 36 months for an individual to start trusting an eCommerce site. A good example of this is Easyjet - over 90% of customer's bookings are now taken on-line. Trust in B2C web sites will be further enhanced if a basic etiquette such a company holding on its site a physical address, telephone number and a contact name or title. Moreover when a customer is concluding a contact on a supplier's web site, that web site should: offer a means of cancellation in case of accidental acceptance allow some kind of documentary record, preferably by automatic email back to the purchaser, of the agreement which has been reached. What is the difference between personal and corporate ethics? Is there a difference? (Apart from the obvious its not me syndrome. It's always others who behave badly!) The individual's behaviour is judged by social norms and governed by these and by a set of personal morals and, in the case of a member of a profession, by a professional code of conduct. Companies are governed by legislation and often by a code of practice for their sector. All behaviour is of course that of an individual - the company must understand its moral and social responsibilities, but in the end it has to depend on having recruited people who act ethically. It also has to be careful not to put its employees into a situation in which unethical behaviour is rewarded. None of this is new, of course. Only the context has changed. The technology is forcing companies to do things that they should have already been doing in terms of managing their social responsibilities and ethical obligations. Greater scope, reach and reciprocity mean more interactions by more people, globally. Such aspect as cultural differences in what we believe is acceptable ethical behaviour are surfacing more and control of abuse of these standards is becoming harder. As the web is so open it is currently easy to impersonate somebody, and to intercept confidential e-mails. It is also extremely easy to conduct industrial espionage by hacking into one's rival's computer.

ETHICAL BUSINESS PRACTICES IN PURCHASING AND SUPPLY MANAGEMENT

I NTRODUCTION The best and most successful organisations recognise that they will only prosper in the long term if they satisfy the aspirations of their stakeholders; including customers, suppliers, employees, local communities, investors, governments, public interest and environment groups. To satisfy this intense scrutiny and the demands for greater accountability in society, businesses and other organisations are increasingly recognising the need to measure, track and report on their social and ethical performance. Source: The Institute of Social and Ethical Accountability BACKGROUND The Chartered Institute of Purchasing & Supply (CIPS) has a Personal Ethical Code with which members undertake to comply. This Code sets out principles of: u integrity u professionalism u high standards u optimal use of resources and u compliance with legal and other obligations and offers guidance in relation to: u declaration of interest u confidentiality and accuracy of information u fair competition u business gifts and hospitality and u seeking advice The Code is the basis of best conduct in the purchasing and supply profession and is reproduced as Appendix 1 to this document. The CIPS position on Ethical Business Practices in Purchasing and Supply Management expands on the principles in the Code and addresses business to business ethical issues and social responsibility issues within supply chains. It also takes into account issues that have arisen throughout business regarding social responsibility, personal accountability, corporate governance and so on, which have in turn been addressed in reports produced in recent years; Turnbull, Nolan and Higgs to name but a few. Purchasing and supply management professionals are increasingly required to demonstrate that the supply chains they manage take ethical and social responsibility issues into consideration. The main reasons for ensuring that supply chains meet these criteria should be professionalism and moral and legal obligations but other drivers include: u media or consumer pressure u the need to comply with a particular code of conduct or legal imperative
u

u u u

a requirement to include such issues in annual financial or social accounts social audits ethical investors supply chains that include sources in a particular country or for a particular product which may be perceived to be high risk

'Ethics' in purchasing and supply management can relate to a wide range of issues from doubts about suppliers' business procedures and practices to corruption. The vocabulary associated with this field can, in itself, be confusing, and includes such terms as: u fairtrade u ethical trading u ethical sourcing u social accountability u social auditing u corporate social responsibility u corporate citizenship u codes of conduct u reputation assurance AUDIENCE, O BJECTIVE AND SCOPE The CIPS position on Ethical Business Practices in Purchasing and Supply Management is intended primarily for purchasing and supply management professionals but it applies equally to anyone who has responsibility for managing the supply of goods or services from an external source. The purchasing and supply management professional has a responsibility to at least be aware, if not have a thorough understanding, of ethical issues in purchasing and supply management and to endeavour to address problem areas in a positive manner. The objective of this practice document is to identify the major ethical issues in purchasing and supply management and to offer some guidance. However, its coverage cannot be exhaustive. Purchasing and supply management professionals work in a wide range of environments, and different industries and sectors will interpret these issues in different ways. Purchasing and supply management professionals should identify the values that are specific to their own employing organisation and its stakeholders in order to incorporate these into their policy on ethical purchasing and supply management. Every organisation requires an ethical policy or code of conduct. CIPS believes that purchasing and supply management professionals should universally apply the practice set out in this document and should encourage their own organisations to include good ethical business practices in all areas of their work.

Purchasing and supply management professionals should also involve all stakeholders in this process. It is vital that an organisation's chief executive officer visibly endorses the organisation's ethical policy. This CIPS practice document provides a basis which purchasing and supply management professionals may find of use in initiating a change of culture within their employing organisation, where appropriate. UK public sector purchasers are reminded that the Government's policy is that all public procurement of goods, services and works is to be based on value for money. Public sector purchasers also have to comply with the EC procurement rules. CIPS has produced guidance notes to help purchasing and supply management professionals understand and address the issues covered in this practice document. This document and guidance notes will be continue to be updated from time to time. Purchasing and supply management professionals are invited and encouraged to contribute to this process by providing comments or case study material. Guidance and further information on many of the matters discussed in this document is available from a number of sources and a list of contact names and telephone numbers is available from the CIPS Professional Practice Team. CIPS may, at a future date, address additional social responsibility issues such as sourcing from countries with oppressive regimes or poor human rights records. CIPS has a separate position on Environmental Purchasing and Supply Management. BUSINESS TO BUSINESS ETHICS The CIPS Personal Ethical Code is the starting point for business to business ethics. This section provides guidelines for purchasing and supply management professionals in dealing with business to business ethical issues in their supply chains. Those in the public sector must be aware of the compliance criteria they must meet; others may need to satisfy standards of ethical practice and look to organisational reputation. Purchasing and supply management professionals in some industries face complex problems in addressing ethical and social responsibility issues and may lack codes or standards of practice. Many of these issues are extremely sensitive. CIPS encourages purchasing and supply management professionals to consider the long term implications of their actions and to question objectives that may unintentionally have negative ethical consequences. An example may be an immediate objective to create

savings by rationalising the supply base - but this may then result in smaller suppliers failing to be developed and a monopoly situation beginning to emerge. Purchasing and supply management professionals should seek appropriate guidance, be open about concerns, and engage positively with suppliers and internal customers or peers, however difficult that may be. The resource implications of addressing these issues must be balanced against the potential risk to the reputation of the organisation and, in the public sector, the organisation's requirement to comply with the EC procurement rules. Everyone involved in purchasing and supply management in an organisation should be aware of the organisation's ethical policy and be actively encouraged to embrace its principles. Purchasing and supply management professionals have a responsibility for the supply chains from which goods, services and works come into their organisation or directly to their customers. Best practice purchasing and supply management includes developing and understanding suppliers' operations and offering guidance and support when improvement is necessary or appropriate. CIPS believes this should include ethical as well as commercial and technical guidance and support. Encouraging suppliers to comply with an organisation's ethical policy can take place in parallel with the development of monitoring procedures, and may need to take place over a period of time, or be introduced in phases. Purchasing and supply management professionals should consider the effect on suppliers of compliance costs, and seek guidance about existing codes that may be applicable to their business so that new codes are not unnecessarily created. This may well require helping the organisation confront long-standing custom and practice which is of dubious ethical standing but which has the appearance of being a sectoral norm. TRANSPARENCY, C ONFIDENTIALITY AND FAIRNESS The purchasing and supply management process should be as transparent as possible, within commercial and legal constraints. This means being open with all those involved so that everyone, especially suppliers, understands the elements of the process, that is, the procedures, timescales, expectations, requirements, criteria for selection and so on. Suppliers' confidential information must not be disclosed to any third party or used in any way without the consent of the supplier. In particular, it must not be shared with other suppliers. This is particularly important when an output-based specification is being developed. Although it is acceptable business practice to share ideas amongst suppliers in order to develop the most appropriate solution, suppliers' confidence should be respected. Everybody involved in

purchasing and supply management should understand the implications of commercial confidentiality and it is the responsibility of the purchasing and supply management professional to reiterate this to colleagues at the start of each new project. No relevant information should deliberately be withheld by either party (unless it has been obtained from another supplier in commercial confidence), nor should any misleading information be given. In general, when a supplier asks for clarification during the procurement process the purchasing and supply management professional should give all suppliers involved the information requested. However, if a supplier asks an insightful question the answer should not be circulated to the other suppliers as to do so may remove the competitive advantage the supplier is seeking to provide. The purchasing and supply management professional is obliged to use best judgement in every case, seek advice if in doubt and act in an appropriate and professional manner. Unsuccessful suppliers should be debriefed with as much transparency about the procurement process as can be provided, e.g. on the weaker aspects of their tender. All suppliers should be treated fairly and evenhandedly at all stages of the procurement process. Suppliers who are known to have no prospect of winning the business should not be invited to tender (unless there is an obligation to invite all suppliers who have expressed an interest in tendering, as in the case of the Open Procedure in the EC procurement rules). Unless they are aware of all the circumstances, suppliers should not be required or encouraged to undertake activities or incur cost when there is little chance of their obtaining business within a reasonable period. USE OF POWER Power is a key element in supply relationships. Purchasing and supply management professionals should understand how to use the purchasing power of their organisation appropriately. For instance, it is common practice to aggregate requirements as a means of leverage to secure greater value for money. Purchasing and supply management professionals are responsible for determining the extent to which power should be used in relationships with suppliers. The exertion of undue influence or the abuse of power, as well as being unprofessional, may contravene relevant legislation and is unlikely to achieve long-term best value for money. Purchasing and supply management professionals should discourage the arbitrary or unfair use of purchasing power or influence.

Purchasing and supply management professionals should ensure compliance with all applicable legislation such as restraint of trade and anti-trust legislation, the Competition Act 1998 (in particular Chapter II, Abuse of Dominant Position), and the Treaty of Amsterdam (Articles 81 and 82, which address anti-competitive practices and abuse of dominant position). CORRUPTION Purchasing and supply management professionals should seek to encourage the application of both the word and the intention of the CIPS Personal Ethical Code. Purchasing and supply management professionals must not tolerate corruption in any form. CIPS believes that there is no excuse for corruption and it can never be blamed on navet, lack of professional knowledge or poor management. Purchasing and supply management professionals aware of any corrupt activity have a duty to the profession and to their employing organisations to alert their senior management. Bribery is a criminal offence in the UK (and in most other countries). CIPS fully supports the Organisation for Economic Co-operation and Development (OECD) convention on combating bribery of foreign public officials in international business transactions. In the UK, legislation now makes it a criminal offence for UK citizens to do this, thus outlawing practices common in some international markets for example facilitation payments. Purchasing and supply management professionals have a responsibility to determine what is acceptable behaviour between suppliers and colleagues, irrespective of their role or status in the organisation and to influence policy makers to define standards. Suppliers often liaise directly with end users and other internal customers. The purchasing and supply management professional should not necessarily discourage such liaison, indeed maintaining product development awareness amongst users may well make it essential, but should develop organisation-wide policies and educate colleagues about unacceptable or unethical relationships with suppliers. DECLARING I NTEREST Purchasing and supply management professionals should encourage colleagues to declare any material personal interest which may affect, or be seen to affect, their impartiality or judgement in respect of their duties. Examples include owning a significant shareholding in a supplier or close family members being employed by a key supplier.

BUSINESS GIFTS , H OSPITALITY AND UNDUE INFLUENCE Organisations should have a clear policy on accepting business gifts. Purchasing and supply management professionals should encourage colleagues to comply with any such policy. CIPS believes that normally the only acceptable gifts are items of small intrinsic value, such as desk diaries. Purchasing and supply management professionals and others involved in the supply chain should not accept hospitality which may be perceived as influencing their judgement or impartiality in any way. Hospitality accepted should never be excessive or frequent, should be managed openly and carefully, and be capable of being reciprocated. The same rules apply in relation to gifts or hospitality offered to close family members. It is generally unethical to accept travel or subsistence payments from suppliers during product familiarisation visits. Acceptance of equipment, samples and demonstration models from suppliers without contractual protection can be dangerous e.g. due to a lack of clarification on liability and indemnity. In particular, the ethical implications of appearing to accept these offers without full transparency can be damaging to both the buyer and the buying organisation. Staff should not accept anything that their taxation authorities would consider to be a taxable benefit. Free issues from the buying organisation e.g. of items for incorporation in rigs, products etc are, in most cases, acceptable business practice. PAYMENT OT BE AN A PPROVED SUPPLIER Purchasing and supply management professionals should not request payment from suppliers as a condition of being placed on an approved or preferred supplier list. Suppliers should be selected on the basis of meeting appropriate and fair criteria. See section on Supplier Imposition. PAYMENT TOWARDS JOINT PROJECTS Purchasing and supply management professionals may invite suppliers to contribute towards the costs of joint projects or initiatives such as sector-wide supplier databases, marketing a new product range or investing in a new IT system, provided there are clear and tangible business benefits to the supplier. This process should be undertaken carefully and fairly and must not discriminate against suppliers, for example small and medium-sized enterprises (SMEs). Suppliers should not be selected solely on the basis of their financial contribution.

PAYMENT TO A GREED T ERMS Purchasing and supply management professionals should ensure that their suppliers understand and agree to the negotiated payment terms. Payment terms are the subject of EU legislation Late Payment of Commercial Debts (Interest) Act 1998. Late payment credibility. undermines the organisation's

Buying organisations should try to ensure that valid invoices are paid in accordance with the agreed terms and in the agreed way. Purchasing and supply management professionals should work with colleagues to ensure that their employer's business processes enable payments to be made promptly. Any problem with an invoice should be addressed and resolved appropriately in order that the invoice can be processed. BARTER Barter is trade by exchange of goods or services for other goods or services. There is no exchange of money and, as barter is not usually a condition of contract between two parties, coercion is not an issue. Where is it appropriate, barter is acceptable business practice, provided both parties have a current business need for the goods/services of the other party. RECIPROCAL TRADING Reciprocal trading (countertrade) which makes being a customer of an organisation a condition for being a supplier, is generally unacceptable business practice. CIPS has a separate position on practice document which details the CIPS view on this matter. In essence CIPS believes reciprocal trading to be only acceptable when: u there is no coercion u both parties are in agreement and u there is mutual benefit and transparency SUPPLIER RELATIONSHIPS AND COMPETITION Most organisations purchase some commodities and services tactically, using short-term contracts, and others, for reasons of strategy, security or leverage, by means of longer-term arrangements. From time to time, longer-term agreements with suppliers should be subject to open and transparent competition: u to provide new or alternative suppliers with an opportunity to win the business and u to enable the buying organisation to access and obtain the best current market offering SUPPLIER MISTAKES Supplier imposition is the situation in which a customer or end user stipulates that a particular supplier should be used. In many cases there is a valid reason for this. However, purchasing and supply

management professionals should always challenge such a situation since it can lead to established internal business controls being ignored and the quest for the best value for money solution being compromised. Purchasing and supply management professionals should, through act or influence, only use or permit supplier imposition where there are transparent and objective reasons for it. An example is when there is only one supplier with the capability to ensure the required level of quality required by the customer, and where existing contractual relationships can be respected. There are sometimes cases where supplier imposition appears to have happened but in reality there has been a misunderstanding e.g. where end users are asked to use framework contracts without fully appreciating the procurement process that was undertaken to create the contract. Purchasing and supply management professionals must ensure that the decision making process for appointing suppliers is visible and transparent. SUPPLIER MISTAKES A mistake is a non deliberate error. CIPS has a separate detailed position on practice on this subject, the essence of which is as follows: Purchasing and supply management professionals should adopt a professional and understanding approach to the supplier when a mistake is brought to light unless of course it becomes apparent that the mistake was not a mistake at all but a deliberate attempt to gain unfair advantage. Purchasing and supply management professionals should search for anything that looks odd or unusual in a supplier's offer and seek clarification prior to contract award. Mistakes identified post-contract award should be investigated impartially and ethically with a view to generating options for resolution. SIZE, MATURITY AND LOCATION It is good practice to balance the risk of awarding contracts to new or small suppliers with the opportunity of encouraging new business to flourish. It is not good practice to exclude suppliers simply because they are small or new to the market. Capability and experience are examples of relevant supplier selection criteria. Purchasing and supply management professionals should consider the magnitude of business they award to a supplier, the impact on that supplier and the level of dependence that may be created. Serious consequences for the supplier can result if business is removed at a later date. It may, in certain circumstances, be wise to agree exit strategies during contract finalisation so that social and other factors can be taken into consideration.

Purchasing and supply management professionals should, wherever possible, be aware of opportunities to support the local community and SMEs whilst maximising opportunities for global sourcing when this is appropriate. SOCIAL RESPONSIBILITY The CIPS position on Ethical Business Practices in Purchasing and Supply Management distils aspects of current developments in the area, including: u the Ethical Trading Initiative (ETI) Base Code u the Core Conventions of the International Labour Organisation (ILO) u the UN Declaration on Human Rights u SA8000 (a standard relating to social accountability developed by the Council on Economic Priorities Accreditation Agency in New York - now known as Social Accountability International (SAI) Purchasing and supply management professionals should not assume, however, that compliance with the CIPS position necessarily implies compliance with any of the above codes or standards as there are some differences between them. Purchasing and supply management professionals should work with new and current suppliers to improve their status in respect of all aspects within this CIPS practice document. The CIPS position on Social Responsibility Issues in Purchasing and Supply Management is as follows. It forms a key part of the CIPS position on Ethical Business Practices in Purchasing and Supply Management. EMPLOYMENT IS CHOSEN ( NO FORCED LABOUR ) u Employees should be free to choose to work for the supplier, i.e. their employer u Employees should be free to leave the supplier after reasonable notice is served u Suppliers should not use forced, bonded or nonvoluntary prison labour EMPLOYMENT R ELATIONSHIPS u Suppliers should establish recognised employment relationships with their employees that are in accordance with their national law and good practice u Suppliers' employees should be provided with an easy to read contract of employment with particular clarity in relation to wage levels. u In the event that employees are unable to read, the contract of employment should be read and explained to them by a union representative or another appropriate third party u Suppliers should not seek to avoid providing employees with their legal or contractual rights

FREEDOM OF A SSOCIATION u Suppliers should not prevent or discourage employees from joining trade unions u Suppliers' employees should be able to carry out reasonable representative functions in the workplace Suppliers should not discriminate against employees carrying out representative functions Where the law restricts freedom of association and collective bargaining, suppliers should facilitate alternative means of representation

L IVING WAGES ARE PAID u Wages and benefits should at least meet industry benchmarks or national legal standards. As a minimum, the wages paid to suppliers' employees should meet their basic needs u Suppliers should not make deductions from wages unless permitted by national law or with the permission (without duress) of the employee u Suppliers should always pay in cash and not in kind, e.g. goods, vouchers SUPPLIERS E MPLOYEES WORKING HOURS u Working hours should comply with national laws or industry standards u Suppliers' employees should not be expected to work more than 48 hours per week on a regular basis u On average, suppliers' employees should be given one day off approximately every seven days u Suppliers should not pressurise employees into working overtime; overtime should be voluntary and not be demanded on a regular basis; where overtime is requested by the employer it should be reimbursed at an appropriate rate and should not exceed 12 hours in any week SUPPLIERS T REATMENT OF E MPLOYEES u Under no circumstances should suppliers abuse or intimidate, in any fashion, employees u Any disciplinary measures should be recorded u Suppliers should have a grievance/appeal procedure that is clear, easy to understand and should be given to the employee in writing u In the event that suppliers' employees are unable to read, the grievance/appeal procedure should be read and explained to them by a union representative or another appropriate third party L AW
u

Suppliers' employees should be trained in health and safety policy and procedures Suppliers should monitor compliance with health and safety policy Suppliers should provide employees (at the supplier's expense) with any necessary health and safety equipment, e.g. gloves, masks, helmets Working conditions should be comfortable and hygienic Suppliers should identify specific hazards, e.g. substances or equipment, and should implement processes to minimise risk Suppliers' employees should have access to clean toilets Suppliers' employees should have regular breaks and have access to water suitable for drinking and washing as a minimum

CHILD L ABOUR In principle, CIPS is against the use of child labour and believes its long-term elimination is ultimately in the best interests of children. However, the elimination of child labour must always be undertaken in a manner consistent with the best interests of the children concerned. Purchasing and supply management professionals should seek to ensure that their organisation's suppliers comply with the following: u Suppliers shall develop or participate in and contribute to policies and programmes which provide for the transition of any child found to be performing child labour to enable her or him to attend and remain in quality education until no longer a child. u Suppliers shall not employ children and young persons under 18 at night or in hazardous condition. u In any event the course of action taken shall be in the best interest of the child, conform to the provisions of ILO Convention 138 and be consistent with the United Nation's Convention on the Rights of the Child In this context, 'child' refers to any persons less than 15 years of age, unless local legislation on the minimum age stipulates a higher age for work or mandatory schooling, in which case the higher age shall apply 'Young person' refers to any worker over the age of a child, as defined above, under the age of 18 DISCRIMINATION u Suppliers should have a policy of equality for all in the workplace with no discrimination on the basis of race, caste, religion, nationality, age, gender, marital status, sexual orientation, disability, union membership or political affiliation.

Suppliers should always work within the laws of their country

H EALTH AND SAFETY u Suppliers should assign responsibility for health and safety to a senior management representative u Suppliers should have appropriate health and safety policies and procedures and these should be demonstrable in the workplace

APPENDIX PERSONAL E THICAL CODE OF THE CHARTERED I NSTITUTE OF PURCHASING & SUPPLY Introduction 1. Members of the Institute undertake to work to exceed the expectations of the following Code and will regard the Code as the basis of best conduct in the purchasing and supply profession. 2. Members should seek the commitment of their employer to the Code and seek to achieve wide spread acceptance of it amongst their fellow employees. 3. Members should raise any matter of concern of an ethical nature with their immediate supervisor or another senior colleague if appropriate, irrespective of whether it is explicitly addressed in the Code. Principles 4. Members shall always seek to uphold and enhance the standing of the purchasing and supply profession and will always act professionally and selflessly by: (a) maintaining the highest possible standard of integrity in all their business relationships both inside and outside the organisations where they work (b) rejecting any business practice which might reasonably be deemed improper and never using their authority for personal gain (c) enhancing the proficiency and stature of the profession by acquiring and maintaining current technical knowledge and the highest standards of ethical behaviour (d) fostering the highest possible standards of professional competence amongst those for whom they are responsible (e) optimising the use of resources which they influence and for which they are responsible to provide the maximum benefit to their employing organisation (f) complying both with the letter and the spirit of: (i) the law of the country in which they practise (ii) Institute guidance on professional practice (iii) contractual obligations. 5. Members should never allow themselves to be deflected from these principles. Guidance 6. In applying these principles, members should follow the guidance set out below: (a) Declaration of interest - Any personal interest which may affect or be seen by others to affect a member's impartiality in any matter relevant to his or her duties should be declared. (b) Confidentiality and accuracy of information - The confidentiality of information received in the course of duty should be respected and should never be used for personal gain. Information given in the course of duty should be honest and clear. (c) Competition - The nature and length of contracts

and business relationships with suppliers can vary according to circumstances. These should always be constructed to ensure deliverables and benefits. Arrangements which might in the long term prevent the effective operation of fair competition should be avoided. (d) Business gifts - Business gifts, other than items of very small intrinsic value such as business diaries or calendars, should not be accepted. (e) Hospitality - The recipient should not allow him or herself to be influenced or be perceived by others to have been influenced in making a business decision as a consequence of accepting hospitality. The frequency and scale of hospitality accepted should be managed openly and with care and should not be greater than the member's employer is able to reciprocate. Decisions and Advice 7. When it is not easy to decide between what is and is not acceptable, advice should be sought from the member's supervisor, another senior colleague or the Institute as appropriate. Advice on any aspect of the Code is available from the Institute. This Code was approved by the Council of CIPS on 16 October 1999.

FRAMEWORK ARRANGEMENTS
BACKGROUND CIPS practice documents are not written to be an end in themselves. They are a collection of views on good practice within a particular subject area, in this case framework arrangements, as it relates to purchasing and supply management. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Further information on framework arrangements is available from CIPS. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on framework arrangements has been written primarily for the benefit of full-time purchasing and supply management professionals. This document is one of a series summarising CIPS' view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document, which supports this series entitled 'Background to CIPS Positions on Practice'. CIPS is expressing beliefs on framework arrangements as they are a fundamental part of managing the supply of goods and services, yet are often a source of confusion. The key positions in this paper are summarised below. CIPS emphasises the importance of buyers making a distinction between framework agreements and framework contracts. Buyers need to be aware of the various expressions associated with framework arrangements, including 'trading agreements' and 'standing offers'. CIPS believes that since, by definition, framework arrangements extend over a period of time, particular care has to be given to setting prices (consideration) when at the contract stage. CIPS would emphasise that lengths of call-offs are not governed solely by EC rules - they are also of significance for medium- and long-term consultancy contracts, for example. CIPS believes that the purchasing professional has a responsibility to select the type of framework best suited to his organisation's needs.

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CIPS considers that when putting framework arrangements in place purchasing professionals should communicate the implications to colleagues both within and external to the organisation. CIPS believes that buyers need to pay particular attention to the supplier base (geographical distribution, for example) when putting framework arrangements in place.

INTRODUCTION AND DEFINITIONS Framework arrangements are becoming more popular as they represent a 'smarter' way of purchasing than placing 'one-off' orders for recurrent contracts for works or supplies; by, for example, optimising volume purchasing discounts and minimising repetitive purchasing tasks. A key aim of a framework arrangement should be to establish a pricing structure; however this does not mean that actual prices should be fixed but rather that there should be a mechanism that will be applied to pricing particular requirements during the period of the framework. It should also be possible to establish the scope and types of goods/services that will need to be called-off. There are broadly two types of framework arrangements - framework contracts and framework agreements. FRAMEWORK CONTRACT A framework contract has a consideration of a monetary sum paid up front by the buying organisation to the supplier. This payment is made in order to create a contract on the terms and conditions offered by the supplier to the buying organisation so it is important to first ensure that the terms and conditions are correctly drafted so that the supplier is tied in to what has been agreed. Consideration is of course an essential element of the contract; without consideration, either party may withdraw at any time. The consideration may be a purely nominal sum which will, however, in the event of a dispute, normally be interpreted by the courts as confirmation that the parties are happy to be bound in the legal sense (see section below headed 'Consideration'). Other expressions associated with framework contracts include 'term contracts' which are generally framework contracts, but may also be encountered in other buyer/supplier situations and are arrangements put in place for a fixed period of time. These are sometimes referred to as 'period contracts'. Where a contract of this kind is put in place without a specified end date it is sometimes called a 'running contract' or 'perpetual contract'.

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FRAMEWORK AGREEMENT A framework agreement is the same arrangement without the up-front consideration - instead, each time a buyer uses the agreement a separate contract is formed by the consideration paid for the order in question. Some organisations call framework agreements 'trading agreements' - others might call them 'standing offers'. 'Blanket orders' are a type of framework agreement (they can also be a commitment of any of the purchasing participants to make use of the arrangement but under the terms of which they are entitled to obtain the specified goods or services from the participating suppliers should they wish to do so). In blanket order situations an order number is given to a supplier which the supplier uses to invoice - and buyers simply call off their requirements against it. Many other terms are used for framework agreements, one example being 'umbrella agreements'. The term 'frames' is also used but is rather unfortunate in that it has negative connotations! Therefore, difference between framework contracts and framework agreements may be summarised by saying that - the former is an arrangement between two parties which commits one to buying at least a certain volume of particular goods or services from the other over a specified period; the latter is an agreement between two parties for the supply of an unspecified amount of a product over a specified period. In this document, for points that apply equally to a framework contract or framework agreement, the generic term 'framework arrangement' is used to include both. A 'memorandum of understanding' is also an expression used in association with, or as a type of, framework arrangement. CONSIDERATION Consideration is almost always a sum of money; however, since consideration may be concisely defined in a contractual context as 'something of value', goods or services can also constitute consideration. Opinions differ as to whether or not nominal amounts such as 1 represents consideration under a framework arrangement; in the civil service and MOD, for example, such a sum is deemed to be acceptable consideration. An opposing view is that if the parties commit themselves then there is a contract - paying 1 will not make any difference. In many cases buyers will not be able to accurately forecast their requirements; however this does not obviate the need for some form of contractual commitment. Generally the reality is that buyers are disinclined to commit themselves when, as is often the case, future needs are unclear; this is a particular issue

when larger value items are involved. The attractiveness of the 1 consideration is that it should ensure the supplier keeps his offer open for acceptance without the buyer being committed to a specific level of expenditure. On the other hand it may be difficult to imagine that a supplier would accept a commitment to satisfy any and every order in return for no client commitment to place any orders at all or at least would require much more than 1 for doing so. An alternative approach is the 'total support concept' this functions rather like an extended consumer warranty, whereby, for a payment of X per month a supplier will undertake to supply all the spares and repairs needed. TERMS AND CONDITIONS Some organisations set up framework arrangements by sending stringent terms and conditions to suppliers as part of the invitation to tender documentation, and in order to be awarded the framework arrangement they have to agree to the terms and conditions proposed. On other occasions 'boiler plate' conditions of contract are sent to suppliers which are modified under the contract that comes into being later, for example, when a call-off order is made. The terms and conditions agreed at today's date will apply even if delivery and hence payment is a year down the line; the original framework document needs to reflect/accommodate this. The framework is the main contract, with each individual order constituting a separate mini-contract. The contract needs some form of disclaimer to the effect that any estimates of volume of demand are non-binding, and even that the buyer is not obliged to place any orders at all. Also that the buyer has the right to place orders for the same goods and services elsewhere during the lifetime of the agreement. Framework arrangements can also be used simply to pre-agree one or two terms or conditions that the parties agree will provide the basis of a trading arrangement if suitable opportunities arise in the future. Here it is important that all the buyers who might be dealing with that supplier are made aware of the arrangement so as to avoid unnecessary debate. Thus a buyer might confirm acceptability of the supplier's buyers standard terms so they do not have to be re-negotiated every time. CALL-OFFS When awarding call-offs (i.e. individual contracts) under framework arrangements, contracting authorities in the public and utilities sectors do not need to go through the procedural steps again as long as the rules for setting up the framework agreement were correctly observed in the first place.

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The length of call-offs under a framework arrangement is not limited by the EC Procurement Directives (see next heading). For example, call-offs for consultancy services might be for three, six or 12 months or even longer. However, individual call-offs should not be affected just to circumvent EC rules. Thus it would be difficult to justify a 12-month call off right near the end of the term of the framework in cases where the normal pattern hitherto has been for onemonth call-offs. Options for call-off arrangements will vary according to individual circumstances and in particular the number of suppliers involved. FRAMEWORK AGREEMENTS AND THE EC PROCUREMENT RULES In the EU, buyers in the public and utilities sectors must comply with the EC Procurement Directives. The Directives do not mention framework arrangements of any kind yet it is common practice in the UK for both public and utilities sector buyers to put such arrangements in place. Indeed, well over 80% of public sector orders are put through framework arrangements. (Note: The new consolidated Public Procurement Directive (currently - June 2003 - in its final stages in Brussels) does for the first time explicitly address the issue of framework agreements. This gives important clarification to the way bodies subject to the EC rules must let and operate framework agreements and introduces certain new requirements including the restriction of the length of a framework agreement to four years except in exceptional circumstances. Comprehensive guidance is available from the OGC website (www.ogc.gov.uk). THE PUBLIC SECTOR Within the public sector, there are two types of framework arrangements that are commonly used. The first is where an arrangement is put in place with one or more suppliers for the supply of a range of supplies or services in which the prices (or more accurately, a pricing formula) and terms and conditions are all agreed for the duration of the period of the arrangement. The second type is where prices are determined by a 'mini-competition' between the suppliers that have been awarded the framework contract; they can also be used to refine other value for money criteria However, the award criteria must remain consistent with those employed at the time the arrangements were put in place. Both types of arrangement can be let with a single source supplier but the 'mini-competition' stage in the second type of arrangement involves the supplier firming up the prices for the requirement in question. Alternatively, it can be argued that rather than two different types of framework arrangement there are instead two different ways of calling off from any given framework arrangement. Whether or not a mini-competition is held depends on the particular

requirement and whether the terms are precise enough to identify the best supplier for that particular requirement. THE UTILITIES SECTOR The separate Utilities Directive provides for framework agreements, defined as an agreement with suppliers, the purpose of which is to establish the terms governing contracts to be awarded during a given period, particularly in terms of price and quantity (this could be used as a generic definition for framework agreements). For this type of agreement there is no particular problem under EC rules as it can be treated in the same way as any other contract. However, the Commission is concerned that there should be no potential for negotiation or varying the contract when calling off a requirement against a framework - finalising the terms of any contract under a framework should be a 'mechanistic' procedure, not involving re-negotiation of the terms already established. The UK has always taken the view that the only sensible approach to such arrangements is to treat them as if they are contracts in their own right for the purposes of the application of EC rules. As such the practice has been to advertise the framework itself in OJEU and follow those rules for the selection and award of the framework. VARIATIONS
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The following examples illustrate some of the variations in framework arrangements, and the purposes they can serve. It is the role of the purchasing and supply management professional to determine the type of framework arrangement to support the organisation's needs according to circumstances. For example, if a supply requirement is from a supply chain with risks associated with it then it is probably best to firm up the arrangement by making it into a contract. Some organisations provide an estimated quantity without any commitment to meet that quantity when setting up framework arrangements, with the aim of achieving better value for money; this will be improved where a quantity is actually committed. When details of quantities are provided these should not be exaggerated, as this will undermine the credibility of the buying organisation in the supply market. Equally, if a framework arrangement is put in place that is not used, then this too will damage the buying organisation's credibility. A deed is another legal device that can be used to tie the supplier in to the terms and conditions offered, as it is a means of creating a contract without consideration. This, however, can be an expensive process involving lawyers and, as such, it is not recommended by CIPS. Suppliers who are awarded framework arrangements are sometimes termed 'approved suppliers' or

'preferred suppliers' as they have been subject to a supplier appraisal process and therefore considered to offer value for money from a relatively secure source. The expression 'qualified list' of suppliers is also used when referring to suppliers who have been awarded framework arrangements. It is arguable that a distinction may be made between approved and preferred suppliers. One pair of definitions might be: an approved supplier is one on a list of similar suppliers who has been prequalified and is eligible to tender or quote for particular categories of requirement a preferred supplier (a dangerously nebulous term) is one who has some kind of for mal agreement with the organisation. One way of avoiding possible confusion is to simply use the term 'contracted supplier'. Framework arrangements are most often used for high volume/low value orders but are also useful for other segments of spend such as consultancy arrangements. They are particularly useful in construction projects as they enable detailed specifications to be worked up at an appropriate time within the project. They are also a useful tool in the bid support arena to generically underpin a future contract that will not be agreed unless the specific bid is won. The Portfolio Matrix can be used to illustrate the different ways framework arrangements can be used, for example, in the 'Leverage segment' it is good practice to aggregate spend but limit the duration of the arrangement and/or have other mechanisms built in to maintain competition. In the 'critical segment' a more detailed term contract may be appropriate' to ensure security of supply. In the 'strategic segment' a framework may be more akin to a partnering agreement and seek to try to extract extra added value services from the supplier relative to the buying organisation's competitors. DRAWING UP FRAMEWORK ARRANGEMENTS Setting up framework agreements and framework contracts should not be seen as an onerous process. They should usually include: some words that describe the purpose and scope of the arrangement clarity on whether it is in fact a contract or agreement (i.e. is there consideration) terms and conditions that apply to each call-off (an identified arbiter is also useful) a pricing mechanism - may not be fixed prices along with discount arrangements specifications, standards, samples as appropriate to define the requirements a call-off mechanism/procedure period - duration of arrangement any limitations on the use of the arrangement estimated volumes as appropriate.

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ADVANTAGES OF FRAMEWORK ARRANGEMENTS Framework arrangements can provide many benefits to the buying organisation including: flexibility - to determine the specific requirement at the call-off order stage saving time at a critical stage in a project, as the buyer can firm up the requirement at the appropriate time and simply call-off rather than having to go through a competitive exercise that could cause unnecessary delays to a project leverage/economies of scale through aggregation - framework agreements and framework contracts can often cover hundreds of items with the prices and terms and conditions agreed avoids duplication - one buyer goes out to the marketplace on behalf of all the other buyers in the organisation avoids re-work as framework agreements/contracts can be used to remove the need for requisitions and approval processes (as the risk has already been managed) - however some organisations prefer to use the full acquisition procedure, even for call-off orders a suitable method of conducting business in an organisation that has devolved budgets - by putting arrangements in place and then empowering end-users to order from them an appropriate method for use by consortia that set up arrangements on behalf of a number of organisations as it provides leverage through economies of scale whilst maintaining the independence of the buying organisations enabling eProcurement by putting the suppliers' offerings under the framework arrangement on the eProcurement system for buyers to use supporting purchasing cards as buyers can call off from the framework arrangements using pCards for ordering and payment can be used as a method of variety control/standardisation as appropriate by offering buyers only the choice of products within a category of spend which are provided for under the framework arrangements in place --alternatively the converse can be enabled through frameworks - offering buyers a wider choice than they would have the time to arrange if sourcing independently. INTRODUCING FRAMEWORK ARRANGEMENTS PRACTICAL CONSIDERATIONS It is important that the purchasing and supply management professionals who put a framework agreement/contract in place for use by other buyers (either colleagues, or those in other organisations) ensure they communicate the fact that this has been put in place and provide these individuals with easy access to the arrangements. This might be done via an intranet or part of an eProcurement solution with suppliers' offerings under the framework arrangements being readily accessible and usable. Suppliers are also helpful in promoting the framework arrangement to buyers and end-users by, for example,

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putting on a lunchtime presentations explaining the new arrangement and taking questions. Another consideration is ensuring that buyers and end-users understand the circumstances in which they should use the framework arrangements. This must be articulated as part of the policies, procedures and standing orders of an organisation that empower specified individuals to carry out certain activities within an overall policy framework. An example might be for an end-user to commit a 100k order to a supplier that happens to be a preferred supplier under a framework arrangement for a given set of requirements whereas it would have been preferable to put the order out to competition. A further related point is that end-users and buyers using the framework arrangements must be aware of the importance of confidentiality - and not for example, communicate prices to other suppliers in the marketplace. It is also good practice to involve a representation from the user community when setting up the framework arrangement so that their needs are included in the decision-making process and hence they are more likely to use and support the arrangement. It is important to note also that a framework arrangement should be tailored for the type of requirement being contemplated e.g. that relating to short-notice plant hire will be very different to those applicable to major project work. MONITORING FRAMEWORK ARRANGEMENTS All arrangements with suppliers need to be managed once they have been put in place, by seeking end-users' and buyers' feedback, as well as through feedback from the suppliers. Performance measurement is important and should be aligned to the award criteria and the scope and purpose of the arrangement. Reviews should be undertaken regularly within a framework of continuous improvement. (Reference should be made to the CIPS Position on Contract Management.) For this purpose, when initiating or re-letting such arrangements, there must be clear definition of the management information and analysis which will be required, e.g. regarding frequency/value/types of goods and services called off, and delivery performance; and which party will capture it. Often, the supplier is in the best position to do this. As well as receiving such reports in hard copy, the customer will benefit from receiving them in digital form e.g. Excel files, enabling them, if necessary, to analyse the data in additional ways. Purchasing and supply management professionals must also ensure that they manage a market so that the competition does not disappear as a result of all the business being placed with just one or two suppliers. This is particularly important when setting up framework arrangements on behalf of a large organisation, or on behalf of a consortium.

When considering how many suppliers to award a framework arrangement to for a given requirement, the issue of geographical spread needs to be considered. For instance, one supplier might be best placed to service sites in the North East of England and not be as capable of servicing sites in Devon or Cornwall. One method is to enable a supplier to subcontract work to another local supplier to cover the area that is difficult for the main contractor to service. In some public sector organisations, multiple framework arrangements are put in place at national, regional and local levels. Care needs to be taken to communicate to end-users and buyers which arrangement offers best value for money to the organisation especially if one supplier is servicing two arrangements - at a national and local level, for example. All frameworks when tendered should clearly show that it is indeed a framework arrangement; the duration of such arrangement; the estimated maximum number of suppliers; estimated total value; and the award criteria, whether simply price, or MEAT (Most Economically Advantageous Tender). CONCLUSION This CIPS Position has drawn attention to the expression 'framework arrangement' as a convenient generic term embracing 'framework agreement' and 'framework contract' although given the visual similarity of the words 'arrangements' and 'agreements' the choice of word is perhaps not ideal. This Position has clearly shown that while framework agreements are an essential feature of the landscape for those working in the public sector and with the EC Public Procurement Directives, and are moreover frequently mentioned in the literature, they have not until now featured in the Public Procurement Directives themselves (a situation which, however, is likely to change when the new consolidated Public Procurement Directive is published). In its review of framework contracts this Position has drawn attention to the vital role of consideration in contracts. Referring to the discussion of nominal consideration, CIPS takes the view that suggesting a sum of 1 might cause resentment in some suppliers. Setting firm prices at the contract stage also has its dangers; a much better approach, suggested towards the bottom of the first page, is to make use of a mechanism that can be applied to pricing particular requirements during the period of the framework.

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INCENTIVISATION
INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case incentivisation, as they relate to purchasing and supply management. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Further information is available from CIPS. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on incentivisation has been written primarily for the benefit of full time purchasing and supply management professionals. This document is one of a series summarising the CIPS view(s) on a wide range of subjects. The reader may wish to refer to the accompanying document which supports this series entitled "Background on Purchasing and Supply Management Positions on Practice". CIPS is expressing beliefs on incentivisation because it is a valuable method of improving a supplier's performance; it works best as a co-operative and collaborative approach rather than a unilateral process and should not be imposed by the purchasing and supply management department. CIPS views, opinions and beliefs are stated throughout the document; however the broad practice statements which underpin the text are as follows: CIPS is in favour of incentivisation where there is a clear business benefit. CIPS recommends that purchasing and supply management professionals should adopt a pro-active and positive 'what-if' approach to the contract management process as this encourages innovation and customer satisfaction. CIPS believes that all purchasing and supply management professionals need to develop the relevant tools and competences if they are to manage the incentivisation process effectively. CIPS believes that the effect on the bottom line is a key determinant in any decision to apply incentivisation principles. DEFINITION Incentivisation is the term used to align the motivations of the client with the supplier and vice versa so that the supplier is stimulated to improve his performance so as to benefit the client. This is usually in return for enhanced reward for the supplier whether it be financial or some other sort. It involves a process of mutually agreeing targets, often with respect to cost, schedule, quality and safety or other measurable benefits to the client's business such as: inventory reduction increased sales reduced cost improved labour utilisation better technical solutions The objective is the achievement of superior, or at the very least improved, performance which can be shared as a benefit of both parties for which the supplier will receive additional reward. The outcomes of the superior performance, whether lower cost, early delivery, safer product or higher quality product are of value to the buyer. Incentivisation might lead to a purchasing partnering relationship but this is not always the case. Incentivisation involves making a judgement on commercial risk so it is essential that the risks in the contract are understood. CIPS encourages all P&SM professionals to constantly exercise a 'what-if' mentality in relation to the procurement of goods, services and works. The 'what-if' mind-set will enable purchasing and supply management professionals to determine the potential outcome of risk techniques by testing assumptions, propositions and approaches under consideration. Incentivisation is not a panacea to the many problems which can afflict large value, long term contractual arrangements. It is not easy, nor is it a quick fix because it requires time, considerable thought and planning for it to work effectively. It works best as a co-operative and collective approach rather than a unilateral process and should not be imposed by a purchasing department. It needs the support and active participation of colleagues within the client organisation (including those outside purchasing) and the supplier and his staff.

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BENEFITS OF INCENTIVISATION: From the client organisation/buyer's point of view, the benefits to the buying organisation are likely to include lower cost, earlier delivery leading to an earlier revenue stream improved quality or safety greater certainty over delivery time, cost and / or quality a more knowledgeable and skilful workforce arising from the experience of open book costing additional services from the supplier possibly a longer relationship with a good supplier less time spent resolving contractual disputes better technical solutions to problems as suppliers will be encouraged to apply specific expertise to the issues. From the supplier's point of view, the benefits are likely to include: more or faster payment better reputation possibly longer relationships with the buyer less time spent on contractual disputes DISBENEFITS OF INCENTIVISATION For the supplier, there is the risk of investing his time and not winning any business. For the buyer, there is the investment of his time with many suppliers of which only one will get the business. There is also the risk that the effort involved in establishing an incentivised arrangement will not equate with the extra outcomes from this arrangement. INCENTIVISATION - KEY FEATURES AND CONDITIONS Incentivisation is contractually based and it might but need not necessarily be based on agreement and trust between buyer and supplier. However, without a genuine meeting of minds, an incentivised contract is likely to be seen in a negative light, most probably by the supplier, who could see it as simply another contractual device imposed by the buyer to compel performance. This means that the reward which the supplier receives must be commensurate with the extra effort required- i.e. the reward must be valued and fair. Conversely, the value from the incentivisation which the buyer receives should be commensurate with the amount to be paid. The incentivisation must be seen by both parties to be win-win, and there should be no hidden agendas. Mutual trust and a drive to continuously improve are essential. For example, where the incentives are concerned with cost minimisation, there will be a need for both parties to practice open book costing.

Contractual incentive schemes need to reflect the business objectives of the client and coincide with the business objectives of the supplier. They should be simple and measurable so as to avoid dispute both about their meaning and their attainment. They should preferably be based on outputs so that deliverables can be easily identified and they should take account of what might happen during the life of the contract. Incentivisation requires closer and more detailed dialogue between the buyer and supplier both at the pre-contract stage and during post-contract management. This is because of the greater need to attend to performance and its measurement if the milestones associated with the incentives are to be unequivocally attained thus clearly justifying payment of the incentive. Lack of clarity associated with the attainment of a milestone can, of course breed mistrust and this will sour relationships Incentivisation arrangements are not an end in themselves. They should only be used where appropriate. This means that the cultures which exist within both the supplier and the client organisation must be compatible. Above all, the concept needs wide acceptance within many departments and at many levels of management in both organisations. It often needs to include all stakeholders. Agreement simply between the buyer's purchasing and contracts department and the supplier's sales department will not work. Incentivisation is naturally dependent on the buyer's ability to pay. This requires the buyer to carefully assess the likely cost of any incentivisation and to take steps to ensure that the purchasing organisation provides the funds to make any payment. If the incentivisation does not have some form of cap, that is, the incentivisation is open ended, there is the possibility and risk of the amounts of payment exceeding the funds allocated for this purpose. This could have severe repercussions, particularly if the incentivisation is associated with the completion on cost of some project. Of course, a possible funding mechanism is to use part of the savings realised previously from incentivised agreements to fund or at least to pump prime future rewards. Incentivisation can be multi-target in nature. This means that there could be more than one target for the supplier to achieve. The achievement of each target is considered individually. Failure to achieve one target does not impact on the supplier's reward for some other target should that target be achieved. The supplier is thus not de-motivated by a failure and, because the overall scheme is fair, it might be that motivation is enhanced. Possibly, there should be some flexibility for the supplier to trade-off variable performance metrics.

