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L4M1 - Scope and Influence of Procurement and Supply
L4M1 - Scope and Influence of Procurement and Supply
Chapter 1 – Added value that can be achieved through procurement and supply chain
1.1 Describe the categories of spend that an organisation may want to purchase.
Procurement involves obtaining something. This maybe tangible such as goods or intangible such as
services. The procurement process begins by identifying a need and is complete once the goods or
services that meet the need are delivered. It is a strategic function of a business and involves high
level of skill.
Elements of procurement
Added Value
Purchasing – act of physically ordering and buying something
Supply – infrastructure which ensures products of services gets to the customer from supplier.
Cost
Quality
Inventory
Logistics
Waste Management
Purchasing on the other hand involves acquiring the goods and services that an organization
requires. It is a small subset of the broader procurement function. This process includes activities like
ordering, expediting, receiving, and fulfilling payment.
Procurement Purchasing
Activities related to acquiring goods and Activities related to buying goods and services
services
Steps that happen before, during and after Straightforward process of purchasing goods
purchase and services
Commonly used in production environment Commonly used in wholesale environment
Puts more importance on item value than cost Focuses more on item cost than it’s value
Refers to a set of tasks that spot and fulfill Refers to the specific task of committing
needs expenditure
Includes need recognition, sourcing, and Includes ordering, expediting, and payment
contract closure fulfillment
Follows a proactive approach to spot and fulfill Follows a reactive approach to satisfy internal
needs needs
Relational–focuses on creating long-term Transactional–focuses on transactions than
vendor relationships vendor relationships
Focuses on strategic, long-term goals like Focuses on short-term goals such as fulfilling
gaining a competitive advantage or aligning the five rights in a transaction (right quality,
itself with corporate strategy or goals. right quantity, right cost, right time, and right
place)
A cost within an organisation is an amount payable in return for receiving something. Within
business, costs usually involve money but sometimes can be made up of time, material, effort,
opportunity.
Organisational Budgets
This is the primary tool used by an organisation to monitor income and expenditure. It is of two
types.
1.2 Analyse the different sources of added value in procurement and supply
Added value in general business sense considers all the costs that contribute towards making the
product or service.
Intercoms
Intercoms are shipping or delivery methods under which a supplier intends to supply goods to the
buyer. The variety of options to consider are detailed below:
Total lifecycle cost or total cost of ownership (TCO) are used to analyze the total costs incurred over
the lifetime of a material or service whereas total cost of acquisition (TCA) relates to amount of
money an organisation has to budget in order to physically receive a product onsite.
TCO includes TCA, Storage cost, Operation, Maintenance, Insurance, Tooling, Training, Disposal, etc.
Internal & External Suppliers – Supply is considered internal when the product or service comes
from same organisation while external suppliers are organisations that are separate business entities
from the buying organisation.
Contracts
A contract is a legally binding agreement between two or more parties in which one party agrees an
action in return for something. A contract is enforceable in law and exists in every commercial
transaction. The following must exist for a contract to be valid:
Intention – Parties must have intention that the agreement can be enforced by law.
Consideration – There must be some form of bargain or promise for certain action.
Agreement – The agreement is created through offer and acceptance.
A typical contract in addition to the five rights of procurement contains payment terms, packaging
(goods), terms & conditions, currency, law, notice, dispute resolution and key performance
indicators.
Key performance indicators (KPI) can either be qualitative such as “reducing number of material
rejects” or quantitative such as “40% reduction in material default”.
Other sources of added value beyond on-time & in-full delivery (OTIF) & good price.
Additional features – something extra to attract customers.
Brand – an organisation’s identity which includes name, logo, color, etc.
Convenience – convenience include time, accessibility, etc. and customers can pay more for it.
Excellence of service – Helps to build relationship and repeat business.
Reduced input cost – A procurement professional can work with supplier to reduce their input
cost thereby achieving more value.
Reputation – Buyers are more likely to purchase products or services from firms with good
ethical values.
