Procurement and Supply in Practice [Lams] Core Study Guide Level 4 Diploma in Procurement and SupplyPrinted and distributed by: The Chartered institute of Procurement & Supply, Easton House, Easton on the Hill, Samford, Lincolnshire PES 3NZ info@cips.org wancips.org Copyright © CIPS 2018, All rights reserved No part of this publication may be reproduced, stored in a retrieval system, rented, hired, transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without permission in Writing from the publisher or under licence from the Copyright Licensing Agency Limited. Further details of Such licences (for reprographic reproduction) may be obtained from The Copyright Licensing Agency, Sth Floor, Shackleton House, 4 Battlebridge Lane, London SE1 2HX, Every attempt has been made to ensure the accuracy of this study guide; however, no liability can be accepted for any loss incurred in any way whatsoever by any person relying solely on the information contained within it The study guide has been produced solely for the purpose of professional qualification study and should ot be taken as definitive of the legal position. CIPS cannot be held responsible for the content of any website ‘mentioned in this study guide. Specific advice should always be obtained before undertaking any investment, ISBN: 978-1-86124-295-2 ‘ACIP (Catalogue in Publication) catalogue record for this publication is available from the British Library. All facts are correct at time of publication. ‘Author: Katie Jarvis-Grove FCIPS Chartered Procurement and Supply Professional First published in 2019 by CIPS Editorial and project management by Harem Ltd. ‘Typesetting by York Publishing Solutions Pvt. Ltd, INDIA Index by Indexing Specialists (UK) Lt. Every effort has been made to trace all copyright holders, butf any have been inadvertently overlooked, the Publishers will be pleased to make the necessary arrangements a the first opportunityContents Your qualification Guide to qualification content About our exams and your study commitments How to use this book vi vii vil Book features ix Procurement and Supply in Practice x Chapter 1 @ __Lemonstrate the application of the procurement cycle 1 Apply the key stages of the procurement cycle to the practical procurement and supply environment 2 + The practical application of the CIPS Procurement Cycle 18 Chapter 2 . © Applying the key stages of the sourcing process 65 Apply the key stages of the sourcing process to the practical procurement and supply environment 6s + The stages of the sourcing process 65, + Creation of contract terms 67 + Supplier selection 84 + Contract award 101 + Contract and supplier management 116 japter 3 The application of whole life asset management 133 ‘Apply whole life asset management to the practical procurement and supply environment 133 * Inclusion of all costs ~ purchase price through to disposal and end-of-life 134 + Hidden costs - global sourcing and risks associated with extended supply chaln 146 + Only develop for larger purchases 161 + Ensure senior management support 165 * Cross-functional support - ensure access to data 168 + Team working ~ reduce data collection time 170 + Decommissioning 175 + Removal or disposal processes 179 + Legal aspects of waste management 183Contents Chapter 4 ‘Apply ethical and responsible sourcing to the practical procurement and supply environment + Bribery, corruption, fraud, human rights, modern slavery + Application of the CIPS Code of Conduct + Ethical codes of practice + Environmental factors Supporting information on ethical practices in supplier quotations and tenders Supplier monitoring and KPIs ‘The triple bottom line - profit, people and planet ‘Adopting sustainable practices, standards and specifications in the supply chain Considering the social impact of the organisation's behaviours + Expanding reporting frameworks to include ecological and social performance Glossary Index The appilcation of ethical and responsible sourcing within an organisation 189 190 190 202 205 212 218 220 224 28 236 244 250 256Your qualification Your qualification CIPS qualifications are regulated internationally to ensure we offer a recognised, professional standard in procurement and supply. CIPS Level 4* Diploma in Procurement and Supply is, ‘a vocationally related professional qualification. Formal recognition is included within the regulatory frameworks of an increasing number of countries such as the UK (England, Wales and Northern ireland), UAE (including Dubai) and Africa (including Zambia), Further information Cn this recognition and the details of corresponding qualifications levels for other international qualifications frameworks are detailed on our website, CIPS members can have the confidence in our regulated qualifications, whichrreliably