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With respect to projects, the buyer needs to consider carefully the implications to all the participants (client, contractors, consultants, key subcontractors, ultimate customers etc) of the incentivisation process. For example, there is little point in independently incentivising some aspect of a contractor's contract if that part is crucially dependent upon another party, say a consultant or the client, neither of which are a party to the incentivisation. The involvement of the other participants might require them to be incentivised themselves- the most likely examples are subcontractors and consultants. Alternatively, in the case of clients, there is a need for an awareness and an understanding of the incentivisation and the reasons for it. Incentivisation of many contracts within a project requires careful management. Multiple incentivisation must lead to complementary outcomes if disruption is to be avoided. This is because all the parties in a project tend to rely on others and the consequence of unco-ordinated incentivisation can upset this reliance. Organisations which have not previously used incentivisation need to proceed with caution until a level of experience is achieved. A policy of keeping it simple is advisable. Incentivisation can work across a series of contracts. This assists in the learning of the buyer and the supplier assuming the same supplier has been used for each of the contracts. This can lead to greater efficiencies in the later contracts. In a study undertaken by HM Treasury and other government departments, the following were identified as key factors in successfully using incentivisation as a technique: a firm and detailed basis for costing a contract both for the buyer and the supplier effective measurements and setting of milestones and targets for both buyer and supplier, this means that a good quality specification is essential and there should be a good audit trail the need for effective contract management within an incentivised contract which commences at the correct time a requirement for transparent structures in respect of cost and performance by both parties operating within this sphere good payment procedures to ensure that payment is made as agreed willingness on the part of the supplier to participate in the incentivisation scheme There can also be an incentive to avoid a negative consequence. The most usual form could be liquidated damages. Other examples could be loss of reputation, no further business etc. In these circumstances, the supplier is obliged to meet obligations in order to avoid something which is deleterious. However, many organisations are trying

to move to a more positive motivational stance with respect to their suppliers. REASONS FOR USING INCENTIVES From the buyer's point of view, incentivisation is used to foster improvement by binding good suppliers with the expectation of even better reward. For the buyer, incentivisation offers the possibility of self financing benefits from improved supplier performance and it also attracts good suppliers who see the potential for better rewards for their efforts and capabilities. The supplier might expect to gain extra financial reward but also an improved reputation as a successful supplier (which should lead to more work from the original buyer or from other buyers in the market place). In some markets, the possibility of a long term multi contract relationship involving some form of partnership sourcing is possible. This is not so likely in the construction field where most relationships are single project based. A further reason for incentivisation is that it is likely to involve less conflict. The following are examples of influential factors which might lead to incentivised contracts CIRCUMSTANCES Incentivisation can be a product of circumstances which act to unite the client and supplier into a team devoted to the resolution of some problem. In essence, the problem is seen as a common enemy which can only be overcome by the pooling of client and supplier resources. The problem can be a result of previous failure, for example the collapse of a construction works, which affects adversely the reputations of the parties. It could also arise from financial difficulty which threatens to overwhelm the existence of both parties or it could be the outcome of a legal threat and so on. FINANCIAL Incentivisation can be purely financial, for example, the client could have an earlier need for the product of the contract with the supplier than previously anticipated. Delivery of the product (whether a facility of some sort such as a building or an off-shore installation or simply the supply of goods) could be financially beneficial to the client and the client might be prepared to share some of the anticipated financial gain with the supplier as a reward for the effort needed to make earlier delivery. An example would be the possibility of an off-shore oil company finding that it can sell the oil or gas from a major development earlier and more profitably than previously anticipated (perhaps the price of oil has unexpectedly risen significantly). It could now be worthwhile for such a company to land the oil earlier and to achieve this end, the company is prepared to share some of the gain with the suppliers who are building the platform etc.

CIPS P OSITIONS

ON

At another extreme, it is possible to envisage a company which is considering the re-decoration of a room. The lead times quoted by the decorating suppliers would mean that the buyer would have to hire a room elsewhere for some important function. If the buyer could strike a deal with the supplier whereby the buyer would pay the supplier extra for earlier completion of the room, then, providing the extra amount paid to the supplier were less than the cost of hiring another room, both parties would gain.

good and excellent performance may be determined. The supplier earns for example a lesser amount of profit/overhead (or none at all) for poor performance as opposed to excellent performance where he might expect to receive the normal margin plus the extra amount. How much profit /overhead the supplier is prepared to risk under incentivisation and the reward actually received will vary on performance. Both parties need to assess their expectations realistically before negotiating the incentive arrangement. CONCLUSION This position statement has identified a number of benefits of incentivisation as seen from the viewpoint of the buyer; the list is quite long and includes such attractions as lower costs, better delivery performance, improved levels of quality, etc. The list from the supplier's angle is much shorter but does include a benefit which is shared with the buyer (i.e. less time spent on contractual disputes). The paper underlines the fact that incentivisation should not be seen as a 'quick fix' solution and once put in place requires care to ensure that it produces the benefits which both sides expect from the arrangement. For each situation and set of circumstances an astute buyer will need to assess the benefits of incentivisation. In particular he will need to be able to assess the risk on investing a lot of time with a number of suppliers some of whom may turn out to be unsatisfactory; by the same token a supplier engaged on the incentivisation process runs the risk of investing time with buyers who may well decide to go elsewhere for the product or service concerned. As in most business situations the natural desire to maximise margins should be tempered with the need to 'look before you leap'.

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ON

Financial incentivisation could also be used to stimulate suppliers to beat cost targets embodied in the contract. This is apt where the target cost acts as a cap to the amount which the buyer is prepared to pay. If the supplier can deliver the requirements of the contract for less cost than the target cost, the difference can be divided in some agreed proportion between the buyer and the supplier. NON PROJECT INCENTIVISATION The above examples all suggest that incentivisation may only be used for projects or as a component of contracts for discrete services. This does not need to be the case. Incentivisation can be a part of contracts to produce goods. In this case, the incentivisation could be to reduce cost, improve design, reduce stocks, speed delivery etc. NON FINANCIAL INCENTIVISATION While incentivisation can be of a straightforward financial nature ie money, it can also be for money's worth to the supplier- for example it would be worth something to suppliers to be assured of a continuity of business and this assurance could be the incentivisation. Similarly, some suppliers could gain kudos from an association with an outstandingly successful contract and this can also be an incentive. MAKING IT HAPPEN Planning is the key factor. The client must have a clear view of what it wants to achieve as part of the procurement strategy formulation and business case. KPIS Key performance Indicators (KPIs) are fundamental to incentivisation. They are measures of business critical deliverables . They include: achieving the scope of work within budget delivering the required amount of deliverables per month every month performing work without any safety and production critical maintenance work every month KPIs must be easily measurable, comprehensible, and critical to the success of the contract and business. The supplier's profit and overheads and even direct costs should be at risk if the contractual KPIs are not met. They can be graduated so that poor, satisfactory,

CIPS P OSITIONS

KNOWLEDGE MANAGEMENT & DOCUMENT MANAGEMENT

INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case knowledge management and document management, as they relate to purchasing and supply management. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Further information on knowledge management and document management is available from CIPS. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on knowledge management and document management in purchasing and supply management is written specifically with the Head of the purchasing and supply management function in mind. This document is one of a series summarising the CIPS view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document which supports this series entitled Background on Purchasing and Supply Management Practice Positions". CIPS views, opinions and beliefs are stated throughout the document; however the broad practice statements which underpin the text are as follows:
x x

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CIPS takes the view that barriers to the effective sharing of knowledge can often be overcome by, for example, promoting knowledge sharing as a bench marking process. CIPS recommends the sharing and transfer of both explicit and tacit knowledge between purchasing and supply management professionals and other colleagues within the organisation. CIPS has identified a number of significant benefits of knowledge management as far as purchasing and supply management is concerned such as reduced costs and shorter learning curves. CIPS encourages the use of collaborative relationships as a method of facilitating and promoting the knowledge sharing process. CIPS encourages purchasing and supply management professionals to carry out cost-benefit analyses of knowledge management within their organisations. CIPS believes that senior purchasing and supply management professionals should possess or develop the necessary skills and expertise to be able to convince senior management of the benefits of knowledge management. CIPS believes that document management constitutes a key element within the knowledge management sphere and that both document management and knowledge management are fundamental to an efficient purchasing and supply management function CIPS takes the view that the effective storage and retrieval of relevant data is essential to the continuous development of purchasing and supply management. CIPS considers that purchasing and supply management professionals should evaluate their document management systems on an ongoing basis so as to ensure that they are consistent with legal requirements and current best practice. CIPS recommends that purchasing and supply management professionals agree with their organisation's auditors an appropriate policy for the retention of purchasing and supply management information based on such parameters as contract value and the importance to the organisation of the goods being purchased.

ON

CIPS P OSITIONS

CIPS believes that knowledge management is becoming increasingly crucial to business success and as such purchasing and supply management professionals should appreciate the importance of this new management approach. CIPS considers that a familiarity with knowledge management is desirable to enable purchasing and supply management professionals to raise the profile of the purchasing function within their organisations. CIPS believes that failures as well as successes are useful sources of knowledge and experience as far as the purchasing and supply management professional is concerned.

CIPS suggests that purchasing and supply management professionals need to ensure that they put in place effective access controls to the purchasing function's document management system.

Examples of explicit knowledge from purchasing and supply management are:

x x

Notwithstanding the previous bullet point CIPS believes that when and where appropriate the purchasing and supply management function should be prepared to share its best-practice documentation with its internal customers. CIPS believes that purchasing and supply management professionals should encourage their organisations to install suitable document management solutions not just within the purchasing department but within the organisation as a whole. CIPS advocates the analysis and re-engineering of business processes relating to document management prior to the procurement of any new electronic document management system. CIPS recommends that wherever possible purchasing and supply management professionals should arrange for the purchase and installation of an effective electronic index system for document management.

Fundamentals of Contract Law The guidelines regarding the conduct a professional negotiation Procedures for sourcing, inviting and evaluating with tenders

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Tacit knowledge can be described as that which comes from experience and informs a situation; it cannot easily be measured, captured or examined but can often be a factor in differentiating one person from another. Tacit knowledge is fundamental to the execution of good procurement practice. Examples of tacit knowledge from purchasing and supply management are: x Knowing how best to develop a relationship with a key supplier x Knowing how best to manage a difficult negotiation x Knowing how best to obtain buy-in from key stakeholders and customers Intellectual assets need to be nourished so that the stock of both explicit knowledge, databases and standard practice instructions, and the tacit knowledge held in the minds of individuals, continues to increase. One way of nourishing knowledge is to acquire the latest academic thinking and its application from university seminars, academic publications and books for instance; this is important as for example, purchasing and supply management policies and procedures quickly fall into disrepute if they do not reflect the latest good practice. Knowledge management should facilitate innovation and creativity, and it is closely aligned to content or document management which is addressed within this policy document. BENEFITS OF KNOWLEDGE MANAGEMENT? CIPS believes that the benefits of knowledge management in the field of purchasing and supply management includes:
x x

ON

WHAT IS KNOWLEDGE MANAGEMENT? CIPS defines knowledge management as the effective extraction, harnessing or creation of intellectual assets that are retained, effectively retrieved and utilised by an organisation". Essentially this means the creation, acquisition, sharing and application of knowledge. Knowledge comprises: x Explicit knowledge (information which is data with added value e.g. names sorted by alphabetical order) x Tacit knowledge (knowledge acquired largely through experience e.g. a child's early knowledge of speech) Knowledge relies on both data (known facts or things used as a basis for inference and reckoning) and information (items of knowledge). For example, in respect of purchasing and supply management knowledge when information on supplier spend is put together with market information and other relevant information is creates a knowledge base about the supplier and its representation in the marketplace. Explicit knowledge is that which can be measured, captured, examined and can easily be passed on to others by means of a code (e.g. the knowledge of music is passed on by means of the code of the bass and treble clef notation system). It is often manifested as hard facts that are capable of being codified e.g. written down.

CIPS P OSITIONS

x x

Ultimate competitive advantage Avoiding the need to : start from scratch duplicate effort repeat the same mistake re-invent the wheel Improving levels of efficiency such as reducing cost Encouraging a supportive no-blame culture Encouraging individuals to feel part of an organisation such that they contribute their expertise to it Enabling organisations to continue to benefit to some extent from an individual's knowledge once they have left

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x Enabling a shorter learning curve for others in t h e team or knowledge network In an increasingly inter-dependent world success goes to those who can manage the resources of their networks as well as their organisation's resources. If the most important resource is knowledge then knowledge management within an organisation i.e. intra-company knowledge management must be supplemented by inter-company knowledge management. e.g. it can be extended across the supply chain. However, any inter-company co-operation or collaboration would need to comply with the legislative framework, the Competition Act for example. Clearly, organisations need to ensure that their intellectual property, which may well be a key element in their competitive advantage, is not disclosed without good reason. Knowledge which provides such intellectual capital should be clearly identified within any knowledge management system.

ment best practice and the promulgation of this via guidance, policy, publications and via CIPS training, education and events Encouraging purchasing and supply management professionals to network further and share knowledge, experiences, tools, approaches and documentation. CIPS Professional Practice Team manages an independent repository of practical knowledge for the benefit of all purchasing and supply management practitioners. This requires the development of a sharing and open culture and a willingness by individuals to put as much in as they take out.
OF

ISSUES IN THE IMPLEMENTATION MANGEMENT

KNOWLEDGE

ON

A knowledge management perspective can inform an organisation's view of appropriate trading relationships. Where the knowledge associated with a transaction is codified and diffused then an arms length (spot market) relationship is appropriate e.g. buying a commodity. Where the knowledge associated with a transaction is largely explicit, then a collaborative relationship will be more appropriate as sharing experiences will be necessary. CIPS would support the use of partnering style relationships across supply chains as appropriate as these can facilitate sharing knowledge and expertise between buyers and suppliers i.e. they are co-operative relationships. For instance, sharing knowledge and resources with a supplier's purchasing team; this can be facilitated by the Internet and E Commerce. Co-operative relationships benefit from knowledge management on a project basis and could include projects to: x reduce internal cost x reduce lead-times to markets x leverage the supply base x reduce the level of capital investment x minimise administrative effort x make greater use of innovative financial arrangements CIPS AND KNOWLEDGE CIPS is at the centre of excellence in purchasing and supply management and provides a wide range of education, training, consultancy and professional development services to members and others in the purchasing and supply management profession. In particular, CIPS' Professional Practice Team is managing knowledge in three key ways: x Facilitation of purchasing and supply management research and dissemination of research findings x Identification of purchasing and supply manage-

Cultural Issues CIPS encourages purchasing and supply management professionals to share failures as well as successes in order to learn lessons from them, and firmly supports a no blame culture as far as this can be realistically implemented. CIPS believes that it is best if organisations avoid a blame culture so that employees are encouraged to be honest about their mistakes and to learn from them whilst sharing this learning with others. However, CIPS believes personal accountability is essential to profitable and ethical business practice. Fostering such an open environment is an organisational culture issue but one which is critical for the optimum extraction and management of organisational knowledge. In order to develop such an environment, an organisation must ensure that its most senior directors have the intelligence, breadth of vision and experience to enable employees to feel confident in sharing all their experiences. Competition Another issue to address is competition at both organisational and individual levels. Some organisations discourage the sharing of information with competitors or similar organisations as they believe this adversely affects their competitiveness if positive aspects are shared, or their reputation and image if less successful practices are shared. CIPS suggests that these barriers may be overcome by: x promoting knowledge sharing as a process of benchmarking x encouraging other organisations to submit the same types of information and knowledge, informally if necessary x initiating the sharing of procurement knowledge with organisations outside the same sector if appropriate CIPS supports approaches to benchmarking and knowledge sharing. It considers that the increasing use of standards to define best practice, such as ISO 9000, ISO 2900, or the European Foundation for Quality Management Business Excellence Model, require a holistic and coherent approach to knowledge management.

CIPS P OSITIONS

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Corporate Memory It is important that individuals contribute to corporate memory since, if not, when they leave the organisation, their personal, often tacit, knowledge leaves with them. This knowledge can include for example, the history of the evolution of relationships with strategic suppliers - corporate use of such information can lead to more effective negotiations with suppliers. One way of addressing this issue is to conduct skills inventories to ascertain which individuals have what knowledge. The objective is then to transfer knowledge between individuals and onto an organisational system for knowledge management as appropriate. Some individuals believe their knowledge to be their power and competitive advantage, and as such are reluctant to share it. Organisations can inadvertently compound this problem by providing individual performance payments rather than rewarding the performance of the team. Even sales teams, traditionally the most competitive within organisations, are now being encouraged by more progressive businesses to share all knowledge with colleagues. CIPS recognises however, that individuals are increasingly perceiving that they hire out their skills to an organisation for a period, rather than consider that their skills belonging to their employing organisation for, at least, the duration of their employment. This is exacerbated by today's trends towards shorter employment periods and portfolios of skills. Incentives and Examples One way in which an organisation could encourage knowledge sharing is to provide incentives for depositing knowledge into a central repository for others to use e.g. prizes for the best contributions. If the use of a particular piece of knowledge leads to a real business benefit e.g. a significant successful sale, then the payment made to the knowledge provider can be more substantial. This approach helps to address the problem of memory loss in that details will be forgotten as time passes but if they have been recorded relatively quickly after being learned they should be rich in information. Whatever method is used, employees must be made to feel appreciated and valued if they are to be willing to share their own personal knowledge. CIPS suggests organisations should encourage their employees to share explicit knowledge with fellow professionals and other colleagues and endeavour to encourage the transfer of tacit knowledge by e.g. mentoring schemes. One way in which tacit knowledge can be disseminated within an organisation is to hold lunchtime seminars on topics in which colleagues present their experiences to others. CIPS encourages organisations to the develop Communities of Interest on the Internet or Intranet; email distribution lists; newsgroups, public

folders and so on. This can help in the effective targeting of information within an organisation and therefore reduces information overload. There is software available such as Lotus Notes which some organisations use for the effective sharing of information. A further suggestion is to have colleagues peer review their work so that they can each learn from colleagues' experiences as well as it having the added advantage of providing a quality assurance system i.e. a method of identifying errors in documentation, evaluation etc. CIPS recognises the importance of sharing experiences and purchasing and supply management professionals supporting one another across organisations and sectors. To facilitate this activity, CIPS Professional Practice Team is creating a support network for queries and other problems in purchasing and supply management. However, it recognises that individuals may be discouraged from sharing their experiences or providing advice for fear of issues of liability should the outcome be negative and that many younger; furthermore less experienced professionals may simply lack the confidence to contribute. 6. TIERS OF PURCHASING KNOWLEDGE
AND SUPPLY MANAGE-

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CIPS suggests that there are several layers of explicit and tacit knowledge which would typically comprise the knowledge in a purchasing and supply management function. 'An illustration to show the tiers of knowledge is a purchasing and supply management function'
Business Excellence 750+

CIPS P OSITIONS

Best in class Reputation

Softer Social and Cultural Issues

Excellent Execution Best Practice Development Procedures, Processes, Policy Bedrock - Data - Management 100-200 Technical and Mechanical Issues

The above illustrates that the bedrock or knowledge foundation of any purchasing and supply management function is the data or management information it has at its disposal; for instance: x Who purchases what, from where, how often, at what prices in what quantities etc. x Expenditure with each supplier x Supplier performance information

The second layer of knowledge above the foundation is still very technical and covers issues such as written procedures and processes for undertaking different aspects of the purchasing process e.g. receiving and evaluating tenders. Policy is also part of this knowledge-set as it dictates what individuals should and should not do in respect of purchasing and supply management. The explicit knowledge technical foundations are employed in the next layer of purchasing and supply management knowledge which is the implementation and development of best purchasing practice. This knowledge is about how to implement best practice policy and procedures; examples include expert bid evaluation, expert negotiation. It can still be rather technical but experience is consolidating tacit knowledge at this layer. The layer second from the top of the pyramid is where tacit knowledge flourishes and where the execution of best procurement practice is located. CIPS would argue that it is at this stage where the individual purchasing and supply management professional is differentiated. Less competent individuals may never pass the stage of following best practice procedures and although this is acceptable and good practice; others with creativity, flair, confidence, experience and thus tacit purchasing and supply management knowledge can add the greatest value. This is why extracting, sharing and managing that knowledge is so fundamental to purchasing and supply management success. In essence it is the way that purchasing knowledge is deployed by an individual. The final tier is the ultimate in knowledge management and depends upon a cultural environment that actively encourages knowledge sharing; adopts a philosophy of no blame and ensures individual employees feel part of the organisation as opposed to merely selling their services to it. With such pre-requisites, high value-add experiences will come into the organisation's knowledge domain. CIPS encourages purchasing and supply management professionals to undertake a cost-benefit analysis of the introduction of knowledge management in purchasing and supply management in their own organisation and in doing so, suggest that it should be calculated for the whole organisation and should also include key suppliers. The costs, which can be significant, are mainly in terms of time, human resource, change management, project management. There are fewer direct costs in implementing a knowledge management solution as it is mainly a cultural issue. It is however, a difficult challenge and extremely time-consuming with many hard and soft management issues to overcome. CIPS believes it is imperative to obtain the visible and practical support of senior directors when introducing knowledge management. Senior purchasing professionals have the skills and competence to

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market strategies on knowledge management to the Board whilst providing the right knowledge-sharing environment within the workplace. It is clear that knowledge management is dependent on effective IT systems, in particular document management systems. CIPS believes that managing knowledge positively is rapidly becoming a key differentiator for organisations as those adopting this approach invariably become more successful. It will have greater advantages for some businesses than others, for example, service sector organisations such as IT and the media. However, irrespective of the type of organisation, CIPS encourages purchasing and supply management professionals to appreciate knowledge management and implement it within their organisations in respect of the purchasing and supply management function as the benefits, CIPS believes, will certainly outweigh any costs which may be incurred. DOCUMENT MANAGEMENT Document management is a key part of knowledge management. CIPS has formulated positions on document management as it considers that the effective storage and retrieval of purchasing and supply management information/documentation is critical to the continuous improvement of purchasing and supply management as well as providing an audit trail. It is of particular importance in commercial areas of an organisation because of the need to retain records of contracts and contractual processes. WHAT IS DOCUMENT MANAGEMENT ? Document management may be defined as the process of managing documentation from inception and development through to archive and final destruction during its total life cycle". It is increasingly referred to as content management; however content is a collection of information which may not necessarily be in a hard or coherent format. Document management involves embracing the full digital network model of document control, storage and retrieval, so that information can be accessed instantly across a whole organisation. This enables a central repository of information to be developed this needs to be managed effectively. A document is a set of associated and coherent information that can be issued for internal or external use. It can consist of technical material, plans, procedures, reports, presentations, training materials etc. Documents need to be managed where accuracy of information is important. Irrespective of the medium on which information is held, the method of document management should be consistent across the organisation.

CIPS P OSITIONS

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PURCHASING

AND SUPPLY MANAGE-

MENT AND DOCUMENT MANAGEMENT

Many purchasing and supply management functions have a database of information which acts, essentially, as a register comprising contract numbers, supplier details, contract duration, value and purpose; responsible person i.e. contract manager or budget holder and so on. Usually however, the documentation that relates to this summary information is retained in filing cabinets or archiving systems.

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The purchasing and supply management information that might be stored in a document management system includes for example:
x

curements for a minimum of six years can prove very resource consuming. If such information is put onto a document management system and is scanned in and then the hard copy destroyed, this will prove more efficient. Notwithstanding this, CIPS suggests that the purchasing and supply management professional agrees an appropriate policy in respect of retention of information relating to procurements with their organisation's auditors, based on: x Contract size and value x Degree of risk associated with the contract x Complexity of the contract x Contract duration x Internal audit requirements of the buying organisation x The importance of the Goods, Works, Materials or Services to the organisation For instance, a complex Public Private Partnership contract with a duration of 15 years would require detailed and careful document management with the majority of information being retained for the contract period, plus several years after its completion. On the other hand, a framework agreement for stationery or IT consumables may simply require summary information being retained for the contract period only, with associated documentation being disposed of after twelve months. There are several other good reasons for retaining purchasing and supply management information including: x Avoiding starting from a blank sheet the next time the contract or similar contract is being let. CIPS recommends that invitation to tender/ sourcing type documentation be updated and improved each time it is used to reflect current requirements, different market conditions and so on x Access to information about existing suppliers to help in the identification of a suitable tender list or equivalent x Avoiding making the same mistakes, for instance, learning from the thinking that comprised the development of the last specification of requirement or service level agreement x Having suitable information with which to debrief suppliers or deal with aggrieved suppliers x Having all contractual information readily available to manage the contract and also to manage the situation in the event that the contract begins to break down x To prove that the procurement project was under taken professionally and to demonstrate quality assurance (CIPS fully supports the need for a clear audit trail in respect of procurement) CIPS suggests that the purchasing and supply management professional responsible for their function's document management system should ensure that there are good access controls in place so that only those who are allowed to view specific information are able to access it. CIPS recognises however that in fast moving business, controlling access and also denying it

x x x x

CIPS P OSITIONS

Record on the Goods, Works, Materials or Services required ITT (Invitation to Tender) documentation The successful tender response Tender evaluation documentation Records of which people comprised the crossfunctional team that managed the procurement process and their contributions Supplier appraisal documentation including records of site visits The original contract itself (in full) together with all associated contract documentation such as terms and conditions; payment mechanisms; risk reward models; service levels etc. Variations or amendments to contract including the control of revisions to documents - this is particularly important whilst hard copies are signed and unsigned copies are emailed to enable distribution as until e- signatures are common place there is a risk of different versions of the same document existing simultaneously Records of supplier performance such as vendor rating records, notes of supplier management and supplier development meetings etc.

ON

There are of course many other documents involved in a procurement project such as all the offers from those suppliers that were unsuccessful, the corresponding tender evaluation forms etc. purchasing and supply management professionals should be aware of The Limitations Act 1980 that specifies the general periods within which an action can be brought. These periods are: x Simple contracts - actions will be barred after six years from the date when the cause or action accrued x Contracts made by deed - actions can be brought up to 12 years from the date when the cause or action accrued When documentation has to be kept in hard copy format and hence stored in filing cabinets for instance, a policy of retaining all information relating to all pro-

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as appropriate, should not be underestimated . Another issue to address is indexing in that a good indexing system is fundamental to the success of a document management system. CIPS suggests that in addition to the above, the purchasing and supply management function could share its best practice documentation with its internal customers by storing it on a document management system and enabling customers to have access to it from their desk tops. This could also be achieved via web pages on an intranet. The categories of documentation accessible could include for example: x purchasing and supply management strategy x purchasing and supply management policies and procedures x Standard forms of contract x Standard letters x Memos of general interest x List of current projects and contracts x Details of benefits and lessons learned from previous contracts x Key presentations x FAQ (Frequently asked questions) x CVs of procurement staff and their responsibilities CIPS also suggests that one method of ensuring high quality document management in purchasing and supply management in larger organisations with multiple purchasing and supply management teams is to have each purchasing and supply management team audit another and feedback what it has learned including both positive and negative aspects. Procuring Document Management Systems CIPS suggests that purchasing and supply management professionals should encourage their organisations to procure and install suitable document management solution(s) for the purchasing and supply management function as well as for other relevant parts of the organisation. Purchasing and supply management professionals can lead the procurement, sourcing and identifying the most appropriate value for money system to meet their organisational needs. Clearly the requirement would be different for small organisations as compared with the requirement for large multi-site or global organisations. When considering investing in a document management system a business case should be produced illustrating the return on investment. The first stage of producing the business case is to determine whether the document management system would be classed as a capital investment and if so, over what number of years the investment would be depreciated. The business case might comprise:
x x

electricity, filing cabinets etc. The cost of losing the data e.g. in a fire which would not happen if a document management solution was employed x Opportunity cost of not having easy access to information by means of the document management system. compared to: x The whole life cost of the document management solution x The length of time the organisation makes investment decisions (e.g. for capital investment the return on investment would usually be between one and three years)
x

In order to produce these costings the current processes for storing and retrieving information should be analysed, evaluated and costed. This should include the total cost of acquisition through creation, operation, storage, retrieval and destruction of documents. It must also include the cost of floor area, furniture, staff time, ease of access (i.e. queueing issues), and the potential benefit to the organisation. CIPS suggests that traditional document management systems can account for between 5-15% of an organisation's revenue. CIPS advocates the analysis, evaluation and re-engineering of business processes relating to document management prior to the procurement of a new electronic document management system. The analysis should cover the operation i.e. the process, structure, flow of information and needs to identify the key pieces of information that need to be retained and are essential for the efficient and effective business operations activity. If the business case proves difficult to justify in such a traditional sense it may be worth addressing it as a business continuity issue rather than just a capital investment and presenting the case on the basis of a minimum of five years. IT AND E COMMERCE CIPS recognises that as E Commerce develops, procurement documentation will increasingly be in electronic format to begin with as opposed to hard copy but this will also require storing and a suitable document management system. Records legislation has not been changed by the arrival of IT and E Commerce.The UK Government has a target of managing all records electronically by the year 2004 (more information on this target is available from www.pro.gov.uk). It is likely that there will be a period of overlap in which both hard copies and e copies of procurement documentation are kept when organisations introduce document management systems. At present document management systems can involve scanning documentation which is then stored on an open access system, as appropriate to the needs of an organisation, and

CIPS P OSITIONS

ON

The current activity cost e.g. time, human resource etc. The current operation e.g. space - rent, heating,

backed up by CD ROMS for security purposes. Best practice in IT management should prevail with disaster recovery precautions implemented as appropriate. Eventually archived information can be taken from the live system and stored indefinitely on CD ROM or some future equivalent. Such systems have the support of the legal profession and scanned documentation is permissible as evidence in a court of law. CIPS advocates the implementation of an excellent e index system for document management, enabling information to be easily found and retrieved.

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There should be less of a requirement to retain information about suppliers' company profiles and offerings for example, as web-sites are increasingly prevalent that provide such information and in some cases, more detailed information such as suppliers' financial profiles. When storing such information about suppliers, care should be taken to ensure it is up to date especially if it is used as part of a decision-making process. There are no universally accepted standards for document management at present although two standards are prevalent: ODMA (Open Document Management API - a consortium formed by Documentum, Lotus, Novell, Oracle, Softsolutions and Watermark) and DMA (Document Management Architecture). ODMA provides access to document repositories via a standard desk top computer. DMA enables tools to access different document management systems run by different vendors. CIPS believes that XML will influence the document management market by allowing metadata (information describing stored documents or data - also called attributes or control fileds e.g. Contract Start Date, Supplier Name) intelligence to be stored within documents. CONCLUSION CIPS believes that effective document management is a key part of the knowledge management process, both of which are fundamental to a strong infrastructure within a purchasing and supply management function. Document management provides purchasing and supply management professionals with an opportunity to review business processes to ensure a smooth, cost effective and efficient procedure for the storage and retrieval in particular, of documentation relating to the purchasing and supply management function and individual procurement projects. Further information on document management is available from the Institute.

LEAN AND AGILE PURCHASING AND SUPPLY MANAGEMENT

INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case lean and agile, as they relate to purchasing and supply management. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Further information on lean and agile is available from CIPS. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on lean and agile purchasing and supply management has been written primarily for the benefit of full-time purchasing and supply management professionals. This document is one of a series summarising the CIPS view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document that supports this series entitled Background to Positions on Purchasing and Supply Management Practice. CIPS is expressing views on lean thinking and agility because it is an increasingly common activity and one which purchasing and supply management professionals should lead in their organisations. CIPS views, opinions and beliefs are stated throughout the document; however the broad practice statements that underpin the text are as follows: CIPS takes the view that in principle at least the lean philosophy is applicable to all corporate situations. When applying lean thinking to purchasing and supply management, CIPS encourages purchasing professionals to make a clear distinction between non-value add and necessary non-value activities. Whilst focussing on the issue of waste in supply chain situations, CIPS would also encourage purchasing and supply management professionals to consider waste from a wider perspective. CIPS takes the view that lean thinking is one way in which the purchasing and supply management function is able to influence corporate behaviour.

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CIPS considers that purchasing and supply management professionals should work closely with their internal clients to implement lean principles. CIPS supports the use of tools such as balanced scorecards to ensure compliance with issues such as corporate governance. CIPS is of the opinion that, rather than being a waste, a customer requirement should be seen as representing a value-adding opportunity. CIPS considers that lean thinking and agility are able to co-exist quite satisfactorily within an organisation.

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This CIPS Position on Practice paper does not attempt to discuss in depth any of the four main schools of supply chain management - the Lean, Agile, Power Regimes or IMP (Interaction); CIPS strongly encourages all purchasing and supply management professionals to learn these approaches. The reader is therefore assumed to understand these schools of thought and be familiar with the strategies that flow from them. Where details are provided, it is for the purposes of the immediate context and clarification only. LEAN THINKING The 'lean revolution' began in the 1980s with JIT tools and similar techniques from Japan that were utilised mainly in the automotive industry. During the early 1990s benchmarking encouraged the emulation and proliferation of these techniques so that by the late 1990s the lean approach was focused on supply chains. Nowadays lean thinking is commonly applied, in varying degrees, to all aspects of business. It is still evolving, with much work being done by, in particular, the Lean Enterprise Centre at the University of Cardiff. There are five key principles to lean thinking: specify what creates value as seen from the customer's perspective identify all steps across the value stream make those actions that create that value flow only make what is pulled by the customer just in time strive for perfection by continually removing successive layers of waste. Cardiff University defines waste as anything that does not add value to a product or service in any office or manufacturing activity. CIPS supports this definition but adds that in principle, lean principles can be applied in any situation.

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All activities undertaken by an organisation can be placed in one of the following categories: Non-Value Adding - activities that do not directly contribute to the satisfaction of customers Necessary Non-Value Adding - activities that have to be done (to comply with legislation for instance).

(Activity to ensure compliance with legislation is value-add in that it avoids the costly problems associated with non-compliance.)

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CIPS encourages purchasing and supply management professionals to consider these categories when applying lean thinking to purchasing and supply management. WASTE IN SUPPLY CHAINS A number of academic studies have identified seven types of waste in a typical supply chain: transporting defects inappropriate processing waiting unnecessary motion unnecessary inventory overproducing. CIPS encourages purchasing and supply management professionals to bear these examples in mind but to also think of waste from a wider perspective. Although lean thinking was developed by the motor industry it is equally applicable to sectors such as utilities, services and retail. The 'lean' concept is applicable to all types of purchasing organisation irrespective of size. A simple manifestation of lean thinking is to analyse the supply process/chain and internal ordering (requisition to payment) and remove any unnecessary steps or processes, i.e. remove waste and increase value. Purchasing cards and aspects of eProcurement are two examples where lean thinking is commonly applied by purchasing and supply management professionals. Simple improvements like consolidated invoices from suppliers also remove waste. Innovations such as rather than a car manufacturer paying an invoice per batch of tyres, payment is automated per car off the production line i.e. payment for four or five tyres (ie including the spare) per unit. However, lean thinking can lead to some processes being removed that add value such as information being fed into an integrated eProcurement system at the time the order is placed. The detailed management information can then only be obtained from the supplier. (It can, of course, be argued that the important point about management information is that it should be readily accessible when required, with the precise source of it being of secondary importance. The 'Shared Data Environment' concept (where all data relevant to both parties is made readily available) should also be borne in mind.

In the late 1980s many organisations had very large central purchasing departments with overall responsibility for procurement; these days purchasing and supply management departments tend to be smaller and leaner, with strategic roles that direct and/or influence the departments or business units that they support. Ironically, supply chains are more difficult to manage than ever, with complex interrelationships of sub-contractors spanning the globe. Indeed, very sophisticated purchasing and supply management skills are required to manage such relationships. Some organisations manage to influence their second and third tier suppliers but most purchasing and supply management functions do not have the resources to go beyond the first tier. These lean purchasing and supply management functions are also faced with the fact that many UK businesses such as utilities are no longer large buyers of commodities - whereas once they had 50-70% of a supplier's business - diversification has led to this being reduced to 10-15%. This obviously has an effect on their power in the marketplace. INFLUENCING CORPORATE BEHAVIOUR The purchasing and supply management strategy and its supporting policies and procedures must always support the organisational objectives and corporate strategy. Lean thinking is one way in which the purchasing and supply management function can influence corporate behaviour as many senior directors do not appreciate the total cost of bought-in goods and services (and works), and so for the purchasing and supply management function to identify this and then implement lean thinking is a major opportunity for the promotion of professional purchasing and supply management. This can then lead to purchasing and supply management influencing or leading corporate decisions on the use of organisation-wide integrated finance systems, for instance. Purchasing and supply management professionals should work closely with their internal clients to identify ways of implementing lean principles. One consequence of 'lean' may be fewer suppliers, achieved by for example, grouping suppliers to supply particular categories of requirement. This started in the motor industry with sourcing strategies leading to a smaller number of suppliers that could then be more effectively managed. When organisations become too lean - such as relying on one supplier for a strategically important requirement - problems can arise. For instance Lucozade lost millions of pounds in market share as its single source glass bottle supplier had also outsourced this to sub-contractors who then let their client down. Effective risk assessment employed at the appropriate stage in the sourcing process will enable mitigating strategies to be developed and provide greater confidence in the lean approach. Another example is where a well-known civil engineering contractor sub-contracted a strategically important project to Romanian labourers who could not understand English and subsequently failed the client in a publicly embarrassing, and very expensive, fashion.

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The trend for outsourcing in the 1990s in particular, was intended to make organisations leaner by enabling them to concentrate on their core skills. However, in some cases they became too lean and lost their core competences in the process. Purchasing and supply management professionals must regularly assess the risk to their organisations in losing core competences and correct the situation by insourcing as appropriate (reference should be made to the CIPS Position on Outsourcing). Insourcing is not a panacea however, as unfortunately it is very difficult for an organisation to re-create the skill base it once had; an example of this is British Gas' R&D skills which were once world-class but which now no longer exist (it should not be forgotten however that the company was to some extent working in an artificial environment arising from the government's obsession with privatising the business, so arguably this is not an ideal example). If knowledge is retained with suppliers then organisations become less and less commercial in their outlook and more dependent on those suppliers. Moreover, where organisations become de-skilled (and in particular lose their commercial skills) they fail to see market opportunities, or are too lean to respond quickly to such opportunities when they arise. In Japanese culture, employees generally enjoy a 'cradle-to-grave' contract with their employer (although there are indications that this may be changing) whereas in the UK, for instance, organisations are far more inclined to 'chop and change' their workforce. Notwithstanding this, one criticism of lean supply bases is that it exploits the workforce although it can be argued that in many cases outsourcing or appointing one supplier of facilities management for instance can lead to a more enriched workforce. Employees often become multi-skilled with, for instance, plumbers learning to become electricians and greater career opportunities being created as a result. Such facilities management companies often build in incentives schemes leading to higher quality of service, greater added value, and inefficiencies being driven out. The growing trend towards acquisitions and mergers (see the CIPS Position Paper on this subject) has led to friction within purchasing and supply management in some cases. For example, if company A which has applied lean principles and has taken out all waste is then taken over by company B which has a different culture, the relationships with suppliers will change, depending on the culture aims of the newly merged company and its planned supply base strategy. It is unlikely that all of the suppliers will view the changes in a positive light, at least not in the short term, and if the supplier, who may have become a market leader having enjoyed a single source contract from the lean client, does not like the new dominant culture they may take their business elsewhere. The newly-merged company will now have a clear indication of the effect

of its culture and strategy, with a timely opportunity to reassess the situation to ensure that optimum value is being achieved. It can be argued that the extent to which the market situation can change as a result of lean thinking is a function of whether or not the organisation is driven by the market (e.g. banks) or whether the organisation drives the market, as in the case of monopolies such as Microsoft. Lean principles may also to lead to a 'bloating' effect. An example of this is where a very lean organisation was worried about stakeholder perception of corporate governance and so implemented measures and audit trails to an extreme degree, using balanced scorecards etc. to demonstrate compliance and integration. CIPS supports the use of such tools but organisations should be aware of the dangers of overreacting to market demand (worries about corporate governance issues for instance), and in so doing, undermine all the lean principles that have already been embedded. In a truly lean environment, activities will all be value-add and activities to demonstrate for example good corporate governance and ethical practices should be determined in conjunction with their direct benefit to the organisation (compliance with legislation, enhanced reputation and prestige, etc) and the needs of the stakeholders (ethical investment for instance). Bureaucracy is always to be resisted and avoided relationships outside the purchasing and supply management function should be cultivated to ensure that a commonsense and commercially viable approach is taken and that one part of the company does not inappropriately drive the activities of another. CIPS' view is that a customer requirement is not a waste - indeed it is a value adding opportunity customers want choice and continual improvement. In an effort to be leaner, a high street bank reduced the number of cheque books removing one with birds etc. printed on it. Their customers created a backlash to this and so the bank had to re-introduce the deleted version. The bank then recognised that a key differentiator might be 'left-handed' cheque books that tear the opposite way and are printed to suit lefthanded people. These left-handed cheque books were then produced in all the versions required by right handed customers meaning that the bank had to purchase more than twice the amount of types cheque books than before! No organisation should ever offend or disappoint its customers as a result of the application of lean thinking. However, lean thinking is very appropriate from the supply-side perspective - it just needs to consider the implications for the customer and the opportunity cost of not being able to respond to a customer need.

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AGILITY IN SUPPLY CHAINS It can also be argued that all organisations require an element of agility in response to customer demand. Racal was asked to hold inventory for its customers in order to respond on very short lead times inventory in this respect is not therefore a waste - it is a value add to the customer. Although in this case there must have been a cost to Racal in providing the service to the customer - their margin was presumably sufficient to absorb this cost. It is a truism that for some companies to be operating 'just in time' it is usually to be found that someone else in the supply chain has to be operating 'just in case'. Agility in supply chains is a subject researched and promoted by the Agile Supply Chain Research Centre at the Cranfield School of Management, where 'agile' is defined as being 'quick and nimble' as opposed to 'lean' which is considered to be 'having no surplus flesh or bulk'. The agile school of thought considers issues such as time and velocity to be essential tools in competitive supply chains. CIPS encourages the reader to study this research and utilise that which is best suited to their organisations. The CIPS view therefore is that lean thinking and agility can exist side by side in organisations, with 'Very Lean' and 'Extremely Agile' being seen at either end of a continuum; most organisations are placed somewhere in the middle. 'Lean' should be used as appropriate to businesses possessing some degree of agility to respond to customer needs and market opportunities. Very few organisations should come down (to use a footwear analogy), to a size 8 when a size 10 is a perfect fit.. Waste therefore, is that which a customer does not need, and which can therefore be eliminated. Furthermore, CIPS recommends that organisations move away from such terminology as 'lean' and 'agile' which are perceived as pejorative and develop their own terminology to best suit the place where they sit on the lean to agile continuum. CIPS also supports the Power Regimes school of thought as developed by Birmingham University's Centre for Business Strategy and Procurement. This, and the IMP school (Interaction) can both be employed alongside lean and agile principles. The skill of the purchasing and supply management practitioner is to have a thorough knowledge of the strategies that support these approaches and then, by use of personal judgement, employ the most appropriate strategies for their own organisation.

'Agility' means using market knowledge and a responsive supply network to exploit profitable opportunities in the marketplace. 'Lean' means developing a value stream to eliminate all waste (including time), promote innovation and enable a level schedule. CIPS subscribes to the view of Professor. Andrew Cox (University of Birmingham) in his view that lean and agile philosophies do not conflict; indeed they contain common features that can be usefully combined. Professor Cox asserts that the lean paradigm is most powerful when the winning criteria are cost and quality whereas agility is paramount where service and customer value enhancement are key. CONCLUSION As this Position Paper makes clear, 'lean' and 'agile' concepts have been, and continue to be, the subject of academic research, notably at the University of Cardiff, the University of Birmingham, and the Cranfield School of Management. What the Position Paper also makes clear however is that 'lean' and 'agile' are not simply theoretical concepts - they also have considerable practical value not least because in principle at least the lean philosophy is potentially applicable to most situations. The Position Paper also makes the key point that lean thinking is one way in which purchasing and supply management is able to exert influence and leverage on corporate behavior. The Position Paper additionally suggests that one consequence of 'lean' may well be a smaller number of suppliers; from the buyer's perspective this can represent both a problem and an opportunity.

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LETTERS OF CREDIT
INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case letters of credit. The reader is encouraged to extract those parts of a CIPS policy document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on letters of credit is written specifically for those purchasing and supply management professionals engaged in significant overseas business. This document is one of a series summarising the CIPS view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document which supports this series entitled Background on Purchasing and Supply Management Practice Positions. CIPS has formulated positions on letters of credit as this method of payment is increasingly common due to the increase in global sourcing. CIPS views are stated through-out this practice document but the key statements are summarised below:
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being made to the terms of a letter of credit once it has been issued, the bank honouring the letter of credit should be informed without delay. Whilst acknowledging their usefulness, CIPS would advise caution before deciding to employ letters of credit in view of the costs, administration and possible risks involved.

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CIPS POSITION Letters of credit are part of the procurement process in international trade and should be familiar to purchasing and supply management professionals along with other aspects of international trade such as Incoterms. CIPS position is that although all purchasing and supply management professionals should be aware of letters of credit, and may regularly use them, they should always seek assistance and advice from colleagues who specialise in Finance and International Logistics. If such assistance is not available, CIPS encourages purchasing and supply management professionals to seek help from their organisation's bank. WHAT IS A LETTER OF CREDIT? A letter of credit is a legal document that entitles the supplier to payment under the terms and conditions stipulated in the letter of credit when it is presented to the bank along with documentation that guarantees that the shipment has been made. Many letters of credit are not for goods but for services and in such cases shipping documents are not applicable and so some other evidence of service provision is required. Irrespective of whether the payment is for goods or services, the purchasing and supply management professional should be aware of the conditional nature of the letter of credit; if the conditions have clearly not been met by the supplier, the bank will probably refuse to make the payment. Hence effective communication with the supplier is of paramount importance. CREATING THE LETTER OF CREDIT The buying organisation opens a letter of credit through their own bank. CIPS recommends that all letters of credit are signed off by the buying organisation's Finance Director. The supplier's Shipping Manager/Director should be requested to provide the signature at the other end as it is he or she who will have to comply with the conditions that the letter of credit contains.