Innovation – Adopting new concepts to make improvements from existing ones.
Sustainability – Involves achieving value for money while ensuring positive outcomes in relation
to the environment, economy and the community.
Summary of the key areas that should be considered when trying to achieve value for money.
Currency/Exchange rates
Environmental factors
Freight cost
Maintenance cost
Packaging
Payment terms
Product/Service price
Place
Quality
Quantity/Inventories
Supplier reputation
Time
Warranty
Definitions of procurement, supply chains, supply chain management and supply chain networks.
Supply Chain – Encompasses all organisations and activities associated with the flow and
transformation of goods from the raw materials storage, through to the end user as well as
associated information flows. It can be found within the three main industry sectors, each adding
value to the process and working together to form a chain.
Primary sector – includes industries that extract natural resources from the earth.
Secondary sector – includes manufacturing/transformational industries that convert raw
materials to finished goods.
Tertiary sector – consists of service industries.
Stages of supply chain
1. Producers extract natural resources
2. Suppliers obtain natural resources from producers
3. Materials are sent to the manufacturer to process
4. Distributor collects processed material from manufacturer and delivers to the customer.
5. Customer receives the processed material which meets demand.
Materials Management
Part of supply chain and covers the handling, storage, inspection and issuing of raw materials,
components and finished goods.
Material requirements planning (MRP)
Involves use of electronic system which can schedule orders, monitor inventory and manage
production process. The three main objectives of MRP system are as follows.
To ensure that the parts or materials needed for manufacturing and end products are available.
To establish when to place orders and schedule deliveries
Keep inventory value as low as possible.
Within its calculation, MRP system will work out order quantities based on minimum order
quantities (MOQ), bath quantities (amount of products produced at a time), buffer stock (minimum
inventory) and lead times which includes supplier lead time and cycle time (time it takes for
production cycle).
MRP has however evolved to Enterprise Resource Planning (ERP) which includes several other
organisational functions beyond BOMs, raising requisitions, creating POs, etc. these functions
include.
Accounting
HR
Manufacturing
SCM & Material management
Customer relationship management
1.4. Differentiating the stakeholders that a procurement or supply chain function may have.
Any group or individual who can affect of is affected by the achievement of the organisation’s
objectives is a stakeholder. Stakeholder can be internal or external.
Internal stakeholders include people or groups who are directly involved with the business e.g.,
directors & employees
External stakeholders are people or group who have interest in the organisation and could
either be impacted by it or have impact on it. E.g., customers, banks, suppliers, community,
government.
External stakeholders
Producers
Shareholders
Suppliers and external manufacturers
Banks/Lenders
Local community
Customers and consumers
Media
Government and regulatory bodies – create and enforce regulations within the state/country
CIPS – ensuring that all members conform with code of ethics and promotes professionalism.
Mendelow’s stakeholder matrix – identifies four groups of stakeholders and suggests how the
group needs to be managed.
Keep satisfied – stakeholders that have a high level of power
but are not very interested in running of the business. Such
as investors who are only interested in good returns.
Manage closely – has high level of interest in the business
and have high power. They need to be involved in decision
making process and have clearly identified role. E.g.,
government.
Minimum effort – least important in terms of power and
influence but are still key to successful functioning of the
organisation. E.g., professional regulatory bodies like OSHA.
Keep informed – Do not have much power within the
organisation but are potentially powerful outside. E.g., local activists.
Added value created by each stage of the CIPS procurement cycle/sourcing process.
Stage Purpose
Understanding needs/
developing specs.
Market/commodity and options
Develop a strategy & plan
Pre-procurement, market test
and engagement
Developing documentation –
PPQ/PQQ, etc.
Supplier selection
RFQ/ITT issue
Bid/Tender/Quote evaluation
Contract award
Warehouse logistics & receipt
Contract/Supplier management
Asset management/end-of-life/
lesson learned
How electronic systems can be used at different stages of the sourcing process.