indicate the standard of knowledge, skills and understanding that you, as a learner, are required to demonstrate. ‘Astep up from the Level 3 Advanced Certificate in inthis way sucessfl learners wll possess transferable workplace Procurement and Supply Operations the Level 4 Diploma shlls,devoping te operational andtacical abies asthey Procurement and Supply is a stepping stone to studyon the’ sve or managerlrles and responses is aimed at those CIPS Level 5 Advanced Diploms in Procurement and Supply. inthe xefession who haveprecuremer and supply actiy ‘The content has been written using the CIPS Procurement atthe heartof thro. Lamers wll be expected provide ‘and Supply Cycle as its focus, which presents a cycical ‘advice and gudonce to ey stakeholders onthe performance process of ey steps faced by hose procuring goods or of ergansatonal procedures and processes assocated . Services. The Diploma offers the mest common entry route with procuement and supply and wil aspire to manage tothe profession and should be used by earners to develop developments in andimprovements tothe relsted functions. ‘aprofessiona'tookbox which eemerscan apply inthe Tarsfeable ils arethose suchas communication, teamwork, “Ty racial environment and further develop at Levels 5 and 6, ar panning and completing tasks to high standards, al enable theleamer to add vaueto the oraniaton, ney evel Entry evel f Migheseeney te! ee Estes Wise Gay ‘This qualication provides progression tothe CIPS Level Advanced Diploma in ar] Procurement and Supply. .Suide to qualification content Guide to qualification -content What will I study? Eight CORE modules make up 60 required ORE Level eer ry Who is it for? ‘This qualification isthe essential toolkit for anyone planning carer inrocurement and supply. Developed fad writen sing the Procurement and Supply yce™* ‘sis focus tia the same level a the fst year ofan Undergraduate degree course. suitable or those In operational roles or those managing or superising the procurement and spl function who want to develop their carer and work towards MCIPS Chartered Procurement and Supply Professional What will I learn? *Youwiiern about making procurement and supply ‘happen within ancrganisaton,and you wlbe equipped vith an essential range of knowledge and too that you can ‘opi mediately in your workplace eam how o app practical theoretical and tecnica knowiedge, gna clear Understanding of procxement and supply and devdopthe ably to adres complex, non-outne probes. credits Con completion youwillbe able to analyse iterret and ‘lune relevant infermation and ideas and have an informed anarenessofafeing perspecives and approaches wthin the profession. You wilaso beable to review te elfeciveness and appropiteness of methods, ‘ons and resus Entry requirements ©) + merecarement ene — tne getesipees ey “hiss the only enty polnt onto our Diglome sey stepe ben pre {qualiicatons. Aminimum of atleast two Alevels(or_gedrer sete Internationa equvalert) ora CIPS Leve!3 Advanced wwmchservengty Cerifcate qualification required. Alternatively, you wil neeé a minimum of two years relevant experience Ina business enuronment Credit values ‘To gana qualcadon you areequredtocompletea total umber ofcredis. Ths away of quantingte requied mies of study hours. 1 credit is equivalent to 1Ohours of study. Each modules gen a red valuect 6 or T2.redks. Total credits required for completion G()[About our exams and your study commit About our exams and your study commitments Objective Response exam format (OR) ‘Tnese questions abow you to select a response from ist of possible answers ‘You wil fingthese types of exams across all our qualifications levels and they are marked by computer and then moderated by CIPS examiners. Constructed Response exam format (CR) ‘Tnese questions require you to create or konstruct a response tothe question ser as an essay or case sty. YOU wl Fd his ype of examin our diploma eve qualfcations and thy wl be marked by subject expert examiners. Your total qualification time (TQT) ‘he TOT indicates the overall numberof gulded learring hours, accionalsestudy and assessment sme that i required Gulded learning hours (GLH) iis expected that rou wl undertake 250 GLH. The éefinkion of guided learning hous Is'A measure of the amount af input time required to achieve the ualfeation, Tis includes lectures, tutorials and practical, aswell as Supervised study infor examole, earning centres and workshops. Self-study requirement (SSR) | acsisonaty, we recorsmend that you also commit to atleast 335 SSR. | ours. Ths inciades wlcerreaing of the subject reas and revision to give yourself ne best preparation fr successtlly achieving the qualicatin. : | Fetal exam time the modules in CIPS qualifications are assessed by an