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CIPS recommends that before using letters of credit, purchasing and supply management professionals should seek advice/assistance from colleagues with appropriate expertise in other departments (e.g. Finance/Accounts) within the organisation. CIPS advises that all letter of credit should be signed off by a senior member of the organisation's Finance/Accounts Department. CIPS considers that it is one of the responsibilities of the purchasing and supply management professional to negotiate and optimise the precise terms of a letter of credit. CIPS would advise purchasing and supply management professionals to be aware that letters of credit do not imply the quality or fitness for purpose of any goods being purchased on this basis. CIPS endorses the recommendations of the ICC (International Chamber of Commerce) concerning the procedures relating to the use of 'documentary credits' for the purposes of international trade. CIPS recommends that, in the event of changes

There is a charge made by the bank for the service which buyers usually try to have the supplier bear; these charges are often high and the supplier will therefore usually try to negotiate the responsibility for these charges. Normally, suppliers wish to have a bank in their own country confirm the letter of credit if, for example, the supplier is unfamiliar with the issuing bank. Purchasing and supply management professionals should be aware that a confirmed letter of credit requires the payment to come from a bank in the supplier's country - usually the same city. If the letter of credit is unconfirmed the payment is made from a distant place in the buying organisation's country. Confirmation also governs the place where the documents are checked; if there is a confirming bank and it finds an error, the supplier should be able to take the amended paperwork to the bank to enable payment to be processed. The confirming bank commits to pay in the event that the issuing bank fails to pay on those letters of credit which have without recourse terms i.e. the buyer has no recourse whatsoever upon the seller should the documents not be honoured when they are due. Usually letters of credit are irrevocable and are categorised as such in that they cannot be cancelled or changed unless both parties agree to such an amendment. If the purchasing and supply management professional requires the letter of credit to be changed, he or she must provide the issuing bank with instructions relating to the proposed change. The bank then advises the supplier of the proposed changes by means of an amendment that is communicated via the advising bank. If the supplier agrees to the changes then they will be implemented. BENEFITS OF USING LETTERS OF CREDIT The supplier would normally request a letter of credit from the buyer as it provides reassurances for them that they will be paid once the goods have been shipped as requested. However, many governments insist that the letter of credit is the only payment mechanism available; this is so that governments can closely control access to foreign exchange. Buyers benefit because letters of credit assist in the security of supply in that the supplier must guarantee that the goods have in fact been shipped to the buyer when he presents the letter of credit for payment. If however, the wording is inadequate in the letter of credit e.g. the conditions are weak or unclear there could be a problem in ensuring security of supply.
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e.g. letters of credit need not necessarily be payable on sight i.e. the time they are presented to the bank. purchasing and supply management professionals can negotiate payment periods such as 80 days after shipment, which allows the buying organisation to accrue interest on the funds and helps cash flow, whilst the supplier is satisfied that they will be paid in due course. In addition to negotiating the terms of the letter of credit related to the payment, purchasing and supply management professionals should negotiate the relevant conditions. Although this is usually the responsibility of international logistics professionals, CIPS encourages purchasing and supply management professionals to take a more significant role in the negotiation and arrangement of airway bills, consignment notes, packing lists, INCOterms, etc. Letters of credit are also used as negotiation instruments; for instance, the supplier can take a letter of credit to the bank and negotiate a loan based on the future income a letter of credit represents. Similarly, the letter of credit can contain terms which allow the supplier to be paid immediately even though the terms state 80 days; this is called discounting and involves the confirming bank taking a percentage for enabling this payment. CIPS emphasises that letters of credit in no way guarantee the quality or fitness for purpose of the goods and therefore the usual principles regarding acceptance should be applied to the purchase contract. CIPS supports the approach taken by The International Chamber of Commerce (ICC) which is detailed in Croner's guide on international trade. The ICC has produced: . a set of rules governing documentary credit operations called the Uniform Customs and Practice for Documentary Credits (UCP) publication 500 (1993 revision). Nearly all banks through-out the world use these rules but the UCP must be expressly incorporated by all parties into the contract and so into the documentary credit itself . a new and comprehensive credit application form, publication 516, for use with the 1993 revision of the above rules. This not only contains the form, but also comprehensive guidance notes on completion and the significance of the information required. As matters included on the credit application should be covered in the purchase contract, this form will provide a useful checklist. CIPS emphasises the critical importance of ensuring the right wording is employed in respect of letters of credit. This is important in two respects: . so that the wording states precisely and clearly what is intended . so that the correct form of words are used (as the words have specific meaning within the finance profession and in the legal profession).

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PROFESSIONALS AND LETTERS OF CREDIT CIPS believes that it is one of the functions of purchasing and supply management professionals to negotiate and agree all aspects of the procurement process. For instance the terms of the letter of credit

CIPS strongly recommends that purchasing and supply management professionals seek advice and guidance from their professional colleagues in Finance when issuing letters of credit. Purchasing and supply management professionals must also be aware of the practical difficulties in changing the terms of a letter of credit once it has been issued. This can be problematic even if both parties agree to the change. CIPS suggests that one way of minimising such problems is to ensure that the bank responsible for paying the letter of credit is immediately informed of any changes and confirmation of acceptance of such a change is formally received. CONCLUSION This practice document is not intended to provide extensive information about letters of credit e.g. it does not explain the different types of letters of credit such as back to back, rolling, standby etc. each which have their own advantages and disadvantages and which should be used in different circumstances. Rather, it is intended to encourage purchasing and supply management professionals to take a more active role in this aspect of international trade. CIPS position is that letters of credit are a useful payment tool, but they should only be used where necessary as they involve a great deal of administration, risk and cost to be a suitable payment mechanism for day to day trading situations.

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MERGERS AND ACQUISITIONS

BACKGROUND CIPS practice documents are not written to be an end in themselves. They are a collection of views on good practice within a particular subject area, in this case mergers and acquisitions, as it relates to purchasing and supply management. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Further information on mergers and acquisitions is available from CIPS. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on mergers and acquisitions has been written primarily for the benefit of the head of purchasing and supply management. This document is one of a series summarising CIPS' view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document, which supports this series entitled Background to CIPS Positions on Practice. CIPS is expressing beliefs on mergers and acquisitions as they are increasingly part of modern day business life and purchasing and supply management professionals need to be positioned to take advantage of the opportunities that they can bring. The key positions in this paper are summarised below. CIPS considers that the procurement function has a key role to play in effecting and maximising savings, both before and after amalgamation/takeover. CIPS believes that mergers can help buyers to act strategically and work more closely with the Board. Even when the procurement function is not directly involved in the merger plan, purchasing and supply management professionals are still in an ideal position to identify and exploit business opportunities. The purchasing and supply management function will often have a key role to play in the due diligence process within the acquiring organisation. CIPS recommends that all members of the new purchasing team within the new and larger organisation should be sent a clear message as to the key role they are expected to play.

CIPS believes it is important for the head of the merged purchasing and supply management function to possess a wide range of abilities and skills, covering change management, communication, persuasion and human resources. CIPS considers it is vital that the threats and opportunities within the newly formed purchasing and supply management function are managed/controlled quickly and effectively. CIPS would draw attention to the additional care which needs to be exercised when international factors and considerations are involved. CIPS sees it as important that the purchasing and supply management function ensures that the supply market is kept abreast of the changes, decisions and initiatives impacting upon it. CIPS takes the view that purchasing and supply management professionals need to minimise any disadvantages created through diversification (as in their organisation being sold away from the parent company, for example).

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When their employing organisation merges (through acquisition or take-over) with another organisation, purchasing and supply management professionals can be involved in: the strategic and commercial process of the merger the business of fusing two or more separate purchasing and supply management functions vertical integration e.g. the buying organisation taking over a key supplier in order to secure supply and manage the business more effectively. OPPORTUNITIES FOR RAISING THE PROFILE There are three key stages at which the procurement function may wish to become involved. 1 Undertaking the covert analysis of potential savings synergies before the other company is approached. This uses a range of analytical tools to estimate key parameters such as spend profiles. The joint analysis of savings potential as part of the due diligence process before amalgamation, once the other company has been approached. Combined working rationalisation alignment and delivery of defined benefits, once 'consolidation' of the companies has taken place.

It needs to be borne in mind that the analysis should focus on process and system strengths as well as estimating potential specification similarities which would facilitate spend leverage and hence price

reductions. It is also worth remembering that after the merger goes ahead senior management will invariably ask for more than was originally promised by the procurement function; in this connection it should be noted that quoted procurement savings can often be based on limited analysis and may therefore be challenged. Mergers give purchasing and supply management professionals an opportunity to be really strategic and work directly for the Board. CIPS encourages purchasing and supply management professionals to be proactive in offering their commercial, management and legal services to senior management to help in the process of agreeing the merger with the organisation concerned. Purchasing and supply management professionals should proactively consider the implications of bringing together two or more purchasing spends and devise an appropriate plan for this process. They can assist the Board in making sensible recommendations to shareholders about the likely commercial benefits e.g. savings that can be expected. Colleagues working in Guinness when it merged with Arthur Bell to form Diageo had their status elevated because of their contribution at this stage. Another example is the Royal Bank of Scotland and NatWest merger. DELIVERING VALUE TO THE MERGER Where, for whatever reason, the purchasing and supply management professionals are not involved with the merger plans, they can nevertheless react to the situation and identify business opportunities (e.g. the acquired company could provide a supply base that enables the potential for a new product to be brought to market) and additional benefits and use these to raise their contribution and influence in the organisation. Where purchasing and supply management professionals have not managed to influence the Board in time, Chairmen often pronounce, for example, that savings of 20m will be delivered as a consequence of the merger. These figures are often guesses based on no substantive facts, leaving the merged purchasing and supply management functions to work out how they can best deliver these savings. Purchasing savings are often used as a way of securing shareholder approval for the premium paid for the business being acquired. Sometimes these savings can mask the real reason for the merger, such as penetrating the US market through the vehicle of the acquired company. However, to an increasing extent mergers are about knowledge intangibles as opposed to tangible assets and benefits. Even so it is worth remembering that savings often arise from reduced headcount or rationalised manufacturing facilities, rather than through the purchasing function.

One way in which the purchasing and supply management team at the acquiring organisation can assist the Board is to offer to be involved with the due diligence process. There appears to be no standard for this process in acquisitions but broadly the following types of issues need to be examined:

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How do they resource their purchasing and supply management - number of people, structure? What are the top ten by suppliers by value? What are the top ten suppliers by risk? What is the size of the supply base? Has this been managed? What are the top ten contracts by strategic importance? What partnering arrangements are in place? What contractual commitments exist? Where is the organisation exposed - e.g. in terms of security of supply, reputation etc? What inventories are held, how are these managed? What terms and conditions are used e.g. payment terms? What assets do they have - have these been subject to life cycle analysis?

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Additionally there is a need to consider whether the company being acquired retains its own legal identity as this could affect novation of contracts. There are also possible TUPE implications if staff changes are involved. It is not always easy to obtain useful management information from merging companies but this needs to be done in order to establish a baseline for improvement. Reference can be made to the CIPS publication 'How to Assess the Maturity of Purchasing and Supply Management. DUE DILIGENCE When evaluating the value for money of contracts during the due diligence process it is often difficult to determine whether it is a good contract or not without being able to benchmark with a similar contract from the acquiring organisation's portfolio. There are also differences between service and manufacturing companies when it comes to due diligence. Manufacturing companies are often focused on issues of quality, compliance and warranties, for example, where a piece of plant or capital equipment is used in the business - the contract that supports it needs to be checked for security of supply e.g. of maintenance parts. On the other hand, due diligence in service companies is often more concerned with MRO issues, software/IT contracts and issues of overheads. It is rather like looking into the future in terms of requirements as opposed to looking at equipment already being used.

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BRINGING TOGETHER THE PURCHASING AND SUPPLY MANAGEMENT TEAMS The merged purchasing and supply management function should have a central role in recapturing the merger premium. A clear message should be given to employees/colleagues about the critical role purchasing and supply management has to play and the importance of a collective effort in this regard. An integration team is required to integrate the purchasing and supply management teams quickly and effectively. Purchasing and supply management professionals are adept at bringing together appropriate cross-functional teams and facilitating planning discussions on the purchasing and supply management consequences of mergers. They do this when Make versus Buy analysis and similar decisions take place. An integration team requires a leader with excellent communication and facilitation skills - and ideally two synergy managers representing the value that both teams can bring to the new function. The leader of this team need not necessarily be the future leader of the purchasing and supply management function. However, organisations often appoint a new head of purchasing and supply management to take on this integration role. Integration team meetings need to take place in quick succession with actions taken in between meetings. As an example, when Racal and Thomson merged there were ten integration team meetings in two months. The problem of having too many purchasing and supply management professionals in the merged organisation also needs to be addressed. This is the basic question of determining the skill sets required to support the new purchasing and supply management key performance indicators and then assessing the skills residing in the merged function. The head of purchasing and supply management needs to have change management skills, communication and persuasion skills, empathy, understanding and appreciation of the human resource responsibilities of bringing the teams through the transition from two (or more) purchasing and supply management teams to one. It is a mistake to try and benchmark the merging supply functions, since one function may be about buying castings, in a hard-nosed manufacturing supply market - and the other might be polished service buyers working in partnership with long-term valueadd suppliers. Both approaches may be appropriate for the supply markets they work in - but not directly comparable with each other. Merging two purchasing teams can create many new opportunities - new skills may become available, new markets open up etc. but there can also be conflicts due to power struggles, different ways of working and culture clashes. These issues all need managing quickly and efficiently so that optimum value is extracted whilst problems are dealt with immediately rapidly and efficiently.

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When Caterpillar bought Perkins, the former were in a much stronger position in terms of their spend and the natural assumption could therefore be that the smaller organisation of Perkins would have complied with the larger company's ways of working. However, this was not the case, as Perkins had established sophisticated supply management capabilities from which the whole organisation benefited. Another example of such a scenario was when Lucas took over Varity - the Varity employees' approaches survived and prospered. The moral of these stories is that the purchasing and supply management profession should be open-minded and evaluate all the approaches, skill sets, methodologies and experiences that they have at their disposal. They should then be sufficiently objective to extract the best from the merged purchasing and supply management functions which can then be used as the base line for further improvement. An additional factor is that international considerations are sometimes involved; this was certainly the case in the Lucas and Varity merger; another example is that of Racal and Thomson. IMPACT ON SUPPLY MARKETS A merger creates uncertainty among both companies' suppliers, particularly if they might have to compete with each other. Although some suppliers may be able to look forward to winning more business from the combined organisation others will lose out. Too much emphasis is often put on the savings that should come out of mergers. Savings can be difficult to achieve if the two merging companies both have high standards as far as their purchasing and supply management activity is concerned. Equally, cost savings can be pursued at the expense of quality, or security of supply and can damage a relationship with a key supplier when the latter is forced to work on an unrealistically slender margin. Quite often savings are generated through headcount reductions in the purchasing and supply management team or as a result of process improvements through the implementation of pCards or eProcurement. The purchasing and supply management function must ensure the supply market is kept abreast of changes and decisions that impact upon them. This can be achieved through supplier conferences, emails/newsletters and the media. Suppliers may also be adverse to dealing with the newly acquired company - and so customer preferencing analysis needs to be undertaken to determine how different suppliers perceive the new purchasing entity. Where perceptions are negative, the purchasing and supply management function must undertake conditioning of the supplier using techniques such as reverse marketing. There is also the assumption that bigger is better i.e. two spends creating greater leverage and power in the marketplace. Where two large global organisations try

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to join forces in this way, this could be prohibited by the Competition laws. The supply base can also react negatively - they might not offer international pricing and insist that subsidiaries of the buying organisation in France buy from their French division, contracting with them accordingly. Similarly, local manufacturers may require local suppliers that cannot supply other parts of the business e.g. a whisky distillery in Scotland may require locally made bottles only. This is an interesting example in that the distillery has to be where it is because the local water is a key part of the product; locally produced bottles are an attractive choice for both brand profile and economic reasons, glass having a high transport cost/factory value ratio. The purchasing and supply management function should also be mindful of the longer term consequences of aggregating spend into large contracts that can only be serviced by large suppliers e.g. smaller businesses failing to flourish and so competition is not created and the buying organisation becomes dependent on the powerful supplier. Another long term effect could be the movement of an entire supply chain out of the country as happened with steel in the UK. CHANGING CONDITIONS AND CONTRACTS Where the two merging companies have similar requirements and have different contracts in place with different suppliers, a value for money analysis must be undertaken in order to determine the best option. When there is no clear best option it is good practice to go out to the marketplace again with the amalgamated requirement of the two companies. It can be argued that this creates buy-in by the new purchasing and supply management function rather than some buyers having to use a contract set up by their peers whilst their own has been terminated. Purchasing and supply management professionals need to minimise any disadvantages created by the possibility of diversification e.g. their organisation being sold from the parent company. One way to minimise disruption is to ensure that the contracts they are party to before being sold off are still available to them to use for a sensible period of time. This can be achieved through the use of clauses in contracts such as those on contract assignment. Equally, where the purchasing and supply management function prefer, they should be released from contracts where, for example, they prefer to source locally from smaller suppliers. The same issues are encountered not just in the merger/acquisition arena but also where a company may win an outsourcing contract from another company (e.g. a third party supplier to provide call centres previously provided in-house). In this case there is a greater pressure as the customer can of course choose to bring such service provision back in-house so there is a prime need to get everything running as efficiently and cost effectively as soon as possible.

INTERNATIONAL, MULTICULTURAL AND TAXATION ISSUES When a company takes over or merges with another company in a different country and assumes responsibility for its contracts with third party suppliers, there are many legal and tax issues to be considered as well as all the cultural, political and even language issues. It is likely to prove beneficial to retain at least a small local purchasing and supply management team in the country concerned to assist with the pitfalls of legal entities, non-reclaimable VAT or Sales Taxes and the implications and ramifications of contracting in local laws. It is likely that, in the immediate short term at least, to maintain continuity of supply, contracts from the merged company will be novated to the acquiring company. Expert advice should be sought to ensure the acquiring company does not expose itself to unnecessary tax exposure (which in certain cases can impact individual product/solution pricing thereby affecting potential bid scenarios the acquiring company may be involved in and/or may also directly affect customers as some charges may have to be paid by the local in country recipient not the provider). Where purchasing and supply management teams from different cultures are merged there will need to be strong leadership, management and guidance as well as education to overcome entrenched loyalties and supplier preferences together with all the different historic attitudes and working practices. Where one company's purchasing and supply management department effectively takes over another from a different global region great care must be taken to understand cultural differences, methods of working and local issues. The challenge of working across significantly different time-zones cannot be overestimated (finding convenient times for conference calls between the west coast of the US, the UK and Asia-Pacific is not easy). Email becomes the normal method of communication. English tends to be the international business language but care must be taken to communicate clearly and concisely, particularly with people whose first language is not English and the subtleties of a contractual clause can easily become confused in translation. CONCLUSION Synergies between companies and the economies of scale generated through mergers are prime sources of value creation. Purchasing and supply management professionals are equipped with the skills to maximise this value creation and not just through savings. Mergers provide purchasing and supply management professionals with an opportunity to deliver real and highly visible business benefits to the Board. They are complex commercial projects and are a minefield of risks which need to be managed through careful

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change management. However they can also create new career opportunities for purchasing and supply management professionals, such as a two year stint in the US offered by Caterpillar to its employees. CIPS encourages purchasing and supply management professionals to view mergers as positive experiences and to proactively offer their services to achieve success.

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NEGOTIATION
INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case Negotiation, as they relate to purchasing and supply management . The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Further information on negotiation is available from CIPS. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on Negotiation has been written primarily for the benefit of full time purchasing and supply management professionals i.e. those in the purchasing and supply management function. This document is one of a series summarising the CIPS view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document which supports this series entitled "Background on Purchasing and Supply Management Practice Positions". CIPS is expressing beliefs on negotiation as this is a key skill of the purchasing and supply management professional. CIPS views, opinions and beliefs are stated throughout the document; however the broad practice statements which underpin the text are as follows:
x

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setting objectives, factors for trade, potential concessions and a fall back position or position at which the buying organisation is prepared to walk away from the negotiation. In the negotiation process, CIPS believes that ideally purchasing and supply management professionals should aim for win-win outcomes (which as explained below - need not necessarily represent ideal outcomes) for both parties.

DEFINITION Negotiation can be defined as: "To communicate with the objective of reaching an agreement by means, where appropriate, of compromise." CIPS believes that negotiation is a key skill of the purchasing and supply management professional. The ability to negotiate effectively is so fundamental, that without it, an effective purchasing and supply management service cannot be provided. Although some people have a natural flair for negotiation it is a skill which not only needs to be learned through professional training, coaching and experience but requires refresher training at, at least, five year intervals. Purchasing and supply management professionals should undertake, or lead, any significant negotiation with suppliers required by their organisation. Where someone else is to undertake a negotiation, it is the responsibility of the purchasing and supply management professional to ensure that they are properly trained and prepared for the experience. CIPS believes it is both dangerous and embarrassing for the organisation when an untrained individual undertakes a complex commercial negotiation. Negotiation should be part of most procurement exercises especially those which are of high value, high risk or are complex. In some cases, negotiation with approved suppliers is preferable to inviting bids such as when the requirement is difficult to specify. ADVANTAGES AND DISADVANTAGES OF NEGOTIATION The advantages of negotiation include: x It is a relatively expedient method of obtaining a value-for-money solution x It is a useful method of maintaining value for money in a single source situation i.e. where there is no real competition x It is useful when the requirement is difficult to specify x It is relatively inexpensive to undertake x It is flexible and not prescriptive x It should be confidential x It can generate a win/win solution

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CIPS firmly believes that negotiation is a key skill requirement for purchasing and supply management professionals and is one moreover which requires refresher training on at least a five -yearly basis CIPS believes that purchasing and supply management professionals should be involved either by leading, supporting or facilitating, on behalf of their organisation, the strategy and process for any negotiations with suppliers CIPS advocates the use of cross-functional teams when significant negotiations are involved; these should be led by purchasing and supply management professionals CIPS emphasises the criticality of planning the negotiation which should include, for instance researching the background, identifying roles,

ISSUES TO CONSIDER CIPS believes that purchasing and supply management professionals should aim for a win-win solution for both parties where appropriate. There will rarely be occasions when the benefits of the negotiation are equally balanced but if suppliers feel they have "lost", this may adversely affect their attitude to the relationship making any negotiated gains by the purchasing and supply management professional short-term triumphs. In some cases e.g. when negotiating with an ad-hoc supplier, as opposed to one with whom the buying organisation is to have a longer term relationship, it is appropriate for the buyer to drive as hard a bargain as possible. Negotiation is particularly difficult where there is little competition in the marketplace. This strengthens the supplier position and correspondingly weakens that of the buyer. The purchasing and supply management professional must identify alternatives as part of the negotiation strategy and have a position with which they are prepared to walk away from the negotiation (for this position Fisher and Ury coined the term "Best Alternative to a Negotiated Agreement or BATNA"). CONCLUSION Negotiation is a skill which must be learned, and refreshed periodically. Purchasing and supply management professionals should be responsible for determining when negotiations with suppliers are appropriate and ensuring that these are undertaken

The disadvantages include: x A lack of transparency x A lack of a clear audit trail x It requires a great deal of skill and competence x It is often viewed as a competition with winners and losers x It can require an extensive amount of preparation

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UNDERTAKING NEGOTIATION Purchasing and supply management professionals often lead cross-functional teams when undertaking complex procurement negotiations. It is imperative that those parties undertaking the negotiation are empowered to make decisions so as to bring discussions to an effective conclusion. CIPS encourages purchasing and supply management professionals to understand and appreciate the importance of the use of emotion and body language in negotiations, in order that all messages given directly, or indirectly by the supplier(s) can be interpreted appropriately. To be successful, the purchasing and supply management professional should ensure that the negotiation is properly planned. The extent of the planning should be a function of value and risk. The planning process should include: x A diagnosis of the situation x An accurate appraisal of the buying organisation's expectations x An assessment of both parties' bargaining power x The setting of objectives for the negotiation e.g. the ideal, realistic and fall back positions need to be identified and agreed x The development of a strategy for the negotiation i.e. approach, style, communication, concessions, baseline even venue e.g. a neutral venue may prove more appropriate than the offices of one of the parties to the negotiation x The factors to be traded need to be identified i.e. those things which the buying organisation can trade for things they would like to obtain from the supplier and those things which can be conceded etc. It is advisable to try to anticipate the suppliers' perception of such factors. During the negotiation, the strategy must be implemented and in addition: x The needs of both parties should be explored x Movement needs to be maintained x Objectives may need to be reviewed x Tactical ploys may need to be used x Concessions may need to be given from both sides x Settlement needs to be recognised and agreed x Closure needs to happen x The agreement needs to be documented

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OUTSOURCING
INTRODUCTION This document is one of a series which summarise the Chartered Institute of Purchasing & Supply (CIPS) view(s) on various purchasing and supply management subjects. The reader should refer to the accompanying document which supports this series entitled "Background to Purchasing and Supply Management Policies and Positions". These policy and position statements express CIPS' beliefs on the subjects. They are not intended to fully explain a subject, or provide extensive guidance, except to help to put the subject in context. Subject explanations and guidance are provided in the CIPS Know about... and How to... series. CIPS is expressing beliefs on outsourcing because it is an increasingly common activity and one which purchasing and supply management professionals should lead in their organisations. CIPS POSITION CIPS takes the view that the outsourcing of services to specialist providers can often lead to better quality of services and increased value for money. Purchasing and supply management professionals should have the knowledge and skills required to manage the outsourcing process and to advise colleagues of the most appropriate solution to obtain best value for money in the provision of services. CIPS strongly recommends that the purchasing and supply management professional ensures clarity on the rationale for outsourcing at the outset and that until such clarity is achieved the purchasing and supply management professional should advocate caution when embarking on the outsourcing process. DEFINITIONS CIPS defines outsourcing as "the process of identifying the most suitable expert third party service provider to undertake the management, administration and provision of the service in question". Facilities management is a type of outsourced service in that it is the contracting out of all activities connected with the organisation and control of a facility such as catering or security. Outsourcing should not be confused with privatisation. The latter can be defined as taking the control and ownership of an enterprise, or part of an enterprise, from government or local government and placing this in the hands of private investors such as individual shareholders or other bodies. POTENTIAL A DVANTAGES SERVICE
OF AN

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CIPS believes that outsourcing services to organisations which are specialists in the provision of the service in question can lead to many benefits including: u More efficient and expert service e.g. compliance with industry standards u Improved resources e.g. staff being professionally trained u Higher quality of service u Customers' needs being met u Lower overall cost u Concentration by buying organisation on core activity CIPS also recognises that many organisations have not realised the potential from outsourcing. Typical reasons for this include: u Poor requirement specification u Failure to attract innovation u Outsourcing a poorly performing area without attempting to improve it first u Weak and badly written contracts u Poorly handled workforce issues u Conflict of interest between colleagues u High bidding costs u Inappropriate allocation of risk and reward CIPS believes that the benefits delivered from outsourcing depend upon: u The degree of efficiency in the in-house service u The extent to which customers' needs were already being met u The process used to determine the service provider and the outsourced requirement specification u A well written and properly managed contract e.g. with a service specification which includes descriptions and service levels OUTSOURCING STRATEGY CIPS recommends that the purchasing and supply management professional works cross-functionally with colleagues in for example, Finance and Human Resource Management in order to determine: u the outsourcing strategy and the rationale behind it and; u to manage the process and the deliverables CIPS believes that it is imperative when contemplating outsourcing, that the purchasing and supply management professional obtains visible commitment to the outsourcing strategy from senior management and

where appropriate the Board of Directors. The outsourcing strategy must also be supported at all management levels within the organisation. The outsourcing strategy must be underpinned by professionally executed change management principles. This is particularly important in respect of those staff providing the existing in-house service. When selecting those services for outsourcing, the purchasing and supply management professional with the cross-functional team needs to identify those services which are core to the organisation. CIPS believes it is not good practice to outsource core services. Outsourcing is usually applied to those services which support the organisation in the delivery of its core business. Having determined which services are noncore to the organisation, the outsourcing team should then identify which of these non-core services are operational (e.g. cleaning, security, catering) and those which are strategic (e.g. information technology or human resource management). Clearly, strategic services require a greater concentration of effort with a proactive, clear and robust strategy for each service being considered for outsourcing. PROCUREMENT PROCESS The fundamentals of good procurement practice apply equally to outsourcing such as, for example adherence to the CIPS personal ethical code and, in the public sector, the need for purchasers to comply with the EC Procurement rules. This policy document is not intended to provide detailed guidance on outsourcing but rather to summarise CIPS' particular views on the issues pertinent to the procurement process of outsourcing. Further guidance is available from CIPS. MAKE OR BUY CIPS suggests that the first stage in any outsourcing strategy should be to determine whether the service in question should continue to be run in-house or whether it should be outsourced to an external service provider. If the in-house service can be improved, perhaps by advice from external consultants or ideas from a benchmarking exercise, coupled with increased training and targets for greater efficiency, the in-house option may remain attractive. The benefits of determining the "make or buy" decision at the outset i.e. not having the in-house team compete with external service providers, has the following benefits:
u

It offers suppliers confidence that the competition is being conducted in good faith It avoids conflict of interest in the buying organisation e.g. loyalty to existing colleagues It enables the in-house team to concentrate on delivering the service rather than preparing a bid It avoids the danger of producing a biased specification of requirements It avoids the need to provide finance, or other forms of assistance e.g. marketing and presentational skills, to the in-house team so that they can compete effectively

Should the buying organisation decide to take the "Make or Buy" decision at the end of a tendering process, having included an in-house bid, care must be taken in evaluating the in-house bid. It can be very difficult to determine the true cost of an in-house service and whoever is responsible for evaluating it will need to have information on for example: u human resources and payroll u facilities management u IT u telecoms u cost of overheads u bought-in materials STAFF ISSUES CIPS emphasises the importance of professionally managing staff issues when undertaking outsourcing. Those currently providing the service in-house will naturally feel vulnerable and this can affect morale and staff motivation. Some staff may even feel inclined to look for alternative employment which may result in a loss of key skills. For this reason, the purchasing and supply management professional must develop a staff communications plan with the head of the organisation's human resources, to fit within the outsourcing strategy. This should aim to ensure that the service is not affected during the transitional period. The time-scales involved in outsourcing can often be quite long and so staff must to be kept informed, reassured and have the opportunity to air their concerns. TRANSFER OF UNDERTAKINGS AND PROTECTION OF EMPLOYMENT (TUPE) REGULATIONS This is one of the key issues to be addressed when considering outsourcing. CIPS recommends that the purchasing and supply management professional employs a legal adviser in respect of TUPE as the law is subject to change and may be difficult to interpret correctly. CIPS recognises that TUPE is important in terms of handling of workforce issues. It aims to ensure that existing staff, currently providing the service in-house, will be transferred to the new service provider under the same terms and conditions of employment. It should then become the service provider's responsibility to manage, train and support those staff to enable them to

It gives staff a clearer picture of what is likely to happen and time to prepare It allows purchasers to get the best from the procurement route that they have chosen

deliver the new service. However, some service providers have been known to wait only for the minimum period in law to expire before they begin re-organising staff which leads to changes in terms and conditions. CIPS recommends the purchasing and supply management professional working with the cross-functional team sets down the ground rules for outsourcing services and for running subsequent generation competitions. They should stipulate that staff should transfer and that at the end of the contract period, TUPE will apply again. Potential service providers require accurate and timely information about the workforce that will be transferring such as certainty about terms and conditions of staff. Without such information, bidders will have to build into their bids potential redundancy costs which will diminish value for money. TENDERING The outsourcing of services can be undertaken by means of a competitive tendering process (reference should be made to the CIPS policies and positions on negotiation, tendering, and post tender negotiation). There are also cases where relationships develop so that the tender process is not appropriate. In some instances, the tender process may even cause deterioration in the relationship with the most likely contender. It should be a responsibility of the purchasing and supply management professional to determine whether or not a tendering process is appropriate for each outsourcing procurement activity. For some services, it may be necessary to create markets as for example, local authorities are doing under the Best Value legislation. This might involve developing suppliers to deliver a new service for instance (reference should be made to the CIPS policy on Best Value). If the purchasing and supply management professional determines that tendering is the most appropriate route to an outsourced service then, as with any complex procurement, the entire process must be carefully thought through, with time-scales identified. One issue to be considered is the number of service providers invited to tender as they incur high costs in tendering which are, ultimately, passed on to the customer. Clearly, however, the purchasing and supply management professional needs to ensure that there is sufficient competition and that those invited to tender have a realistic chance of winning the business. An effective way of ensuring competition is to have a pre-qualified list of service providers. The service providers on the list should satisfy the first level of the selection criteria e.g. with respect to their financial standing, track record, capacity to deliver etc. (Pre-qualification is addressed in the CIPS policy on tendering, negotiation and post tender negotiation.)

OUTCOME/OUTPUT BASED SPECIFICATION One of the key issues in outsourcing is generating innovation (reference should be made to the CIPS policy on innovation). Purchasing and supply management professionals should endeavour to encourage innovation from the service providers in the contracting process starting with the employment of an output or outcome-based specification. This should be comprehensive and cover everything that is required but it should not stipulate how this should be achieved. The purchasing and supply management professional, working with the cross-functional team, should diagnose the strengths and weaknesses of the service currently being provided and work with customers to ascertain their needs and aspirations in respect of the service. CIPS emphasises the importance of involving internal customers of the service throughout the procurement process in order that they feel they have been properly represented and have ownership of the solution. The findings from this diagnosis will form the core of the outcomes expected but it should be the responsibility of the service providers to submit, in their tender, their own individual solution (or a range of solutions) to the service as appropriate. Whatever method is employed to develop an innovative value for money solution this must be transformed into the specification of requirement or the service description before the contract is awarded. This is necessary so that both parties have a documented, clear and thorough understanding of what is expected to be delivered, from both parties. This of course can be subject to improvement, post contract award, as deemed appropriate. One method of generating an innovative solution is to issue the outcome-based specification at the pre-qualification stage and have suppliers submit ideas in response to that which can then be used to develop the specification further. However, the purchasing and supply management professional should ensure that service providers are aware of the purpose of doing this and that this information will be shared within the marketplace. TRANSFER BENEFITS
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Outsourcing can involve the transfer, as appropriate, of those risks associated with the contract as well as responsibilities. As part of the initial diagnosis of the current situation, the purchasing and supply management professional with the cross-functional team, should endeavour to identify all risks and responsibilities associated with the service. Risks and responsibilities can be illustrated by means of a table; it is good practice to have the bidders stipulate in their tenders which risks they would be willing to take responsibility for, should they be awarded the contract. These can then be negotiated during the process of bid clarification. However, risks have a high cost associated

with them and as price and risk are interdependent, ultimately the buying organisation will pay for passing any risks on to the service provider. CIPS suggests that the aim should be optimum risk allocation and that the party which is allocated a particular risk should have the freedom to manage it. Equally, benefits expected to arise from the contract should be ascertained as far as possible prior to inviting tenders. The tenderers should be requested to stipulate those benefits that they would be willing to share and to identify any others which may arise from the contract. Benefits, like risks, should be measurable and quantifiable and once the contract is in place, should be monitored and managed accordingly. These benefits can act as incentives to the service provider and ensure that the buying organisation is perceived by the supplier as a key client. REFERENCES

tract and these might state the requirement for skills and knowledge transfers, so as to prevent the buying organisation becoming dependent on the contracted service provider. CIPS suggests that buying organisations should try to retain the intelligent client capability i.e. appoint an internal expert to manage the contract so that they retain and develop the knowledge in question. This person can also provide a valuable contribution to contract variations and amendments by presenting an informed internal view. The buying organisation needs to be in a position, at the end of the contract period, to competitively tender the contract again. This may include inviting the current service provider to bid. In some cases, it may make commercial sense to simply re-negotiate with the existing contractor, especially if market testing has demonstrated that the service provider has continued to deliver value for money. CONTRACT DOCUMENTATION

Before deciding on the successful service provider, indeed as part of the procurement process, it is important that the preferred bidder's, or even the short-listed service providers', references are contacted and, where appropriate, visited. Reference sites are an effective way of ascertaining whether the service provider can in fact deliver the solution required. INTERPERSONAL ISSUES CIPS strongly recommends that potential service providers are invited to present their solution to the buying organisation as part of the procurement process. "Beauty Parades" are an essential part of the outsourcing process and as such purchasing and supply management professionals must ensure that the people who will be managing the service are present, if not actually presenting, in order that they can meet them. Equally, when discussions or negotiations are taking place, the key staff expected to manage the contract must be present. It is important that the buying organisation is comfortable with the people with whom they will be working. Further, the purchasing and supply management professional should ensure that there is provision that the buying organisation has a role in the selection of new staff to manage the contract. For example, in the circumstances that the staff allocated to manage the contract choose alternative employment or move to another part of the service provider's organisation. "BABIES AND BATH WATER" When outsourcing strategic services particularly, care must be taken to ensure that the knowledge and competencies required to deliver the service, currently residing within the organisation, are not lost during the contract period. For this reason, CIPS recommends that appropriate exit strategies are built into the con-

An outsourced arrangement must be supported by an expertly written contract. Unlike the purchase of supplies, the purchase of services is not effectively covered under common law. CIPS recommends that the contract comprises an effective set of terms and conditions, covering issues such as conflict resolution, as well as special clauses to cover the specific service in question. A draft set of terms and conditions should be included in the invitation to tender and the tenderers invited to submit any special clauses they deem appropriate which can be subjected to bid clarification at a later stage. Both parties should aim to continually improve both the service, the contracted relationship and the processes that support them. CIPS recommends that purchasing and supply management professionals include mechanisms in the contract to review processes and working practices in the light of experience. The service should develop, and in many cases change, during the contract period and so it is important to include change management clauses in the contract. These might define a protocol for change to ensure that any such change is discussed by both parties and approved in writing before being implemented. The changes might also have implications in respect of incentives, benefits and risk, and so the contract documentation may need to be varied to accommodate change as it arises. CONTRACT PERIOD When outsourcing, the length of the contract needs to be determined at the outset. CIPS believes that an outsourced service contract should have a minimum duration of three years. The contract should provide for exit strategies including appropriately drafted termination clauses if, for example, the service provider repeatedly fails to deliver the required level of service.

Some outsourced contracts can involve a financial input from service providers, possibly under a PFI type arrangement, and as such the service provider will require a greater period to receive a return on its investment. It is not unusual to have contracts with durations of seven or ten years and in some industries e.g. construction, 15 or 25 years is not unusual. The important issue is that the contract provides for exit strategies and that the relationship is properly managed. MANAGING THE CONTRACT Notwithstanding the benefit of an appropriately written contract, with a "service specification" that includes for instance service levels, service descriptions, agreed incentives, benefits and risks, it is imperative that the contract is properly managed. Regular contract management reviews are essential to ensure that both parties are meeting their respective obligations and that the service is being continually improved. These reviews are particularly important in long and complex contracts. Contract management reviews might involve regular scheduled meetings with the service provider to monitor performance, to develop the service and to measure the extent to which the benefits are being delivered. They can also include subjects such as administration, the technical relationship, as well as contractual matters. In a partnering style relationship, problems can be addressed and resolved quickly especially if a rapport has built up between key personnel from both parties. It is essential that the buying organisation's contract manager is commercially astute in order to prevent the service provider from seeking opportunities to maximise profit by reducing the quality of service or by seeking opportunities to increase charges. In order to limit difficulties of an adversarial nature, CIPS would recommend that a partnering style relationship is entered into between the buying organisation and the service provider especially when the service in question is strategic to the buying organisation. (Reference should be made to the CIPS policies on partnering and supplier development). Nevertheless, when conflict does arise, conflict resolution mechanisms should be employed which should already have been addressed at the time the contract was negotiated and signed. OUTSOURCING PURCHASING AND SUPPLY MANAGEMENT CIPS believes that purchasing and supply management is a non-core but strategic service except in some small organisations. As such, purchasing and supply management may be a contender for outsourcing and a number of organisations have already outsourced their purchasing and supply management function.

As with any other strategic service, purchasing and supply management must continually improve and be properly managed with objectives and targets that are both quantifiable and measurable. It is often the role of the Internal Audit department to determine whether or not the purchasing and supply management function, often within the context of limited resources, is delivering the best procurement service possible. Where it is not, as with any other service, the service should be evaluated and the expected or required level of service ascertained. The resources required to meet these expectations should be identified along with any skill gaps within the purchasing and supply management team. CIPS believes that it is the responsibility of purchasing and supply management professionals to deliver year-onyear continuous improvement and to ensure that their own knowledge, skills and competencies are continually developed. The purchasing and supply management professional should test their own stakeholders and customers and ensure that the level of service required is being delivered. Further, they should market their successes by means of an annual report and presentations to senior management and customers. CIPS suggests that professional services such as purchasing and supply management lend themselves to "selective" outsourcing for example: u the increased use of consortia contracts for commodity items u use of third party expertise for one-off irregular procurements u use of bought-in expertise for specialist markets such as energy CIPS believes that most organisations will benefit from retaining control of their purchasing and supply management, especially the procurement of core goods and services, but this does not necessarily mean that all purchasing and supply management should be undertaken in-house. CONCLUSION The CIPS believes that outsourcing should deliver improvements in value for money if the contracting process is undertaken professionally. Purchasing and supply management professionals should take a proactive role in respect of outsourcing in their organisations, by identifying those services which should be subjected to these processes and outcomes. Outsourcing is another method by which the purchasing and supply management professional can raise the profile of the profession within their own organisation and in the business environment at large. Competence in outsourcing and its associated activities are fundamental to the purchasing and supply management professional and, as such, they should ensure that these skills are continually developed and refreshed by professional training as appropriate.

PURCHASING AGENTS : RAISING AWARENESS

INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, (in this case the minimum amount of training purchasing agents should receive), as they relate to purchasing and supply management. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Further information on training purchasing agents, and indeed anybody involved in purchasing and supply management, is available from CIPS. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs has been written primarily for the benefit of full-time purchasing and supply management professionals. i.e. those in the purchasing and supply management function. This document is one of a series summarising the CIPS view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document which supports this series entitled Background to Positions on Purchasing and Supply Management Practice. CIPS is expressing beliefs on the minimum training requirements of purchasing agents as it strongly encourages purchasing and supply management professionals to address this issue. CIPS views, opinions and beliefs are stated throughout the document; however the broad practice statements which underpin the text are as follows: CIPS believes that the head of purchasing and supply management in any organisation should be responsible for managing their organisation's entire bought in goods, services and works and that he/she should determine appropriate policies, procedures, delegations of authority to support this management The head of purchasing and supply management has a key responsibility for identifying all those involved in purchasing and supply management and assessing the roles CIPS believes that those people involved in buying high value requirements, such as budget holders and end users, are the ones with whom the organisation's purchasing and supply management professionals should work most closely CIPS recognises that 'purchasing agents' (defined below) have an important role to play in the purchasing function The purchasing and supply management professional should work very closely with purchasing agents who have a significant spend; training and supporting them on an ongoing basis CIPS encourages the development of crossfunctional teams within the organisation as, amongst other benefits, it both supports and educates all those involved in purchasing and supply management The CIPS recommendation is that ideally, at minimum, purchasing agents, should attend an awareness-building session on professional purchasing methods - and where it is appropriate this should be extended to others involved in purchasing and supply management CIPS suggests that such awareness-building sessions should include an overview of the legal environment and sessions should conclude with an assimilation test to ascertain what has been learned MANAGING PURCHASING AND SUPPLY MANAGEMENT CIPS believes that the head of purchasing and supply management in any organisation should be responsible for managing their organisation's entire bought in goods, services and works and that he/she should determine appropriate policies, procedures and delegations of authority to support this management. Purchasing and supply management procedures and policies should be mandated by the Board (or its equivalent) in order to secure value for money but in particular to minimise risks to the organisation. Where purchasing and supply management is not completely centralised the head of purchasing and supply management should be innovative in his/her management of the wide range of people involved in the purchasing and supply management process. There is no single best solution and so organisations have different infrastructures to support the management of purchasing and supply management. CIPS recommends that purchasing and supply management professionals produce clear information on the purchasing infrastructure that should be given to all new employees as part of their induction pack. Indeed, all existing employees should be provided with this information. Although such information should be readily available on the organisation's intranet and of course obtainable via the purchasing and supply management office - it should also be given directly to all purchasing agents.

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Within decentralised infrastructures are what CIPS refers to as purchasing agents. Purchasing agents include:1) People who call off from contracts or other arrangements with suppliers that have been set up with the approval of the head of purchasing and supply management People who can do the above but are also empowerment by delegation of authority to purchase small value items without any central involvement.

second category of purchaser i.e. those empowered by delegation of authority. PURCHASING AGENTS: RAISING THEIR AWARENESS CIPS strongly recommends that, where possible and appropriate, purchasing agents attend an awareness building session on professional purchasing. (It is appreciated that, in some large organisations, it would be a full-time job to train all purchasing agents and therefore some prioritising is necessary.) The objective of such a session should be to communicate that procurement is not the same as everyday shopping, as well as giving the reasons why it should be undertaken within the defined parameters and be compliant with the purchasing and supply management strategy. Another way of characterising this is to make people aware of what they do not know. Such a session should be designed and delivered by the professional purchasing and supply management team which is an excellent mechanism for building relationships and marketing the purchasing and supply management function. CIPS suggests that the awareness-building session for purchasing agents should include: An overview of the legal environment which, in the public sector would cover, albeit superficially at this stage, the public sector procurement rules; in the local government sector it would also cover such subjects as Best Value. In both the public and private sectors however, the standing orders and financial procedures should be addressed. The purchasing and supply management strategy - why it is as it is - the importance of leveraging spend; of minimising exposure and optimising value for money - this is a particularly good opportunity to present case studies The organisation's policies on, for instance, sustainable and ethical purchasing Contract law; for example, explaining what constitutes a contract, the importance of terms and conditions, battle of the forms, and so on A demonstration, ideally using video techniques, of the salesman's expertise in negotiation and the importance of purchasing and supply management expertise An overview of the purchasing cycle Negotiation- principles and practice An introduction to the procedures - to demonstrate the importance of probity in tendering, for example Bid evaluation and the importance of whole life costing The above are only suggestions and for an initial session they can only be touched on superficially. As stated above, the objective is not to train people at this stage but to raise their awareness. They should leave the session mindful of the need to contact the purchasing and supply management office whenever they have a significant purchase to make. (Smaller organisations with limited resources may often find it beneficial to make efforts to focus on major spend and high-risk areas).