examination.How to use this book How to use this book Welcome to this study guide for Procurement and Suppiy in Practicp. It contains al : the information needed to prepare you for the assessment in this module, : This stuidy guide follows the order of the module specification and each chapter, relates to one of the Jearning outcomes below. You can also see the assessment criteria for each learning outcome, Fer completing this chapter you wl be ab + demonstrate the application ofthe procurement‘ ‘ os aii as ad Paner Completing tis chapter. you wll be able to + demonstrate the application of the key stages of the cing process. completing this chapter you will be able to demonstrate the application of whole life asset. Dp k mranagement. - proce nesta P After completing this chapter you will be able 2 demonstrate the application of ethical and [psesponsible sourcing within an organisation. wiltBook features Book features ‘Throughout this book there are a number of features to ald your learning and simplify your revision. Take 3 look at the different features you will find in the book below. AlZ ‘Remember . ‘This information is important, so you should make a note of it. Slossary These arethe key | Check ermsand:their | These revision questions give you a chance to check you Sefieidions understand the content in this chapter. Apply These tasks give you a chance to test out your knowledge and understanding. ‘Recap This information will summarise sections from previous chapters. a ‘These case studies will relate the content youhave = learned to real-world examples. ‘Recommended reading These books can give you more understanding on the subject. Link to CIPS knowledge where members will be able to access additional resources to extend your knowledge, plus links to online eLearning content including videos, audio and interactive quizzes to recap and test your knowledge and understanding. End of chapter assessments Atthe end of each chapter In the book there is a set of examstyle questions to prepare you for your assessment. End of Chapter Assessment : MEE} @ The National Health Service (NHS) in the UKis an example of an ‘organisation from which sector? | a. Public «Third | b. Private 4, Primary“eninge {Module purpose ‘On'completion of his made. earners wil be abi oidemanstate the racial application _ Of the key elements of the procurement cyclen an ncegrated manner, within a workolace Module aim(s) Procurement he business function that ensuresidentifkaton sourcing access and management of external esourcs that an organisation neds ar may need to sucessfully ‘ult strategic objectives exsist explore supply market epporunkies and ro knplement resourcing strategies that dever te Bet possible supa automes tothe organisatlon its stakeholders anc customers. n todays volatile global tating erwronmets, tis not enough for procurement and supoly professionals to simply know the theory behind thei profession they ‘must aso beln a poston 0 confidently and effectively apply that knowledge tothe Benet ofthe whole organisation, ders and customers, This madule s designed to test the practical appicavon of procurement and supply concepts and ideas within the practical envioninents which professionals are expected 1 perform. Credit valueCHAPTER 1 Demonstrate the application of the 7 procurement cycle r ‘After completing this chapter, you will be able to demonstrate the application of the procurement cle. be! Learning outcome |g Sere ore SE TTIR Chapter overview | ‘Apply the key stages of the procurement cycle to the practical - procurement and supply environment You will understand: + The practical application of the CIPS Procurement Cycle: i. © Defining business need 'o Market analysis and testing © Supplier evaluation © Tendering processes © Supplier and stakeholder management Se eee ee crbiainaiceaaaanaeaNistontinceees uated ae Introduction Procurement Is the strategic business function that Identifies, sources, accesses and manages the external resources that an organisation needs to successfully fuifil its objectives. In a changing trading environment, procurement professionals must understand the theories of strategic purchasing and be able to effectively | apply that knowledge in a work situation. This study guide shares the knowledge of procurement and supply in practice, ‘esing worked examples to bring theories to life, This helps you to understand how | Burchasing works in an operational environment.CHAPTER 1 Demonstrate the application of the procurement cycle ® Apply the key stages of the procurement cycle to the practical procurement and supply environment You must understand the procurement cycle to be an effective and efficient buying professional. The procurement cycle is at the heart of purchasing, sourcing and supply and so should be followed in day-to-day practice in the industry. In the first chapter of this guide you will learn in depth about the procurement cycle and how it is used in procurement practice in a working environment. Figure 1.1 shows the CIPS Procurement Cycle on which this chapter is based. “ser < Figure 1.1 The CIPS Procurement Cycle (Source: www.cips.org/en-gb/knowledge/ procurement-cycle/. Copyright CIPS 2014, All rights reserved.) ‘The CIPS Procurement Cycle has thirteen stages, which are outlined in table 1.1. stage. 