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There are also other people involved in the purchasing and supply management process, who are not purchasing agents (as they do not do the purchasing) but rather assist cross-functionally; examples include people who specify the requirement, budget holders and end users. CIPS believes that those in this category who are involved in buying high value requirements are the ones with whom the organisation's purchasing and supply management professionals should work most closely. Purchasing and supply management professionals should work with them and penetrate this spend -or if it is unable to do this then it should introduce tight controls in these areas. CIPS encourages the empowerment of purchasing agents in the first category, as it is not usually the responsibility of professional purchasers to place orders on call off contracts or indeed low-value, lowrisk items. The small order buyers identified in the second category on the other hand, need basic training, together with strategies to ensure they retain their interest in good purchasing techniques; for instance, through the provision of awareness training, one aspect of which might be challenging suppliers' prices. It is a key activity of any head of purchasing and supply management to identify purchasing agents and to ascertain what types of procurement they do, or rather should do, and to assess their competencies accordingly. Another important consideration for the head of purchasing and supply management to bear in mind is the possibility of a clash of priorities between purchasing and non-purchasing work for purchasing agents as they may not see the importance of following good procedures to the letter. Depending on the size and nature of the organisation, internal audit procedures can play a part in establishing and following guidelines. (In the public sector, the Audit Commission and the NAO (National Audit Office) are the regulatory bodies.) The head of purchasing and supply management should be able to identify both types of purchasing agent within the organisation, with a particular focus on supporting and developing relationships with the

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The awareness-building session can bring significant benefits, particularly if it concludes with an assimilation/ understanding test to ascertain what has been learned. END USERS, SPECIFIERS AND BUDGET HOLDERS ETC. The next stage should be to assess the skills of those involved in significant spend areas such as budget holders, specifiers, end users and others that interface with the supply market. CIPS reiterates that it is in these significant spend areas that professional purchasing should be most focused. Purchasing and supply management must ensure it has responsibility for managing such areas of spend yet may feel it appropriate to simply support with a tight infrastructure of policies, procedures and controls, rather than take over the actual purchasing. CIPS encourages the development of cross-functional teams as the more colleagues are aware of what is involved in professionally executed purchasing the less time the professional purchasers will have to spend on each major project. In assessing this group's skills, the purchasing and supply management team might find that some of these people are already competent in some aspects of purchasing and supply management; for instance the Director of HR may well be competent in negotiation but may require more advanced training in specific areas such as supplier appraisal. The difficulty lies in assessing competencies without giving rise to offence. The awareness-building session is helpful in this respect as it can make part-time purchasers realise what they do not know; the objective is to get them to admit to these skill gaps. One method is to ask them to complete a short questionnaire which lists skills and competencies required for effective purchasing and supply management and to ask them to rate themselves on a score of one to ten. The purchasing and supply management team should then offer introductory training in the deficient areas or, if a person scores himself poorly overall, training may be provided, covering the subjects addressed in the awareness-raising session in more depth. In due course new subjects could be introduced covering for instance: Producing appropriate specifications Sourcing, supplier selection, appraisal and development Bidding process, bid evaluation and whole life costing Negotiation Single source, dual source, unique suppliers Types of contract - lump sum, term etc. Contract management Introductory training should ideally be delivered by the purchasing and supply management team as it is an opportunity to develop and strengthen relationships and gain credibility -but CIPS recognises that sometimes this is not appropriate - in particular in respect of technical training (in contract law for example).

An important point is to make any training appropriate for the person being trained by using examples that are relevant to them. It is useful therefore to deliver training to groups of people with similar areas of spend; the organisation's catering managers for instance, could be one such group. CIPS is not suggesting that in depth training in all aspects of purchasing and supply management should be a requirement - after all, the purchasing and supply management function is there to provide guidance and support - or in some cases to actually undertake the entire procurement project. However, where people with substantial spends are keen to learn, then this training should be provided as appropriate with 'refresher' training to ensure that skills learnt are not forgotten. It could even lead to NVQ assessments and CIPS qualifications. Some organisations have developed licensing systems whereby such people having undertaken sufficient training and skills assessment are then licensed to contract on behalf of the organisation i.e. they become purchasing agents but with delegations of authority that are high value. ADDITIONAL SKILLS FOR PURCHASING AGENTS AND OTHERS INVOLVED It is also important to make purchasing agents aware of those skills - in addition to the technical skills - that contribute to effective purchasing. These include: Interpersonal skills An appropriate level of deference Listening skills Numerical ability Analytical ability Ability to present your case Persuasive skills CONCLUSION CIPS advocates that purchasing and supply management skills are best deployed on major contracts and on areas of significant risk. Although some organisations have insufficient manpower for purchasing and supply management professionals to undertake every major procurement, the purchasing and supply management function should nevertheless be responsible for managing the entire expenditure for bought in goods, services and works. CIPS also recognises that some smaller organisations prefer to have all requisitions go through the purchasing and supply management office. This CIPS practice document has concentrated on those organisations that have the benefit of a purchasing and supply management office/function but some, especially smaller, organisations do not have access to purchasing and supply management expertise within their organisation. CIPS strongly advises those organisations to identify a company representative for the purchasing and supply management function, (if they are unable to recruit an additional member of staff for this specific purpose) and ensure that this person approaches CIPS for appropriate training and guidance.

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PARTNERING
INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case partnering, as they relate to purchasing and supply management. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Further information on partnering is available from CIPS. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on partnering has been written primarily for the benefit of full-time purchasing and supply management professionals. This document is one of a series summarising the CIPS view(s) on a wide range of subjects. The reader may wish to refer to the accompanying document which supports this series entitled 'Background to Positions on Purchasing and Supply Management Practice'. CIPS is expressing beliefs on partnering as it is fundamental for success in some buyer/supplier relationships, however it is just one of several different types of buyer/supplier relationships. Reference should be made to CIPS practice documents on Supplier Relationship Management and Supplier Development. CIPS views, opinions and beliefs are stated throughout the document; however the broad practice statements which underpin the text are as follows: CIPS believes that partnering is an effective and beneficial approach to managing relationships with some suppliers, provided it is undertaken strategically, professionally and selectively Partnering demands a specific set of skills and competencies from those who will be responsible for developing and managing the partnering arrangement Partnering is a supply chain process which should be led by the purchasing and supply management professional and include colleagues in the organisations entering into the partnering arrangement CIPS emphasises that there is a clear distinction to be drawn between 'partnering' and 'partnerships', the latter having clearly a defined legal basis Although partnering is often thought of as referring to long-term relationships, CIPS believes that the term is also applicable to contracts of relatively short duration CIPS takes the view that partnering arrangements should only be considered if they can be seen to bring quantifiable benefit to the organisations concerned CIPS sees partnering arrangements as ideally leading to higher levels of innovation and creativity and, often, reduced wastage and cost CIPS supports the concept of partnering agreements but believes they should be supported by a professionally-drafted contract CIPS considers that one key objective of partnering is continuous improvement CIPS believes that open book costing is a useful device for deriving maximum benefit from a partnering relationship although, to maximise efficiency, consideration should be given to the use of professional advisers WHAT IS PARTNERING? A partnering arrangement may be defined as an approach with an attitude, or management ethos, (towards selected suppliers) of openness, effective communication, close collaboration and co-operation, trust, honesty, transparency, sharing and mutual benefit. The concept of working in collaboration with key suppliers is not new and covers a wide range of close relationships between businesses. It is important to differentiate between partnering and partnerships, the latter having a specific legal basis: as such partnering is fundamentally different in nature from partnerships and is a form of relationship between businesses that are independent of each other and connected only by their contractual relationship as buyer and seller. A legal partnership on the other hand is of two parties jointly carrying out the same business being jointly liable for all risks and costs of that business. It is imperative that where only partnering, (not partnership), is intended this is made expressly clear and that the relationship is not described to other businesses as one of partnership. CIPS believes that partnering is an effective and beneficial approach to managing relationships with some suppliers provided it is undertaken strategically, professionally and selectively. It is a valuable tool for the purchasing and supply management professional and demands a specific set of skills and competencies from those who will be responsible for developing and managing the partnering arrangement. Partnering is a supply chain process which should be led by the

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purchasing and supply management professional and include colleagues in the organisations entering into the partnering arrangement. WHEN IS PARTNERING APPRORPIATE? CIPS believes that it is the responsibility of the purchasing and supply management professional to determine which supplies, services and works would be most suitable for a partnering arrangement, and to work cross-functionally with colleagues in identifying the most suitable suppliers to adopt the role of partners.

Some suppliers may not wish to partner with the buying organisation. This depends on how those suppliers position the buying organisation in their marketplace. It may be the case that the buying organisation is not perceived as an important or valuable customer, compared with those who may be unwilling to develop that relationship. In such cases, the purchasing and supply management professional should endeavour to persuade the supplier of the merits of partnering facilitating a supplier development programme. Partnering may often be a fundamental aspect of supplier development (reference should be made to the CIPS practice document on Supplier Development). Whatever method is employed, the supplier must feel comfortable with the partnering arrangement and not enter into it under duress. There are also the questions of size and power to consider; CIPS believes that size is not as important as the relative power between partnering organisations as it is easier to partner when the balance of power between the organisations is more or less equal. As partnering is a resource-intensive approach, it could be argued that it should only be undertaken where the benefits obtained exceed those that could be obtained by more traditional, less resource-intensive means. However, it can lead to substantial business benefits for both parties, not least as the opportunity to exploit the marketplace by combining both organisations' sales and marketing forces, or their research and development resources. DEVELOPING A PARTNERING ARRANGEMENT Partnering arrangements normally develop once the supplier/buyer relationship has been established. However, should a competitive process such as tendering be used to identify the suitable partner then the evaluation criteria would have to be specific to the partnering arrangement in question - this would not necessarily be the same as that for the provision of supplies for instance. Whether or not a competitive process is employed, there should be specific discussion and negotiation on the objectives of the partnering arrangements and the respective roles to be undertaken by the two parties. CIPS advocates the use of output or outcome specifications when developing the partnering arrangement so that innovation and creativity can be encouraged. The two parties need to determine those areas where close co-operation between the two businesses will generate the most valuable benefits. Partnering is based on the principles of trust and collaboration, with the two parties working very closely in specific areas. It is good practice to establish an audit trail so that close business relationships remain at a professional level.

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Although partnering is most useful in longer-term, strategic and high value contracts, the principles of partnering may also be applied to contracts of relatively short duration. It is a question of balancing the resources required, perhaps by means of a cost-benefit analysis, to establish and manage a partnering arrangement. Partnering arrangements have been successfully implemented for a broad spectrum of supplies, services and works contracts. Examples include hotel services, supplies of business-critical items for manufacturing, and various construction projects, some of which are large-scale construction projects with a lifespan of several decades. Partnering is increasingly common in the outsourcing of those services which support an organisation's core business. Partnering is also useful in respect of particular projects that have a finite duration; in such cases details such as performance targets, time schedules and cost must be agreed at the outset. Equally, it is important that any risk and reward provisions are based upon real business needs. Another example of where partnering is useful is in alliances where the client/owner would normally have a participating role - for instance having an equity stake in the relationship. This underlines the interdependency of the parties within the supply chain and the importance of the process which establishes the alignment of objectives between the parties involved. CIPS believes that partnering arrangements should only be considered with those suppliers able to bring additional value to an organisation over and above that of simply supplying the goods or services required. Purchasing and supply management professionals are encouraged to seek extra value from suppliers and identify the value they can offer over that of the competition. It should also be emphasised that partnering is likely to be the preferred solution where both parties feel it is the best value-adding strategy to follow i.e. they can both identify areas of mutual interest. It could be argued that partnering arrangements may not deliver best value for money in all markets, for instance a highly competitive commodity market as, although value, volume and risk may be high, maximising the benefits of constant competition might be the most effective purchasing strategy.

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Businesses engaged in partnering should take particular care over their contractual arrangements. Some organisations prefer to employ a written partnering agreement which simply describes the working relationship i.e. what is required of the two parties without any legal document. CIPS advocates the use of partnering agreements but believes these should be supported by a carefully written contract. The close working relationships involved in partnering give rise to specific legal issues which may well be beyond the scope of normal contract terms.

be at least one individual (quite possibly the purchasing and supply management professional) who is personally responsible for ensuring the partnering arrangement is properly managed. This role requires a strong personality in order that the arrangement remains on a professional footing with demonstrable measurable benefits being defined on an ongoing basis. CIPS believes that one key objective of any strategic partnering arrangement should be continuous improvement. Objectives and targets must be measured and progress monitored. This measurement and review will help reduce any tendency towards complacency between partners. Partnering arrangements should enable all involved to become more flexible, more communicative, share ideas, risks, resources and benefits within an umbrella of security. Partnering can thus be useful in underpinning further corporate initiatives such as joint ventures. There is much emphasis on 'soft' skills with the need for excellent interpersonal and communication skills on both sides. Regular meetings between the partners are essential with representative cross-functional teams from both organisations working together in an atmosphere of confidentiality to develop the relationship to its full potential. Being able to work effectively in a team is a key requirement for anyone involved in partnering, the logic being that through working together, the whole can become greater than the sum of the parts. OPEN BOOK COSTING Maximum value can be derived from a partnering arrangement which includes open book costing. However, the extent of openness is a subject for negotiation. The supplier would probably prefer to reveal costs relating to the contract in question only, as opposed to its entire business. Both parties have to feel comfortable with the extent of the transparency, and to minimise any risk associated with this intimacy, a confidentiality agreement should be drawn up. If an open book policy is introduced, it should be on an equitable basis with both parties sharing information. There should be a clear and valid reason for it that is understood by both parties, for instance in order to cost, and subsequently price, change. When working together, under for example a supplier development programme to take costs out of the supplies, it is easier if both parties have a thorough appreciation of the costs and how these fit with the overall infrastructure of the business. Furthermore, adoption of open book costing throughout the organisation can be very resource-intensive and may require the assistance of professional accountants in order to make an accurate assessment of the data obtained in this way. When adopting open book policies, it is important that the buying organisation does not abuse this position by reducing the supplier's margin to such an extent that the supplier feels the business is no longer attractive or, where they have no choice but to continue, perceive it as a win/lose relationship.

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For instance, the parties may work jointly on product development and so issues such as which party owns the resulting intellectual property rights need to be clarified. Equally, open book accounting and other open disclosure policies give rise to a confidentiality requirement which needs to be agreed. CIPS also recommends the inclusion of a suitable Dispute Resolution procedure in the contract. Typically arrangements are set for an initial period of say, five years with an option to review at the end of the period. If the contract is meeting expectations, and market testing has demonstrated that the costs associated with the contract are still competitive, the contract can be extended, or re-negotiated, for a further period. Some organisations prefer to let contracts on an evergreen basis; that is to say with no specific end date envisaged. This can lead to complacency, and such contracts, in particular, require carefully thought-through exit strategies. It could be argued that an element of traditional arms length purchasing can legitimately be introduced into the process when negotiating such aspects as payment mechanisms, allocation of risk and contractual terms and conditions. However, this attitude should be replaced with a friendlier atmosphere once the contract has been agreed and market forces are no longer given a priority. It is important that there is compatibility between partnering organisations and that the individuals involved can work comfortably together. One way of being introduced to individuals in a potential partnering organisation is to arrange for a presentation from potential partners to be given by those who would be contributing to the relationship rather than by the sales team. Partnering often requires a cultural shift in at least one of the organisations involved in the arrangement. Any such arrangement should be sponsored by senior management within both organisations but driven from the bottom with appropriate change management to support any required cultural shift. An important aspect is expectation management which requires attention from the very beginning of the partnering arrangement through to its conclusion. There should

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CONCLUSION Partnering, with or without open book costing, requires a particular skill set and approach from purchasing and supply management professionals. It can deliver significant business benefits for both parties and may form part of a supplier development programme. CIPS believes that purchasing and supply management professionals should develop their competencies in delivering and managing partnering arrangements and that this approach to purchasing and supply management will become increasingly popular, providing organisations with a means of gaining additional competitive advantage.

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PURCHASING CARDS
INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case purchasing cards, as they relate to purchasing and supply management. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Further information on purchasing cards is available from CIPS. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on purchasing cards has been written primarily for the head of the purchasing and supply management function. This document is one of a series summarising the CIPS view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document which supports this series entitled Background to Positions on Purchasing and Supply Management Practice. CIPS is expressing beliefs on purchasing cards as the CIPS view is that they can add value to most organisations' purchasing and supply management processes and as such are a very useful tool within the purchasing and supply management professional's toolkit. Purchasing cards are in fact an ordering, purchasing and payment mechanism, which can automate part of the purchasing process for certain goods and services. CIPS also believes that each organisation should decide how purchasing cards best fit into their overall purchasing strategy. CIPS views, opinions and beliefs are stated throughout the document; however the broad practice statements which underpin the text are as follows: It is the responsibility of the purchasing and supply management professional to work with colleagues in the relevant departments, to determine how purchasing cards should best support their purchasing and supply management strategy CIPS suggests that purchasing cards deliver greatest value when used for high volume/low value procurement - and may complement or act as a stop gap to an eProcurement system CIPS believes that the purchasing and supply management professional should recommend who within the organisation should be card-holders CIPS believes that the implementation of a purchasing card system should be preceded by a defined process and policy for its use CIPS takes the view that when used appropriately, purchasing cards can be an effective way of keeping transaction costs to a minimum In addition to reduced transaction costs, CIPS has identified a number of other benefits associated with the use of purchasing cards - such as speeding up the process, improving data collection and compliance to contracts Purchase cards should only be implemented where they improve the visibility of spend information; this can then be transferred into existing eProcurement databases Purchase card application should be assessed as part of the eProcurement strategy - although the need may be reduced or replaced through the use of an electronic internet system CIPS considers that purchasing cards are an appropriate payment mechanism for eCommerce transactions The level of benefit to be gained from the use of purchasing cards is closely linked with the maturity of the purchasing and supply management strategy and its supporting systems CIPS considers that purchasing cards can be an effective tool for the purchasing and supply management professional wishing to develop and improve relationships with internal customers There are three types of purchasing cards a) cards for the purchase of goods and services (the subject of this practice paper) b) cards for travel and expenses c) lodge cards which are virtual cards BACKGROUND In the UK purchasing cards are widely used, mainly for low value, low risk orders. Numerous writers have suggested estimates for the cost of raising a low value order and paying the corresponding invoice. It depends on the degree of simplicity of the order i.e. whether it is a call off order for instance, and more importantly, the salary levels of the person carrying out the process. For the purposes of illustration, a reasonable estimate of the cost of raising a typical low value, simple order and paying the corresponding invoice is approximately 50. As, typically, 80% of an organisation's orders are low value i.e. around this 50 mark and represent less than 20% of expenditure, purchasing cards can significantly reduce the overall costs of an organisation's transactions or at the very least, ensure a more effective reallocation of resources. There are generally two ways in which purchasing cards are used for the purchase of goods and services; that is purchases from existing contracts or for ad hoc

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purchases. CIPS suggests that purchasing cards may deliver greatest value when used for high volume-low value supplies e.g. from call-off contracts. It could be argued that there are other equally suitable solutions for high volume-low value orders such as a blanket agreement for stationery with monthly billing. For purchases from new ad hoc suppliers, purchasing cards avoid the time and cost of the customer establishing the supplier on their finance systems and the supplier opening an account for the customer. They are also useful when used like an ordinary credit card, instead of petty cash, for ad hoc purchases at retail outlets as deemed appropriate by the buying organisation. Purchasing and supply management professionals should determine, in conjunction with colleagues from relevant departments, how, and in what ways, their own organisation should use purchasing cards to best support their purchasing and supply management strategy. ADVANTAGES AND POTENTIAL ISSUES CIPS believes that there are significant potential advantages to be had by implementing purchasing cards which can include: Devolving the transactional i.e. order processing part of the purchasing cycle to card holders e.g. end users, other colleagues or internal customers Improved liaison between an organisation's purchasing and supply management professionals and card holders, leading to improved relationships (a counter-argument is that the reverse might turn out to be the case if the Finance department rather than the Purchasing department is the main channel for transactions) Greater compliance with contracts (if implemented within a clear, effectively communicated procurement policy and procedures e.g. the card holders may only use the cards with certain suppliers, or within a closed eProcurement system which can significantly reduce maverick spend) Reduced bureaucracy, if implemented properly (individual invoices are no longer processed) Environmental benefits from e.g. reduced paper work Released time, across the purchasing cycle, for work which adds greater value to the organisation Suppliers being paid promptly by the card providing bank, typically within three days as opposed to 30-60 days. Improved relationships with suppliers due to prompt payment reduced paperwork and enhanced contract compliance More effective expenditure analysis from management information (providing the relevant systems are updated with enough detail of what has been purchased via the card) Improved audit control The impact of the above advantages depends upon the maturity of the purchasing and supply management strategy and its supporting systems within an organisation.

Issues which purchasing and supply management professionals should be aware of when implementing purchasing cards include: Some suppliers complain that the transaction fee that they must pay to the card providing bank (approximately 2% of transaction value) is excessive. This fee can be offset by greater market share (as a result of end users complying with preferred supplier contracts) and prompt guaranteed payment Purchasing cards could lead to a headcount reduction that needs to be carefully managed Purchasing cards will demand a culture change Card holders will require training and support There may be increased workload for card users Some organisations may require each purchase coding to a different budget line resulting in less of a reduction in bureaucracy than initially envisaged Commitment accounting is not automatic with purchasing card transactions Management information on purchasing card transactions may be too generic for some buying organisations Ad hoc suppliers may not wish to accept purchasing cards unless higher volumes are committed Some small suppliers do not accept purchasing cards ISSUES TO CONSIDER It is a responsibility of the purchasing and supply management professional to recommend who, in their organisation, should be card holders. Maximum benefit is obtained when cards are given to the users of the goods and services to be purchased. However, in some cases it is appropriate to give the card to the person who is responsible for purchasing within a given budget centre, if for example the individual end users rarely make a purchase. It is the responsibility of the organisation using the purchasing card to decide what it considers to be low value. In some organisations this can be as little as 50, in others it can be 5,000. Equally, it is the responsibility of the buying organisation, in particular the purchasing and supply management professional, to determine what categories of expenditure, and credit limit, each card-holder should have. CIPS encourages purchasing and supply management professionals to endeavour to negotiate appropriate transaction fees for their suppliers whilst selecting the most appropriate card-providing bank. CIPS suggests that a defined policy and procedure on the use of purchasing cards should be introduced prior to the implementation of purchasing cards. For example, the organisation may decide that there should be no need for line item detail when using purchasing cards for low value orders. In some cases such changes, coupled with closer working relationships with suppliers, can in itself deliver many of the benefits attributable to the introduction of purchasing cards.

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It is also the responsibility of the purchasing and supply management professional, in liaison with colleagues in Finance and Internal Audit to determine who, in the organisation, should receive card statements and the arrangements for verifying and paying these card statements. If suppliers are VAT-enabled they should no longer need to submit invoices to the buying organisation, as they are not required for VAT purposes. However, proof of delivery is still required for internal control purposes. At present, the capability of suppliers to transmit electronic VAT data is still patchy and as a consequence, many purchasers' systems have to accommodate both (i.e. electronic VAT data and paper invoices) methods. CIPS recommends that the buying organisation approach their local Customs and Excise office in order to agree an appropriate percentage of VAT to be reclaimed each year against purchasing card transactions. CIPS suggests that it is the responsibility of purchasing and supply management professionals to decide what management information is required by their organisation in respect of purchasing card transactions and to agree with the card-providing bank on the provision of such information.
EPROCUREMENT

cards are an appropriate interim step towards eProcurement. CIPS encourages the appropriate implementation and use of eProcurement systems and suggests that, at present, purchasing cards are a suitable method of payment in eProcurement environments. However, CIPS will continue to monitor the development of eCommerce payment mechanisms, and will review this position accordingly.

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CIPS believes that purchasing cards are an appropriate payment mechanism in eProcurement, especially if the transactions are taking place in a safe environment e.g. Extranet. As eProcurement develops, so will methods of payment. As organisations become more confident in the use of eProcurement, they will effect increasingly high value and high risk orders over the Internet. CIPS believes that any purchase transaction of a high value or high risk product or service, whether or not ordered over the Internet, or paid for via a purchasing card, must also have been subject to an appropriate procurement process. Such a process must involve at the very least: a verification of the supplier's status e.g. supplier appraisals are undertaken the product or service being purchased is checked to ensure it meets the requirement value for money is ascertained on the basis of whole life costs agreement has been reached on the terms and conditions of business CONCLUSION CIPS advocates the use of purchasing cards for those purchase transactions which are high volume (i.e. from a call-off contract) low value, low risk and also for ad hoc low value, low risk purchases. However, it is the responsibility of the purchasing and supply management professional to work with colleagues in the relevant departments to determine how purchasing cards should best support their purchasing and supply management strategy. If implemented appropriately, purchasing cards can be another way in which the purchasing and supply management professional can develop relations with internal customers and end users and thereby promote the purchasing and supply management function. Purchasing

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MONITORING THE PERFORMANCE OF THE PURCHASING AND SUPPLY MANAGEMENT SERVICE

INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case monitoring the performance of purchasing and supply management. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Further information on performance monitoring is available from CIPS along with related subjects such as benchmarking purchasing and supply management. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on performance monitoring of purchasing and supply management has been written primarily for the head of purchasing and supply management. This document is one of a series summarising the CIPS view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document which supports this series entitled Background to Positions on Purchasing and Supply Management Practice. CIPS is expressing beliefs on performance monitoring of purchasing and supply management as it is an activity that contributes to continual improvement in purchasing and supply management and is therefore a process that CIPS strongly encourages purchasing and supply management professionals to implement. CIPS views, opinions and beliefs are stated throughout the document; however the broad practice statements which underpin the text are as follows: CIPS believes the most important measurement of effective purchasing and supply management is that the purchasing and supply management strategy precisely and continually aligns and integrates with the organisation's corporate plan, business unit and functional strategies. CIPS encourages purchasing and supply management professionals to adopt the principles of the Balanced Scorecard methodology when identifying and agreeing suitable performance objectives. Performance objectives should be SMART and act as key performance indicators that can demonstrate purchasing and supply management's contribution to the organisation's corporate plan. PERFORMANCE OF PURCHASING AND SUPPLY - ALIGNING STRATEGIES CIPS believes that a fundamental pre-requisite for effective performance is aligning and integrating the purchasing and supply management strategy with the organisation's corporate strategy and its business unit and functional strategies. Further, purchasing and supply management professionals should ensure the continual alignment of their purchasing and supply management strategy so that their day-to-day operations fit precisely with the organisation's corporate strategy and objectives. Indeed, the head of purchasing and supply management should seek to influence the development of the corporate strategy and other relevant business strategies. In particular, they should identify and publicise several core objectives that they are responsible for delivering in support of the corporate strategy. This does not mean that such objectives are unique to the purchasing and supply management operation as supporting and complementary objectives may also reside in other parts of the organisation such as Human Resources or Marketing. CIPS believes that to be most effective, organisations should ensure that all functional strategies are in support of the corporate strategy and complementary to other functions. The head of purchasing and supply management should ensure purchasing and supply management is proactive and visible in this regard. As a general rule, the purchasing and supply management department need to bear in mind that they need to keep doing the basics right (right goods/services at the right place at the right time at the right price) thereby contributing to value-add. CIPS believes that if the purchasing and supply management department can demonstrate it has delivered on the key objectives within the strategy which are in support of the corporate plan that this should be ample evidence of its performance. The challenge is to measure the extent to which these key objectives have been met. In order to make this easier, CIPS recommends that the objectives set must comply with the following principles (SMART): Specific Measurable Achievable Realistic Time-bound

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Any performance monitoring should be objective and output based as far as is possible. The key is to identify the objectives that best align to and are integrated with the corporate plan. Traditionally, the purchasing and supply management function has focused on savings - often on the basis of price, but now is increasingly focused on life cycle costs and value for money (CIPS has a separate practice document on savings which describes bona fide savings). However, CIPS strongly encourages purchasing and supply management professionals to focus their efforts on whatever the corporate objectives dictate. The list of corporate objectives which the purchasing and supply management department can support is endless and so the following examples are intended to provide a flavour only. Introducing new innovative products and services that provide differentiation in the marketplace and provide a first mover advantage. Here purchasing and supply management would be focused on supplier development, R&D and may be involved in negotiating substantially more expensive products than before in an environment where speed to market is the prime objective. Entering emerging markets in which the objective of the purchasing and supply management operation could be identifying new sources or facilities in different countries - conducting extensive audits and appraisals of new supply chains. Ensuring that the organisation's reputation is not at risk by activities within the supply chain and that it can use its responsibility as a source of competitive advantage in advertising. CIPS advocates a Balanced Scorecard approach to identifying such objectives. There are a number of papers and articles outlining the key features of the BBS (Balance Business Scorecard) concept which are available from CIPS Professional Practice Team's OLIB database. In summary, the Balanced Scorecard approach puts the company vision and values at the centre and classifies measures under headings of Finance/Shareholders; People; Processes; and Customers. In a purchasing and supply management context suppliers may be included within the 'customers' category. Typical measures could thus include: Finance/shareholders Cost savings and cost avoidance Contribution to revenue targets Percentage of corporate spend covered by contracts managed by Purchasing e.g. overall impact on spend - this can be broken down into different categories such as controlled, directly influenced, not yet targeted and so on. The point of such a measure is to monitor year on year improvements Number of suppliers (see point on supplier rationalisation below)

People Staff training and development e.g. training of end-user purchasers - the extent to which people who make transactions outside the purchasing and supply management department are trained and competent The extent to which colleagues perceive the purchasing and supply management department as partners rather than service providers Processes Time/cost to process purchase orders Implementation of effective IT systems (e.g eProcurement) Performance against SLAs agreed with internal customers (e.g time to turn round a purchase order) Customers/suppliers Supplier payment performance Supplier quality performance measures Feedback from staff survey reports i.e. customer satisfaction surveys which illustrate the perception of the purchasing and supply management department by colleagues within the business Examples of other objectives might include: prevention of fraud adherence to code of ethics use of self assessment models such as the EFQM or OGC excellence models price benchmarking - comparing similar organisations for instance the NHS and local government (service specific) use of innovation (eg eProcurement) Care must be taken when identifying objectives as a suitable objective for one organisation may be inappropriate, if not damaging, for another organisation. An example is supplier rationalisation - the extent to which the supply base has become rationalised e.g. 8,000 suppliers reduced to 3,000. This is appropriate provided that this brings identifiable benefits to the organisation as supplier rationalisation is not necessarily always an appropriate measure. Equally, simplistic targets to reduce the number of suppliers can lead to inappropriate actions - for example it may encourage buyers to look for single sources where competitive supply may be the most appropriate supply strategy. The list is in effect endless, and could no doubt be extended still further to include key areas such as audit and control, supplier relationships, marketing/development/innovation. Measures can also be based in specific groups such as measures of time, cost, quality. The purpose of such measurement is so that the purchasing and supply management department can monitor its own development over time. However this may not always be a straightforward process. To take supplier rationalisation as an illustration, it could take a couple of years or more to see whether rationalisation has had the right result and to be sure that vital resources have not been lost as a result.

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The results of this continual monitoring of purchasing and supply management's contribution to the organisation's corporate plan can be used in annual reports, presentations and other opportunities for marketing the benefits of strategic purchasing and supply management as well as for benchmarking purposes. MONITORING INDIVIDUALS' PERFORMANCE It is common practice for the head of purchasing and supply management to monitor the performance of his/her team in order to assess an individual's productivity, effectiveness and efficiency as well as their contribution to the team. There are also soft issues which need to be monitored such as interpersonal and relationship management skills for instance. The setting of any objectives with individuals should be a collaborative exercise, not one which is dictated. It should be part of a continuing professional development programme based on the principle of continuous improvement. CIPS suggests that heads of purchasing and supply management promote performance targets that are positive as well as SMART, such as developing a collaborative purchasing arrangement or developing a key supplier's service levels. Simple quantitative measures can also be used such as "a 35% reduction in the number of contract amendments/variations". CONCLUSION CIPS strongly encourages purchasing and supply management professionals to implement performance measurement in their department/function and, as appropriate, the individuals within the team. It is recommended that the principles of a Balanced Scorecard approach are employed and that the aim should be for continuous improvement. This practice document has set out CIPS views on monitoring purchasing and supply management performance and further information is available from CIPS. CIPS acknowledges that savings are a key aspect of purchasing and supply management performance and has addressed this subject in a separate practice document. The point being that savings are only one aspect of purchasing and supply management performance. CIPS' view is that the key measure of purchasing and supply management is the extent to which it demonstrably supports and contributes to the fulfilment of the organisation's corporate plan; this should be demonstrated by SMART objectives. Finally, two further benefits of monitoring purchasing and supply management performance are that the findings can be used for benchmarking across other organisations - (a subject addressed in a separate practice document) as well as a tool for marketing the benefits of strategic purchasing and supply management.

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PERFORMANCE MONITORING OF SUPPLIERS

INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case monitoring the performance of suppliers. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Further information on performance monitoring of suppliers is available from CIPS along with related subjects such as relationship management, contract management, supplier appraisal, supplier development. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on performance monitoring of suppliers is written primarily for those working full time in purchasing and supply management. This document is one of a series summarising the CIPS view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document which supports this series entitled Background to Positions on Purchasing and Supply Management Practice. CIPS is expressing beliefs on performance monitoring of suppliers as it is an activity that is core to purchasing and supply management and is in fact a pre-requisite to activities such as supplier development. CIPS views, opinions and beliefs are stated throughout the document; however the broad practice statements which underpin the text are as follows: Performance monitoring of suppliers is a fundamental part of contract management. Relationship management is a key skill of purchasing and supply management professionals. Purchasing and supply management professionals should perceive performance monitoring as a two-way process and be open to feedback and suggestions for improvement from the supplier. Buyers and suppliers should, as appropriate, jointly measure combined performance towards joint goals. The monitoring of suppliers' performance should be against that which is agreed in the contract and supporting documentation such as service levels and partnering agreements; and a key objective from the outset should be to aim for continual improvement. Effective purchasing and supply management involves determining the appropriate methods of managing the supply base - different solutions are appropriate for different situations - therefore CIPS cannot be prescriptive about the use of specific measures. Purchasing and supply management professionals should also monitor the performance of their main suppliers to ensure they remain familiar with their profiles in terms of e.g. growth, market share and financial performance. Purchasing and supply management professionals need not be those undertaking the performance monitoring of suppliers, or indeed the wider role of contract management; however they should be responsible for ensuring that those who are undertaking the role are properly trained and supported. PERFORMANCE MONITORING OF SUPPLIERS AND ITS FIT WITHIN PURCHASING AND SUPPLY MANAGEMENT For the purposes of this practice document - the term suppliers includes contractors for works and services as well as supplies; the term performance monitoring means measuring a supplier's ability to comply with, and preferably exceed, their contractual obligations i.e. monitoring post contract. CIPS recognises this is sometimes referred to as vendor rating especially where specific measures are used. It can also be argued that monitoring the performance of suppliers can be a) an aspect of supplier appraisal (i.e. the process of evaluating potential suppliers) and can be extended to supplier selection criteria during tendering; and b) an aspect of the management of approved supplier lists. CIPS believes that performance monitoring is a fundamental element within contract management and supplier development (the broader subject is covered in a separate CIPS practice document). Contract management includes activities of a buyer during a contract period to ensure that the seller fulfils all his obligations under the contract. At the start of a contract there is inevitably a degree of risk and uncertainty for the parties involved. As the contract proceeds both parties learn from experience and the risk begins to diminish as the original contract assumptions come to be tested. For these reasons too it is important to hold regular review meetings where both parties ask how they can make the contract perform better. Hence the need for monitoring and mea-

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surement of performance against that agreed in the contract, its supporting service level descriptions and other documentation such as partnering agreements. These meetings should be two-way, with both parties learning from each other. Thus the buying organisation needs to seek the supplier's comments as to how well they are carrying out their side of the contract; for example, to check whether all information is being provided on a timely basis. It is vital that the buyer keeps managing the supplier and deals with problems as and when they arise. If a supplier begins to suffer financial strain in discharging his obligations then, commercial nature being what it is, the supplier will begin making behind-the-scenes cutbacks, irrespective of what may or may not be specified in the actual contract. The key is to address problems when they are still minor and therefore easier to resolve. There are many contractual relationships with suppliers where it is more important to agree joint goals and jointly measure performance against these goals - rather than the buyer simply monitoring the supplier's performance. This requires transparency and a sharing, as appropriate, of business goals. This type of relationship allows for the supplier to monitor performance provided a suitable process of validation is in place. Relationship management is part of the performance monitoring process. It is a key skill for the buyer and can be summarised as the proactive development of particular relationships with suppliers. A managed relationship is one in which both parties are sufficiently intimate that they each know how the other will react; the relationship is predictable. The purpose of investing in a relationship with a supplier is to improve the supplier's performance in fulfilling the needs of the buying organisation. CIPS has produced a separate practice document on this related subject. ASSESSMENT OF SUPPLIER PERFORMANCE There are a number of key themes which might be used to assess supplier performance and which might be used as a yardstick for determining whether good practice is being achieved in specific situations. Some examples of such themes (together with their sub-categories) are as follows: Product Quality MTBF (Mean Time Between Failure) Percentage of incoming rejects (delivery accuracy) Warranty claims Service Quality (against agreed SLAs) Call-out time Customer service response time Performance against agreed delivery lead times

Relationship/Account Management Accessibility and responsiveness of account management Commercial Costs are maintained or reduced Whilst traditional 'hard' issue key performance indicators such as those above are obviously important it is advisable also to be aware of the so-called 'soft' issues so frequently encountered in other contexts. These include such considerations as ethical issues, professional relationships and cultural fit. The measures, objectives and targets used in the monitoring of the suppliers performance must reflect those that were agreed when the contract was let. That is why it is important to specify a commitment to continuous improvement at the outset. It would be unfair to the supplier to suddenly introduce a range of measures after the contract had begun - however if such an introduction mid-term through the contract is unavoidable then it should be negotiated and agreed in a professional manner and not merely imposed on the supplier. CIPS believes that suppliers should always be asked to continually improve their contract performance. However, incentives are required for the supplier to reflect improvement in costs or to give more for the same price. Competition and the possible loss of the business may well be an incentive but where the supplier is aware that there is little risk of that (in a genuine sole-source situation for instance) things may be very different. There is arguably another reason for doing it - in that over time the market and the needs of the customer can change and this needs to be taken into account one example might be the closure of a distribution terminal because of the construction of a new road which means that an operation could be serviced from some other terminal. Any activities ought to be on a prioritised basis as the benefits realised need to be proportional to the degree of effort expended by both parties. Performance monitoring can be a time-consuming task and so the effort and methods should be proportionate to the value and importance of the contract. CIPS believes that effective purchasing and supply management involves determining the appropriate methods of managing the supply base - different solutions are appropriate for different situations e.g. although not always appropriate, supplier reduction programmes have helped in the management of the supply base and are particularly beneficial in respect of monitoring suppliers. CIPS believes that a further purpose in undertaking performance monitoring is to provide an opportunity for the supplier to propose changes in the behaviour/approach of the buyer in order to enable them (the supplier) to improve their performance (there may be different solutions open to the buyer which could be value adding).

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Monitoring the performance of suppliers is a key aspect of purchasing and supply management but one which can easily be under-resourced and neglected. When performance monitoring is undertaken post-contract, the purpose is twofold a) to ensure that the supplier is meeting the performance criteria e.g. service levels and quality, laid down in the contract and b) to identify room for improvement. The object of performance monitoring is to improve performance of all parties involved in the contract; it should not be seen as a way of attacking the supplier. Both parties have to perform and learn to measure each other and provide feedback.

suppliers at their premises so enabling them to assess efficiency levels on the supplier's 'home ground'. The situation may however be somewhat different for outsourced services such as cleaning or catering where the meeting should be held where it facilitates inspection of the problem areas - this approach also ensures that the outsourcing contractor's senior management is present at the site of delivery. Suppliers providing goods and services on security/bottleneck type goods and services i.e. those which are relatively low value but of significant importance to the organisation - for whatever reason - need regular monitoring as, in some cases, supplier failure can bring a business significant financial loss or even failure. The final, and in many ways, the most straightforward significant category of spend is leverage i.e. high value/volume and low risk - the usual method of monitoring the performance of such suppliers is to hold quarterly meetings in which feedback from both parties is reviewed. However, it is not just term contracts that need monitoring; suppliers of capital equipment who provide maintenance services should also be monitored to ensure that their service is consistent with what was agreed at the outset - and indeed that the performance of the equipment meets the customer's expectations. RESPONSIBILITIES, REMEDIES AND RESULTS

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ELEMENTS OF SUPPLIER PERFORMANCE In summary, there are three different aspects to the monitoring of supplier performance post-contract. 1. Gathering factual, and therefore objective, information about their performance such as lead-times from order, quality standards being met, pricing compliance and whatever else is laid out in the contract. This type of information can usually be obtained from IT systems within the organisation in the form of management information. With all of these aspects, it is good practice to be as consistent as possible in the approach to the performance monitoring. 2. Obtaining the experiences of the customers in respect of service, attitude, response rates for instance - which should be as objective as possible and reflect reality but, inevitably may in some cases be subjective. One way to collect information on performance is by individual interview against a defined set of questions. This can be face-to-face or on the phone but needs to be interactive so that the interviewer can explore the background when necessary. The purchasing and supply management function will have to assess the validity of any subjective remarks. Sometimes commitment is required from customers, such as engineers in the field, to keep records of their experiences of working with a supplier in order that objective factual data can be used. Another way is to undertake customer satisfaction surveys which can be quite short and distributed by email. 3. The supplier's experience of working with the buying organisation must be considered in the evaluation, as it might be the case that they are facing unnecessary obstacles or dealing with difficult people. ASSESSING THE PERFORMANCE OF KEY SUPPLIERS Key suppliers of high value and high risk goods and services (outsourced service providers, for instance) demand close performance monitoring and this is where most resources should be employed. This might involve monthly meetings where performance is discussed, issues resolved and new targets set as appropriate. CIPS encourages purchasing and supply management professionals to hold feedback meetings with

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As stated above, CIPS recommends the practice of ensuring that performance criteria are an explicit part of the contract so that both parties are fully aware of what is required of them post-award. Although monitoring performance of suppliers should be directed and managed by the purchasing and supply management function, it need not necessarily be carried out by them. CIPS believes it to be of critical importance that whoever carries out performance monitoring (and especially the review meeting with suppliers) is properly trained and supported by the purchasing and supply management department. This is particularly important when the payment mechanism in the contractual arrangement is contingent on supplier performance. It should be borne in mind that it is the technical people, who may well not appreciate commercial nuances, who need to be encouraged to carry out the monitoring process. In the event that a supplier consistently fails to meet the requirements of the contract - and does not respond to feedback or suggestions - then the remedies set out in the contract must be brought into play. Since performance monitoring should lead to continual improvement from suppliers, most suppliers would expect a long-term business relationship with the client. This may involve contracts of several years duration, with options to extend for further periods if the supplier's performance is satisfactory.

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A final point is that monitoring suppliers should not just be about their dayto-day performance as viewed by their trading partners, but also in their performance as a business. CIPS strongly encourages purchasing and supply management professionals to monitor the performance of their main suppliers for example, in terms of their growth, market share and financial standing in order that the buyer remains aware of the profile of his key suppliers. In the case of particularly key suppliers - regular meetings with their directors on strategy and future policy and prospects is important with perhaps purchasing and supply management professionals being present to provide a common thread. This however assumes the companies who are party to the contract are of similar size; the reality may be different so that the buyer in an SME for instance will almost certainly have a different perspective to that enjoyed by a global supplier. CONCLUSION Performance monitoring of suppliers is a key aspect of purchasing and supply management and one that requires a range of skills - in particular relationship management. It is the responsibility of the purchasing and supply management professional to negotiate and agree appropriate performance criteria at the time the contract is let and these measures, together with a commitment to continual improvement should be clear to all concerned. The level and frequency of performance monitoring is dependent on the value and criticality of the contract to the buying organisation; and it need not be the purchasing and supply management professionals that carry out this function or indeed the wider role of contract management. The important point is that those who carry out the function are properly trained and supported by professional purchasing and supply management.

PROMOTING THE PURCHASING AND SUPPLY MANAGEMENT FUNCTION

INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case promoting the purchasing and supply management function. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. More detailed guidance on promoting purchasing and supply management is available from CIPS. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on promoting the purchasing and supply management function is written specifically with the senior purchasing and supply management professional in mind. CIPS POSITION CIPS views, opinions and beliefs are stated throughout the document; however the broad practice statements which underpin the text are as follows: x CIPS takes the view that purchasing and supply management professionals should assume the duty to promote the strategic importance and the contribution which professional purchasing and supply management can make to corporate wellbeing, via their own professional conduct and the effective marketing of the purchasing and supply management function. Purchasing and supply management professionals should ensure that their role is in harmony with their organisation's vision and corporate plan; they should be able to communicate with members of the Board in an effective manner. CIPS believes that it is necessary for purchasing and supply management professionals to be seen to be working in support of corporate needs whilst at the same time being prepared to adapt their service profile to satisfy individual needs and circumstances when required. CIPS advocates purchasing and supply management professionals delivering a 'Performance Promise' to their organisations, setting out their plans for supporting the corporate strategy. x CIPS advocates the formation of a Procurement Advisory Panel, a key feature of which is a customer-focused relationship management approach. The Panel should be seen to act in support of the purchasing and supply management strategy. CIPS believes that customers' needs and expectations should be seen as a priority in any purchasing and supply management strategy, placing emphasis on the ways in which the purchasing and supply management function can be of assistance in ensuring that customers' requirements are accurately identified. CIPS takes the view that purchasing and supply management professionals should work in harmony with part-time buyers, offering support and training when and where necessary. The purchasing and supply management professional should be able to detect, and have the ability to reconcile, any conflicts of interest between different departments within the organisation, thereby enhancing the perceived value of the purchasing and supply management function. The purchasing and supply management professional should always be prepared to take the initiative and be prepared to develop commercial acumen, sound negotiation skills and the effective management of suppliers. Wherever possible, the purchasing and supply management professional should avoid the use of jargon. In those cases where jargon is unavoidable he/she should be prepared to provide clarification. CIPS recommends the selection of an 'easy win' procurement project, seeing this as a cost-effective way of enhancing the profile of the purchasing and supply management function within the organisation as a whole. CIPS takes the view that there is a close link between the purchasing and supply management and Marketing functions and further, that purchasing and supply management professionals have much to learn from the marketing and sales strategies of their suppliers.