1 Understand need devel I ificatic TE lana DEai ns ah coven eerie speocaten Market/commox ‘options including make-versus-buy assessment SO RNNERNNTTISENRDRSO TI i Develop strategy/pian emrecine saci Stage4 _|Pre-procurement market tests and market engagement Eee FPP |Datelafiment of required dScUrnenGStion| eg, request T6P™ quotation (RFQ)CHAPTER 1 Demonstrate the application of the procurement cycl [Supplier selection to participate in an Invitation to tender (ITT) exercise Issue invitation to tender/request for quotation Bid/tender/quotation evaluation and validation Eontiact wand and Fimplomnentation Warehouse logistics and receipt [contract performance review and continuous improvernent Supplier relationship/contract management Table 1.1 CIPS Procurement Cycle stages CIPS Procurement Cycle stages explained Stage 1: Understand need and develop a high-level specification | The first stage in the cycle Is understanding the need that has been generated. 7 The person generating the need should communicate with the buyer to ensure there is no misinterpretation. | Once the need is clearly understood, the procurement professional should ". | develop a specification. { The specification should be developed together with stakeholders and { colleagues to ensure that the final design is fit for purpose and that it meets | the generated need. | various skillsets and knowledge. ‘Specifications can be focused on performance or conformance. Performance specification Performance specifications state what the product or service mustdo or howitshould Sbeates ut the perform but leave the supplier the freedom to achieve this however they wish, product or service will do or achieve. This, Conformance specifications give lear instructions to the supplier about whatis overs the sutpute Fequired and how it should be achieved. Examples of conformance specifications required, tolerances include chemical formulae, recipes and technical drawings. and ary functions the product/service may ‘There are some key differences to think about when developing a high-level have to perform specification and deciding whether to choose a performance or conformance Technical specification, Table 1.2 outlines the differences between the two types of (conformance) - poreceavons specification Specifies which standards a Pireromancesneote eee | ‘Allow supplier innovation Sng oo RE Promote cormpetition in the eomomorrcesrec emote No supplier innovation men Reduce competition requirement must? | meetorexceed tee ncaa ‘The buyer bears the risk‘CHAPTER 1 Demonstrate the application of the procurement cycle Variance The difference Ddenween the ‘eucgeted amount and * the actual spend Commodity Rraw material that “can be bought or sold, eg. oil, gas, coffee : Buyer may not Know exactly what they | Buyer knows exactly what they are WU De BERING fa esapudedhue SEUNG sila ach asm Shorter docut Longer, complex document Liars sis timeegnslimingtalbtener iii Disregards supplier expertise ‘Takes advantage of supplier expertise Table 1.2 Specifications Stage 2: Market commodity options ‘Once the specification has been developed, the procurement professional is aware cof what is required, why and when. The next stage is to evaluate the market options. The options to consider include the budget available to spend on the procurement, the number of suppliers available and whether to make or buy the product or service. Itis important to understand the budget before sending out any Information to suppliers. Ths is essential for keeping within budget. The amount of budget that is available will affect the quality of the product or service that can be obtained, ie. the higher the budget, the higher the quality. Procurement professionals are often assessed on thelr actual spend against budgeted spend and the variance between them. So, ifthe budget is incorrect at the start of a project or financial year, itis good practice to speak with those setting the budget to understand the reason why and decide if any changes can be made. ‘Once the budget has been finalised, the procurement professional should research the market to learn how commodity prices are behaving in the relevant sector and how many potential suppliers are available. To fully understand the market pricing, procurement professionals should research the level of competition. Porter's Five Forces model is an established way of assessing the competition. Boigainng Power of Buyers Borgo Power of Suppliers sisttutos 9p Figure 1.2 Porter's Five Forces (Source: Porter, M.E (1980), Competitive Strategy: Techniques for Analysing industries & Competitors. The Free Press, NY)CHAPTER 4 Demonstrate the application of the procurement cych By evaluating the competition, a buyer can find out if there are likely to be many suppliers battling to win the contract or a small number of specialists who could supply the product or service. The next consideration is whether the product or service, developed through the high-level specification, should be made or bought. This decision is often called the ‘make or buy decision’. Core competentie: To establish which method offers best value, the business should think about ‘The processes whether the item in question is core to the company. A core competency within that are cota an organisation is a product or service that is strategic to the success or failure of Sehiewing success the business - its the main focus of the business. For example, in abakery, the and competitive core competence would be making bread or cakes. advantage Remember Make or buy decisions are about whether a product or service should be made within the organisation or bought-n from an external supplier. ‘A procurement professional can use Carter's Outsource Matrix when deciding whether to make or buy. Figure 1.3 shows this matrix. High Strategic alliance Retain Strategic importance Eliminate’ Outsource Ween Hains Contribution to operational performance Hh Figure 1.3 Carter's Outsource Matrix (Source: adapted from wiw.medium.com/ | @folsen/how-to-focus-the-startup-focus-matrix-5d13468e 18e) { Using this matrix, procurement professionals can decide whether the product | or service has a high or low contribution, assess its strategic importance and act accordingly. Products or services best suited to the ‘buy’ decision are ones that, {have a high contribution to operational performance but low strategic importance. [alz] | When products or services are bought-in to an organisation, the process is called | outsourcing. Outsourcing Contracting an The benefits to outsourcing can include the following. externa cornpany £ + Saving m to supply goods or money services that were + Reducing overheads once produced Internally + Reducing headcount { Using external knowledgeCHAPTER 1 Demonstrate the application of the procurement ¢yele $$ + Focusing internally on core competencies + Helping with shortfalls in labour/expertise ‘The recognised disadvantages of outsourcing can include the following, + Losing some control within an organisation + Relying on external organisations + Reducing quality ’ + Losing some internal knowledge oA ENTE aN TTR Outsourcing - does it jeopardise quality? Areport published in 2018 by.the Public Administra }p and Constitutional Affairs Seléct Committee revealed | that the quality of some public services in the UK en) ome had been put at risk by the government's decision to |; outsource the contracts for these services to companies [in the private sector, [Its believed thatthe government had made decisions E primarily based on price rather than quality when jj-ousouring work thax contributes tothe provision of pubiic services Companies that were awarded contracts to carry out work on public services would have been aware that . {the government priority was to reduce costs, These : F companies would have'been motivated to keep their ® own costs to a minimum, compromising the quality of, work completed.as a result. © A significant exemple isthe governments use of Carilion, Pa large construction services company, to work on large projects such’as the completion of a new hospital and a high-speed railway line. Carilion was forced to borrow large amounts of money when its contracts prevented it from passing additional cosis on to the government. The company’s poor financial situation caused ittocollapse in FF January 2018. This meant that many significant contracts f and projects were left unfinished. ain Ir essed “the government claims thats Use of outsourcing is intended to provide value for money by generating better services in return for les public money However, the government's decision to outsource work to carillon shows how the use of externa contractors i can be a rskas it means the level of quality may not be controled and the completion of work not always : guaranteed Stage 3: Develop strategy/plan ‘Once the decision to make or buy has been made and the market has been evaluated, the next stage is to develop the strategy or plan of how to achieve