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OVERALL POSITION The CIPS position is that purchasing and supply management professionals have an obligation to the profession to proactively promote the strategic importance and potential contribution of professional purchasing and supply chain management through their own professional conduct and the effective marketing of the purchasing and supply management function. Purchasing and supply management professionals

should be more outward looking and move away from the tendency to focus inwardly in terms of what is traditionally thought to be a purchasing and supply management professional's role. This outward focus should include aligning with the organisation's corporate plan and proactively helping internal customers to manage their requirements by acting or influencing in a manner which demonstrably improves value for money. STRATEGY i) Aligning purchasing and supply management with the corporate plan Purchasing and supply management professionals should ensure that their role is in harmony with their organisation's vision and corporate plan. Furthermore, purchasing and supply management strategic objectives should dovetail with the organisation's objectives. This should be a proactive process involving the purchasing and supply management professional approaching the organisation's Board of Directors (or equivalent) to obtain a thorough understanding of the corporate plan and its supporting strategies. Purchasing and supply management professionals should learn to communicate in the language of the Board and, where possible, contribute to the development of the corporate plan. CIPS believes that purchasing and supply management professionals should plan what they do i.e. their service in the context of the issues facing the business; this is of course a strategic planning activity but it is also something which can change on a regular basis. For instance, the global market can change, unexpected threats can appear, market share can be lost. purchasing and supply management professionals need to keep abreast of such changes and maintain the dialogue with the Board in order that the purchasing and supply management function is fully supportive of the organisation at all times. ii) Potential problems in aligning strategies In some cases it is difficult to align the purchasing and supply management strategy with corporate objectives and hence it may become necessary to rely on tactical aims or action plans, in order to find suitable values or performance targets. CIPS believes it is of critical importance, when promoting purchasing and supply management, to be able to demonstrate how the purchasing and supply management strategy directly supports the organisation's corporate plan and is an effective component in the business planning process. CIPS recognises however, that in some organisations Boards of Directors are yet to be interested in purchasing and supply management. This should not prevent the purchasing and supply management function aligning itself with the organisation's corporate objectives; indeed this process itself should have the effect of raising the profile of purchasing and supply management. Similarly, CIPS recognises that in some

organisations, different business units have entirely different objectives which sometimes appear to conflict with the organisation's corporate goals. Purchasing and supply management professionals must position their strategy to support the overall organisation; however this should not preclude them from adapting their service on a tactical basis to suit genuine and legitimate individual needs. A common problem encountered by purchasing and supply management professionals is that the stakeholders e.g. the Board or its equivalent, require one set of objectives from purchasing and supply management in line with the corporate plan, yet the end users, budget holders etc. require a service which is quite different; sometimes indeed the complete opposite of that which the Board expects purchasing and supply management to deliver into the organisation. By ensuring that the purchasing and supply management strategy supports the organisation's strategy, the professional can demonstrate their value to the stakeholders and promote it as necessary to various internal customers. iii) Some suggested solutions The Performance Promise CIPS advocates that purchasing and supply management professionals deliver a Performance Promise to their organisations stating what they will provide in respect of supporting the corporate plan and what they intend to provide in future. The Performance Promise could include, for instance, objectives covering training and development of part-time buyers, a higher profile for ethics and sustainability, visible compliance with statutory legislation, measures of performance and so on. The Procurement Advisory Panel CIPS recommends that purchasing and supply management professionals develop a Procurement Advisory Panel which includes key stakeholders, a champion, sponsors, influencers etc. This Panel might also be called a Stakeholder Board but whatever its title it should be very high profile and consistently visible in its support and endorsement of the purchasing and supply management strategy. The Panel should meet on a regular basis to receive reports on progress from the Head of Purchasing and Supply Management; to discuss new ideas and approaches for the purchasing and supply management strategy, help to prioritise projects, identify opportunities for improvement, and so on. It would be helpful if the Head of Purchasing and Supply Management developed an informal relationship with the members of the Panel and could contact them by email for instance, on a daily basis in between meetings, as and when the need arises. The Panel should also be used to lobby the Board on issues that require top level endorsement, for example, mandating policies. Where appropriate, purchasing and supply management professionals should endeavour to obtain a mandate(s) to underpin the effective implementation of the purchasing and supply management strategy, policies, procedures etc. Such top-down

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mandates are often unavailable but if they are obtained, CIPS strongly recommends that a customer-focused, relationship management approach is put in place. If presented in a dogmatic, prescriptive fashion, mandates can lead individuals to feel impelled to undermine such rules. In some organisations, the purchasing and supply management function is more successful without any mandates. One way of introducing mandates which are more acceptable to colleagues is to present them as company policies so that they are perceived in the same way as other company rules (those relating to Personnel or Finance for instance).

make a difference and who persist in non-compliance. Part of the purchasing and supply management strategy must be to have in place an arrangement whereby an in extremis appeal can be made to their management for the individual to have their behaviour corrected. This is probably best done by having compliant procurement actions made part of internal customers' competencies -though CIPS appreciates that not all organisations will have this discipline. iii) Customer expectations In many cases, different customers have conflicting expectations for the same requirement e.g. the Finance Director may require a significant cost saving from a project, the project manager may require on-time delivery whilst the consumer/end user may be demanding the best quality available. The purchasing and supply management professional should identify these conflicting expectations and, if possible, reconcile them in a positive fashion thereby promoting the value of professional purchasing and supply management; otherwise all three customers in the example will be disappointed, possibly resulting in long-term disenchantment with professional purchasing and supply management. One method of addressing this problem is Sponsor Mapping. Sponsor Mapping (also known as Client Management) involves identifying the different customers and their individual needs, perceptions, perspectives and expectations. It involves working with them to ascertain these whilst educating them about the importance of security of supply, for example, or the value of leverage across the whole organisation. Customers should be categorised or segmented into groups so that those customers with similar needs can be targeted with a particular proposal. For example, an invitation to join a cross-functional team to source a contract for IT services. There may be occasions when it is not possible to reconcile all requirements and expectations and so, as appropriate, the purchasing and supply management professional must highlight and communicate this lack of cohesion to the relevant stakeholders and the Procurement Advisory Panel. iv) Purchasing and supply management professionals and perception of customer requirements Although purchasing and supply management professionals should demonstrate empathy towards a customer's needs, they should actively challenge the need; this might involve analysing the requirement and extracting higher quality at a lower cost or at the very least questioning and clarifying the requirement. The purchasing and supply management professional should take the initiative and lead the in-house team. There has been a marked shift in emphasis on professional buyers having strong technical empathy with the specialism in which they operate, towards much more focus on commercial expertise, negotiation skills and supplier management.

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CUSTOMER RELATIONSHIP MANAGEMENT (CRM) i) CRM and purchasing and supply management strategy CIPS recommends that any purchasing and supply management strategy should begin by assessing customers' (often categories of customers) needs, expectations and specific requirements. Purchasing and supply management professionals should assess customers in two key ways: to discover what the customer wants (or what they think they want) as opposed to that which the purchasing and supply management function believe they need; individual customers may have significantly different requirements to inform and enlighten the customer as to how the purchasing and supply management function might help them and then; depending on their response, adjust the service offering accordingly ii) CRM and part-time buyers In many organisations, part-time buyers or order placers i.e. individuals for whom buying is not a core function, enjoy the activity of purchasing, sometimes conducting it in an amateurish manner, without training in negotiation and frequently in ignorance of ethical or legal issues. They often do not appreciate interference from professional purchasing and supply management, seeing it as a threat to their influence and power or simply the status quo, either with products or with a supplier to whom they are a compliant customer. The key to delighting customers is to understand their perception and perspective, show empathy and to undertake relationship management in order to meet, if not exceed, their expectations. CIPS suggests that purchasing and supply management professionals should work with the part-time buyers; provide training and support, and enable them to support the purchasing and supply management strategy whilst continuing to be in charge of their own expenditure. This process should help buyers who are tempted by unsuccessful suppliers into fragmenting contracts i.e. so called maverick purchasing in that they will appreciate the implications of being tempted in such a way and should then become willing stakeholders in the purchasing and supply management strategy. However there will also be some customers to whom no amount of relationship management will

A final point is that purchasing and supply management professionals should take care not to fall into the trap of over-selling and then under-delivering: this can easily occur when there is a hostile and constructively inhibiting customer base. v) Speaking the Customers' Language CIPS believes that the purchasing and supply management function should avoid the use of jargon and provide an explanation every time it is necessary to use an ambiguous term. Equally, they should select an appropriate name for their service; different expressions mean different things for example, procurement in the US means expediting; supplies often conjures up images of stores and low value goods etc. It is important that when promoting purchasing, the purchasing and supply management professional speaks the language of the customer and designs supporting literature accordingly; and sets out to facilitate their interpretation by logical and consistent use of terminology. vi) Promoting purchasing and supply management within the organisation CIPS recommends that one effective strategy for promoting purchasing and supply management is to select an easy win procurement project so that it is executed well, value is added, and the customer is delighted. By involving the customer at the outset and throughout the procurement project; (especially at the decision-making stages), the customer should take ownership of the project and be proud of the results. The successful project can then be used as a case study within the organisation. CIPS suggests that the case study be published with details of the benefits, along with a quotation from the satisfied customer. Effective communication of successes is a key aspect of promoting purchasing. This can be achieved by means of a website on the organisation's intranet; a newsletter, road shows within the organisation, presentations to potential new customers and so on. Purchasing and supply management professionals should not be afraid to publicise their successes but when doing so, they must utilise the views of existing customers and position their message appropriately for individual new customers. Another point of good practice is when emailing or writing to individual customers to use their name(s), rather than addressing the letter/note/email to a general audience. PURCHASING AND SUPPLY MANAGEMENT AND
MARKETING SKILLS

CIPS recommends that purchasing and supply management professionals actively learn from the marketing and selling techniques of their suppliers. Suppliers generally invest heavily in training sales representatives; different suppliers will adopt different tactics, styles and approaches, depending on how they perceive and position the buying organisation. Another method of developing marketing skills is to liaise with the organisation's Marketing Department. Most organisations employ professional marketing staff and CIPS encourages purchasing and supply management professionals to develop working relationships with these colleagues so that they help in the promotion of purchasing and supply management. This may help the purchasing and supply management function to work with Marketing in respect of their purchases of advertising, other external services and bought-in goods. The Marketing spend can otherwise be quite difficult to access and yet it is an area where there are many quick wins for delivering immense dividends. CONCLUSION Purchasing and supply management professionals should develop a broad range of business skills in order to be increasingly effective and raise the profile of purchasing and supply management within their organisations. In many respects these can be summarised as internal consultancy skills which are increasingly important in ensuring the success of the purchasing and supply management function. CIPS recommends that purchasing and supply management professionals have a very clear self-image within the organisation, concentrate on developing expertise in marketing/selling/communications, customer/supplier relationship management in order to promote purchasing, as well as skills in change management. CIPS also recommends purchasing and supply management professionals develop an elevator speech which in a few sentences has a significant impact on the listener, convincing him of the important role which purchasing and supply management has to play within the organisation. A suggested format appears in the attached Appendix.

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CIPS' Graduate Diploma includes a Marketing module which should provide the basis of the purchasing and supply management knowledge in this sphere. CIPS encourages purchasing and supply management professionals to learn more about marketing, perhaps via the Chartered Institute of Marketing, so that these skills can be employed to promote purchasing and supply management.

APPENDIX Elevator Speeches An elevator speech is a few sentences that have great impact and can be delivered in a relatively short space of time i.e. the time it would take to travel in a lift (elevator in American usage) to the top floor of a tall building. CIPS encourages purchasing and supply management professionals to develop their own elevator speeches. These, or the key points within them, can be used as and when an opportunity arises to impress a stakeholder such as the organisation's CEO, or a potential new customer, for instance a Director of part of the business with which the purchasing and supply management professional has not yet been involved. Sometimes the stakeholder will initiate the opportunity by asking a question such as "how is the Purchasing Dept doing these days?" Other times the purchasing and supply management professional will need to initiate the opportunity. Usually only the opening few words would be different in each case, such as with the question the opener would address the question maybe with "we're doing very well, for instance we recently (mention a success here)". If the purchasing and supply management professional needs to initiate the conversation the opening will depend on how well they know the other person; if there is some familiarity then it could begin with "hello X, did you hear we recently (mention a success here)", if there is little familiarity it could begin with "hello X, I'm Y and I was recently involved with (mention a success here)". CIPS recommends that in any of the above situations elevator speeches should include: purchasing and supply management's position in the organisation a brief statement of what purchasing and supply management does a case study demonstrating the value-add to the business. Example: "The purchasing and supply management function stands between our customers and our suppliers; it is the one department in our organisation that looks into the supply stream and into business. Marketing is the department which looks out to end customers and reflects their requirements back to the business; purchasing and supply management is primarily responsible for the opposite end of the value stream. Effective purchasing and supply management is one of the key strategic drivers of successful enterprises because it enables them to serve their customers effectively at optimum cost and margin. That is what we provide our business ...we have a great opportunity here as 65% of our expenditure is on goods and services and so when we save 1 on a procurement this goes straight to the bottom line; unlike what happens in sales e.g. if 10,000 is saved on purchasing then all of that appears on the profit line -

whereas 10,000 of additional sales may generate less than 1,000 to the profit line. We have already taken out 15% of the costs of bought in goods and services and are aiming for a further 7% this year" A recent successful case study should then be quoted. "Sheila Babcock, (the Director of HR) recently shaved 100k from her recruitment budget by seeking our assistance. Not only has she developed a superb working relationship with the new recruitment agency, enabling us to access quality people effectively - which was a real problem before, but they have agreed to benefit sharing and continual improvement. I know she is delighted as the added value has enabled HR to invest in that new IT system they have been trying to get funds for over the last three years." CIPS recognises that such speeches need to reflect the culture of an organisation, its resources, and attitude towards purchasing and supply management. There is no universal panacea and purchasing and supply management professionals must develop their own approach as is appropriate to their organisation and to their own personal style. The content of elevator speeches can be used in presentations, newsletters, articles etc. and other forms of communication within and, as appropriate, externally to an organisation, in order to promote purchasing and supply management. CIPS recommends that the purchasing and supply management professional: undertakes research to ensure that they, and their team, are familiar with the current issues facing the business so that they can position what purchasing and supply management delivers in support of such issues and objectives reviews the elevator speech on a regular basis to ensure that it remains relevant develops a mini-business case for purchasing and supply management to use as appropriate i.e. alongside the elevator speech identifies a range of useful anecdotes for elevator speeches remembering that CEOs for instance, generally like to tell one part of the business about the success of another part of the business treats all colleagues as potential or existing customers shows empathy towards colleagues and others who think they understand purchasing and supply management i.e. do not be rude about their attempts is never negative during an elevator speech i.e. it is not the forum for complaints never offers something that cannot be delivered. Further information and examples are available from CIPS Professional Practice Team.

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PUBLIC PRIVATE PARTNERSHIPS

INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case Public Private Partnerships (PPPs), as they relate to purchasing and supply management. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Further information on public private partnerships is available from CIPS. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs has been written primarily for the benefit of full-time purchasing and supply management professionals. This document is one of a series summarising the CIPS view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document which supports this series entitled Background to CIPS Positions on Purchasing and Supply Management Practice. CIPS is expressing beliefs on public private partnerships because there exists a political will to encourage the public sector to enter into such arrangements. Opening the Public Private Finance Congress at the end of May 2002, John Prescott reaffirmed the Government's commitment to public private partnerships, observing that they are central to the Government's programme of modernising public services. Unfortunately, in many cases purchasing and supply management professionals are still excluded from the initial commercial appraisal of such projects. CIPS views, opinions and beliefs are stated throughout the document; however the broad practice statements which underpin the text are as follows: Purchasing and supply management professionals should encourage their organisations to involve them in PPP projects at the very outset and that they should play an increasingly prominent role as the project progresses Purchasing and supply management professionals should assess the full range of commercial options before deciding to explore the public private partnership route (reference should be made to the CIPS position on Strategic Sourcing) When delivering and managing public private partnership contracts, purchasing and supply management professionals require specialist skills and knowledge, over and above traditional procurement expertise Purchasing and supply management professionals should assume the role of an intelligent client e.g. providing contractors with accurate, full and relevant information in a timely and professional fashion Whatever the role of the purchasing and supply management professional in public private partnership - s/he should, as a minimum, be responsible for the proprietary procurement processes relating to PPP including for example the documentation, advertisements, tendering etc. If the idea of a partnership between members of a PPP consortium is being contemplated then this should be made clear at the start of the process In common with other support tools, the Information Communications and Technology (ICT) required for a public private partnership project should always be addressed at the very beginning To minimise the risk of incorrect decisions being made, a recognised project management procedure should be employed in all public private partnership projects Many specialist organisations, Partnerships UK (a private sector body) being one example, have a useful role to play in facilitating public private partnerships BACKGROUND CIPS endorses the Treasury definition of public private partnerships as follows: "Public private partnerships are defined as bringing the public and private sectors together in long-term partnerships for mutual benefit. The public private partnership label covers a wide range of different partnerships, including: The introduction of private sector ownership to state-owned businesses using the full range of possible structures (whether by flotation or by the introduction of a strategic partner) with sales of either a majority or minority stake The PFI (Private Finance Initiative) and other arrangements whereby the public sector contracts to purchase quality services on a long-term basis so as to take advantage of the private sector management skills incentives by having private sector finance at risk. This includes concessions and franchises, where a private sector partner takes on the responsibility for providing a public service, including maintaining , enhancing and constructing the necessary infrastructure

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Selling government services into wider markets and other partnership arrangements where private sector finance and expertise are used to exploit the commercial potential of government assets." The PFI grew out of competition and market testing in the public sector in the early 1990s, based on the premise that there was something to be learnt from successful private sector management and that public finance might be freed up for other use if there were private sector investment. Public private partnership has developed since and CIPS believes it to be a more commercial approach to contracting between the private and public sector. As stated in the Treasury definition - PFI and PPP are two of a number of procurement approaches available for the public sector buyer including the more traditional approaches to asset ownership. ROLE
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emphasises the importance of selecting the right commercial team when embarking on a PPP project; the team must be cross-functional and involve external expertise as necessary and appropriate. Whatever the role of the purchasing and supply management professional in public private partnership - as a minimum they should have responsibility for the proprietary procurement processes relating to public private partnership which may include for example documentation, advertisements, tendering, evaluation, debriefing etc. A common and valuable role undertaken by purchasing and supply management professionals in PPP projects is that of facilitator and translator e.g. translating the requirements of a public private partnership invitation to tender to the contractor's and other members of the team. Competent purchasing and supply management professionals should be involved with the market i.e. the supply side, as they understand finance, contracts and broader issues and so can add commercial expertise to all aspects of the organisation's business. When undertaking these roles and dealing with colleagues in other respects, purchasing and supply management professionals should endeavour to learn from colleagues and others in order to raise their awareness of broader business issues. In particular, purchasing and supply management professionals should assume the role of an intelligent client by for example providing contractors with accurate, full and relevant information in a timely and professional manner. Additional skills required for public private partnership include: Strategic partnering skills e.g. co-operation with common goals Relationship management skills - knowing when to intervene Listening skills Facilitation skills Influencing skills Change management and change control skills Dispute resolution skills Risk identification and risk management skills Contract skills The purchasing and supply management professional should be involved with all PPP contracts both at the client side and, if working for a private company, on the supply side. The skills required are sophisticated and so public private partnership provides an opportunity for the purchasing and supply management professional to raise their own profile and that of procurement, within their organisation. This should then lead to the purchasing and supply management professional being involved with other complex high profile commercial projects.

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PROFESSIONALS IN PUBLIC PRIVATE PARTNERSHIPS

The role of the purchasing and supply management professional in public private partnerships depends on their level of experience and competence in PPP, and other complex projects. It also depends on the level of resource available to the buying organisation and other priorities. Purchasing and supply management professionals should encourage their organisations to involve them in public private partnership projects at the very outset and, during the project, they should take an increasingly prominent role whenever appropriate. CIPS encourages all purchasing and supply management professionals to be familiar with the concept and mechanisms underpinning PPP, even if they do not get actively involved in public private partnership projects. Public private partnership demands specialist skills and knowledge, over and above traditional purchasing and supply management skills. CIPS warns purchasing and supply management professionals not to assume that they can simply extrapolate from their existing skill set and experience; public private partnership procurement and contract management skills must be learned. CIPS encourages purchasing and supply management professionals to assess the full range of commercial options before deciding to explore the PPP route. Options still include traditional procurement methods such as make/buy/outsource etc. which should be properly evaluated as part of the development of the procurement strategy and should be accounted for in the business case for the public private partnership approach (reference should be made to the CIPS positions on Strategic Sourcing and Outsourcing). If the purchasing and supply management professional is involved in the PPP project from the outset, the decision to proceed with a public private partnership will have been made, with the full support of the commercially experienced team and can hence be justified, on sound analytical and commercial grounds. CIPS

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ADVANTAGES
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There are several advantages to public private partnership including: It is a disciplined and structured approach to contracting It demands the production of a robust business case It requires a clear definition of the outcome/ requirement to be established at the outset It requires a rigorous method of supplier selection and recruitment It facilitates the establishment of long-term relationships on a non-adversarial basis It brings together design and construction and service delivery so that the whole project is seen as an entity It encourages the proper assessment of risk It requires skilled project management techniques It requires benchmarking and refreshment which should generate continuous improvement It demands clear change control procedures and a professional approach to change management It allows mutual exchange of valuable skills It requires clear thinking on the exit strategy from the outset CIPS recognises that these points are good procurement practice and should be applied when undertaking different forms of procurement. The point here, however, is that public private partnership generally promotes such good practice. A negative point is the lock-in problem, where for example, local authorities have to set aside a large part of their income to cover payments; this reduces their flexibility elsewhere. It is important to remember that having procured an asset an authority will have to look after it. It was the fact that maintenance has always been the first to suffer from cutbacks that the problem of a large maintenance backlog arose, which public private partnership sets out to address. ISSUES However, there are a number of complex issues to understand and address including: Infrastructure Issues The creation of a Special Purpose Vehicle Company (SPV/SPC) is often necessary to deliver the contract. This can be involve significant investment to create and manage as senior directors of the consortia member companies are often involved with the management of the SPV. It can be argued that SPVs are not necessarily expensive, as they provide a corporate framework as a counterpart for the authority, rather than a joint venture or indeed separate companies which

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would have to be managed on a collective basis. A consortium is often created as a result of the SPV with additional contractors. A contract is then created with a bank, which generally provides the majority of the finance; thus forming a tripartite relationship. The members of the consortium, the bank and the client all have different needs and objectives from the PPP project and these have to be recognised, understood and managed. SPVs do have an important 'single role responsibility' to play for all those residual risks that cannot be transferred to the subcontractors. The key is the internal rate of return the SPV obtains for absorbing these risks. This to some extent relates to the point as to whether an operator should be an equity shareholder in the SPV. It does not greatly matter either way but if the SPV is getting a higher rate of return than is commensurate with the level of risk it accepts then, arguably, the operators are in fact being paid twice. However, there is no evidence to date to indicate whether or not the SPV is receiving excess profit for the risk for which it has taken responsibility. Payment/Cost Issues Third party finance can result in a disproportionate amount of attention being given to the financial arrangements at the expense of the service provided. Assets can be transferred from the public balance sheet to another party or parties and the issue of who is responsible for the asset underlying the service (both in management and accounting terms) has to be determined. There are various options available to assess the contract baseline e.g. open book accounting, balanced scorecard, benchmarking etc. and the choice should be made on a project by project basis. Banks are mainly interested in the Return On their Investment; they have Step in Rights which create uncertainty for contractors and increases the contractors' commitment towards the banks. Negotiations can be lengthened by bankers requiring verification of the ROI. The payment regime on public private partnership projects tends to be a unitary charge regularly payable by the public sector buying organisation when the service is being delivered (which may not commence until possibly two years into the contract). Such unitary charges need not be uniform through the contract nor are they the only payment mechanism available in respect of public private partnership projects.

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Risk Issues Risks must be carefully identified and allocated as appropriate i.e. to the party best placed to manage them. The purchasing and supply management professional has a key role in the identification, allocation and management of risk and is best placed to lead on this aspect of the project. Further Procurement Issues Partnering can be difficult as members of a public private partnership consortium may have very different goals that they wish to achieve from the project - so careful management of a partnering arrangement is required. (Reference should be made to the CIPS position on Partnering.) CIPS suggests that if a true partnership is envisaged this should be made clear at the start of the procurement process and it should have a bearing on the choice of consortium. The aims of the buying organisation and the consortium members should be aligned where possible. The ICT required to support a public private partnership service can easily be overlooked at the start of PPP projects leading to higher costs later on. CIPS recommends that ICT, along with other support tools, should always be addressed at the very outset of the project. The correct management of an in-house workforce potentially affected by public private partnership and their trade unions is fundamental to the success of a project. Transfer of Undertakings and Protection of Employment (TUPE) law must be complied with; however, post-transfer staff may perceive their conditions to have changed for the worse whilst others may experience advantages. Public sector workers may, prior to the introduction of Best Value legislation, have felt constrained from establishing close relationships with contracting bodies. However, the establishment of close but proper relationships is essential if the aims of Best Value are to be achieved. APPROACHES TO PUBLIC PRIVATE PARTNERSHIPS SPECIALIST ADVISERS CIPS supports the use of the structured methodology to project management, one example being the Gateway Process to projects introduced by the Office of Government Commerce. This should minimise the risk of poor decisions being carried to fruition. CIPS is sympathetic to the aims of organisations such as Partnerships UK which is a private sector company that facilitates public private partnership and so provides another option for public sector clients. Such organisations can provide experienced project management for objective oversight to sometimes inexperienced public sector buyers. However, where buying organisations have purchasing and supply manage-

ment professionals experienced in public private partnership they should be able to determine the best value for money without the need for external advice. Buying organisations should develop their in-house capability. Buying organisations embarking on a public private partnership project procure the expertise of lawyers; this procurement should always be undertaken by the purchasing and supply management professional (reference should be made to the CIPS position on the Use of Lawyers). Lawyers should be instructed by means of a specifically tailored brief to negotiate the principles of the contractual arrangement and not the precise wording. When the process of negotiation includes precise wording at the same time as the principles this will result in very large lawyers' fees. Purchasing and supply management professionals need not necessarily use external lawyers; in-house lawyers are an option for those organisations which employ them and such professionals can brief a barrister directly, which may save costs compared to the use of a larger city firm of lawyers. The services of special advisers to assist in a public private partnership project are usually required. These are consultants who are often commissioned by the directors of the buying organisation. CIPS strongly suggests that purchasing and supply management professionals should assess their own competencies in respect of public private partnership and they should recruit specialist advisers as they deem necessary, ensuring that the terms of reference agreed ensure value for money is obtained. Where a purchasing and supply management professional has little or no experience of public private partnership then specialist advisers are clearly a significant requirement. Where the buyer is to have regular input to PPP type contracts, the contract with specialist advisers should enable skills transfers, such that over time the purchasing and supply management professional will become increasingly competent and confident with PPP projects, and specialist advisers should be required less. DOES PUBLIC PRIVATE PARTNERSHIP DELIVER VALUE
FOR MONEY?

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Many would say that the whole public sector infrastructure has suffered from decades of under-investment and needs to be modernised and improved. Contractually agreeing a payment mechanism e.g. a unitary charge, is a good way of delivering improvements in quality but care needs to be taken to ensure that at the contract's outset the dogma of < 100% service/no payment is not applied so rigorously as to alienate the service providers. Public private partnership has enabled markets to be moved and investment to be made. It has transformed many public services. In almost every case of public private partnership the end result has been a significant improvement on the status quo. However, in order for public private partnerships to be attractive to private sector companies the profitability of such projects must be sufficient to

cover their considerable bid costs and the level of risk they assume. Private sector companies also have to justify their involvement with public private partnerships to their shareholders and other stakeholders. It is also difficult, even at this stage, to ascertain where or when the more mature contracts will show benefits, or whether there will be unforeseen consequences at the end of some of the earlier PFI contracts. There are few services that the public sector currently provides that could not be provided by the private sector. However, private sector organisations must make a profit and meet the expectations of their shareholders (e.g. they have legal obligations under Company Law which can conflict with the public service ethic expected of the (old) public sector); they have no captive market like the public sector's taxpayers. Although contractually bound, private sector investors may wish to withdraw their investment at any time which can at the least be disruptive. Another issue is that private sector companies may go out of business if a major contract becomes subject to Step in Rights and such rights are enforced. The SPV created for the PPP project is an overhead cost. Other costs include bidders' costs which can easily be 200k (and as much as 2m) for a multimillion pound contract. Bidding costs are invariably charged back to buying organisations, albeit indirectly, through the contract's payment mechanism. However, each time a PPP contract is let, the person responsible for the contract, which typically may be the Treasurer or Accounting Officer, has to sign a document stating that value for money has been obtained. Value for money is the best deal that can be achieved at the time subject to limitations in time and resources, as indeed is the case in most procurement projects. CONCLUSION CIPS recognises that PPP type procurement projects are complex commercial exercises demanding high level skills from a range of experienced professionals. The buying organisation usually needs to recruit the services of specialist advisers, lawyers and others; purchasing and supply management professionals should be responsible for the procurement of such services and should, ideally, be involved in the entire PPP project from the outset. CIPS encourages purchasing and supply management professionals to develop the necessary procurement skills required to add value to, if not lead, public private partnership projects since they are best placed to handle the intricacies and ramifications of such a means of procurement.

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MANAGING PURCHASING & SUPPLY MANAGEMENT RESOURCING AND COMPETENCIES

INTRODUCTION The CIPS Positions on Practice statements cover a range of purchasing and supply management issues. The purpose of such statements is, primarily, to provide direction for purchasing and supply management professionals on what is the CIPS position on a given subject. They are not intended to be prescriptive, not least because CIPS recognises that purchasing and supply management professionals work in many different environments. CIPS practice statements are not written to be an end in themselves. They are a collection of views on good practice within a particular subject area, in this case managing purchasing and supply management - resourcing and competencies. The reader is encouraged to extract those parts of the statement which they can use for their own particular purposes such as writing and reviewing policy statements, guidance and procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Background data and further reading is available from CIPS. They are written for use by anyone associated with, or interested in, the purchasing and supply management profession. This document is one of a series summarising the CIPS view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document, which supports the series entitled 'Background to Positions on Purchasing and Supply Management Practice'. BACKGROUND It is an established fact that up to 80% of an organisation's non-payroll expenditure is handled in the purchasing arena. Resourcing is therefore a key lever for the effective management of costs, itself an increasingly strategic differentiator for companies. Purchasing practice, and the associated relationships developed with other companies (and sometimes governmental bodies), is one of the principal activities by which the reputation of a company is measured. CIPS believes that, in line with good business practice, effective resourcing within organisations, using competent professionals, helps organisations achieve corporate objectives. CIPS sees a professional as having: a working knowledge of current excellent purchasing and supply management practices, tools and techniques CIPS has identified some of the softer skills purchasing professionals in the 21st century should use to complement their technical skills. the ability to demonstrate practical use of the above to add value to the organisation access to support from a professional purchasing institute.

For the purposes of definition, 'resourcing' is a strategic activity, and 'competencies' are the skill sets required of the individual A TRADITIONAL, TRANSACTIONAL MINDSET CIPS believes that traditionally, the purchasing function has been seen as a non-strategic activity within an organisation. The purchasing department's remit did not extend beyond the narrow definition of purchasing. CIPS research indicates that those who traditionally worked in purchasing did not choose it as their career of choice. The profession is in a transitional phase with some organisations recognising the strategic input to the primary business process. TRANSFORMATION WITHIN THE PROFESSION The profession continues to develop in line with the changes in the business environment. An increasingly proactive stance has resulted in purchasing impacting upon an increasing number of areas within the supply chain (which itself is more akin to a supply network than a supply chain). Organisations are increasingly realising the strategic benefits of professionally managed purchasing and supply management. CIPS has identified two main strategic changes affecting the profession. One has been the development of the purchasing specialist, with an indepth knowledge of their particular industry and sector, and using differing processes, supported by technology to deliver results. The use of technology has changed the nature of the work performed by lesser-skilled workers. The other main development relates to purchasing professionals working within an integrated product/service delivery team (IPT). An IPT is a cross-functional team formed with the responsibility and authority to see a project through to its conclusion. These developments have led to changes in the skill sets required within the profession.

REQUIRED COMPETENCIES

The purchasing and supply management professional must be competent with interfacing internally within their own team and organisation, and externally with suppliers, customers and other stakeholders. Interfacing internally Good knowledge of the legal and financial framework within which the organisation operates. Knowledgeable about financial, legal and CSR (corporate social responsibility) issues. Ability to appreciate technology and IT in its capabilities, limitations and opportunities for exploitation. Competent project manager. Ability to analyse, evaluate and recommend on risk. Ability to develop positive relationships with other departments. Ability to convince others of the benefits of purchasing within the organisation. Ability to manage people effectively within their own team. Ability to coach and develop those within the team. Interfacing internally and externally Good awareness of the business environment and own organisation's objectives. Ability to analyse issues at the macro-level (globally) for implementation at the micro-level (locally). Involved in stakeholder management, including the development of suppliers. Ability to live and work with ambiguity. Expert knowledge of purchasing tools and techniques. Ability to proactively employ lateral thinking for solving problems. Ability to manage diversity. Ability to influence, and at ease presenting at Director level. Comfortable working in a range of ethnic and cultural environments. RESOURCING IMPLICATIONS CIPS believes in the importance of encouraging individuals with the requisite interests and attributes to develop their careers as professional buyers. CIPS also believes that the purchasing and supply profession offers an attractive and challenging career option for individuals who are looking for a professional foundation from which they can move into general management and/or business leadership at the highest level. Career opportunities in the profession should be communicated widely through a structured approach, involving schools, colleges, universities and organisations.

Resourcing activities of the Human Resources Department need to reflect the increasingly strategic contribution purchasing makes to organisational success. Skills analysis is used in some organisations to identify the skill set for a purchasing professional in a set role. This framework is then used to drive an individual's personal development. This approach can be effective in developing professional skills. However, the skills analysis should also contain requirements for softer skills; these are often overlooked. Sustainable performance can only be achieved through ongoing development within the purchasing team, and a culture supporting individual development does need to be nurtured. This marks the distinction between a clerical role and a professional role. Career progression outside the profession should be highlighted where it is an advantage to have gained a good commercial understanding by adopting purchasing and supply management as a first career.

CONCLUSION

This position statement acknowledges that the purchasing profession has gained in strategic importance in many organisations, in different sectors. However, progress in some sectors is lagging behind. As a result, those who are achieving results in the profession have an enhanced portfolio of skill sets. To this end, organisations should plan to resource their business with competent professionals. This will be to the benefit of the profession, the organisation and society as a whole. The Chartered Institute of Purchasing & Supply (2004)

RISK MANAGEMENT IN PURCHASING AND SUPPLY MANAGEMENT

INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case risk Management in purchasing and supply management . The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. More detailed guidance on risk management in purchasing and supply management is available from CIPS. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on risk management in purchasing and supply management is written specifically with the senior purchasing and supply management professional in mind. This document is one of a series summarising the CIPS view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document which supports this series entitled Background to Positions on Purchasing and Supply Management Practice. CIPS views, opinions and beliefs are stated throughout the document; however the broad practice statements which underpin the text are as follows: x Risk management is a fundamental aspect of purchasing and supply management and one with which all purchasing and supply management professionals should be familiar. CIPS considers that when carrying out whole life costings, purchasing and supply management professionals should be alert to the risks associated with each stage of the life cycle. CIPS takes the view that it is best to allocate risks to the person or department best placed to manage them effectively. CIPS believes that the purchasing and supply management professional should do his/her best to minimise areas of concern as seen from the supplier's viewpoint. CIPS firmly believes that purchasing and supply management professionals are under an obligation to understand the corporate objectives and ensure that the procurement strategy is in line with these. x CIPS considers that risk awareness should be seen as a positive attribute as far as purchasing and supply management professionals are concerned; it should not be interpreted as an expectation that things will go wrong but rather as being prepared for the fact that they may do so.

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BACKGROUND Risk management and incentivisation, a subject on which CIPS has developed a separate practice document,, are techniques that can be applied separately or together to ensure that contracts are successful. CIPS encourages all purchasing and supply management professionals to constantly exercise a what-if mentality in relation to the procurement of goods, services or works. The what-if mind-set will enable purchasing and supply management professionals to determine the potential outcome of risk management and incentivisation by testing assumptions, propositions and approaches under consideration. RISK MANAGEMENT CIPS suggests that risk can be defined as the probability of an unwanted outcome happening. Risk management involves three key activities: risk analysis, risk assessment and risk mitigation all of which facilitate the taking of decisions and actions to control risk appropriately by providing a disciplined and objective approach. RISK ANALYSIS Risk analysis is the process of identifying all the potential things that can go wrong with an activity, and then estimating the probability of each happening. Risk analysis is part of the strategy development process. When a need is identified, a strategy is developed having taken into account all relevant commercial issues, such as specification, supply market and finance. A risk analysis methodology allows all the risks to be identified and objectively assessed. The purchaser can then decide on an appropriate sourcing strategy. Once the sourcing strategy is decided, the contract strategy can then be formulated - it is at this stage that a decision of whether a risk/reward type contract is appropriate. CIPS considers that risk analysis should be part of any significant purchasing and supply management process; it is a fundamental activity of use in for example, determining the overall strategy, to individual plans for categories of expenditure, sourcing and, even, if appropriate, tactical procurement. It is a key skill of any purchasing and supply management professional and is

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necessary to minimise commercial exposure. The analysis can, however, be a simple, or a very formal process. The latter approach is more appropriate for highvalue and high-risk projects such as a new IT solution - and may involve following a set procedure, working cross-functionally with colleagues, brainstorming and risk evaluation. Analysis can also be informal, using an iterative or intuitive process, for less significant procurements, or it may even be reactive, such as in response to a crisis for example.

iour, thereby increasing the risk. An example would be insuring lap top computers - where lap top computers are insured against loss or theft, some users take less care and for example, leave them in their cars overnight. RISK MITIGATION Having assessed all the risks and identified those that require action, plans need to be drawn up and responsibilities assigned to control and mitigate these risks. Risks then should be allocated an owner, who is responsible for managing them, possibly with the help of other team members The allocation of risk should be dependent on the assessment of the likelihood and consequence of the risk and then the identification of who is best able to control or manage the risk. This is an important aspect of any significant procurement and so something in which purchasing and supply management professionals should be involved. Having allocated the risk, the issue of what is a fair reimbursement mechanism is a related but separate issue. Like all reimbursement it should be fair and reasonable. Forcing vendors to assume risks they cannot control by offering an incentive or a reward is not good practice. It should be remembered that risks change over time. Risk assessment should be iterative. CIPS recommends that when undertaking whole life costing, purchasing and supply management professionals should identify the relevant risks associated with each stage in the life of the product; thus in some cases, risk might increase dramatically towards the end of the life cycle due to problems of disposal or obsolescence. A route to risk mitigation is insurance. CIPS suggests that purchasing and supply management professionals ascertain what insurance arrangements their organisations have in place as some risks may already be covered by insurance; equally insurance may no longer be necessary for some aspects if the risks can be managed properly. Similarly, new insurance policies may be required to reflect different approaches to contracting strategy. Risk can be transferred to suppliers. However, risk mitigation is a calculated trade-off. Too much risk transfer to a supplier will simply lead to cost increases as the supplier seeks to lay off the risk. Insufficient transfer of appropriate risk leads to the buyer accepting a disproportionate amount of the risk, which might be better accepted and managed by the supplier. CIPS' position is that risks are best allocated to the person or party best able to manage them. This may be in terms of expertise, time and/or resource. Where this is a supplier, or another third party, purchasing and supply management professionals should be mindful of the fact that suppliers will build in a suitable contingency fee to charge the buying organisation.

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There are no golden rules of best practice in risk analysis - the key is to be able to identify all the risks relating to a particular procurement including the impact of that procurement on the business, and to decide what level of effort is appropriate to the circumstances. For more complex situations, the risks can be brainstormed and categorised into groups such as technical risks, financial risks etc. Alternatively a more detailed approach may be adopted. In some public sector areas, particularly for IT or PFI projects, there are quite specific analyses to be undertaken, and failure to address all aspects fully can result in rejection of the procurement by a higher authority such as the Treasury. The second stage is to assign a level of probability to these risks. Some methods express the impact of the risks and the cost of controlling them and so decisions on trade-offs can be made. As stated in the introduction, CIPS has developed an approach for risk analysis. RISK ASSESSMENT This is the process of assessing the likely impact of a risk on the organisation. Highly predictable risks may have low impact and therefore it is possibly not worth taking any action to control or avoid the risk. On the other hand, low probability risks can have a significant impact and some form of action may be demanded 'just in case'. The cost of controlling or avoiding the risk needs to be taken into account. It may be that some risks are not very easily controlled or managed. These may fall into the category which needs to be insured, if indeed the insurance market is prepared to insure them. The process of risk assessment is not all encompassing, as there is usually a degree of uncertainty. This uncertainty increases as the probability of the unwanted outcome reduces. Uncertainty can be addressed by sensitivity analysis. This involves manipulating the variables or assumptions e.g. events that can lead to the unwanted occurrence, to see the effects of these. It can illustrate where the outcomes may be different if some assumptions are incorrect. Another point to consider during risk assessment is compensating behaviour, which is where people, aware that a particular risk is being controlled or managed, compensate by doing more of the unwanted behav-

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ing and supply management professionals have a responsibility to understand the objectives of their organisation and to ensure that the procurement strategy is in line with the corporate strategy. SKILLS REQUIRED CIPS believes that in order to undertake risk management, the purchasing and supply management professional should have: a knowledge of the risk management techniques available an analytical mind-set objectivity confidence to ask the right questions knowledge of their employer's business and market. Like many skills, effective risk management improves with experience and so, with practice, knowing how far to analyse and assess risks will become easier, if not intuitive. CONCLUSION Organisations are increasingly aware of the importance of managing risk and high profile reports such as that by Turnbull, September 1999 (Internal Controls:Guidance for Directors on the Combined Code) have contributed to the interest. CIPS believes that purchasing and supply management professionals can add value to any risk management process within an organisation, whether or not it is directly related to purchasing and supply management. This practice document has stated that risk management is another invaluable technique; CIPS believes that an awareness of risk should be regarded as a positive trait in the successful buyer - it needs to be seen not as an expectation that things will go wrong but rather as an alertness to the fact that they might do so, coupled with an readiness to take positive steps to prevent undesirable outcomes. Of course CIPS recognises that not all buyers are equal. Significantly, the skills and competencies identified in this policy a being necessary for the management of risk are generally viewed as being of pivotal importance in other areas of purchasing and supply management.

If the supplier perceives risk to be high he will naturally build in extra safety and extra margin. An effective buyer will try and identify and ameliorate areas of concern. Often this can be done in discussion with the supplier and involves little if any cost or compromise on behalf of the buyer. THE ROLE OF THE PURCHASING MANAGEMENT PROFESSIONAL
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CIPS holds that the purchasing and supply management professional's role is to: Identify and promote the business need for risk management in procurement Identify who in their organisation is/should be responsible for this work with them in analysing and assessing the risks inform himself/herself sufficiently about the supplying organisation(s) and the people involved to make discretionary judgements about the balance of probability of the supplier causing or allowing risks within their own control, to materialise make a value-added input to commercial decision by leading a commercial risk assessment in the development of commercial strategies be fully conversant with a range of contract strategies that can be applied when setting up contracts to achieve best value in meeting organisational objectives. Various purchasing and supply management techniques can make a substantial contribution to this process, for example supplier appraisal or tender evaluation can minimise the risk of using unsuitable suppliers. Where there is no-one identified as responsible for risk management, the purchasing and supply management professional should communicate probable risks to colleagues such as the sales person who deals with the external customer, the budget holder, or finance director. They should seek to challenge assumptions and encourage colleagues to manage risks. Where there is little interest, the purchasing and supply management professional should take responsibility for all significant procurement risks and document these accordingly e.g. assessing a new yet significant supplier's financial standing, taking references etc. Such initiative should help build trust and professionalism within the organisation. With respect to wider business issues, such as risk to reputation for instance, CIPS would advocate that as a purchasing and supply management professional is an external face in the organisation, he/she has a responsibility to feed into the organisation anything they detect which may generate a risk to the business. As is regularly stated, CIPS firmly believes that all purchas-

SAVINGS
INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case savings, as they relate to purchasing and supply management. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Further information on savings is available from CIPS. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on savings has been written primarily for the benefit of full time purchasing and supply management professionals. This document is one of a series summarising the CIPS view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document which supports this series entitled Background to Positions on Purchasing and Supply Management Practice. CIPS is expressing beliefs on 'savings', one measure of purchasing performance, as the delivery of savings is a key expectation by most organisations from professional purchasing and supply management. Reference should be made to other CIPS practice documents in particular:Measuring Purchasing and Supply Management Performance Benchmarking Promoting Purchasing CIPS views, opinions and beliefs are stated throughout the document; however the broad practice statements which underpin the text are as follows: The focus for savings, and indeed any other aspect of performance measurement, must be a reflection of the Board's (or its equivalent) expectations of the purchasing and supply management function CIPS believes that savings analysis should be linked where possible to the organisation's financial accounts CIPS considers that to qualify as savings, outcomes must be realised; they must also be quantifiable, measurable, tangible, auditable and verifiable CIPS also believes that forecasted potential savings that are agreed with the budget holder, should where possible and appropriate, be fully or partially removed up front from the budgets so that the organisation can utilise the saved money for alternative investment opportunities as early as possible CIPS believes that all purchasing and supply management professionals should measure their own performance, as well as that of their teams, on at least an annual basis CIPS considers it is the responsibility of the purchasing and supply management professional to understand, manage and influence the cost drivers that impact on total cost as this is a key factor in maximising savings As a general rule CIPS believes that purchasing and supply management professionals should always seek the most economically advantageous option to satisfy the requirement Whilst they are obviously important, CIPS takes the view that savings are just one aspect of purchasing performance measurement Purchasing and supply management professionals should balance the pursuit of additional savings for a given requirement by targeting, prioritising and resourcing accordingly DEFINITIONS A saving is an outcome that can reduce budgets. Outcomes are only savings if they are realised and are quantifiable, for instance an outcome that leads to greater market share, increased profitability, improved cash-flow, reductions in organisational costs or something that the organisation's customer perceives as a real value proposition. A cost avoidance is an outcome that attempts to thwart price increases and to keep within budget. A cost avoidance is not a saving; whilst it can involve significant procurement activity to negate inflationary pressure for instance, it does not contribute to the financial accounts. WHAT ARE SAVINGS? The following are examples of bona fide forms of savings: Agreeing a straight-forward reduction in price e.g. obtaining the same item for less cost Sourcing, or developing with the supplier, a lower quality item (that still meets the purpose) at a reduced cost Obtaining more value for the same cost e.g. negotiating extended warranties, additional spares etc.

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Negotiating retrospective rebates, improved payment terms etc. Negotiating improved terms and conditions, improved service levels etc. Improved business processes e.g. real savings in time as a result of restructuring, the introduction of purchasing cards, eProcurement Reducing commercial exposure e.g. by identifying and managing all forms of risk in any procurement Challenging a need or requirement that results in the avoidance of unnecessary expenditure by for example, reducing the specification An example of a perceived saving which does not fall within this category is when, following a tendering exercise, the cost of the tender accepted is compared to the cost of the highest tender and the difference is seen as the proposed saving. However, if the budget holder or end user would have purchased from a higher cost option, such as the supplier which offered the highest tender i.e. without competition, and the intervention of the purchasing and supply management professional resulted in a lower cost option being selected, this would be a bona fide saving. PURCHASING'S ROLE CIPS recommends that purchasing and supply management professionals work closely with Finance on budget preparation, savings forecasting, tracking reporting and capture. For instance, Finance and Procurement should agree an appropriate savings measurement for true commodities. Savings can be measured as In-Year numbers, that is relating to the budget, or Full Year relating to the annualised impact, that is to say a twelve month equivalent. Full Year savings credit has the benefit of reducing the temptation to report savings in the first month of the financial cycle. Savings analysis should be linked where possible to the organisation's financial accounts. CIPS also believes that forecasted potential savings that are agreed with the budget holder, should where possible and appropriate, be fully or partially removed up front from the budgets so that the organisation can utilise the saved money for alternative investment opportunities as early as possible. The decision on the utilisation of savings should normally be one of the following three options:Leaving the money in the budgets for greater budget holder value Investing the savings into alternative budgets Taking the savings as increased profits These decisions do not come within the purview of the purchasing and supply management professional but are rather the responsibility of Finance. However, purchasing and supply management professionals should highlight, deliver and report savings, providing

business awareness, visibility and transparency. Achieved savings that are not reported could be seen as negligence as it could deprive the organisation of greater investment opportunities by enabling budget holders to spend their original budget. CIPS believes that purchasing and supply management professionals should report cost increases as well as savings. CIPS believes that it is a key responsibility of purchasing and supply management professionals to measure their own performance, and that of their teams, together with the overall value which they add to their organisation, on at least an annual basis. However CIPS recognises that each organisation has its own demands and therefore the frequency, complexity and level of reporting is not generic across all purchasing and supply management functions. One of the components of this performance is the impact of professional purchasing and supply management on the financial performance of their organisation. The results should be a vehicle with which to raise the profile of purchasing and supply management, and thereby promote it in the organisation. CIPS believes that all purchasing and supply management professionals should continually endeavour to promote their profession, thereby raising its profile, and to promote the value of CIPS (reference should be made to the CIPS practice document on Promoting purchasing and supply management). However, CIPS recognises that more often that not, purchasing and supply management professionals do not deliver savings single-handedly; rather savings are a result of cross-functional working. Organisations often impose performance targets on the purchasing and supply management professional and these are usually expressed in financial terms, most common as a price reduction. But price is just one component of cost. Non-purchasing and supply management professionals often perceive savings on price to be the only indicator of purchasing performance. CIPS believes it is a key responsibility of the purchasing and supply management professional to promote the concept of total cost. CIPS advocates that purchasing and supply management professionals ensure their strategies are in accordance with, and therefore support, their organisational strategies. This may mean that purchasing and supply management professionals procure goods and services of a higher price, than previously purchased for their organisations, if this delivers corporate objectives such as greater margin or improved market share. Notwithstanding this, purchasing and supply management professionals should endeavour to obtain best value for money even for the most expensive items. Savings are just one aspect of purchasing and supply management performance measurement, albeit an important one (reference should be made to the CIPS positions on Measuring Purchasing and Supply Management Performance).