the procurement.Procurement professionals should think about the external environment when developing this plan and take several factors into account that could affect thelr decisions, The ‘STEEPLE’ analysis s an effective way to evaluate the external environment. This helps buyers to assess which factors could affect their need and helps them to develop the plan accordingly. Figure 1.4 shows the STEEPLE themes. Figure 1.4 STEEPLE | The SWOT analysis Is another useful tool for evaluating the environment | before finalising a strategy or plan to meet the generated need. This is shown | in figure 1.5, Weaknesses st perform wellwithin, | .. Areas that need improvement - righ Resse sk of slattsrsourtes Gln Sy Opportunities " + Threats vex ouside the organisation |. Aresreltd io external thot eau contoute favouraby.| tars that coud pose a enwitsuccess | problems forty organsm0n | pure 15 or oni atin ths ana. te stengts and weaknesses are areas win he oreenuaton andthe opporurites ond vents af ous the organisation ‘The next stage is to decide whether to use a request for quotation (RFQ) or an invitation to tender (ITT), ‘CHAPTER 1 Demonstrate the pplication ofthe procurement cye! (alzI Request for quotation Arequest for a supplier to give a ‘quotation against a given specification” Invitation to tender A structured process requesting a suppller to provide a bid against a specified set of terms, usually to carry out a service, by astated deadlineCHAPTER 1 Demonstrate the application of the procurement eyele $$$ Public sector A sector of the ‘economy that is. owned, financed ‘and.run by the “government Private sector _Asector ofthe ‘economy that is owned, financed and run by private Individuals Once the analysis is complete, a final plan and strategy are created ahead of the next stage in the procurement cycle. Apply Conduct a STEEPLE or SWOT analysis for an organisation with which you are familiar. Stage 4: Pre-procurement market tests and market engagement This stage of the cycle ensures it is the right time to carry out the procurement. Procurement professionais should consider the following, * Stakeholder engagement for feedback + Supplier engagement + Market research + Any new legisiation/regulations + Currency fluctuations + Competitors’ actions Ifthe feedback suggests the time is right to procure, then the next stage of the cycle can be carried out, if the feedback is negative, the procurement team should revisit the need and specification before continuing the process. Negative feedback could include the following, + No desire in the marketplace for the end product + Limited number of suppliers with capacity or capability + New laws about to be passed that will force specification changes + Currency is weak + Competitors are already one step ahead Stage 5: Development of documentation This stage of the procurement cycle involves creating the documentation that will be sent out to the potential suppliers. The documents may be requests for quotations or invitations to tender. The choice of documentation depends on the following. + The urgency of the need + The type of need + The sector in which the procurement professional works + Regulations and legal obligations + The procurement professional's preferred method of working Generally, RFQs are used for quicker, less complex products or requirements and tenders are used for long-term, complicated contracts and services. The public sector uses tenders a lot more in the working environment than private sector procurement teams,CHAPTER 1 Demonstrate the application ofthe procurement cycle ‘The documentation should contain the elements/information shown In table 1.3. Specification Performance or conformance aii "Payment terms, exclusions, labllty, . sasaiamaaptcermnnty sic ctl : Date for quotation/bid to be Deadline for prices to be submitted received by RG LTTE Contractual terms bracers: ~ Sgememymcyeseme “Amount of goods/services required EDN seiadinbinaltst Saati aoe Conformance to any standards, €g., Quality standards 2S 150 SERN Delivery schedule 4 "When will goodsrservices be required? masses ‘Where will goods/services be delverec? = ar Terra SLs SEMAN TN BT ee Ieee STSTUTSN RE SUEDE? ey performance indicators. be modtored wie Standards of service te supple wl be expected tomeet Delivery address Service level agreements Table 1.3 Documentation requirements + Check - sector most frequently uses invitations to tender? Stage 6: Supplier selection Before sending out the prepared documentation, the intended recipients need to be selected. Supplier selection involves evaluating suppliers against pre- determined criteria to assess their suitability to work with the buying organisation. Suppliers can be evaluated according to Carter's 10 Cs, which are as follows. 