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MEASUREMENT CIPS believes that all reported savings must be quantifiable, measurable and tangible. They must also be auditable and verifiable. CIPS also considers that purchasing and supply management professionals should commit themselves to continuous improvement year on year. It is important to build on the previous year's reported savings and demonstrate improvements. It could be argued that some commodity prices increase year on year; in such circumstances purchasing and supply management professionals should be monitoring (insofar as this is possible) prices paid by their competitors or others and those prices being offered by the supplier's competition. The objective should be to purchase the commodity at a given time at less than the average annualised price of the commodity. Purchasing and supply management professionals should balance the pursuit of additional savings for a given requirement by targeting, prioritising and resourcing accordingly. Targeted areas should be reviewed and appropriate action taken to reduce cost in respect of the product or service in question. This might form part of a partnering arrangement or a supplier development programme involving for example value analysis and value engineering as appropriate (reference should be made to the CIPS positions on Partnering and Supplier Development). It may also involving working cross-functionally with colleagues to review the requirement, re-sourcing or re-tendering to facilitate continuous improvement. Further examples would be encouraging suppliers to move their business to a place with a lower cost economy or to employ reverse marketing e.g. encouraging a supplier to expand their range of products to a market which is currently not economically viable. Another example of where purchasing and supply management professionals can increase a supplier's contribution to the buying organisation is to access the supplier's total business resource e.g. the supplier's buyers may have expertise which can be accessed, or spend which could be combined with the buyer's for instance. CONCLUSION CIPS is not suggesting in this practice document that savings are the only, or indeed the most important, contribution from the purchasing and supply management profession. The skills and competencies of a qualified purchasing and supply management professional will deliver enormous value to any organisation contributing to its future well being. CIPS encourages purchasing and supply management professionals to promote their overall value-add in their organisations and utilise the full range of performance measures to communicate the benefits of professionally executed purchasing and supply management activity.

SUPPLY CHAIN MANAGEMENT

INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case supply chain management. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. More detailed guidance on supply chain management is available from CIPS. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs is written specifically with the more senior purchasing and supply management professional in mind. This document is one of a series summarising the CIPS view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document which supports this series entitled Background to Positions on Purchasing and Supply Management Practice. CIPS views, opinions and beliefs are stated throughout the document; however the broad practice statements which underpin the text are as follows: CIPS believes that: Supply chain management is still evolving and developing and there are, therefore, numerous definitions of it, some of which are presented in this paper. Supply chain management may be said to be broadly about the efficient and effective management of all activities from primary suppliers right through to the point of sale In some sectors supply chain management is a key activity whilst in others it is somewhat less important. Purchasing and supply management professionals should become increasingly involved in supply chain management, ideally playing a leading role in its development wherever possible For best results, supply chain management requires a senior sponsor appropriate to the sector Supply chain management has a pivotal role to play within the organisation, involving as it does responsibility for predicting and satisfying end customers' demand back through to the suppliers Supply Chain Managers have a vital role to play in managing cost, being, as they are, in a position to monitor and influence the whole cost base across the business and the supply chain Supply chain management creates opportunities for the purchasing and supply management professional to contribute to the organisation's success. It is an important activity that purchasing and supply management professionals need to understand and interface with; furthermore they should develop their supply chain management skills so as to supplement the knowledge they possess as far as traditional procurement procedures are concerned BACKGROUND Supply chain management is a business process which although still evolving has been in existence for many years. It affects every business irrespective of size, age, sector or location. CIPS acknowledges that supply chain management has undergone many changes in recent years; in particular in the 1980s there was a recognition that holding inventory was an inefficient use of resources and that supply chain management was one area where buyers, suppliers and internal customers could work closely together to ensure goods and services were delivered as required, of the appropriate quality and at the agreed cost. In essence, the supply chain starts with the extraction of raw material (or origination of raw concepts for services) and each link in the chain processes the material or concept in some way, or supports this processing. The supply chain extends from the raw material or extraction or raw concept origination through many processes to the ultimate sale or delivery to the final consumer, whether goods or services. Arguably it can also include the disposal of the waste associated with the consumed product. Although an accepted term, 'supply chain' as one expression is inadequate to cover all the complexities to be found in the interconnections within and between organisations; an alternative way of thinking is to consider it as a network with various nodes in which the nodes can be customer of other suppliers, supplier to other customers and collaborator or competitor with many. The primary function of the supply chain might be said to be the provision of goods or services required by the end customers. However the chain also acts as a channel or medium for the exchange of information as well as the communication of orders or instructions. As well as providing for the flow of products it also provides a channel for the flow of customer requirements and ultimately payment back up the chain.

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Although, as noted above, supply chain management is an evolving process, there are distinctions to be drawn between supply chain management 'as was' and supply chain management 'as is'. Reasons for these differences include the following: New management thinking on supply chain management as such, and on partnership sourcing generally New opportunities for close liaison with key suppliers and their key customers, supported through the use of IT New legal, consumer and ethical demands on the supply chain - for instance the emergence of the preference for GM-free food and the avoidance of child labour The drift of branding (and hence of product responsibility) from the manufacturer to the retail level recognising however that product liability is not easily transferred The number of mergers within industry and the rise of multinationals gave certain parties an increasingly dominant position within their supply chain. Effective supply chain management is certainly facilitated if the most powerful party decides to enforce on the others but power to force is not the most productive approach. Co-operation can be argued to surface costs hidden in traditional approaches whose removal permits both to benefit CIPS considers that this new profile for supply chain management creates opportunities for the purchasing and supply management professional - in, for example, developing a deeper involvement in the procurement of production materials and by bringing supply chain management thinking into MRO (Maintenance, Repairs and Operations) purchasing and in the strategic issues associated with partner selection and relationship management WHAT IS SUPPLY CHAIN MANAGEMENT? There are numerous definitions of the supply chain and supply chain management: The supply chain conceptually covers the entire physical process from obtaining the raw materials through all process steps until the finished product reaches the end consumer. Most supply chains consist of many separate companies, each linked by virtue of their part in satisfying the specific need of the end consumer. Supply chain management may be thought of as the management of all activities aimed at satisfying the end consumer; as such it covers almost all activity within the organisation. It has been suggested that it incorporates a number of key success factors which include a clear procurement strategy, effective control systems, and development of expertise. Supply chain management therefore represents and reflects a holistic approach to the operation of the organisation. In other words, supply chain management relates to the entire procurement cycle not just at the end (which

is the commonly-held view). In particular it has a pivotal role to play in the development of an initial sourcing strategy. A distinction may be drawn between strategic and tactical supply chain management, the respective definitions being: The selection and linking of suppliers and customers through negotiation and agreement to achieve customer satisfaction by providing value added products and services within beneficial and profitable relationships of all parties within the supply chain. and Supply chain management is the continuous planning, developing, controlling, informing and monitoring of actions within and between supply chain links so that an integrated supply process results which meets overall strategic goals. Supply chains are not linear; rather, any organisation has several supply chains coming into (upstream), going through and going out of (downstream) the organisation. Supply chain management is the management of the whole demand process, starting with the end customers' requirements - be that external customers (e.g. consumers) or internal customers (e.g. end users) - and managing the meeting of their requirements right up to, and in some cases, beyond the supplier of the required goods or services. Few organisations have fully integrated their supply chains; one example of where supply chain management has been successfully implemented is in the automotive sector where Nissan, the car manufacturer, has integrated its upstream supply chains - certainly for its car production if not for its entire business. The supermarket sector is an excellent example of where the supply chains close to the final customer have been managed to the extent that all goods and services required by the organisation are demand-driven, with technology enabling end-customers' requirements to be communicated direct to suppliers. CIPS encourages organisations to manage their supply chains for both direct spend i.e. those goods and services required for the business (components for a manufacturing process for example), as well as indirect spend i.e. those goods and services required to support the business - professional services for instance. Supply chain management involves identifying where the value lies within the whole supply chain i.e. identifying the value chain and then segmenting it so that each segment can be addressed individually. It is also concerned with analysing and identifying all the non-value adding activities across the entire supply chain and removing them. This process is sometimes referred to as diagnostics. The purpose of this is to diagnose each value segment to determine whether the organisation could improve it whether the value segment could be more enhanced, whether cost could be taken out or whether knowledge about it could be bettered, for instance.

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Supply chain management is evolving it is becoming more complicated with many organisations having 80% of their turnover comprising bought-in goods and services. This trend has been exacerbated by an increase in outsourcing; make/buy decisions resulting in more goods and services being bought in, and longer-term partnering arrangements leading to fewer key suppliers who are more willing to take a greater responsibility for efficient upstream supply chains. Technology, notably eProcurement, eMarketplaces and eAuctions, are creating new and alternative upstream supply chains which also have to be managed. Some organisations have outsourced their production to their suppliers so that the organisation's role becomes one of brand management; this is an example of where supply chain management is critical to the success of an organisation. Practical aspects/issues associated with supply chain management within the organisation will vary from one organisation to another and from one industrial sector to another but a typical list might include: Perception by individuals that supply chain management represents a threat ; for example, the job profile may change perhaps necessitating new approaches to supplier management Suppliers, buyers, manufacturers and sub-contractors may all be at different levels of development Upstream - some clients are keen to develop supply chain management but the great majority are price-driven - therefore education as to the benefits of supply chain management is very important Board members sponsor the supply chain management programme and the work being carried out by the buying teams Whole cost rather than lowest price is key Supply chain management will only be a success where the relationship is two-way and risk/ profit/opportunities are shared New eCollaborative software has emerged which facilitates supply chain management SUPPLY CHAIN MANAGEMENT - A STRATEGIC ROLE Supply chain management has a strategic role to play within the organisation; it is pivotal because, as stated above, its spans all demand, right from the end-customer's requirement to the suppliers that provide the goods and services to meet that need. Sometimes, supply chain management involves going beyond the suppliers that interface with the organisation to their suppliers, in order that improvements can be made. These may include removing cost, increasing quality or ensuring ethical, environmental or socially responsible inputs. Very few organisations have worked closely with their suppliers' suppliers; working at more than two suppliers removed is unusual. Supply chain management involves the sharing of risk with suppliers - this can involve moving the risk up the supply chains to those suppliers best able to manage it.

Such devolution of risk will come at a cost and so it is to that extent an economic decision. An organisation has to determine the right approach to meet its own objectives, it should therefore evaluate the economic drivers to develop an appropriate level of sophistication in respect of its supply chains - this may involve deciding to bear most risks internally. For instance, organisations must ensure that the goods and services that are critical to them have security of supply and that the supply chains are managed accordingly. However supply chain management is not only about sharing risk - it is also about sharing benefits, which is an aspect which not all organisations would necessarily be comfortable with. CIPS encourages purchasing and supply management professionals to appreciate that passing responsibility on to suppliers in terms of risk, or even outsourcing a service, requires more, not less, management of supply chains on the part of the buying organisation. Some organisations make the mistake of outsourcing a requirement and believe that the supplier in question is then responsible for managing that need. CIPS believes that it is sometimes the reverse and outsourcing, and similar strategies, require very careful supply chain management in order to be successful. WHO
SHOULD BE RESPONSIBLE FOR SUPPLY CHAIN MANAGEMENT?

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CIPS believes that purchasing and supply management professionals should become increasingly involved, and where possible lead, the development of supply chain management. However, it is recognised that not all buyers have the skills necessary to manage even the upstream part of an organisation's supply chains; these can be complex networks of complex supply chains, notwithstanding the supply chains within and downstream from the organisation. For best results, supply chain management requires a senior sponsor appropriate to the sector; this is because it is such a central function and is fundamental to the commercial management of the business. CIPS holds that supply chain management is at the fulcrum of the business as it involves responsibility for the end customers' demand right through the organisation to the suppliers, and where appropriate, beyond. Such a role, requires objectivity, an open mind and an ability to work with all stakeholders within the chains such as Sales, Marketing, Finance, Production (if manufacturing), Procurement, Logistics and Distribution. In particular, supply chain management need to work closely with Account Managers who are best placed to feed information back into the supply chain. Many organisations still work in functional silos instead of cross-functionally - supply chain management demands this crosscutting approach to managing the customers' needs. The key skill of an effective supply chain manager is relationship management. Good purchasing and supply management professionals are well equipped in this skill. The ability to manage customer relationships, both internal to the organisation and external, and

supplier relationships is fundamental to success in supply chain management. In the context of supplier relationship management, whilst CIPS would endorse backward integration as a technique; it would argue also that supply chain management is able to provide benefits over and beyond backward integration. In essence both supply chain management and backward integration are means to an end, and companies should select whichever of these two approaches is most appropriate for them in specific circumstances. There are also many hard skills which are also key, notably process design (redesign); IT integration/role of eCommerce; supply chain modelling; and performance management. The skill of the purchasing professional working in a supply chain management environment lies in getting suppliers interested in working with the buying organisation i.e. so that the suppliers position and perceive the buying organisation as a valuable long-term client relationship which is worth investment. A key competence is sophisticated interpersonal skills e.g. an ability to persuade, influence, communicate, facilitate, coordinate and manage the human implications of change. Another valuable competence is the ability to challenge existing processes, policies, procedures CIPS encourages all purchasing and supply management professionals to continually question and challenge where it is appropriate to do so, and not just within the purchasing dimension. Purchasing and supply management professionals wishing to promote and develop supply chain management must adopt all of the above skills and competencies but most importantly, should be able to think in terms of the whole business. To achieve maximum benefit, supply chain thinking would of course pervade the whole of the company's corporate strategy; supply chain considerations would be as integral a part as Marketing, Production or Finance.

SUMMARY CIPS suggests that the supply chain managers have a vital role to play in the management of total cost - they are able to see and influence the whole cost base across the business. Supply chain management is responsible for bringing a product to market utilising all the resources, both internal and external, available and aligning this activity directly with the organisation's strategies and objectives. Supply chain management is spreading within the business world as larger blue chip and global organisations are demanding this approach in order to remain competitive. The effect of this is that smaller organisations, further down supply chains, are becoming involved with, or appreciative of, supply chain management. CIPS encourages all purchasing and supply management professionals to equip themselves with supply chain management skills not least 'hard ' skills such as process and performance management and to move from traditional procurement, namely managing upstream supply chains into the organisation-wide application of supply chain management.

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SEPARATION OF DUTIES
INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case the separation of duties, as they relate to purchasing and supply management. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Further information on the separation of duties is available from CIPS. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on the separation of duties has been written primarily for the benefit of full-time purchasing and supply management professionals i.e. those in the purchasing and supply management function. This document is one of a series summarising the CIPS view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document which supports this series entitled Background to Positions on Purchasing and Supply Management Practice. CIPS is expressing beliefs on the separation of duties as this process is fundamental to demonstrating probity in purchasing and supply management. CIPS views, opinions and beliefs are stated throughout the document; however the broad practice statements which underpin the text are as follows: CIPS believes that separating duties within a procurement process is one of the various strategies available to assist in the effective control and management of financial and non-financial risks within the organisation. To be fully effective and authoritative a Separation of Duties policy requires Board level approval. CIPS believes that purchasing and supply management professionals should not tolerate corruption of any kind. This view underlines the broader spectrum of similar CIPS practice statements that can be found in the CIPS document Ethical Business Practices in Purchasing and Supply. CIPS considers that the allocation or separation of the roles or responsibilities of the individuals concerned should ideally be determined by the head of purchasing and supply management. Purchasing and supply management professionals should be proactive and make recommendations to the Board, or its equivalent, on the subject of the separation of duties and the Board should approve the agreed policy. Whilst they are most typically associated with the public sector, policies on the separation of duties should also be put in place in private sector bodies. The cost of putting a Separation of Duties policy in place should be in proportion to the sums potentially at risk. CIPS recommends that a table of Delegations of Authority is produced which sets out who has authority to approve what under each of the three key purchasing processes identified in the definition below. Whilst always being alert to the possible existence of fraud, purchasing professionals should avoid being seen as acting as internal 'police'. Buyers must always be careful to make a clear distinction between co-operation and collusion in their dealings with suppliers. DEFINITION Separation of Duties means that the processes involved in purchasing are divided between two or more people so that no one person is responsible for the entire purchasing process. It essentially involves three key authorities - budget holder authority; authority to negotiate and commit and the authority to accept and pay. The separation of duties is one of a range of strategies available to the purchasing and supply management professional for ensuring probity in purchasing and supply management. It achieves this objective by ensuring that no single individual has complete authority over one purchase - rather the power is divided between two or more people. The importance of the concept of the separation of duties is illustrated by the relevant regulations currently in place in the public sector aimed at ensuring and maintaining the required level of probity and integrity within the purchasing process.

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RESPONSIBILITIES OF THE PURCHASING PROFESSIONAL CIPS encourages purchasing and supply management professionals to take responsibility for all their organisation's expenditure and implement appropriate procedures (in accordance with the wider legislative environment), controls, and allocate duties accordingly. Moreover, CIPS encourages purchasing and supply management professionals to be proactive in recommending to the Board, or its equivalent, an appropriate policy on the separation of duties.

As a minimum requirement and in accordance with basic principles enshrined in the separation of duties, CIPS believes that it is good practice for a minimum of two different employees to be responsible for the following sequence of three key activities taken from the above list. Determining the need e.g. the requisition (or equivalent), specification, budget Undertaking the procurement e.g. sourcing and commitment Effecting the financial aspects e.g. authorising payment CIPS recommends that a table of Delegations of Authority is produced which sets out who has authority to approve what under each of the processes identified. However, CIPS believes that this can be undertaken by any of the two or more employees identified earlier. It goes without saying that some organisations may require dozens of people to take responsibility for the three roles - with, however, no single individual having responsibility for more than one of the roles. Additionally it is good practice for those employees to have a nominated representative in case of absence through illness or holiday. CIPS also takes the view that, ideally, the actual signing of the contract documentation should also be seen as a separate function. As stated above, the prime reason for allocating different duties to different employees is so that a single individual is not able to influence the outcome to his own advantage. There are other benefits in separating duties in purchasing and supply management such as the cross-fertilisation of ideas and sharing of commercial expertise between the person who defines the need and the person responsible for the procurement. It is important to ensure that those employees chosen to take on such responsibilities have the competence to carry out their duties effectively. There are a number of additional tools which can be employed to support the separation of duties which need somewhat more detailed explanation than those listed above. 1. A document that outlines the procurement procedures, processes and policies (such as an ethical code including points on, for example, transparency and declaration of interest). The document should state signing limits and roles and responsibilities defined for categories such as end users and budget holders etc. In particular, the procedures should state that the purchasing and supply management function should be notified as soon as a need to purchase (something not already on contract) is identified. Ideally, this policy should be mandatory requiring compliance from all employees within the organisation. eCommerce, (and, in particular, eProcurement) is a means of enabling compliance as it automates the transaction processes and authorisation and

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Where employees choose to work outside the rules they should be reported to internal audit - CIPS does not encourage purchasing and supply management professionals to be seen to act as internal police as this could well be damaging for their relationships with their internal customers - however they should be constantly on the alert for possible fraudulent activity. Equally, if a purchasing and supply management professional is told, by his/her line manager to do something outside the procedures, or indeed anything that could be perceived as unethical, they should use influencing skills or if under duress, take it up with a senior colleague or, alternatively, with the internal/external audit function. This process should be formally documented. Having established that separation of duties is effective and desirable in a given set of circumstances it is important to identify all the potential risk/control points in a procurement process and then decide what, if any, controls should exist. Assessment should include financial and non-financial risks, including reputation and impact on brand. Appropriate cost-benefit analyses should be undertaken to ensure that any such measures are (and are seen to be!) fully cost-effective. KEY CONTROL POINTS There are many control points or parameters in the separation or allocation of duties but these can be summarised in broad terms as follows: Specification/Requisition process e.g. definition of the need - who authorises the specification/requirement/requisition? Supplier selection process e.g. who draws up tender lists, organises receipt of tenders, produces short-lists, undertakes negotiation? Contract award e.g. who decides on the successful supplier; authorises the contract or purchase order? Goods received e.g. who checks that what has been ordered and what will be paid for has been received? Payment process e.g. who authorises the payment - signs off an invoice; arranges payment including setting system tolerances?

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tolerance limits can be set to ensure purchasers can only buy within the frameworks that have been put in place. CIPS recognises however, that such policies, procedures, systems and processes are best deployed in the context of change management e.g. with effective communications, training and support. A disciplinary policy which could be the responsibility of the Human Resources Department but which sets down the processes for reporting situations which have an ethical dimension, whistle blowing and so on, and which encourages adherence to the Separation of Duties policy. A risk analysis to support the Separation of Duties policy as it identifies risk issues within the organisation such as whether employees are motivated and whether they are remunerated appropriately. Indeed, an organisation's human resource strategy, in particular its recruitment and retention policy, can support effective control processes. It can be argued that a prerequisite to the implementation of controls is the assessment of the organisation's culture, recruitment processes and its approach to the training and employee development, the argument being that the higher the calibre of the employees - the less need there is for tight controls. Rotation of duties is good practice in terms of improving job knowledge and enhancing staff flexibility and CIPS encourages purchasing and supply management professionals to employ job rotation for this reason. It can also prevent buyers getting too closely involved with their favourite suppliers and help to prevent fraud - indeed rotation of duties is sometimes brought into play following discovery of a major fraud.

However, it should be remembered that this very liaison can result in the buyer being influenced by the supplier in a variety of ways. Because of this, particular caution should be exercised in those instances where a specific supplier is being suggested or recommended to the exclusion of all others. CIPS believes that buying should normally be a team effort, that cross-functional teams should be promoted, and that one of the roles of the purchasing and supply management professional is to facilitate and encourage this. CIPS holds the view that purchasing and supply management should have Board level representation and this is usually a prerequisite to strategic purchasing and supply management. The Board is ultimately responsible for the system of internal control, usually delegating its design and operation to nominated individuals. Delegation from the Board should include an agreed definition of what each function is responsible and accountable for and any powers reserved only for them. As already stated, CIPS believes that the Board should be clearly seen to approve the Separation of Duties policy which should help to give it the imprimatur required for effective implementation. To ensure controls and their operation are in the best interests of the organisation, CIPS recommends a balanced scorecard approach. This will aid decision making and help to avoid conflicting priorities between the purchaser, the user and other functions. It will reduce instances of where policies/controls are summarily disregarded due to perceived lack of business fit, and promote flexibility and collaboration between departments. A process for exceptions to the policy should be agreed. The Separation of Duties policy and other means of controlling financial and non-financial risks should be supported by regular reviews of buyers' activities and those colleagues involved in the procurement process, by both line management and internal audit. FRAUD - SOME ORGANISATION-WIDE
CONSIDERATIONS

OTHER STRATEGIES FOR DETECTING AND

PREVENTING FRAUD AND CORRUPTION

Separating duties is just one means of preventing corruption - it may be regarded as a first step and, like many other methods, is not foolproof. There are other means of control and methods of discouraging such behaviour such as holding random audits of different contracts and procurement projects. There is also the issue of financial limits to consider when implementing controls e.g. how much each buyer can commit the organisation to. These processes should not be too onerous or complex - in particular they should not create unnecessary delays in the procurement process where an opportunity for corruption might arise. Also, they should not be too costly to implement. It is also important that the effort is proportional to the risk as it would represent a poor use of resources to put significant effort in respect of controls into very low value/low risk expenditure. Further, controls should not prevent the end user liaising with potential suppliers and enhancing their market and product knowledge.

There are a number of areas in relation to the management/prevention of potential fraud which impact particularly on the purchasing and supply management area but which should nevertheless be addressed on an organisation-wide basis. These include: Culture - a clear commitment to ethical values sends a strong message to employees on what is expected from them Competency and integrity - visible commitment by the Board An organisational structure which to supports and facilitates the monitoring of the business objectives Recruitment procedures - including the culture message in job advertisements so as to attract the right applicants

Rewards/grievance disciplinary procedures to show that compliance issues are visibly managed Appropriate training programmes LIMITATIONS OF CONTROLS It should be recognised that controls do not give certainty, merely a reasonable assurance of effective and efficient operations; internal financial control; and compliance with the relevant laws and regulations. However, it is worth remembering that such controls protect the purchasing and supply management professional as much as the organisation by providing a clear audit trail which can be used in any situation where the purchasing and supply management professional's judgement, decisions or actions are brought into question. In summary, CIPS recommends that purchasing and supply management professionals implement controls that are: Endorsed by the Board or its equivalent Economically sound and appropriate for the organisation; that is to say, they are appropriate to its culture and values. CONCLUSION There is a considerable potential for fraudulent activity within the procurement process, ranging from taking a percentage payment on a large multi-million pound contract to siphoning a few pounds from each call-off order. An organisation's reputation is at stake when problems occur as a result of an inappropriate separation of duties. As already indicated, separation of duties represents just one approach to addressing this key issue (other forms of fraud are well-known and recognised and are not itemised here). CIPS would not wish to give the impression that buyers should automatically assume that fraud is endemic within their organisations. They should however be aware that some organisations are more susceptible than others to fraudulent practices. For example, an organisation characterised by weak management tends to be more prone to fraud than one which has a more robust management style. As this practice document has shown, the separation of duties is one weapon available to combat the problem. Only circumstances can enable a decision to be made as to whether a Separation of Duties strategy should be implemented as a precautionary measure, or introduced only after the existence of fraud has been established. On the familiar principle that prevention is better than cure probably the first option is preferred, assuming of course that the inevitable costs incurred have been taken into account.

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USE OF SMALL SUPPLIERS

INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case the use of small suppliers, as they relate to purchasing and supply management. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Further information on small firms is available from CIPS. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on the use of small suppliers has been written primarily for the benefit of full time purchasing and supply management professionals i.e. those in the purchasing and supply management function. This document is one of a series summarising the CIPS view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document which supports this series entitled "Background on Purchasing and Supply Management Practice Positions". CIPS is expressing beliefs on the use of small businesses as CIPS encourages purchasing and supply management professionals to consider the use of small businesses when sourcing and aims to illustrate the issues which purchasing and supply management professionals should consider in this regard. However, CIPS is not advocating that small suppliers be selected in preference to any other size of supplier; indeed CIPS believes that good practice dictates that buyers undertake market evaluation, supplier positioning, customer preferencing and risk asessment at the outset in order to determine their purchasing and supply management strategy prior to the process of selecting any suppliers. CIPS views, opinions and beliefs are stated throughout the document; however the broad practice statements which underpin the text are as follows: x Purchasing and supply management professionals should undertake market evaluation, supplier positioning, customer preferencing and risk assessment before selecting suppliers. x Small suppliers offer a range of benefits and CIPS encourages purchasing and supply management to use them where value for money can be secured x Some approaches to purchasing and supply. management can disadvantage small firms including supplier rationalisation, programmes of standardisation and complex invitation to tender requirements - of which purchasing and supply management professionals should be cognisant and endeavour to minimise such disadvantages. CIPS encourages purchasing and supply management professionals to work with their small suppliers to develop their supply chain management expertise as part of a supplier development programme. Risk is not synonymous with small - and CIPS encourages purchasing and supply management to be less risk averse especially in relation to placing business with small suppliers. CIPS encourages purchasing and supply management professionals to ascertain the percentage of the supplier's turnover that their business may rep resent, evaluate the corresponding risk and manage this accordingly. CIPS suggests that where possible and appropriate, parent company guarantees or performance bonds may help minimise any perceived financial risks when dealing with small suppliers. Purchasing and supply management professionals should ensure that suppliers are paid on time; late payment is bad practice (without very good reason) and is particularly problematic for smaller suppliers - especially if the payments relate to a sizeable per centage of their turnover.

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This practice document is commenting on small suppliers in the UK only as there are other broader issues to consider when dealing with small firms overseas, many of which are covered in the CIPS practice document on Business Ethics. CIPS recognises that there are several definitions of small organisations available from sources such as the UK Government, EC and the CBI. For the purposes of this practice document, CIPS will employ the following definition of a small organisation. A small organisation is one with up to 100 employees and/or a turnover of up to 15m per annum. However, CIPS acknowledges that many of the points stated in this practice document apply equally to the larger category of Small and Medium Enterprises (SME's) e.g. those organisations with up to 250 employees. CIPS acknowledges that there is no single measure which will enable the concept small to be usefully reduced to numbers. In any case, simply considering numbers can be unhelpful because there is a temptation to overlook other potentially crucial differences

between companies which may be far more important. Equally, it is worth bearing in mind that a firm near the top end of a typical SME scale (250 employees) has much in common with large firms and that there are a number of other issues which concern very small suppliers. A new term - microbusiness has been coined to mean those with say, five employees and turnovers of up to 250k. Therefore this practice document should be interpreted with some measure of flexibility. CIPS believes that purchasing and supply management professionals should pursue long-term value for money and only award contracts to small suppliers when they provide value for money for that particular procurement. The selection of an appropriate supplier to meet a need is a key aspect of maximising value. SMALL SUPPLIERS IN CONTEXT Small suppliers perform a key function within the business community and within the economy as a whole. It is suggested that three key roles may be distinguished.
x x x

to append a list of those small suppliers to any invitation to tender as information for a prospective new prime supplier. However in the case of public sector procurement the need for transparency needs to be borne in mind. Standardisation Another example is standardisation i.e. the decision to buy one, or a few, type(s) of certain products or services across an organisation. This, like supplier reduction programmes, results in larger suppliers generally obtaining the business. This is because larger suppliers are perceived, not just to be better placed to handle larger volumes as stated above, but to be more stable than smaller firms. Buyers tend to have more confidence that larger suppliers can provide a whole life service e.g. they believe that there is less chance of a larger supplier with a healthy financial position going out of business. Although this applies principally to the purchase of goods it may also to some extent be relevant to the supply of services. Security of Supply Purchasing and supply management professionals are often overly concerned with security of supply - small firms, for reason of perhaps having only a short track record, non-standard quality systems, or inadequate financial accounts for instance, have been excluded for worries about continuity or security of supply. CIPS believes that, in fact, small suppliers are just as capable of meeting requirements; indeed their size and overheads often allow even greater flexibility. Small firms have to be managed like any other supplier and if there were any imminent problems the buyer should be notified of these by the supplier (indeed there should be a requirement on the supplier to do so) allowing the buyer to make alternative arrangements. Complex processes There are of course several other examples as to why small organisations have been disadvantaged, such as their lack of resources, expertise and know-how when being faced with a large and complex invitation to tender document. Small firms should not be disadvantaged in the marketplace by issues that are beyond their own control e.g. having to respond to large and unduly complex ITTs or failing to comply with a policy of having to submit three years accounts. CIPS encourages purchasing and supply management professionals to streamline their purchasing processes and offer to help any supplier struggling with the meaning or purpose of questions within an ITT. It is worth noting that the Office of Government Commerce has recently issued guidance to government departments, which emphasises the need to balance risk against potential benefits for a specific requirement e.g. relaxing the requirement for three year profit and loss accounts when selecting tenderers (two year accounts are suggested or if these are not available suppliers should provide other information to prove their financial capability). However there will inevitably be cases where, because of their limited resources, small businesses will find it

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In total number, they employ more people than large organisations They can be fruitful sources of innovation A proportion of them will later develop into the large multinational organisations of tomorrow (Microsoft is a classic example)

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For the above reasons (and there may well be others) CIPS suggests that it is worthwhile, where appropriate, supporting small businesses. WHY HAVE SMALL BUSINESSES UTILISED IN THE PAST?
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A number of reasons may be put forward, as follows: Supplier Reduction CIPS believes that some traditional approaches to purchasing and supply management, supplier reduction for instance may have disadvantaged some small firms. The purpose of supplier reduction programmes is to aggregate business and so give more business to fewer prime (i.e. first tier) suppliers in exchange for improved terms and conditions of purchase, service etc. as well as the opportunity to work on other aspects such as improved payment processes and better management information. The problem is that, in the main, only larger firms have the capacity and resources to deal with such huge volumes of business and increased service expectations. Where the prime supplier chooses not to sub-contract to smaller suppliers then disadvantage may arise (although it must be recognised that this is not always preventable due to normal commercial considerations and does not of itself constitute unethical discrimination). purchasing and supply management professionals should endeavour to provide all ethical assistance to small suppliers who find themselves targeted as part of a supplier reduction programme. With their agreement, it may be acceptable

difficult to compete for complex/larger contracts and indeed it is widely recognised that the EC procurement rules tend to be particularly burdensome for small suppliers because of their complex nature. CHARACTERISTICS OF SMALL BUSINESSES Longevity Small firms are not necessarily mean newly formed firms. There are many different types of small organisations; some are new "start-up" organisations - many of which are created for a limited period, for example, to fulfil a specific purpose to launch a new pharmaceutical product. Others have very long histories, for example small family firms established over a century ago. Composition Some small organisations, especially those in the IT sector are virtual organisations with no head office or premises. Others have a presence that forms the heart of a community employing many local people and doing businesses with other organisations in the area. Small organisations tend not to employ specialists; rarely is there a professionally qualified purchaser or supply chain manager in a small organisation. Instead, any one manager could be responsible for, for example, purchasing, stores, production and accounts payable whilst another might be responsible for marketing, sales, customer relationship management and outbound logistics. The implications of this for purchasing and supply management professionals liaising with small organisations are obvious, for instance it would not be unusual to find managers suffering from a lack of time, expertise and focus. CIPS encourages purchasing and supply management professionals to work with small firms to help to develop their supply chain management expertise as part of a supplier development programme (reference may be made to the CIPS practice document on Supplier Development). However, as with any supplier development programme - serious consideration of suitable suppliers should be undertaken before any planned strategic corporate development programmes are put in place. The investment potential of small companies which show innovative promise should also not be ignored. One of the implications of managers multi-tasking and there being no defined structure to the organisation is that they may not be able to achieve industry standards such as ISO9000 which are often one of a buyer's criteria for supplier selection. Market Share Small businesses tend not to have a large market share unless they have a very specialist or niche offering e.g. software. Indeed, purchasing and supply management professionals have traditionally employed small firms on the basis that they have offered a "niche" product or service i.e. one that is not readily available elsewhere or one that is unique in quality or characteristics. CIPS has referred to such suppliers as "value-add sectoral organisations".

Financial Backing Small firms tend to be independent, privately-run organisations and this, coupled with small turnovers, has tended to make purchasing and supply management professionals perceive them as a fairly risky option compared to a larger firm offering a similar product or service. This has been compounded by the fact that private firms tend to be less transparent about their profitability and financial standing. Sometimes small businesses have a parent company or some other means of financial support; in such a scenario CIPS would encourage purchasing and supply management professionals to obtain parent company guarantee if they are committing substantial business to the small organisation. Another method would be to obtain a performance bond from the small organisation with the responsibility for funding a bond resting with the supplier. Cash Flow Purchasing and supply management professionals need to be aware of the importance of cash flow to small firms. They should ensure that they agree, and do not impose, suitable payment terms with small suppliers and they should ensure that their organisation complies with these. Shorter than normal payment periods may be appropriate, as may stage payments, or pump priming for certain projects. In spite of the Late Payment legislation (Late Payment of Commercial Debts (Interest) Act 1998), irresponsible organisations still postpone payment. CIPS believes that late payment, without good reason (in the case of defective goods for example) is unprofessional and is a practice that purchasing and supply management professionals should endeavour to rectify. Economies of scale Small organisations do not have the benefits of economies of scale enjoyed by larger organisations and consequently their input costs can sometimes be higher, especially if their procurement is being undertaken in a non-professional manner. This is an obvious example of where purchasing and supply management professionals can help small firms by for example, encouraging collaborative purchasing. (Competition law is unlikely to be a barrier here but its provisions should nonetheless be noted.) Capacity The capacity of any firm to carry out a particular contractual requirement has, of course, always been a key concern of the purchasing and supply management profession. CIPS believes that small firms are no worse positioned that any other organisation in respect of the buyer having to ascertain their capacity during a supplier appraisal process. The point is, as with any supplier appraisal process, the full capacity of the firm has to be determined, along with their current and expected commitments - so that the spare capacity available for the contract in question can be determined. This may or may not be sufficient, but it is not necessarily a function

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of the size of the firm; a large company may well have insufficient spare capacity to meet the specific requirement at any one time.

Being a key customer of a small supplier provides greater leverage than being a medium customer of a large supplier and may give benefits that overcome a possible cost difference. On the other hand, although the direct costs of smaller suppliers may be higher, this is often offset by a lower level of overhead. Balancing Risks All procurement, including the selection of supplier, involves managing risk. Risks relating to procurement are numerous and beyond the scope of this document to list exhaustively but might include for instance, financial risks such as the possibility of a supplier going into liquidation and security of supply. It is the buyer's professional responsibility to balance the risks against the benefits to ensure the best value for money. Boards of many companies have in recent years responded to increases in competition by exhorting their staff to take more carefully considered risks to increase returns and ensure the survival of the organisation in an uncertain world. Purchasing and supply management, no less than any other function, must demonstrate that it can rise to this challenge. A key element in procurement risk is the choice of supplier and a key factor in this risk is the size of the supplier. All suppliers of whatever size carry risk but the level of risk will vary depending upon the size of supplier. There is a perception that large suppliers are less of a risk in some ways, such as financial risks, than small ones but this is not necessarily the case. While large companies perhaps experience less bankruptcy, this can be balanced by the fact that large companies are more inclined to reorganisation and rationalisation. Equally, as was stated earlier in this document, small suppliers can often offer greater assurances about security of supply. CIPS encourages purchasing and supply management professionals to be less risk averse and, where it makes sense to do so, to enable smaller firms to bid for larger pieces of business. Risk is not synonymous with small - many large organisations have unexpectedly gone into receivership or liquidation. Larger organisations are also more susceptible to mergers, acquisitions and take-overs. It is however important to bear in mind that risk is just one of a number of factors and may not be appropriate for consideration in all situations. One approach for developing a policy on the use of small suppliers is to think of the purchasing and supply management four box grid which has risk on the vertical axis and value on the horizontal axis. R High Security Bottleneck Ad hoc Low Low High

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Management CIPS suggests that small firms demand a closer working relationship with the customer, to the mutual benefit of both organisations. This is good contract management and should be undertaken irrespective of the size of the firm but in fact it is often neglected by purchasing and supply management professionals when dealing with larger firms in the belief that they are always competent; this however is not always necessarily the case. purchasing and supply management professionals should be prepared to spend time with the small organisation, providing feedback and suggesting improvements. Price Small firms may not be the cheapest but may add value in different ways. If the selection decision is largely based on price, often small suppliers would not win the business. CIPS encourages purchasing and supply management professionals to evaluate the whole package when evaluating a supplier's offer, irrespective of their size, as CIPS believes too many purchasing decisions are primarily based on price. Benefits of Dealing with Small Firms CIPS encourages purchasing and supply management professionals to have an open mind to employing small firms. There are many benefits to be gained by placing business with small firms, especially if they are niche suppliers - they often have excellent research and product development facilities which provide their competitive advantage and from which the purchasing organisation can also derive benefit. Small organisations are generally more responsive to the value of the contract and this makes the buyer a preferred customer - the reverse of what is frequently the case as far as large firms are concerned. Due to their size, small firms have fewer customers and they are thus more inclined to provide a higher quality service and are more concerned about the risk of losing the business. This makes them more receptive to suggestions and improvements and probably more willing to work with their customers on supplier development programmes. They are also better prepared to provide a more personal service, an important element in maximising competitive advantage. Small businesses have fewer staff and therefore shorter command structures; this makes communicating with their decision-makers much easier and it makes implementing change more straightforward. Further advantages of small companies over their large company counterparts include innovation, flexibility/influencing, shorter lead times and logistic chains.

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Small suppliers are often considered for the bottom two boxes and the top right box, subject to capacity and value for money and so on. CIPS would also encourage purchasing and supply management professionals to consider small firms for the top left box provided, as with any sourcing activity, risks are properly evaluated. Because of their specialist niche capability small companies often find themselves in the high risk boxes of the portfolio analysis. The purchasing and supply management professional needs to be aware of this and manage the situation with care.

The UK Government is backing the EU in its programme to assist the development of small firms. CIPS believes that such action, supported by the work of organisations such as the Federation of Small Businesses, the regional work of the CBI, the Regional Supply Networks and the Local Chambers of Commerce will continue to raise the profile and opportunities of small businesses. Indeed, it has been suggested that small local/national organisations are becoming increasingly successful due to current global economics and politics that are breaking down traditional supply chains previously dominated by large organisations. Purchasing and supply management professionals need to be aware of the benefits which can flow from entering into trading relationships with small firms including personal service, flexibility, innovative capacity, and the ability of small firms to supply goods and services which may not be readily available elsewhere, or, if they are available, may involve long lead times or other forms of inconvenience. This is not to say of course that the purchasing professional should automatically give preference to small firms in any sourcing decision which he/she may have to make. As this document has shown, the appropriate purchasing skills need to be exercised, so as to ensure the optimum purchasing decision is made in any given set of circumstances.

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CIPS suggests that one way to test the ability of a small firm to meet a requirement would be to dual-source in the first instance before moving, as appropriate, to a single-source, or even partnering type, relationship. CIPS advocates that purchasing and supply management professionals should be responsible when encouraging small suppliers to grow and meet their needs. CIPS recognises the importance of creating markets and developing suppliers so that they are able to meet a need that currently cannot be met within the marketplace. Equally when partnerships, or even backward integration (buying the supplying organisation), are required to enable the smaller firm to move nearer to the customer, as is the case with some automotive manufacturers and other organisations which have implemented Japanese purchasing principles - CIPS would expect purchasing and supply management professionals to undertake responsible contracting and engage in the supplier development process. Responsible contracting includes ensuring that longer term business relationships in particular have appropriate exit strategies so that in no circumstances is a small firm's (or indeed any size firm's) financial integrity damaged to such an extent that their business subsequently fails when the contract expires. CIPS recommends that purchasing and supply management professionals carefully evaluate by means of a thorough assessment the amount of a supplier's turnover their business represents. OGC guidance states the percentage of turnover an individual organisation's business represents should not be more than 40% in any one year. CIPS has chosen not to be prescriptive in this regard but advises purchasing and supply management professionals to understand the risks associated with awarding contracts of a higher percentage. Another aspect of good practice is to ensure that a risk analysis is undertaken if a supplier is dependent upon less than four key contracts. CONCLUSION Small firms play a more significant role in the business environment and in the economy as a whole than is often realised. CIPS encourages purchasing and supply management professionals to avoid the concept of 'big is best' and analyse the options carefully so as to arrive at appropriate conclusions for their businesses.

SUPPLIER RELATIONSHIP MANAGEMENT

INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case Supplier Relationship Management (SRM), as they relate to purchasing and supply management. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Further information on SRM is available from CIPS. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on SRM has been written primarily for the benefit of full-time purchasing and supply management professionals. This document is one of a series summarising the CIPS view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document which supports this series entitled 'Background to Positions on Purchasing and Supply Management Practice'. CIPS is expressing beliefs on SRM as this activity has been mentioned in many previously written positions on practice and is becoming fundamental to effective purchasing and supply management. CIPS views, opinions and beliefs are stated throughout the document; however the broad practice statements which underpin the text are as follows: SRM is a key skill of purchasing and supply management professionals and one that should be acquired CIPS encourages all purchasing and supply management professionals to take the necessary steps to ensure they have SRM skills Purchasing and supply management professionals should ensure that those who do not have SRM skills are not expected to manage supplier relationships The purpose of investing in a relationship with a supplier is to improve their performance in fulfilling the needs of the buying organisation, thereby improving the buying organisation's performance and creating mutual benefit Performance management, and managing the relevant changes to improve that performance, is at the core of SRM Purchasing and supply management professionals must be able to understand and deploy power and dependency factors in supply chains and buyer/ supplier relationships The purchasing and supply management function should utilise appropriate tools to gain an understanding of the supplier's perspective of the buying organisation CIPS believes the role of the purchasing and supply management professional is to be the custodian of the supply base thereby ensuring that internal customers are satisfied with the service from suppliers WHAT IS SRM? CIPS defines SRM as the process for managing the interaction between two entities - one of which is supplying things to the other entity. SRM is a two-way process in that it should improve the performance of both the buying organisation as well as the supplying organisation and hence be mutually beneficial. It involves proactively developing relationships with particular suppliers. A managed relationship is one in which both parties are sufficiently familiar that they each know how the other will react; the relationship is predictable. The purpose of investing in a relationship with a supplier is to improve the performance of the latter in fulfilling the needs of the buying organisation. Equally, the buying organisation may have to implement changes in order for the supplier's performance to improve. Performance management, and managing changes to improve that performance, is at the core of SRM. (Measuring the Performance of Suppliers is the subject of a separate practice document.) Relationships with suppliers vary in intimacy - even those that are proactively managed. A relationship can be deliberately arms-length but nevertheless cordial when there is no business benefit in developing it further e.g. a supplier of relatively low-value items required on an irregular basis with minimum risk in respect of, for example, security of supply. At the other extreme, relationships can be close, long-term and enacted on a partnering basis as may be appropriate in high-value, high-risk projects such as joint ventures (reference should be made to the practice document on Partnering).

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Whilst CIPS encourages SRM, it can be a resource-intensive process that should only be undertaken when measurable value can be extracted from the relationship. It is important to bear in mind that for any given supplier there may be differences in perception of the relationship by the purchasing and supply management function on the one hand, and for example, endusers on the other. SRM is a structure and a process that brings all of the players together to identify, plan and deliver measured improvements based on agreed objectives. CIPS' view is that the purchasing and supply management function should be the facilitator and focal point of supplier relationships and the manager of the overall SRM process. For example, the purchasing and supply management function will be responsible for ensuring that all suppliers act at all times in accordance with the CIPS Code of Ethics. KEY SKILL CIPS has advocated for a long time that SRM is a key skill of purchasing and supply management professionals. They should have, in addition to the core purchasing and supply management technical expertise, the following skills as they apply to SRM: interpersonal skills listening skills presentation skills persuasion skills diplomacy skills motivational skills arbitration skills emotional intelligence/intuition skills project management skills facilitation skills performance measurement skills. SRM skills can be acquired or learned through training and CIPS encourages heads of purchasing and supply management to develop their purchasing and supply management colleagues' job profiles in this respect. In some cases the purchasing and supply management function cannot be responsible for managing all commercial relationships with suppliers and so SRM is undertaken by other colleagues. In such circumstances it is important that purchasing and supply management sets the tone and expectations of the relationship and becomes involved at critical points in the course of the contract. This may take the form of the honest broker who is impartial, particularly if the relationship becomes unsound at any point. PRE-CONTRACT PHASE The proactive process of managing a relationship begins at the pre-contract stage and involves the careful selection of the appropriate supplier based on an analysis of market information. From the outset purchasing and supply management professionals must be aware of the impact of power and dependency in buyer-supplier relationships. Equally, CIPS encourages purchasing and supply management professionals to

be aware of the way in which their organisation will be perceived and managed by suppliers under CRM (Customer Relationship Management). CIPS recommends that purchasing and supply management professionals employ a range of tools, one example being customer preferencing analysis, in order to establish, as far as can be ascertained, how a potential supplier perceives the buying organisation. It is highly advantageous if the supplier regards the buying organisation as core in terms of the relative value of the business and the attractiveness of the account. Customer Preferencing Attractiveness of Account High Development Nuisance Low Low High Core Exploitable

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Relative value of Business Of equal importance, and an activity which should have been undertaken at the outset as part of the strategic sourcing exercise, is the supply positioning process - following which a strategy can be developed to build an appropriate relationship (reference should be made to the practice document on Strategic Sourcing). Supply Positioning High Bottleneck Risk Strategic Critical

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Tactical Acquisition Low Low Value

Leverage High

For example, if the buying organisation's requirement is Strategic Critical and the supplier perceives the organisation as Core then there is potential for an intimate relationship where both parties are prepared to invest equal resources. On the other hand, if the supplier perceives the buying organisation's Strategic Critical requirement as Exploitable then the purchasing and supply management professional would have to take great care and preferably search for a new supplier or undertake extensive supplier conditioning in the hope of making their business appear more attractive. Detailed guidance on the application of these techniques is available from CIPS. CIPS strongly recom-

mends that such details about the buyersupplier relationship be carefully considered in advance as there are many unfortunate, and in some cases high-profile, examples of where projects have failed due largely to the lack of clarity when setting up the relationships in the first place. The supply positioning technique is an appropriate method of determining the extent to which relationships with different suppliers need to be managed i.e. the resources that should be invested in the relationship. Purchasing and supply management professionals should concentrate on the Strategic Critical, Bottleneck and Leverage areas, usually in that order of priority. SRM is about determining the relationship that the buying organisation has with the supplier in question, what type of relationship it would prefer or requires, and developing a situation that leads to the desired relationship. Another issue to consider when evaluating suitable suppliers with whom to develop a close relationship is culture; it is essential that there is a cultural fit between the buying organisation and the selected supplier. This is because norms and values affect behaviour and attitude and therefore need to be compatible between the two (or more) parties. CONTRACT PHASE Irrespective of the type of relationship between the buying organisation and the supplier, the relationship should be underpinned by a contract. The contract should be clear and professionally written. It is the purchasing and supply management professional's responsibility in liaison with legal advisers to ensure their organisation is adequately protected from litigation. It should be of benefit to both parties and agreed on a win-win basis (albeit not necessarily on a 50:50 basis). CIPS advocates that contracts be formed with the objective of continual improvement and therefore the aspirational aims of both parties should be established. It is the fulfilment of these aims, and the development of mutual trust, that helps enable a relationship to become more established. It is important to have the performance expected from the supplier defined clearly in the contract in terms of a performance definition or description. The contract documentation should be constructed so that new players can manage the relationship should the need arise. The purchasing and supply management professional should be integral to the decision regarding the extent to which commercially sensitive information about the organisation can be shared with the supplier - ensuring confidentiality agreements are set up as appropriate. CIPS has long advocated the importance of exit strategies in contracts and these should provide an appropriate escape route should the relationship begin to founder.

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SUPPLIER MANAGEMENT PHASE Although relationships are often said to exist between organisations, they are more often than not a personto-person relationship. Relationships exist between buying organisations and all their suppliers even if it is simply a case of both organisations' Accounts staff discussing invoice issues, or order placers expediting deliveries. In terms of SRM it is imperative that the people representing both parties who manage the contract post-award can work comfortably together. A relationship cannot easily be managed without mutual respect and ideally, the people involved liking one another. Where the relationship chemistry is wrong the relationship is usually more susceptible to failure. However, one hallmark of a professional buyer is his/her ability to establish and maintain effective working relationships even with those he/she has no great liking for. An important consideration, during the selection process, is to meet the team who will be assigned to the contract; in many cases the sales and marketing team conduct the pre-contract presentations and subsequent negotiations and then introduce other people to manage the contract. CIPS has repeatedly advocated the importance of meeting prior to contract award, the people with whom the buying organisation is to be working. Equally, CIPS has recommended that there be a contractual requirement for the buying organisation to have an active part in the supplier's selection of a replacement contract manager(s) should the person originally identified then move on to another role. Another issue that purchasing and supply management professionals should be mindful of is that relationships are dynamic and change over time. This is why the contract should include relationship assessment criteria that both parties agree are fundamental to the contract. In particular, the power relationship alters, especially if the buying organisation becomes increasingly dependent on the supplier. Equally, the supplier may prefer to allocate its best resources to a more attractive account at some point during the contract duration - it is issues such as these that the person responsible for managing the supplier relationship should be aware. CIPS believes the role of the purchasing and supply management professional is to be the custodian of the supply base, thereby ensuring that internal customers are satisfied with the service from suppliers. However, it is good practice to investigate complaints from internal customers before raising it with suppliers as sometimes the fault may lie with the buying organisation and so some measure of diplomacy may be required. It could be argued that relationship management is the art of effective purchasing and supply management which supports the science of using appropriate strategies, tools and methodologies.

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CONCLUSION Purchasing and supply management is increasingly about the procurement of services; even if the contract requirement is actually for supplies - customers expect a professional service and this is at the heart of the SRM process. SRM is an emerging field in purchasing and supply management - but it can be argued that relationship management is equally applicable to the relationships between the purchasing and supply management function and its internal customers and stakeholders. CIPS suggests that the skills are fundamentally the same for both types of purchasing and supply management constituents and can be applied accordingly.

LINKING STRATEGY AND PURCHASING

INTRODUCTION CIPS practice documents are not written to be an end in themselves. They are a collection of views on good practice within a particular subject area, in this case linking purchasing to strategy, as it relates to purchasing and supply management. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Further information on strategy is available from CIPS. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs has been written primarily for the benefit of full-time purchasing and supply management professionals. This document is one of a series summarising CIPS' view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document, which supports this series entitled "Background to CIPS Positions on Practice". CIPS is expressing beliefs on linking purchasing and strategy in order to encourage the development of the purchasing and supply management contribution to corporate strategy. CIPS considers that the key roles, characteristics and objectives of the purchasing and supply management function with respect to the implementation and development of a corporate strategy, whether it is in industry, commerce, public service or in a not-forprofit organisation, are as follows:

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To maximise its contribution to corporate wellbeing, it is essential for all members of the purchasing department to have an in-depth appreciation of the strategic objectives of the organisation and how purchasing and supply management can contribute to the achievement of corporate goals. Purchasing and supply management professionals should have the ability to analyse the corporate plan in such a way that they are able to generate objectives and opportunities for the purchasing department. At its interface with both internal and external customers, the purchasing and supply management function in private enterprise is in a unique position to promote brand names and maximise market share. Purchasing and supply management professionals possess sound commercial skills which can be of benefit to the organisation as a whole - in the development of joint ventures, for example. Purchasing and supply management professionals should in general be supportive of change where it can be seen to be of benefit to the organisation Effective communication is critical to the success of any strategy.

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DEFINITIONS An organisation usually has a corporate vision - a 'North Star' - something it is aiming for and which is often aspirational. The vision is then supported by the mission that is a realistic aim over a reasonable time-scale, being reviewed, typically, every 3-5 years. This however is not realistic in the case of those organisations that undertake changes in the corporate structure two or three times a year, thereby making such missions redundant. To support the mission, functions within an organisation often have objectives or goals with timescales of approximately 12 months. The purchasing function should be no exception. The goals should be SMART in that they are Specific, Measurable, Achievable, Realistic and Time-bound. The relevant strategies are then developed and perfected to ensure achievement of the objectives. Policies, although not cast in stone, generally are of long duration and are updated every 3-5 years. They reflect the ethos of the organisation and are a key aspect on which purchasing and supply management is able to exert an influence.

To ensure that as far as possible procurement strategies are in harmony with the time-scales and objectives of the corporate plan. The purchasing and supply management department should be quick to capitalise on those occasions when, due to external politico-economic factors, directors are particularly aware of the impact which sound purchasing techniques can have on the bottom line. An effective purchasing and supply management department, staffed by fully-qualified professionals, is in a strong position to influence corporate behaviour.

It is important to avoid, or at least minimise, problems arising from mismatching time-scales. One of the key responsibilities of purchasing and supply management professionals is to be aware of (and if necessary draw to the attention of the relevant people within the organisation) cases where procurement strategies are at variance with the time-scales of the corporate plan as a whole. Notwithstanding the above, CIPS acknowledges that different terminology is used interchangeably and often inconsistently within the sphere of organisational strategy, with terms like policy, objectives, procedures and indeed the term strategy itself often being confused. The situation is not helped by the fact that strategy comes in a variety of forms. Thus, there are various levels of strategy such as the eProcurement strategy and how that feeds into the purchasing and supply management strategy. There are also strategies for a particular category of spend or for a project. These are often termed contract strategies, category plans, procurement strategies, commodity strategies which are actually individual plans for particular procurement projects. It can be argued that these are tactical plans. Sometimes such tactical plans generate and influence organisational strategy by means of backward integration i.e. acquiring the supplying organisation. EXAMPLES OF CORPORATE GOALS These are relatively few in number, but typically include: For profit-driven organisations: Increasing profitability Developing the business Staying independent Safeguarding the organisation's future. For public bodies or non-profit making organisations: Achieving improvement and value-for-money in public services Promoting democracy and/or political objectives (central and local government) Promoting certain values or causes (e.g. Commission for Racial Equality, Countryside Commission, charities) Protecting people (health, social care, armed forces and emergency services). For a company whose goal is to maximise profitability, strategies might include: Cutting manufacturing and distribution costs Removing unprofitable lines Being lean and mean Developing new, more profitable products Getting rid of unprofitable customers Selling the existing profitable products into new markets.

An organisation with the primary goal of expanding the business might: Grow through merger and acquisition Sell existing products into new markets/sell more of existing products in new markets/sell new products into existing markets/sell new products into new markets Reduce prices so as to sell more. A public body whose goal is to achieve improvement in public services might: Seek to optimise the use of resources to maximise the benefit Improve efficiency and eliminate waste Invest in infrastructure and new technology Recruit, train and develop its people. The examples below reiterate some of the typical goals of an organisation and indicate what procurement strategies are appropriate for achieving those goals. Cutting manufacturing and distribution costs The relevant procurement strategy is to reduce supply chain costs Cutting out unprofitable lines The procurement strategy is to negotiate the organisation out of existing supply contracts for materials or services that support those lines. Improving efficiency and eliminating waste Rationalising support roles so that core activities focus only on clear prime objectives. The procurement strategy is to consolidate procurement to ensure learning and best practice is shared. INTEGRATING
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An organisation's individual functions such as purchasing and supply management, marketing, operations and human resources then generate their own objectives that support and align with the organisation's corporate objectives and strategies. These must also dovetail with each other so that the purchasing and supply management objectives align with those of operations for instance. Purchasing and supply management strategies should be visible and demonstrable. A Balanced Scorecard approach is recommended to ensure consistency across the organisation (Kaplan and Norton, 1996). It can also be argued that in times of increasing organisational change, the objectives of an organisation must be integrated carefully to ensure that it remains focused on the central strategic objectives. In private enterprise, purchasing and supply management is in the unique position of working with both internal customers (colleagues) and with the customer base; this is the essence of supply chain management. Professionalism in purchasing, with its ongoing external trading relationships, is key to supporting and/or enhancing the brand; sometimes this can be the only differentiating factor between companies.

In some cases, (retail organisations for example), purchasing and supply management is the core revenuegenerating part of the organisation. Sometimes purchasing and supply management is the only constant in a changing organisation maintaining professional practices whilst at the same time responding to the changing needs of the business. Purchasing and supply management professionals have sound commercial skills that should be applied across the organisation. CIPS encourages purchasing and supply management professionals to work with marketing and sales in teaming and bid preparation activity and with senior management when considering joint ventures - these are just two commercial activities where purchasing and supply management skills can be applied to good effect. In essence, purchasing and supply management must be aligned, and remain aligned, to the organisation's corporate objectives. PURCHASING AND SUPPLY MANAGEMENT FUNCTION - RESPONDING TO CHANGE As a guiding principle, purchasing and supply management professionals should accept and encourage change where it can be seen to be beneficial to the organisation. No organisation is an island and as such it will have to continually react and respond to markets. However, it is difficult to keep purchasing and supply management strategy on track when organisations frequently and rapidly change direction. An added practical problem is that it takes time to change objectives and so it is not unusual for purchasing and supply management strategies to be out of tune with corporate strategies. Such strategy must therefore be capable of being easily and swiftly communicated, and purchasing and supply management strategies made flexible. In such circumstances, purchasing and supply management professionals should not waste time in developing and perfecting strategy documentation. For example, if the organisation determines that it is in the business of bringing new products to market ahead of the competition, then purchasing and supply management may have to sacrifice cost savings at the expense of focussing on innovation in collaboration with the supply base. This accords with the CIPS view that purchasing and supply management never was and never could be about cost savings alone. Further, strategies are sometimes emergent in that, for example, a supplier generates innovation that the buying organisation had not predicted and so has to respond in a strategic and opportunistic fashion. Projects are often considered part of programme management that, as a function, is sometimes external to purchasing and supply management. In such scenarios, purchasing and supply management professionals should ensure they can contribute to bringing projects to an effective conclusion (i.e. on time and within budget).

Strategy development also varies with factors such as the size of the organisation, the sector it is in, the maturity of the organisation and the maturity of the markets in which it operates. THE
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Purchasing and supply management professionals have long attempted to influence corporate objectives and strategies and in some cases have secured a place on the Board or its equivalent. Unfortunately, the power to influence is usually correlated to the status of the head of purchasing and supply management, with the purchasing and supply management function as often as not being perceived as not being as "professional" as the finance or legal functions, for instance. Similarly, issues such as an unattractive office location can affect colleagues' perception of the status and importance of purchasing and supply management. The question of to whom purchasing and supply management reports is often key to its status and influencing power. This is not just a question of whether it is the Director of Finance or Director of Public Affairs but whether that person can be persuaded as to the potential contribution of purchasing and supply management. Equally, when key people that have been convinced of the importance of the purchasing and supply management contribution leave the organisation, the purchasing and supply management function often has to start the self-promotion cycle again. In general, Boards are only interested in specific purchasing and supply management projects that are on their agenda, for instance if they are concerned about surging oil prices - the fact that purchasing and supply management has had the foresight to hedge for oil prices, the Board is interested as it saves them substantial costs. Purchasing and supply management should maximise any opportunity such as this, when the spotlight is on them, to promote their contribution to the organisation. Specifically, if purchasing is able to secure the support of the Board in a particular project which goes well then a level of trust may often develop, which could well result in purchasing being approached by the Board on a subsequent occasion when for instance a new marketing initiative could be under consideration. A
LEADING ROLE FOR PURCHASING AND SUPPLY

CIPS P OSITIONS

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MANAGEMENT PROFESSIONALS

It can be argued that once purchasing and supply management professionals become Board Directors, they should no longer have an operational role. The point is that in some cases it is preferable to have a representative on the Board who is sympathetic to purchasing and supply management and can therefore influence Board business accordingly. This is particularly powerful when that individual has at some point been seconded to purchasing and supply management.

An effective purchasing and supply management department, staffed by fully qualified purchasing professionals, is in a strong position to influence corporate behaviours. As purchasing and supply management is the key interface with the supply market it is in a position to influence behaviours by policies on issues such as ethics and sustainability. By ensuring that the entire organisation behaves professionally and responsibly in respect of the supply market, purchasing and supply management can elevate the organisation's status with its suppliers.

Purchasing and supply management professionals should be able to take the corporate plan and dissect it so as to generate objectives for purchasing and supply management. By being aware of the macro environment purchasing and supply management can remain ahead of the game - in other words, be proactive rather than reactive to change. The purchasing and supply management function needs a range of business competencies to ensure that it remains alert to such developments. Key to this is the CPD (Continuous Professional Development) concept whose value is underestimated by many organisations. The management of emergent strategies is eased by purchasing and supply management networking with colleagues i.e. remaining close to the business. Walking around the organisation, with specific objectives (discussing market trends for example) weekly cascade meetings (reinforced by conventional face to face meetings) can help. In cascade meetings ideas are cascaded upwards from managers and departments to the Board and then downward immediately after the Board meeting. Forecasting, probability models etc. can assist with the management of emergent strategies as they encourage proactive thinking and planning. Risk assessment is a key purchasing and supply management skill and is fundamental to the management of emergent strategies. Market intelligence is required across the whole supply chain; research is key to this knowledge. Performance-related pay is one method of focussing buyers' activities on the corporate agenda. However such initiatives are no substitute for the expectations of best behaviour which really good companies ensure are embedded in their activities; in fact in some cases it can be counterproductive. CONCLUSION As this position paper has demonstrated, purchasing and supply management has a pivotal role to play in the formulation and evolution of an effective corporate plan; indeed CIPS would suggest that it can be unwise to develop such a plan without the active involvement of purchasing. By definition this means close co-operation and regular discussions with members of the Board and it is essential therefore that the purchasing department is seen as an efficient function within the organisation, staffed by qualified professionals. Whilst it is not being suggested that efficient purchasing is simply about cost savings, experience has shown that an efficiently run purchasing function is able to make a significant impact on the achievement of corporate strategic objectives. REFERENCE Kaplan, R. S. and Norton, D. P. (1996) The Balanced Scorecard: Translating Strategy into Action, Harvard Business School Press

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There is an issue about corporate governance and risk management in that this is fundamental to an organisation's corporate strategy and a particular aspect that purchasing and supply management can influence and/or contribute to. There is a view that strategy development is a responsibility of a few very senior people within an organisation and everyone else deploys that strategy. Whatever the status of strategies, the key point is that they must be effectively communicated; this can be achieved by various means (intranet, email, written documents, presentations, etc). Purchasing is able to make an effective contribution to corporate strategy but only if purchasing and supply management professionals ensure their entire team has a detailed understanding of the strategy and those to whom the strategy is communicated are able to understand and support it. It is important for it to be communicated upwards and downwards in an organisation so that all levels of staff understand both what it means and what its impact on them will be; it also needs to be communicated across the organisation thereby ensuring that the various departments or functions do not operate in isolation from each other. Purchasing and supply management professionals must therefore:

CIPS P OSITIONS

learn to articulate; develop communication and interpersonal skills e.g. skills of persuasion learn to give a reasoned argument learn how to segment, target and position communications within the organisation - one single email to all is ineffective learn to write good workable strategies, policies and processes learn to give effective presentations learn what interests the Board learn how to impress and influence the Board understand how to interpret messages from the top i.e. not be distracted by political agenda act as the internal expert on markets and their behaviour; this is important to an organisation even if no one else realises it.

SUPPLIER MISTAKES
INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case supplier mistakes, as they relate to purchasing and supply management. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Further information is available from CIPS. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on supplier mistakes has been written primarily for the benefit of full-time purchasing and supply management professionals. This document is one of a series summarising the CIPS view(s) on a wide range of subjects. The reader may wish to refer to the accompanying document which supports this series entitled Background on Purchasing and Supply Management Positions on Practice. CIPS is expressing beliefs on this subject as inevitably suppliers do make mistakes from time to time and purchasing and supply management professionals find themselves in the dilemma of having to decide how best to handle the situation. The CIPS Professional Practice Team receives regular queries on this issue and so this belief statement has been produced to summarise CIPS' position on it. CIPS views, opinions and beliefs are stated throughout the document; however the broad practice statements which underpin the text are as follows: Purchasing and supply management professionals should adopt a professional and understanding approach to the supplier when a mistake is brought to light (unless of course it becomes apparent that the mistake is not a mistake at all but a deliberate attempt to gain unfair advantage) Purchasing and supply management professionals should search for anything that looks odd or unusual in a supplier's offer and seek clarification (through a variety of means identified below) prior to contract award The best commercial relationships are founded on good human relationships rather than simply on hard and fast contracts Purchasing and supply management professionals should try to resolve mistakes identified post contract award themselves, subject to the degree of complexity and implications, without the need to involve lawyers There is no rule of thumb for dealing with mistakes post - contract award as this preferred approach depends on a number of variables (identified and discussed below) however several principles of good practice should be adhered to including for instance - investigating the mistake impartially; behaving ethically; generating options for resolution Purchasing and supply management professionals should also be mindful of mistakes made by themselves or by their organisation when dealing with suppliers' mistakes. WHAT IS A SUPPLIER MISTAKE? 'Mistake' in the legal sense is used in the context of contract law as one of the ways in which a contract may be rendered invalid (see below). However, the CIPS definition of mistake as 'a non - deliberate error' is much broader and more generic. CIPS does not consider a mistake in this sense to be the retrospective perception of a project that has been inadequately fulfilled of which there are many examples. On reflection such cases are often referred to as "mistakes" but for the purposes of this practice document the type of mistake being referred to is for example, the supplier submitting an incorrect price in their tender. Another example would be the supplier's representative agreeing to do something that could not be supported or carried out by their organisation. The general common law rule is that a mistake made by one or both parties in making a contract has no effect on the validity of the contract. However, where the parties contract on a fundamental mistake of fact, the contract may be void if: a) the mistake is one of fact, and not of law or opinion, and b) the mistake is so fundamental as to negate the agreement 'For a mistake to be operative it must exist at or before the time when the contract was made' (Redmond, (1990) although doubtless many other authors and researchers have commented in similar vein). It is important to bear in mind that those mistakes which lead to contractual problems where direct and indirect costs are incurred and need to be paid by someone are obviously far more difficult to resolve and may well have the greatest impact.

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Supplier mistakes may be classified as either pre- or post-contract.

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SUPPLIER MISTAKES IDENTIFIED PRE-CONTRACT When evaluating offers submitted by suppliers, the purchasing and supply management professional should search for anything that looks odd or unusual that could be a mistake; and these should be clarified with the supplier. This activity must be handled carefully as, for example, if a supplier has submitted an abnormally low price they may well have identified an innovative and cost - effective method of delivering the requirement and be encouraged to revise their quotation upwards to the obvious detriment of the buying organisation. On the other hand, it is most likely that they have misunderstood the requirement or submitted an incorrect quote i.e. not what they had intended. One way of dealing with such a scenario is to contact the supplier and ask them what it is they believe they are quoting for; this will clarify the position on both sides. CIPS recommends that the purchasing and supply management professional goes through the preferred offer, section by section, with the supplier's representative, irrespective of whether or not negotiation is taking place. It can be argued that one purpose of an order form, or contract acceptance, is to confirm what has been agreed but CIPS recommends seeking clarification wherever possible prior to contract award. CIPS strongly recommends that when the purchasing and supply management professional is negotiating and agreeing contracts with suppliers that they ensure that the supplier's representative is in a position of empowered authority and has all the correct facts and figures at his/her disposal. This practice should minimise the frequency of mistakes made by suppliers. Terms and conditions of contract are drawn up on the basis of the experience of past mistakes and so protect the company against similar mistakes happening again. A common error is for both parties to assume the other party is responsible for the risk involved in delivery i.e. loss, theft, damage, etc. CIPS recommends therefore, that for all substantial contracts, the purchasing and supply management professional goes through the terms and conditions of contract with the supplier to ensure understanding and agreement on both sides. Similarly, suppliers should be invited to inspect the site, as appropriate, and be advised on the buying organisation's health and safety policy, insurance and indemnity policies so that the supplier has a clear understanding and acceptance of their obligations.

Some kind of conference or meeting for tenderers may also be set up, enabling them to be fully briefed on the proposed terms and conditions, informed about the scope of the project, and shown round the site. Experience suggests that suppliers will be careful not to give away their good ideas to the competition but at least they will all have been given exactly the same information and hopefully all possible misunderstandings will have been eliminated; this saves time and effort later. Further points which the purchasing and supply management professional might like to bear in mind are as follows: Care needs to be taken to avoid giving signals which the supplier might interpret as a 'green light' for raising prices A supplier who makes small mistakes at regular intervals should perhaps be addressing and reviewing the relevant procedures within his organisation Experience indicates that the best commercial arrangements are founded on good human relationships rather than simply on hard and fast contracts seeking to protect respective interests in case of breach Clearly identified mistakes pre-contract are best dealt with through a clarification process. SUPPLIER MISTAKES IDENTIFIED POST - CONTRACT CIPS recommends that when suppliers have made a mistake which comes to light after the contract has been let, the purchasing and supply management professional should try to resolve it, subject to complexity and implications, in the interests of both parties before involving external lawyers. The purchasing and supply management professional is the guardian of the supply base and is responsible for managing relationships between suppliers and the buying organisation. It is important to adopt the correct procedure, which will depend on the power balance between buyer and supplier. Obviously if the supplier is in a strong position then the buyer will need to tread very carefully! That said, there is no rule of thumb for dealing with such post-contract mistakes as they depend on a combination and relative weightings of the following variables: type of relationship with the supplier value of the contract risk associated with the contract duration of the contract the quality and availability of alternative suppliers the magnitude of the mistake track record of supplier the commercial implications associated with the mistake

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In many cases the mistake is of a minor nature and can be rectified without too much trouble. However, where a mistake has created problems, the purchasing and supply management professional should consider the relationship with the supplier in their choice of approach to dealing with the mistake. If for example, the relationship is arm's length and the requirement is a one-off or irregular purchase, and there are many other suppliers in the marketplace that could supply the requirement in the future then, subject to risk, the purchasing and supply management professional could adopt a hard approach.

generate options to resolve the mistake and agree the most appropriate option with the supplier undertake sound contract management, as effective liaison can lead to the discovery of mistakes at an early stage CONCLUSION This paper has focused on supplier mistakes, underlining the need for the purchasing and supply management professional to adopt a professional and understanding approach to the supplier when such mistakes occur, unless of course it becomes apparent that the 'mistake' is not a mistake at all but a deliberate attempt by the supplier to gain unfair advantage and/or circumvent the terms of the contract. Purchasing and supply management professionals need to bear in mind that mistakes are not restricted to suppliers and that despite all precautions genuine mistakes by the buying organisation can sometimes occur. In such cases the approach recommended by CIPS is to be open with the supplier and see if some mutually acceptable arrangement can be arrived at. The precise approach to adopt will of course depend on individual circumstances and whether the mistake occurs pre- or post-contract.

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On the other hand, where the relationship with the supplier is of a longer term nature and the buying organisation is to some extent reliant on that supplier - then a greater level of empathy may be more appropriate. It may also be the case that the buying organisation is as responsible for the supplier's mistake as the supplier and that cost implications should then be shared as a matter of course. Probably the most influential aspect in dealing with a supplier's mistake is the attitude of the supplier to that mistake. If they are genuinely embarrassed and willing to act to rectify and compensate for their mistake the purchasing and supply management professional should have considered all the variables listed above, be willing to resolve it as proposed. If on the other hand, they suspect that the supplier had been culpable - deliberately bypassed their quality procedures for instance, then this should also influence the buying organisation's response. If the supplier has made a costly mistake that is entirely his own fault, then the supplier should absorb these costs and pay the buying organisation any appropriate damages. Where, in such circumstances, the supplier tries to burden the buying organisation with these costs then the purchasing and supply management professional should assess the relationship and consider terminating the contract. One method of dealing with a mistake is to agree to address it at the annual contract review date and produce a contract amendment to cover and rectify the issue as part of the continual improvement process. Whether or not the mistake is rectified immediately it is good practice to: investigate the mistake impartially bring the mistake out in to the open so that it does not fester and become more complex and, as appropriate, inform superiors and internal audit treat the supplier in an ethical manner e.g. do not use the mistake as an opportunity to take unfair advantage of him

SUPPLIER RATIONALISATION
SOCIAL IMPACTS OF SUPPLIER RATIONALISATION
INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case Supplier Rationalisation, as they relate to purchasing and supply management. The reader is encouraged to extract those parts of a practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Further information on supplier rationalisation is available from CIPS. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on supplier rationalisation has been primarily written for the benefit of the full- time purchasing and supply management professionals. This document is one of a series summarising the CIPS view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document, which supports the series entitled 'Background to Positions on Purchasing and Supply Management Practice' BACKGROUND CIPS believes that supplier rationalisation is an important practice within purchasing and supply management to help organisations achieve optimum efficiency when managing external resources. CIPS also believes that for some time now organisations have undertaken this activity without giving any consideration to the social impacts of the decision making process related to this activity. CIPS encourages all purchasing and supply management professionals to constantly exercise a 'what if' approach in relation to supplier rationalisation. The 'what if' mindset will enable purchasing and supply management professionals to determine the potential outcome of the risks associated with supplier rationalisation by testing assumptions and other alternatives for consideration. CIPS also believes that while supplier rationalisation is an enabler to controlling costs within an organisation and its supply side, extreme rationalisation has its own risks, such as market distortion, the artificial creation of new monopolies, and undesirable social outcomes. Some large organisations and the public sector need to manage carefully initiatives such as supporting the Small Medium Enterprise (SME) and buying from local sources while trying to achieve significant cost savings for those organisations. SUPPLIER RATIONALISATION CIPS believes that developing a portfolio of suppliers to achieve optimum efficiency, including product and service cost can be difficult. Choices may appear straightforward but they rarely are. Purchasing and supply management professionals need to satisfy not only the contradictory internal requirements but must also consider the external commercial and social impacts to achieving an optimum efficient supply base. Such elements as an existing supplier dependency can have an enormous negative social impact as a result of a rationalisation exercise as well as potential loss of effective competition. CIPS recommends that purchasing and supply management professional's employ a range of tools, one example being supplier positioning prior to undertaking the exercise of supplier rationalisation (reference should be made to the practice document on Supplier Relationship Management). This exercise will enable purchasing and supply management professionals to better understand the nature of the relationship with suppliers. SUPPLIER
POSITIONING

Low Bottleneck Risk Tactical Aqquisition High Low Value High Strategic Critical Leverage

When undertaking the practice of supplier rationalisation CIPS believes the supplier positioning tool will help the purchasing and supply management professional in determining the extent of the relationship with different suppliers, therefore taking the relationship into account within the selection criteria. CIPS recommends that such details about the supplier relationship be taken into consideration in advance. Sensitive management of rationalisation decisions CIPS believes that purchasing and supply management professionals should allow the suppliers involved in this process as much time as possible to deal with any sues for them arising from a rationalisation exercise. Where necessary, and if possible, purchasing and supply management professionals should support and facilitate introductions/opportunities for the supplier to trade via a preferred third party (i.e. so they can become a sub-contractor and don't lose the business entirely) the sooner the better as those relationships may

need time to develop within their own right. Where appropriate purchasing and supply management professionals should assist the supplier in widening their customer base by helping them develop experience in dealing with a range of differently sized customers (e.g. depending upon the maturity of the supplier some mentoring may be needed to help them understand what different customers may be looking for and how best to present their proposals). Purchasing and supply management professionals should recognise and understand the potential social impact and reputational impact of any rationalisation on a case-bycase basis and take this into account in the risk assessment for the decision (e.g. if use is made of vulnerable groups such as disabled workshops then exceptions may need to be made regardless of immediate monetary cost - if there is a CSR department in the organisation purchasing and supply management professionals should solicit their contribution to the decision making process; they may also have aims/budgets/targets that may be useful cross-functionally in offsetting any exceptions to the main purchasing rationalisation strategy). INVOLVEMENT IN THE RATIONALISATION PROCESS CIPS believes that due to the potential risks associated with the practice of supplier rationalisation the decisionmaking unit should consist of a cross-functional team of stakeholders within the organisation, for example: Senior management Budget holders Marketing/PR Internal customers Human resources Suppliers. CIPS believes that it is essential that purchasing and supply management professionals formulate an agreed exit strategy, that minimises both commercial and social impact on both parties and on the relevant communities at the very outset, if possible given the particular circumstances and monitor for any dependency arising in the life of the contract (taking appropriate action given the supply/reputational risks). KEY SKILLS AND DEVELOPMENT CIPS has long advocated that the practice of supplier rationalisation is a strategic activity, therefore purchasing and supply management professionals should have, in addition to the core purchasing and supply management technical expertise, the following skills as they apply to supplier rationalisation. However it is important that purchasing professionals endeavour to keep up on the development of these skill sets. A knowledge of risk management techniques Analytical mind set Knowledge of suppliers business and their markets Listening skills Diplomacy skills Interpersonal skills Emotional intelligence/intuition skills Understandings of the social make up of an organisation e.g. the suppliers standing in the community. CONCLUSION In the current environment in which organisations operate purchasing and supply management is increasingly more than buying in products and services for organisations. Customers are now asking organisations to be more socially responsible for their actions in providing products to the open market. CIPS believes that purchasing and supply management can add considerable value to an organisation's social responsibility and also add value in any risk management process within an organisation. This practice document has stated that supplier rationalisation is a strategic activity and is a valuable technique to the profitability of an organisation. CIPS believes that social awareness and the awareness of risk are positive traits in the successful buyer - they need to be seen not as an expectation that issues will escalate but rather as an alertness that social criteria such as urban regeneration, local economic impact, social diversity, employment of illegal immigrants and sustainability, to name a few, needs to be considered and the risks associated are acknowledged and complimented with a readiness to take positive steps to prevent any undesirable outcome such as skills shortage/adverse reputational impact. CIPS recognises that not all buyers are equal. Significantly the skills identified in this practice statement are a necessity for the management of the supplier rationalisation process. Like many skills, effective supplier rationalisation improves with experience and so, with practice, knowing how far to analyse and assess the social issues will become easier, if not intuitive.

Transparency, fairness and confidentiality CIPS believes that purchasing and supply management professionals should make the practice of supplier rationalisation as transparent as possible. This clearly means being open with all stakeholders involved, both internally and externally, so that all parties understand the elements of the process, that is, the procedures, expecta tions, timescales, rationalisation criteria, and so on. Clearly confidential information should not be disclosed to any third party or used in any way without the consent of the supplier. In particular it must not be shared with other suppliers. In general, when a supplier asks for clarification during the rationalisation process purchasing and supply management professionals should give all stakeholders involved the information requested. However, if a supplier asks insightful questions the answer should not be circulated to the other suppliers as to do so may remove the competitive advantage of that supplier. Throughout the rationalisation process all suppliers should be treated equally and fairly. Unsuccessful suppliers should be debriefed with as much transparency about the rationalisation process as can be provided; for example, reasons for non-selection to the preferred supplier base.

SUPPLIER CO-ORDINATION - KYORYOKU KAI

INTRODUCTION CIPS practice documents are not written to be an end in themselves. They are a collection of views on good practice within a particular subject area, in this case supplier co-ordination, as it relates to purchasing and supply. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Further information on supplier co-ordination is available from CIPS. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on supplier coordination has been written primarily for the benefit of the head of purchasing and supply management. This document is one of a series summarising CIPS' view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document, which supports this series entitled "Background to CIPS Positions on Practice". CIPS is expressing views on supplier co-ordination because it is an increasingly common activity and one which purchasing and supply management professionals should lead in their organisations. Supplier co-ordination is a technique to add value as well as remove waste. It involves a buying organisation identifying its most important suppliers and bringing them together on a regular basis for the purpose of mutual benefit and in particular to:

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CIPS believes that the skill sets of buyers should be at least on a par with those of the supplier representatives in the kyoryoku kai. Whilst largely restricted to the private sector CIPS considers that supplier co-ordination principles can also be applicable to the public sector. CIPS underlines the key importance of trust as an element in any kyoryoku kai arrangement. CIPS considers it important for buyers and suppliers alike to benefit, and be seen to benefit, from kyoryoku kai.

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Purchasing and supply management professionals should be looking for optimisation all the time and this is a useful tool for this. However, it is a very demanding activity requiring many different skills on the part of purchasing and supply management professionals, involving as it does bringing different suppliers together and encouraging them to work to the common good. The principles of the kyoryoku kai approach can also be used for internal suppliers (e.g. design teams) and it could be argued that this is similar to cross-functional working. It is important to select suppliers that are in synergy with each other as there would be little point in the selecting an organisation's 'top ten' suppliers if they were no connection or inter-relationship between them. This means that suppliers should be grouped into categories in which they have something in common e.g. a glass bottle supplier, a bottle top supplier, and a packaging supplier. Another way of grouping would be into supply chains so that the first, second and third tier suppliers of a vital supply chain can be brought together for supplier co-ordination and mutual benefit. Suppliers who are in competition either in the buying organisation's space or in any market might not be willing to work together in this way for fear of losing a measure of competitive advantage. However, there are some exceptions such as a well-known utility that invites the UK's large construction contractors to a contractor's construction forum held twice yearly. The large construction contractors are all in competition to win the utility's business and the business has to be tendered regularly in accordance with the European Union Utilities Directive. However, this forum is to discuss the utility's future workload and the contractors' resources to meet this; plus specifics such as health, safety, environmental issues as well as toolbox briefings. The contractors lead individual sessions chaired by their respective managing directors to debate these issues. The objectives are mutually

CIPS P OSITIONS

to devolve strategy and policy throughout the chain to create a sense of common purpose to strengthen trust and the relationships of the members to share knowledge and expertise to facilitate joint development and learning to jointly identify ways of minimising waste.

This process is also known by the Japanese term kyoryoku kai. CIPS emphasises the importance of selecting suppliers who have a high level of synergy with each other.

beneficial to all; for instance, to avoid problems with the Health and Safety Executive and/or lose labour time. There are many examples of where competing suppliers work together on projects facilitated by the buying organisation tackling environmental responsibility and health and safety are particularly popular. Some forums have covered issues such as standards in mobile phones the underlying motivation here being enlightened selfinterest. Other forums have involved contractors working together on designs and contract remits in order to avoid problems for the successful tenderer further down the line. If contractors do this regularly then no one will lose out and everyone should derive benefit from the shared experience. The key to success in kyoryoku kai is to avoid discussions about the cost base which is generally seen as too commercially sensitive to be covered in such a forum. It is difficult to devolve policy and strategy to suppliers through kyoryoku kai if the suppliers are different sizes with different cultures - imagination and flexibility are key to success in these circumstances. Equally, the issue of power in supply chains needs to be considered - if one supplier is larger and more powerful than the others this needs to be managed. In particular if the suppliers are more powerful than the buying organisation this should make the kyoryoku kai rather challenging! It can be argued that kyoryoku kai employs traditional purchasing and supply management processes such as value analysis and value engineering to identify waste and generate options for improvement. Whatever techniques are employed with kyoryoku kai the outcome should be some form of tangible benefit. Supplier co-ordination is found most often in the private sector but CIPS would argue that in some respects it is also applicable to the public sector. For example a local authority commissioning a new leisure centre could bring together the suppliers of catering, cleaning, pool management etc. under the general objective of improving health and safety. It is also worth mentioning that PFI projects are arguably a form of kyoryoku kai. Trust is absolutely key to the success of kyoryoku kai - between all those participating. In some cases it may be necessary to have confidentiality agreements in place. All suppliers must be able to benefit from kyoryoku kai. The buying organisation must ensure that they do so, otherwise the forum will not be sustainable. Ideally, the forum should be a long-term arrangement with the objective of continuous improvement.

There are alternatives to kyoryoku kai that can achieve similar ends - such as an eSupply Hub which is a virtual meeting place in which suppliers can air issues, and share experiences and problems - on professional indemnity insurance for instance. Purchasing and supply management professionals should be mindful of the Competition Act when undertaking any form of supplier co-ordination and seek legal advice, as appropriate. Kyoryoku kai is a way of solving problems and bringing about improvements but purchasing and supply management professionals need to deploy the necessary hard and soft skills to determine whether, or when, circumstances are right to ensure success. It is perhaps worth adding that greater use could be made of the concept, a development which CIPS would like to see take place. CONCLUSION This CIPS Position Paper has highlighted some of the attractions of supplier co-ordination but it is emphasised that any such benefits must be tangible and, ideally, quantifiable. Buyers should be aware of, and alert to, these benefits, whilst at the same time realising that such arrangements are not necessarily appropriate for every situation. Nevertheless they should ensure that they have the necessary skills to identify and derive benefit from possible supplier coordination scenarios when circumstances are right. As this CIPS Position Paper has indicated this includes buyers working in the public sector.

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SUPPLIER DEVELOPMENT
INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case supplier development, as they relate to purchasing and supply management. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Further information on supplier development is available from CIPS. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on supplier development has been written primarily for the benefit of full-time purchasing and supply management professionals. This document is one of a series summarising the CIPS view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document which supports this series entitled Background to Positions on Purchasing and Supply Management Practice. CIPS is expressing beliefs on supplier development as it is a key aspect of strategic purchasing and supply management. CIPS views, opinions and beliefs are stated throughout the document; however the broad practice statements which underpin the text are as follows: CIPS believes that before any decision is made to implement supplier development the organisation's corporate needs and objectives need to be established CIPS recommends that purchasing and supply management professionals should be able to identify and prioritise by means of an appropriate method, the reasons for embarking on a supplier development process such as improving a supplier's performance, reducing costs and resolving serious quality issues CIPS believes that it is not necessarily only the best suppliers which should be eligible for development programmes - each supplier should be assessed on the basis of individual merit and potential CIPS believes that there is no single, universally applicable approach to supplier development; each situation needs to be assessed on its own merits CIPS considers that supplier development projects should be capable of being assessed in terms of quantifiable business benefits CIPS believes that suppliers involved in any supplier development programme should be encouraged to review and develop their relationship with the buying organisation Supplier development is a two-way activity in that it should be thought of as a joint buyer/supplier development CIPS believes that purchasing and supply management professionals should possess expertise in supplier development; in particular they need to have the necessary interpersonal skills to be able to persuade colleagues and suppliers who may otherwise be reluctant to embark on a development programme CIPS considers that a purchasing and supply management professional needs to have the ability to decide when it is time to bring a development project to an end. A DEFINITION Supplier development is the process of working with certain suppliers on a one-to-one basis to improve their performance for the benefit of the buying organisation. It is closely associated with supplier relationship management and partnering - two separate subjects on which the CIPS has practice documents. REASONS FOR SUPPLIER DEVELOPMENT CIPS recommends that purchasing and supply management professionals should be able to identify sound reasons for embarking on supplier development process such as: improving supplier performance reducing costs resolving serious quality issues developing new routes to supply improving business alignment between the supplier and the buying organisation developing a product or service not currently available in the marketplace generating competition for a high price product or service dominating the marketplace Supplier development should lead to improvements in the total added value from the supplier in question in terms of product or service offering, business processes and performance, improvements in lead times and delivery for instance.

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WHAT MIGHT SUPPLIER DEVELOPMENT INVOLVE? There is no single approach to supplier development. Purchasing and supply management professionals must select the most appropriate approach to suit their relationship with the supplier that they have selected for development. There are different types of, and approaches to, supplier development that are appropriate for different supply markets. Supplier development involves embracing supplier expertise and aligning it to the buying organisation's business need, and, where appropriate, vice versa. The objectives for development can be relatively minor such as slight adjustments in staffing levels or very substantial such as the appraisal and re-launch of an entire range of critical products. A supplier development project might involve developing a supplier's business such as helping the supplier to evaluate and redesign their corporate strategy. The purpose of this might be to align the supplier very closely and on a long-term basis with the buying organisation in a strategic alliance or joint venture. Equally, there may be circumstances where it is more appropriate for the buying organisation to align its corporate strategy to that of the supplier. Whatever the form of the alignment, this process may be a highly resource-intensive exercise and involve for example, a steering group and various action teams each with action plans for allocated projects and formal reporting procedures against time-scales. Both organisations must share a mutual understanding, appreciation and desire to achieve the objectives of the supplier development project. Such a project would involve the principles of change management and require visible commitment from both parties' top management teams with identifiable sponsors and champions of change. It is critical to involve people with vision, imagination and commitment; to keep these involved and to ensure the project is not damaged by a change in personnel. It is also important to ensure that there is a smooth decisionmaking process and that, where appropriate, those involved in the supplier development project from both organisations are empowered to make decisions. Value management, in particular value analysis, is a key part of supplier development. Value analysis can be used to reduce the cost of a product or service without diminishing the operational value; other objectives might include reducing time to market, improving environmental performance or improving quality. Value engineering is another aspect of value management used in supplier development projects and is similar to value analysis but it takes place before a new product is finalised. Another approach to supplier development is 'Reverse Marketing'; one example of which is where a buying organisation encourages a supplier(s) to enter a new market. This might, for instance, involve the supplier developing its operation or introducing a new range of products.

PRE-REQUISITES TO SUPPLIER DEVELOPMENT CIPS believes that a fundamental pre-requisite to supplier development, and indeed the development of any purchasing and supply management strategy, is that purchasing and supply management professionals analyse, evaluate and appreciate their own organisation's corporate objectives and business needs. The supplier development projects which are undertaken must be in support of the purchasing and supply management strategy which, in turn, supports the organisational strategy. Supplier development requires key technical purchasing skills as well as contract management and project management skills. It also demands excellent interpersonal skills as it is an effective way of opening up communication between the buying organisation and the supplier. Interpersonal skills are necessary in order to "sell" the idea behind the development project both internally with colleagues and to the supplier, and then to work effectively with all those involved irrespective of their status in either organisation. Influencing skills are therefore of fundamental importance. One of the key interpersonal skills required is empathy i.e. the ability to appreciate others' perspectives. For example, the buying organisation must appreciate the supplier's position and the impact on their business of this development. In some cases, their other customers might perceive that they are being neglected as a consequence of so much resource being channelled into a supplier development programme of another customer, which may also be one of their competitors. SELECTING SUPPLIERS FOR DEVELOPMENT CIPS advocates studying the supply base and evaluating the extent to which it meets the needs of the organisation. Suppliers of key supplies and services should be rated according to their current performance and their ideal, or preferred, performance as well as compared to other suppliers. This evaluation should also cover the relationship between the two parties e.g. the style of relationship and how this compares to the preferred type of relationship. CIPS believes that these processes will encourage competition between suppliers especially if it leads to a supplier accreditation such as 'Best of Breed'. It would be ideal if the relationship between these suppliers and the buying organisation was managed on a key account basis i.e. an individual is given responsibility to manage a number of contracts. CIPS also believes that those suppliers being developed should be encouraged and supported to 'rate' their relationship with the buying organisation and to develop it appropriately. Before selecting suppliers for development, the purchasing and supply management professional must first have identified a reason and an understanding of why supplier development should be undertaken and what it involves.

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The selection of suppliers for development should be dependent on: category strategy scale of value/improvement opportunity cost, complexity and duration of value attainment supplier co-operation There are a number of methodologies for prioritising which suppliers are most suitable for development including a range of portfolio analysis techniques. CIPS suggests that a reasonable way to begin would be to identify those products, goods and services which are procured from critical and strategic suppliers and to decide how these should be improved. It may simply be a case of re-sourcing or re-tendering a new contract or moving those goods into another market. CIPS believes that selecting the best supplier for development may not always be the automatic choice; frequently it is the 'less than best' suppliers which are most appropriate for development. Supplier development is normally undertaken with existing suppliers that can be, and agree to being, improved. The supplier's performance against agreed criteria must be measured in order to identify the scope for development at the outset and, once the development process has started, to monitor and manage improvement. As supplier development can be a resource-intensive process, it should be undertaken only with selected suppliers. CIPS suggests that it should only be undertaken with those suppliers from which real business benefit can be derived. Supplier development can be a one-off project as well as ongoing activity that may take some years to come to fruition. Suppliers can be categorised in respect of supplier development in three ways; they are: being developed on hold as a potential for development or identified as not being worth the investment of development Supplier development is a two-way process in that it should be thought of as joint buyer/supplier development activity. SUPPLIER POSITIONING Some suppliers may be resistant to being developed; this is usually a function of their position in the marketplace and the way in which they perceive, and therefore position, the buying organisation. This is why purchasing and supply management professionals embarking on supplier development require excellent interpersonal skills e.g. influencing skills.

Purchasing and supply management professionals should always be aware of the way in which a key supplier positions their buying organisation. Incentives need to be given to suppliers to encourage their commitment to supplier development, such as a reward of shared benefits or 'preferred supplier' status. In many cases, the development of the supplier will be of benefit to the supplier's other customers, some of which may be the buying organisation's competition. This in itself may be an incentive for the supplier to participate in a supplier development project i.e. they can improve relationships with all their customers as a consequence. This may not matter if the development is in terms of improved service, greater quality, value add and management information for instance. However, where for example, the supplier's product has been developed to meet a particular competitive advantage of the buying organisation, the purchasing and supply management professional should consider the implications of this at the outset. CIPS suggests that the purchasing and supply management professional should develop a chart along the lines illustrated below which can be used by the buying organisation and the supplier selected for development in order to identify the extent of the development project. The chart could be as simple or as complex as required; the purpose is to identify what has been agreed in terms of outputs or deliverables; which party is responsible for doing what (ideally with an accountable person identified) and when; and an appropriate apportionment of effort, risk and reward. It is useful to identify the risks in advance and allocate these appropriately. The chart could then be used to monitor progress and manage the project. Equally, a chart could be developed to assist the buying organisation in deciding whether or not a particular supplier should be developed and might comprise a simple yes/no checklist or list of facts to be completed. For example: such a chart might include the level of expenditure (top 20% of expenditure yes/no); level of risk (high/ medium/low) and so on, as deemed appropriate. CONCLUSION Purchasing and supply management professionals should determine when the process of developing a supplier can be brought to an end as objectives and targets have been delivered and measured. In many cases, the results of the development may be simply a quick fix or at the other extreme it may involve continual improvement and step change. CIPS believes that whatever approach to supplier development is employed, purchasing and supply management professionals should ensure quantifiable and measurable results that lead to business benefits. Supplier development is, therefore, a significant opportunity to raise the profile of purchasing and supply management in an organisation and should be utilised by all purchasing and supply management professionals.

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TENDERING AND POST TENDER NEGOTIATION

INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case tendering and post tender negotiation, as they relate to Purchasing and Supply Management. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Further information on tendering and post tender negotiation is available from CIPS. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on tendering and post tender negotiation has been written primarily for the benefit of full time purchasing and supply management professionals i.e. those in the purchasing and supply management function. This document is one of a series summarising the CIPS view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document which supports this series entitled "Background on Purchasing and Supply Management Practice Positions". CIPS is expressing beliefs on tendering and post tender negotiation as these activities are fundamental to the purchasing and supply management profession. CIPS views, opinions and beliefs are stated throughout the document; however the broad practice statements which underpin the text are as follows:
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Whilst individual circumstances can vary considerably, in general CIPS would recommend a minimum of three and a maximum of ten tenderers CIPS believes that through-out the tendering process, potential suppliers should receive exactly the same information, preferably at the same time CIPS takes the view that it is the responsibility of the purchasing and supply management professional to determine a reasonable and appropriate time for receiving a response from tenderers (consistent with any legislative requirements); he/she should also take responsibility for determining and defining all other parameters associated with the tender evaluation procedure CIPS takes the view that it is unacceptable for details of a tender to be divulged to other tenderers without prior agreement CIPS supports the concept of post tender negotiation, provided that the correct professional and ethical procedures are followed CIPS believes that conducting the post tender negotiation process should be the responsibility of the purchasing professional and that such individuals should undertake appropriate refresher/ training programmes at five-year intervals

CIPS POSITION Tendering and post tender negotiation are core components of purchasing and supply management and, as such, all purchasing and supply management professionals should be competent in their application and use. The processes described and positions presented in this document are intended to illustrate good practice in respect of these key purchasing and supply management processes although it should be emphasised that other approaches, adapted to suit particular sectors or industries, may also represent good practice. These principles of good practice can be extrapolated to an eCommerce environment. The reader should not infer that if they follow the guidance set out in this document that this is all that is required for effective competition. CIPS believes it is the responsibility of the professionally trained purchasing and supply management practitioner to develop appropriate processes for his or her own organisation based on the principles, not necessarily the detail, described in this document. As with any aspect of purchasing and supply management, more detailed guidance may be sought from the Institute.

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As core elements in purchasing and supply management, CIPS considers that all purchasing professionals should be proficient in the application of tendering and post tender negotiation. CIPS considers that tendering is most appropriate for higher-value, and certainly high-risk, procurements where transparency is a key requirement CIPS considers that an appropriate specification is a vital precondition for successful tendering CIPS believes that pre-qualification is a useful tool to employ prior to issuing Invitation to Tenders (ITTs)

The public and utilities sectors must comply with the EC procurement rules that prescribe procedures for use when tendering for contracts above given thresholds and these EC procurement rules must always take precedence.
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PRE-REQUISITES FOR TENDERING Specification - a good specification is the single most important factor in achieving value for money. It is vital when inviting tenders, and the greater the financial commitment the more important it is that purchasing and supply manage-ment professionals ensure the existence of an appropriate specification. Generally, the specification should be output or outcome-based i.e. what is to be achieved as opposed to how it should be achieved, or functional i.e. what the requirement should be able to do as opposed to its technical profile. Such specifications enable suppliers to be innovative in their solutions. In some cases, a technical specification is useful but the purchasing and supply management professional must ensure the specifier is absolutely clear about the requirement and that he or she is capable of specifying it properly. Such specifications should be described in terms of European standards, British standards or, as an alternative, American standards. When using a technical standard, care must be taken not to name proprietary items. When using a choice of standards, those standards must be comparable.
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The CIPS definition of tendering is: "An offer made in writing by one party to another by a prescribed date and in time to execute, for a given consideration, a supply of goods and/or services".

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There are other means of obtaining offers from suppliers such as requests For pricing/quotation" (RFPs/RFQ), bids, enquiries etc. many of which refer to the same process. CIPS believes that obtaining an offer from a supplier can be seen as a continuum with the degree of complexity as the axis; with enquiries at one end and tendering at the other. Enquiries RFQ Tendering eg. EC Procurement Directives

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Degree of complexity ADVANTAGES AND WEAKNESSES OF TENDERING The advantages of tendering include: x Transparency x An established, accepted and generally understood method x An audit trail x Compliance with the organisation's policy x Fairness to all parties x The encouragement of competition x The production of a written quotation, along with relevant supporting information, against a prescribed need x An easier comparison of offers The weaknesses of tendering include: x It can be very bureaucratic x It is may provide a barrier for SMEs x It can be a triumph of process over substance x It can inhibit flair, creativity and innovation x It can be expensive for all parties e.g. the time and resource in preparation and evaluation of tenders x It can inhibit negotiation x Prices submitted are often inflated to allow room for negotiation CIPS believes that tendering is most appropriate for high value and high risk purchases and where transparency is paramount.

Documentation - there are various elements that the CIPS suggests could comprise an invitation to tender (ITT) document such as: x A covering letter providing instructions e.g. labels to be used, return date, contact names and numbers etc. with some background to the requirement and also a statement that reads along the lines of "we are not bound to accept any, or the lowest tender" x An acknowledgement form - to be returned stating whether or not the supplier is intending to submit a tender x A specification (as above) x A cost, price and delivery schedule - to be completed with the price and corresponding costs components e.g. information to assist whole life costing along with the expected delivery or lead time x A detailed breakdown of production costs e.g. margin, overheads etc. to be completed x A quality schedule - declaring which quality standards are met by the supplier x A signed declaration of bona fide tender x A parent company guarantee/performance bond to be completed as appropriate x A set of terms and conditions of contract along with any special clauses to be signed x A series of questions on policy e.g. health and safety, environment, social responsibility etc. to which the supplier should respond x A list of information required on the supplier's company profile (if not already obtained) x A request for the supplier's company accounts e.g. for the last three years (if not already obtained) x A list of satisfied customers along with at least one reference x An aide memoire advising the suppliers which documents have to be submitted with their tender

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PRE-QUALIFICATION CIPS advocates the use of pre-qualification before inviting tenders where possible. This is so that suppliers which are unsuitable for the requirement in question can be eliminated from the tendering process and the tendering process can then be focused on the offer itself. Pre-qualification would include an evaluation of, for example, suppliers': x Financial standing x Quality procedures x Capacity and competence x Track record

above a given threshold are subject to rules about response times during tendering. For those contracts let where such rules do not apply, whether within those sectors or outside, it is the responsibility of the buying organisation to set reasonable time periods for responses to tenders. CIPS believes that it should be the responsibility of the purchasing and supply management professional to determine a reasonable period for responses which will depend on variables such as the complexity of the procurement, the nature of the marketplace and the urgency of the purchase. The response date or tender return date should be clearly shown on the covering letter which accompanies the ITT. There should also be a time given (typically, noon) beyond which tenders received will be deemed late tenders. These should be separated from the rest and a decision then taken, by an independent person if the purchasing and supply management professional deems appropriate, as to whether or not the late tender should be evaluated. Reasons for inclusion may include a bona fide reason for lateness or a lack of competition due to too few tenders being received. If, due to unforeseen circumstances, the tender return date is changed, this should be immediately and effectively communicated to all suppliers which have been invited to tender. They should all be given the exactly the same new tender return date. TENDER BOARDS/EVALUATION PANELS Tenders often arrive early and these should be stored in a safe place, unopened. When the response deadline is reached a group of at least three people, including at least one purchasing and supply management professional, should meet to open the tenders and record their receipt. This group is often referred to as a Tender Panel. A special form can easily be produced to list those tenders received by the deadline and this should be signed by all on the panel. Members of the panel should each sign the first page of each tender which should also be stamped with the date. It is good practice to stamp and sign every page in a tender containing price or financial information. The extent of such processes should be determined by the purchasing and supply management professional in conjunction with the Internal Audit department. The tender panel, or a separate evaluation panel, then has the task of determining the winning supplier(s). During the time between tenders being opened and a final decision being made, all those involved must take care not to breach confidentiality. CIPS believes that is bad practice to advise any tenderer of the details of another tenderer's offer without prior agreement with all suppliers. SELECTION CRITERIA

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These criteria would then not be required in the ITT and can be used in any subsequent tendering exercises. However, depending on the market, it is recommended that pre-qualified suppliers are evaluated in this way at least once every three to five years. Suppliers who have successfully passed the pre-qualification stage are sometimes referred to as approved suppliers. This is different to the term preferred suppliers, that is to say those suppliers that have successfully won a tendering exercise and have been awarded a contract or a framework arrangement/agreement for the supply of a specific range of goods or services for a given period. If a pre-qualified list of tenderers is to be used (so that the suppliers are all known in advance as opposed to simply responding to an advertisement) it is acceptable practice to advise these suppliers that an ITT for the supplies or services in question will be forwarded to them by a specific date. This enables suppliers to plan what can be a resource intensive process. CIPS believes that a reasonable rule of thumb would be a minimum of three tenderers and a maximum of ten. The ideal number of tenders is four to six if there is confidence that most will respond. CIPS believes that suppliers should not be requested to pay for ITT documentation. DIALOGUE WITH SUPPLIERS In order to refine and finalise the requirement, CIPS believes it is acceptable practice to discuss requirements with suppliers before tenders are invited. However, suppliers must be advised that this is the purpose of the dialogue and care must be taken not to use proprietary information in the specification. Variations may arise during the tendering process and the purchasing and supply management professional should ensure that all suppliers receive exactly the same information and, as far as possible, at the same time. RESPONSE TIMES FOR TENDERS In respect of the utilities and public sectors, contracts

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During tendering there are generally two forms of selection criteria. One is similar to the pre-qualification

criteria, whether or not that is used at a pre-qualification stage or once the tenders have been received. With this type of selection criteria the objective is to ensure that the supplier is capable of providing the supplies and services to the level of quality required so issues to be evaluated include financial standing, quality systems, track record and so on. The other set of selection criteria is centred on the offering i.e. the individual supplier's solution to the requirement, and these should be value for money criteria. This will almost always include the following: x Quality of product or service x Delivery times x Terms and conditions (payment terms, warranties etc.) x Cost to include the initial price, total acquisition cost plus whole life costs It may also include the future likelihood of supplier innovation, technical or cultural fit with the purchasing organisation, the strength of the supplier's account team, ability to handle TUPE transfers, or any other factor which is important to that particular procurement. The selection criteria should be agreed prior to the tenders being invited so that the information required can be incorporated in the tender documents. The EC procurement rules require that, for public sector and utility sector procurements to which the rules apply, the selection criteria be stated in the advert and this is normally reiterated in the ITT. There are many different approaches to evaluation for example, the selection criteria can be weighted according to their importance and a table produced listing the suppliers against the criteria. The tenders then need to be evaluated and ranked against each criterion accordingly so that the best value for money offer can be assessed. Evaluation should never be a purely mechanistic process. In most cases, cost has to be assessed against the other criteria, and usually there will be some value judgements to be made e.g. whether to pay more for apparent better quality or service. However, the objective of a robust evaluation process is to make these judgements as structured and objective as possible. POST TENDER NEGOTIATION Provided it is undertaken professionally and ethically, CIPS believes that post tender negotiation is an appropriate process to secure value for money. It is the responsibility of the purchasing and supply management professional to determine whether, for any particular contract, post tender negotiation should be undertaken. CIPS suggests that bid clarification i.e. detailed discussion about the offer, should usually comprise the final stage after receipt of tenders and before contract

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award; it will normally lead to improved value being obtained. This is because there are often points in the tender which need to be clarified. It may also be necessary to undertake bid clarification with several suppliers, for example if a bid appears especially low, or especially high on price. During bid clarification, discussion might take place around the specification or delivery period for example. This may lead to negotiation on terms and conditions, warranties, payment terms or price. It is important however, that during this process of negotiation, the changed offer does not alter the competition. Where the negotiation is taking place with the clear winner, as judged against the pre-set selection criteria, it would not matter if the outcome dramatically changed. The problem arises where for instance, three suppliers are undergoing a process of bid clarification and negotiation and the third most attractive offer suddenly changes substantially. It is important in this case to allow all suppliers access to the same information and the same opportunity to review their proposals. CIPS believes that during post tender negotaiton on price, suppliers must be treated fairly and courteously. The person responsible for negotiating should be the purchasing and supply management professional, but where this is not the case, it is their responsibility to ensure that the negotiator conducts the negotiation on a professional basis. Post tender negotiation is a key skill of the purchasing and supply man-agement professional and, like other aspects of negotiation, the CIPS believes that the purchasing and supply management professional should undertake a refresher training course, once every five years. One way of obtaining Best and Final Offers (BFO) is to send to suppliers, on an anonymous basis, a list of all the costs/prices obtained, inviting their BFO. It is important that suppliers are advised at the ITT stage that this process is scheduled to take place and that suppliers make their own decision as to whether or not they wish to participate. A similar method is the reverse auction, whereby suppliers are requested to submit offers which progressively reduce in price until either a) they are accepted by buyers, or b) until those other suppliers decline to reduce their prices any further. It is worth noting that eAuctions are based on the reverse auction principle. CIPS approves of these techniques for obtaining BFOs, provided that suppliers are under no compulsion to participate and as long as they have the reasonable expectation that buyers are in principle prepared to award them the contract. CONTRACT AWARD Once the decision has been made as to the successful supplier(s) the contract should be negotiated, finalised and signed. It is good practice to produce two copies and sign both before sending to the supplier with a

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request that the supplier signs both, retains one and returns the other copy. The unsuccessful suppliers should be advised that they have not been awarded the contract on this occasion. This should be communicated by a courteously written letter with an invitation for the suppliers to receive a debrief as appropriate. CONCLUSION Tendering and post tender negotiation are fundamental purchasing and supply management skills which must be executed professionally and ethically in order to obtain best value for money. This document has described the principles and processes of good practice in respect of the above but does not intend to be prescriptive. In particular, purchasing and supply management professionals in the utilities and public sectors must ensure compliance with the EC procurement rules. CIPS recommends that purchasing and supply management professionals adopt the principles of good practice but define and develop purchasing processes which are best suited to their own organisations and reflect the sectors, industries and markets in which their organisations are positioned.

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TRADING IN FOREIGN CURRENCY

INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case trading in foreign currency, as they relate to purchasing and supply management. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. CIPS stresses the importance of seeking further information on trading in foreign currency which is available via the CIPS website, Bookshop or through CIPS training. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on trading in foreign currency has been written primarily for the benefit of full-time purchasing and supply management professionals. This document is one of a series summarising the CIPS view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document which supports this series entitled "Background to Positions on Purchasing and Supply Management Practice". CIPS is expressing beliefs on trading in foreign currency as this is an operational issue for purchasing and supply management professionals sourcing globally. CIPS views, opinions and beliefs are stated throughout the document; however the broad practice statements which underpin the text are as follows: It should be the role of an organisation's Finance department to determine the organisation's policy on currency The same principles apply to all currencies Where the purchasing and supply management professional has a choice whether to pay in their base currency or not, there are a number of considerations not least that paying in the base currency will avoid unnecessary exchange rate fluctuation risks CIPS believes it is good practice to create a foreign currency account for those situations in which the purchasing and supply management professional has agreed to pay in the foreign currency concerned Purchasing and supply management professionals should ensure that any new finance systems they acquire for their organisations are able to transact in any currency. CIPS believes it is the role of an organisation's Finance department to determine the policy on currency. The Finance department should provide advice, on at least a quarterly basis, to purchasing and supply management professionals on what they should do in respect of paying foreign invoices. The term 'base currency' in this context refers to the currency normally used by the buying organisation however it can be used to refer either to the location of the supplier or the location of the buyer. The issue of base currency can be complicated in the case of a buyer in a complex multinational organisation which reiterates the importance of seeking the organisation's policy on the issue from the Finance department. Trading issues are the same, no matter what foreign currency is being used. Any transaction between organisations with different base currencies introduces a risk of exchange rate fluctuation. For example, a UK buyer who insists on contracting in sterling is buying security of pricing, but at the cost of the exchange rate risk which the foreign seller has built into his price. Various publications and papers have been written showing how best to negotiate such a contingency allowance; one option may be to buy forward where this is justified in terms of the value of the contract. CIPS suggests that purchasing and supply management professionals should consider prices in various currencies and select the best option according to their sourcing strategy. It is easier to pay to suppliers in the buying organisation's base currency e.g. in the UK - sterling but factors other than choice of preferred currency enter the equation, thus, price and stability are also important considerations. Some suppliers may offer discounts or improved terms (i.e. longer payment terms) to be paid in their own currency. Agreeing to pay in a foreign currency will create exchange rate fluctuation risks. For example, taking a pound/euro illustration - agreeing a price of 63 euros for a commodity at the start of a term contract might mean paying 100 per item, but then during the course of the contract the item might actually cost 130 (because of the pound/euro exchange rate) - although it is still compliant with the agreed price of 63 euros. CIPS suggests that purchasing and supply management professionals should agree to the price of 100 (to continue the illustration) as they will then know that the price will stay at 100 for as long as the contract allows it.

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Where buyer-supplier power dictates that the purchasing and supply management professional has no choice but to pay in foreign currency then the purchasing and supply management professional should undertake a risk analysis in conjunction with colleagues in Finance to determine the exposure - the analysis would include: What is the value of the contract - how much money is at risk? What is the duration of the contract? - if it is a long period e.g. a term contract the risk will be high. What are the payment terms? - a longer payment period enables the buyer to choose a time when the exchange rate is more favourable; however longer payment terms may result in a higher price as the supplier would probably have calculated the increased costs in funding the business whilst awaiting payment. CIPS believes it is good practice to create a foreign currency account for those situations in which the purchasing and supply management professional is unable to negotiate payment in his/her own currency. This enables such payments to be offset against payments received into the business from sales. In other words the money that is received from sales in e.g. dollars can be used later to pay for invoices requiring payment in dollars which avoids the need to convert the dollars to pounds as well so avoiding transaction fees and exchange rate fluctuations. Even if the exchange rate remains constant for the period in question - converting currency can rapidly erode the value of the payment through transaction fees alone. CIPS acknowledges that it would be much simpler from a market point of view if businesses could trade in the same currency to avoid exchange rate fluctuations and transaction fees. Certainly where UK companies have an income in a particular foreign currency they should also give careful consideration to paying suppliers in that currency, the logic of this being that it is arguably a balancing act in terms of foreign exchange exposure. Finally, CIPS would encourage purchasing and supply management professionals to ensure that any new finance systems being acquired for their organisations are able to transact in any currency.

USE OF LAWYERS IN PURCHASING AND SUPPLY MANAGEMENT

INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case the use of lawyers in purchasing and supply management. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on the use of lawyers in purchasing and supply management is written with the full time purchasing professional in an organisation in mind. This document is one of a series summarising the CIPS view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document which supports this series entitled "Background on Purchasing and Supply Management Practice Positions. CIPS views, opinions and beliefs are stated throughout the document; however the broad policy statements which underpin the text are as follows:
x x

CIPS takes the view that purchasing and supply management professionals should have sufficient knowledge of the law to be able to establish whether or not a specific lawyer has an acceptable level of expertise in those areas of the law in which he/she lays claim to expertise. CIPS encourages purchasing and supply manage ment professionals to source legal services in a similar fashion as they would any other procurement. In view of the relatively high cost of buying legal services the CIPS would recommend seeking the advice of senior management before any significant decisions are made. CIPS recommends that purchasing and supply management professionals should seek and obtain as much advice as possible from their legal advisers. When a specific legal issue arises and no internal legal advice is readily available, CIPS considers it is legitimate for the purchasing and supply management professional to seek the advice of, say, the Company Accountant or the Company Secretary. CIPS takes the view that specific details of the contractual relationship (e.g. division/allocation of responsibilities) should appear in the contract schedules rather than in the terms and conditions.

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CIPS considers that purchasing and supply management professionals have a pivotal role to play in managing the interface between their organisation and external lawyers. Purchasing and supply management professionals have a responsibility for assessing the level of risk in given situations; CIPS believes also that purchasing and supply management professionals have a role to play in developing a policy for ensuring that the organisation's lawyers (internal or external) draw attention to the existence, or the threat, of risk; purchasing and supply management professionals also have a responsibility for deciding an appropriate course of action to achieve this objective. CIPS considers that purchasing and supply management professionals should collaborate with their in-house legal department when necessary and in particular develop relationships with those members of staff in such departments specialising in procurement.

USE OF LAWYERS The emphasis within organisations should be on ensuring that purchasing and supply management professionals have the necessary level of competence to deal with routine legal matters and that expert legal advice is taken where it is warranted and where it can add most value. Where there is a knowledge gap, purchasing and supply management professionals should feel comfortable in approaching legal advisers for relevant advice and information. The purchasing and supply management professional must be able to manage the relationship with lawyers whether they are in-house or an external resource; they should be the key interface between external lawyers and the organisation as far as purchasing and supply management issues are concerned.

Typical uses of lawyers includes: Advising on complex aspects of general legislation e.g. Competition Law x Interpretation of complex legislation e.g. TUPE Guidance and advice on precedent Drafting terms and conditions of contract Evaluating tenders as part of an in-house project team Handling disputes arising from the interpretation of terms and conditions of contract Handling disputes arising from performance measurement/monitoring of a contract
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x x x x x

CIPS suggests that purchasing and supply management professionals should be able to manage on their own as far as routine contractual matters are concerned. However, where they are at all unsure or where the contractual issue is slightly more complex, they should work alongside their in-house lawyers. CIPS suggests that purchasing and supply management professionals should as appropriate, on a case by case basis, assess the value for money obtained from their in-house legal team as compared to procuring the services of external lawyers in the same way as any other value-for-money review of services. External Lawyers Many organisations do not have internal lawyers and so purchasing and supply management professionals, and other colleagues, have to seek advice from external professional sources. Even when lawyers are employed within an organisation, like purchasing and supply management staff, they too have a multitude of specialist areas and may thus not be the best source of advice for commercial transactions. Purchasing and supply management professionals should be sufficiently familiar with the law to ascertain whether or not a lawyer is truly an expert in the field of law in which they claim to be most proficient. It should not be assumed that just because he/she is a solicitor or barrister then he/she should necessarily possess the relevant expertise. CIPS encourages purchasing and supply management professionals to procure the services of lawyers as they would any other regular requirement, aggregating demand over a specified period of time and negotiating the appropriate hourly rates and terms and conditions of contract. Some legal firms are surprised at having to enter into competitive tendering for the provision of legal services; purchasing and supply management professionals should question such a response if they are seeking to appoint lawyers who specialise in commercial law. It is worth noting that a professionally qualified person e.g. accountant and of course an in-house lawyer can seek a legal opinion directly from a barrister without first applying to a firm of solicitors. Barristers are often considerably less expensive than City solicitors and all have chosen legal specialities in which they are expert. As external lawyers can prove an expensive resource, CIPS suggests that all requests for advice in relation to procurement should be authorised, if not organised, by the organisation's most senior purchasing and supply management professional or their nominated representative. When employing external lawyers in particular, value for money is maximised when the purchasing and supply management professional provides the lawyer with a carefully written brief as to the nature of the problem together with specific questions that require answering.

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Purchasing and supply management professionals should be aware that lawyers tend to have different perspectives on risk; there may therefore be occasions when purchasing and supply management professionals seek lawyers' advice and nevertheless decide to adopt an alternative course of action. Further, lawyers often have a different mindset and background to purchasing and supply management professionals; typically they tend to think in terms of litigation rather than mending the relationship with the supplier. CIPS recommends that purchasing and supply management professionals develop a policy that facilitates lawyers being responsible for drawing attention to risk yet it is the purchasing and supply management function that is responsible for assessing the risk and determining an appropriate course of action. CIPS suggests that purchasing and supply management professionals should carefully manage lawyers' contributions during post-tender negotiation, as by virtue of their role, lawyers can be too prescriptive and inflexible so preventing partnering arrangements from flourishing. However, where knowledge is otherwise lacking in the purchasing and supply management professional, they can prove invaluable in assessing the validity of any resultant proposals/agreements against relevant Competition Law etc. Providers of legal services fall into two broad categories - in-house lawyers and external lawyers. In-House Lawyers Most large organisations have legal departments in which they employ qualified lawyers or legal advisers. CIPS believes that purchasing and supply management professionals should work with their in-house legal department and foster relationships with those legal advisers specialising in procurement. Relationship management is an important aspect of purchasing and supply management and is particularly valuable for maintaining relationships with in-house lawyers and avoiding potential conflict on roles and responsibilities. CIPS recommends that the head of purchasing and supply management holds regular meetings with the head of legal services to maintain effective lines of communication and promote team spirit.

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If that lawyer does not know the answer to the problem he can then discuss the issues involved with colleagues. If however, the purchasing and supply management professional simply provides the lawyer with a generic problem, such as a contract to look at, with no particular context provided or problem identified, the costs may well be excessive and value for money reduced. Moreover, if the brief to the lawyer clearly specifies the commercial goal in view not only should the lawyers' advice be much more relevant, but if it proves in future to have been seriously inappropriate he will (if an external solicitor) be liable for charges of negligence Purchasing and supply management professionals should encourage the lawyer employed to train them so that similar issues arising in the future can be dealt with on an in-house basis. Very often external lawyers can be persuaded to provide training free of charge, given that it is to some extent self-promotional. CIPS advocates that purchasing and supply management professionals endeavour to obtain as much free advice as possible from their lawyers; this aspect could be built into contractual arrangements especially if the contractual period is for a number of years. Conversely, purchasing and supply management professionals should utilise the lawyer's non-chargeable time to train him/her in an understanding of their organisation's business needs. CIPS suggests that the processes outlined above are also broadly applicable to the use of in-house lawyers. Other Sources of Legal Advice When faced with a specific legal concern, and without the benefit of internal lawyers, the purchasing and supply management professional might seek the opinion of other professional colleagues such as one of the company's accountants, internal auditors or the Company Secretary as these professionals may well have had some legal training. This may help with the production of a brief for any external lawyer who may be appointed. CONCLUSION CIPS has developed a range of practice documents on purchasing and supply management issues but the reader may find Purchasing and Supply Management Professionals' Competence with the Law of particular use. All published policies are available on the CIPS web site at www.cips.org Further, a booklet entitled 'How to Buy Legal Services' is available from the CIPS bookshop which contains useful advice on obtaining legal advice in those instances where such advice within the buyer's organisation is, for whatever reason, not available.

Appendix An illustration to show the process of employing lawyers in purchasing and supply management

Issue and receive tenders

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Identify project Significant Legal Input

Decide on project team

Examine underpinning legislation/policy Judge complexity of contract Asses risk of failure/ damages Examine model terms and conditions Draft special terms and conditions

Evaluate tenders

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PTN Accessing the validity of any resultant proposals/ agreements against relevant Competition Law etc

Significant Legal Input

Contract Award

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Contract Monitoring

USING LOCAL SUPPLIERS

INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case using local suppliers, as they relate to purchasing and supply management. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Further information on using local suppliers is available from CIPS. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on the use of local suppliers has been written primarily for the benefit of full-time purchasing and supply management professionals i.e. those in the purchasing and supply management function. This document is one of a series summarising the CIPS view(s) on a wide range of purchasing and supply management subjects. The reader may wish to refer to the accompanying document which supports this series entitled Background to Positions on Purchasing and Supply Management Practice. CIPS is expressing beliefs on using local suppliers as this is a common consideration in the selection of suppliers and an area which has as many advantages as it does pitfalls. CIPS views, opinions and beliefs are stated throughout the document; however the broad practice statements which underpin the text are as follows: CIPS recognises that purchasing and supply management professionals are often put under pressure to place business locally for reasons such as positive public relations; however CIPS encourages purchasing and supply management professionals to determine the best source of supply on objective and relevant criteria CIPS appreciates that public sector buyers need to comply with the EC Procurement Directives and not use geography as a basis for awarding contracts over the relevant thresholds During any sourcing activity buyers should normally also consider the benefits (and disadvantages) of choosing local suppliers Buyers should always be aware of the importance of keeping their supplier portfolios up to date, so enabling them to determine which purchases would benefit the most from local supply. BACKGROUND Whilst the sourcing choice, whether in the private or in the public sector, should usually be based on value for money and the most economically advantageous option, having first taken factors such as security and continuity of supply into account, buyers should also give careful consideration to the benefits as well as the disadvantages of choosing local suppliers. Some buyers have to work within a policy of promoting and encouraging business for the local community, for reasons of public relations for instance, and effectively 'seed-corn' local suppliers and services. Generally however, CIPS would encourage all buyers to always ensure they employ objective and relevant criteria when determining the most appropriate source of supply. On the other side of the coin many large, geographically-dispersed suppliers are able to maintain a 'local' profile presence. This can then jeopardise the existence or survival of local entrepreneurs who could well be in a position to deliver superior quality goods or services at lower prices. Buyers therefore, need to be aware of the broader considerations which come into play when considering the most appropriate source of supply. For instance while government policy is to support SMEs, (one such example being the DTI Quality and Manufacturing Initiatives of some years ago) such policies are threatened by factors like the prevalence of national purchasing agreements which are able to deliver significant benefits such as greater cost efficiencies but which can also mitigate against awarding business to local suppliers. A DEFINITION - WHAT DO WE MEAN BY 'LOCAL SUPPLIER' At first sight the term 'local' may be defined simply in terms of geographical distance but the issue is not in fact quite that straightforward. Thus, whilst a supplier located a couple of miles away is clearly local, how far do we have to go before the term 'local' ceases to be valid; 10 miles? 20? 55? We might also consider the ease of contacting the supplier as a factor, so to the basic criterion of distance we might add 'time taken' So, as an example the time taken to go to a meeting with a supplier 10 miles up the M6 north of Birmingham can often take longer than the time taken

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to travel 60 miles on less congested roads. A further criterion is the product itself. A buyer may well describe a source of supply 150 miles away as local if the supplier is in a niche market. But for more commonplace products (plastic mouldings for instance) a buyer may well feel that 10 miles is the maximum for the supplier to be classed as local. In summary, there is no one appropriate definition for local in this context but for the purpose of this practice document the expression means based within easy reach of the buyer. BENEFITS OF USING LOCAL SUPPLIERS CIPS would suggest that the principal attractions of sourcing locally are as follows: Promoting the use of local suppliers can result in good PR for an organisation, (particularly if it is a large employer in an area) and can create an impression of investing in the community. A further benefit is that local MPs will generally be impressed and therefore may be more susceptible to influence etc. Generally speaking local suppliers would place considerable value on being selected in this way and would be reluctant to lose the high profile within the community which may be expected to result from it Geographical nearness makes it far easier to travel to them for supplier development and contract management purposes, as well as for site inspections The local knowledge of local suppliers means that they are well-placed to appreciate and satisfy local preferences - this is particularly relevant where specialised products and services are concerned Supply chains are generally shorter, leading to greater certainty and predictability of delivery times. This is particularly attractive to companies working on a JIT basis. An associated benefit is that delivery costs are normally lower LOCAL SUPPLIERS - DRAWBACKS Private Sector CIPS would suggest that when using local suppliers there is the potential risk of getting too close for comfort especially if buyers find that the supplier's staff include company people they know socially and to whom they may even be related. This can obviously lead to difficulties in the supplier selection and contract award process (which to some extent can be overcome with a clearer ethics policy). Even without close connections of this nature, difficulties can still arise with local suppliers in the sense that if they fail to honour their contractual obligations, like any supplier, it may be necessary to terminate the contract which can lead to undesirable local publicity.

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Further possible drawbacks to using local suppliers may include: A possible resistance to change Too great a dependence on the buying organisation which can lead to complacency in both the financial and technical sense If local suppliers are also small businesses they may be restricted in terms of exercising economies of scale and may then be less efficient than their larger counterparts. (There are however, many benefits of using small suppliers and reference should be made to the CIPS practice document on small suppliers.) The difficulty of being able to differentiate between encouraging local suppliers to be competitive and the positive discrimination in favour of local suppliers as a policy. A good buyer should be able to assess the merits and drawbacks of using local suppliers and make sourcing decisions accordingly. The Public Sector The public sector must not discriminate on the basis of geography for any contract over the relevant threshold in the EC Procurement Directives. However, the question of whether or not to buy locally has bedevilled local government for years - on the one hand there is the need to achieve (and be seen to have achieved!) value for money and on the other hand, a desire to support local businesses. The dilemma has been brought back into the limelight by a) the introduction of Best Value which has increased the need for local authorities to demonstrate that value for money is being achieved and b) by the growing influence of eCommerce which will greatly widen choice in the marketplace and put pressure on local companies to remain competitive. The current emphasis on Best Value has made it more difficult to justify a decision to try and source purchases locally when at first sight the prices being charged would seem to indicate that this would be uneconomical. It is important therefore to calculate the true cost of a purchase, including its impact on the policy outcomes of the authority. The problem is however that the benefit often does not accrue to the department or individual making the purchase when there is a local sourcing decision. CIPS would draw attention to the publication 'Developing Local Suppliers' produced by SOPO (Society of Purchasing Officers in Local Government) which puts forward a number of disadvantages in dealing with local suppliers which are particularly relevant to local authorities. Some of these (which may also be applicable to organisations in the private sector) include: The requirement, under the EC Procurement Directives, to award the contract to the most competitive tenderer regardless of location, and based on lowest price or MEAT (Most Economically Advantageous Tender)

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Paying more than you need Lower quality products and services Encouraging a false sense of security in local businesses and reducing their competitive ability Risk of discouraging innovation Risk of loss of probity and transparency DEVELOPING THE LOCAL MARKET - POTENTIAL FOR PARTNERSHIPS CIPS would stress the importance of buyers keeping their supplier portfolios up to date, so enabling them to determine which purchases would benefit the most from local supply. If a local supply is readily available then well and good, but the likelihood is that an adequate local supply does not exist, in which case the buyer may wish to try to develop one. Strategies for implementing this kind of approach include: Working with local suppliers in developing their business Buyers explaining to customers their reasons for using local suppliers Buyers encouraging their suppliers to extend the local supply chain by buying locally Buyers encouraging other buyers and bodies (Chamber of Commerce, for instance) to collaborate with them in developing the local supplier base Ways in which Local Authorities in particular can help the local market include: Developing a guide to supplying goods and services to local authorities Making local firms aware of their needs in advance through a PIN (Prior Indicative Notice) on the OJEC pattern Organising 'Meet the Buyer' events and inviting other public sector representatives to participate Holding supplier briefings for local companies about selling to the local authority

CONCLUSION - A PRACTICAL EXAMPLE Practical considerations which may arise in implementing a policy of purchasing from local suppliers may be illustrated by reference to the NHS (example taken from one particular Trust but has broader applicability). In this particular Trust, much healthcare expenditure is directed at national/multinational suppliers providing medical products and services; the opportunity for using local suppliers is limited as the predominantly retail supply structure is targeted at the individual consumer. IT consumables, closely followed by stationery and printed forms are the only product areas where there may be an alternative local market but such products represent a relatively minor percentage of expenditure. Within the health care sector there is an increasing reliance on national purchasing agreements where, from experience there is little that a local supplier can do to challenge prices across the range sourced. This applies also to non-healthcare products which the NHS requires from time to time. As an example, to satisfy the requirements for building materials, contracts are currently being sought with national chains such as Wickes rather than with local builders merchants. In conclusion, there are several benefits of using local suppliers which should be considered by the purchasing and supply management professional - but the final selection, irrespective of the sector within which the buyer is working, should always only be based on objective and relevant criteria.

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GOOD PRACTICE IN WRITING CONTRACTS

INTRODUCTION CIPS practice documents are not written to be an end in themselves - they are a collection of views on good practice within a particular subject area, in this case writing contracts, as they relate to purchasing and supply management. The reader is encouraged to extract those parts of a CIPS practice document that they can use for their own particular purposes such as writing policy statements, guidance or procedures. This range of publications is intended to provide direction on good practice along with some guidance for context and interest. Further information is available from CIPS. Practice documents are written for use by anyone associated with, or interested in, the purchasing and supply management profession. However, this particular set of CIPS beliefs on writing contracts has been written primarily for the benefit of full-time purchasing and supply management professionals. This document is one of a series summarising the CIPS view(s) on a wide range of subjects. The reader may wish to refer to the accompanying document which supports this series entitled Background on Purchasing and Supply Management Positions on Practice. CIPS is expressing beliefs on good practice in writing contracts as this is a fundamental day to day activity of purchasing and supply management professionals. Reference should be made to the CIPS positions on practice document on the Use of Lawyers. CIPS views, opinions and beliefs are stated throughout the document; however the broad practice statements which underpin the text are as follows: CIPS would underline the need for care when drawing up Heads of Agreement which, correctly drafted, can prove beneficial in the formal contract negotiation process CIPS recommends that the salient points of a contract are recorded in the contract schedules CIPS recommends that one of the clauses in the contract (or in the case of complex contracts, one of the schedules) should be devoted to a description of the change control procedure to be employed CIPS would suggest to purchasing and supply management professionals that they should be alert to the fact that a good contract can be an important factor in achieving and maintaining good project management practice

CIPS takes the view that certain aspects (for example, who takes responsibility for undertaking specific tasks and responsibilities) should appear in the schedule(s) rather than form part of the terms and conditions

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The title of this paper has been carefully chosen to reflect the fact it is concerned in essence with the factors and considerations which should be borne in mind when drawing up the terms and conditions of a contract. The reader should bear in mind that contracts can be verbal; they can be implied by conduct as well as be written documents. A sound written contract provides a good basis for a successful relationship between the parties. However this not to say that a comprehensive formal written contract is always necessary; the need is dependent on the value and risk associated with the nature of the procurement concerned. Where a contract serves the purpose of a "relationship framework" (a term which should not be confused with 'partnering' ) and is to be used only as a supplier performance management tool (which could in fact under some circumstances be contractually binding), then clear, straightforward English should be used and, as far as possible, all legal jargon removed. It is often the case that legal documents are only referred to when normal relationship management techniques are seen to have failed. However it can be argued that a good contract encourages good project processes and management, one example being the NEC (New Engineering Contract) where this is seen as an important objective even at the pre-drafting stage. CIPS would encourage purchasing and supply management professionals to be aware of such considerations even when the relationship enjoys the support of a very robust contract. COMPOSITION OF THE CONTRACT DOCUMENT Written contracts often appear merely as standard terms and conditions on the back of purchase orders (subject of course to the avoidance of any confusion which may arise as a result of the Battle of the Forms). This approach is often sufficient as far as low value and low risk orders are concerned. If the parties consider that a formal detailed written contract is appropriate and necessary then they should be prepared to spend some time coming to an agreement on its contents. Each document will be different; for example, the contract associated with a Public Private Partnership for Information

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Technology Services services will be very different from that for the construction of a building. The specific terms and conditions which normally appear in written contract documents are names and addresses of the parties; dates of commencement and completion; deliverables; acceptance procedure; warranties and indemnities; provision for early termination, etc. CIPS believes that the terms and conditions of a contract need to be harmonised with the scope of work and the obligations and liabilities of each party. DRAFTING THE CONTRACT It is unusual for contracts to be drafted from scratch; there is usually a model form that can be used as the basis for negotiations. This is a cost-effective way of drafting the contract, providing the purchasing and supply management professional is familiar with the content and meaning of each clause. The key point is that all aspects of the contract, whether clauses or schedules, should (where possible) be written in plain English with short succinct sentences that are easy to follow and understand. In those cases involving complex legal issues and concepts it is often instructive and perfectly acceptable to provide a "worked example" to illustrate and underline the form of wording used. Practice and procedure in drawing up complex contracts will also vary from one sector to another. In the case of the MOD for example, with the emphasis on competitive tendering, it is usual to produce a draft contract which is issued as part of the ITT package. This enables all tenderers to see the sort of document they would be expected to sign up to and therefore, in theory at least, they can all bid on the same basis. This is not to say of course that post-tender negotiation on terms and conditions will not occur, but at least it can do so with the existing groundwork in place. The importance of the pre-contract stage is often underestimated but it is vital to invest time and effort at this point not only for the clarification of the respective roles and responsibilities but also to facilitate the drafting process and minimise the risk of future misunderstandings. That said, it is important to avoid going into excessive and potentially confusing detail. Where a contract has to be drafted from first principles or largely separately from the usual model, it is good practice for purchasing and supply management professionals to negotiate Heads of Agreement as a first step. CIPS would also advise taking care when drawing up Heads of Agreement, avoiding the risk of creating an agreement that is in any way prejudicial to satisfactory and mutually beneficial formal contract negotiations. The purchasing and supply management professional can subsequently work with lawyers, as appropriate, on the contract drafting process. If the clauses are drafted, i.e. the precise wording agreed, at the time the Heads of Agreement are agreed, effectively two stages in the process are being compressed and the benefit of

thinking through the principles separately is being obscured. It can therefore be an additionally laborious and time-consuming process. Further, if lawyers are involved in such a process, the cost of their services would be substantial and in most cases would not represent value for money. CIPS believes that it represents best practice to put the specific (i.e. non-standard details) of the contractual relationship (for example, who is responsible for doing what and by when), in the schedules to the contract, rather than in the terms and conditions of the document. Any changes to the standard terms or additional special clauses should be put in a separate section and highlighted. This means that differences between each contract are readily identifiable and those who are not directly involved in the contract negotiations can easily see what has been agreed. DISPUTES Only a small percentage of cases in procurement ever come to litigation not least because litigation is a painful and expensive process, and usually the parties involved have a strong commercial interest in continued constructive relations. A further reason is that purchasing and supply management professionals effectively manage the supplier/buying organisation relationship, identifying problems and dealing with them before they can develop further. Under English law, contracts for construction are required to provide an adjudication process before a dispute can reach the courts. This is a desirable practice that can usefully be applied in many procurement contracts. Adjudication is generally regarded as a best practice process. The traditional dispute resolution process of arbitration is widely considered by clients to be legalistic, expensive and needlessly confrontational and where there is a choice, should normally be avoided, as should going directly from adjudication to litigation. CONTRACT AMENDMENTS It is important that the contract documentation should contain guidance as to who has the authority to make amendments, as well as the level of entitlement of the other party or parties to agree or reject such changes. CIPS recognises that different organisations refer to changes to contracts, once they have been let, in different ways i.e. change or variation orders, contract amendments etc. When a change is required the purchasing and supply management professional should follow the procedures and policies of his/her organisation. It is far easier to make changes to contracts if such a change is in one of the schedules rather than the body of the contractual terms; this is why CIPS advocates that the salient points of each contract are recorded in the schedules.

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CIPS advocates the use of an appropriate change control procedure which, as well as unambiguously setting out the procedures to follow, should also state who is authorised to make these changes. This does not necessarily imply drawing up a list of authorised signatories but should be sufficient to prevent end-users making their own amendments at will. If, however, certain end-users are in fact given delegated authority to make changes then this needs to be clearly set out so that the supplier is made aware of who does, or can, represent the customer. Equally the customer may need to know who is authorised to sign off on behalf of the supplier ( does everything need to go via the sales department or is it permissible for, say, a design engineer to liaise direct with the customer as far as, for example, any cost implications are concerned.?) It has been suggested that every change reflects a lack of foresight at the drafting stage. However it is not a perfect world and so CIPS recommends that a clause, (or, in extensive or complex contracts, a schedule), should be devoted to Change Control, setting down the agreed process as well as the requisite escalation clauses and arbitration procedures. CIPS recommends that such clauses be as precise and unambiguous as possible; vague generalisations about, for example, reasonable prices should be avoided as they can so easily lead to misunderstandings and bad feeling between the parties. CONCLUSION Whilst acknowledging that it is permissible for contracts to be verbal in form and that as such they carry full legal force, the CIPS is of course fully aware that most commercial contracts are, for avoidance of doubt almost always in writing. CIPS considers however that such a document need not be confrontational; on the contrary, correctly and carefully drafted it can provide a sound basis not only for a successful relationship between the parties but can also serve as a solid foundation for project management processes. It has nevertheless to be admitted that even with carefully drafted contracts, disputes can and do occur; in such cases adjudication, in the opinion of CIPS, offers the best chance of

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