1. Competency 2. Capacity 3. Consistency 4, Control 5. Cost 6. Commitment . | 7. cash 8 Clean ‘ 9. Culture 10. CommunicationCHAPTER 1 Demonstrate the application of the procurement cycle Ey Corporate social responsibility (csk) Abusiness approach that contributes to sustainable development by delivering socal, environmental and economic benefits forall stakeholders. The CSR policy may cover fundraising for charity, ethical behaviour, social and environmental policies, etc. Ethical code of conduct Adocument stating ‘an organisation's accepted standards of conduct and behaviour for its ‘employees and stakeholders Lead time The time between placing an order with * a supplier and receipt of the goods 10 Suppliers can be audited to ensure they have a corporate social responsibility (CSR) policy and an ethical code of conduct. Procurement professionals can choose to evaluate their suppliers on different criteria, depending on the culture of the organisation, the overall strategy and the business objectives. Whichever criteria are chosen, the results can be analysed to select the most suitable suppliers to receive the documentation. Stage 7: Issue Invitation to tender/request for quotation In this stage the documentation that was prepared in stage 5 is sent to the pre-evaluated suppliers from stage 6. In the public sector the documentation will sometimes be sent in one stage to a market of suppliers who have not been. pre-selected. This is called ‘open’ tendering, ‘The documentation can be sent by post or electronically, most commonly via the procurement organisation's eTendering portal. If the documentation is an invitation to tender, all suppliers should be issued with the invitation at the same time. Stage When the bids or quotations have been received by the buying organisation, the next stage Is to evaluate them to select the most suitable supplier to award the contract to, Bid/tender/quotation evaluation and validation The bid or quotation documents from the potential suppliers should be evaluated against the documents generated and sent by procurement. This is to ensure that the potential suppliers are offering a suitable product or service. In the public sector, the evaluation criteria need to be agreed beforehand and presented in the ITT so that the suppliers know what their bids will be evaluated on. Itis easier to evaluate the offers if a conformance specification has been used, because a performance specification may allow a variety of interpretations. To be certain that the potential supplier has offered a product or service that is fit for purpose, itis good practice to work cross-functionally and involve other team. members who have expert knowledge of the product/service, Le. engineers, designers or people who use, or will use, the product/service. It is important to remember that the best price may not be the lowest. The purpose of evaluation is to consider everything about the supplier's offer. The total cost of acquisition should be calculated, This includes the following. + The price + The quality + The lead time + The supplier's reputation ‘+ The supplier's ethical conduct + The supplier's CSR policy + The warranty given + The training requirements + The associated risk—— CHAPTER 1 Demonstrate the application of the procurement cyc The total cost of acquisition (TCA) can be explained using the iceberg model. Figure 1.6 shows an example of this. Logistics and Handling costs ~ _ Customer service ed Consumables Stock costs Training & “support Regure 1.6 Iceberg model (Source adapted from Baily, P Farmer, D, Crocker, 8, Jessop, Jones, D. (2015), Procurement Principles and Management, Harlow: Pearson) Stage 9: Contract award and implementation ‘The procurement professional can now award the chosen supplier with the contract to supply. : ‘The two parties will then negotiate contractual terms to reach a mutual agreement before signing the final agreement and starting the contract. Greating mutually acceptable terms at this stage helps to reduce risk and avoid problems throughout the contract. (Once the contract has been finalised, the procurement professional informs the suppliers who were not successful and gives them feedback if required. This. feedback is compulsory in the public sector. Stage 10: Warehouse logistics and receipt Ifthe contract awarded Is for a tangible need, then the stores or warehouse Tangible department need to be involved to prepare for the arrival of the goods. The Something you can warehouse workers will need to allocate space for the products, be advised when ‘ouch to expect dellverles and understand the specification so that they can carry out quality checks accurately. Stage 11: Contract performance review and continuous improvement In order to effectively manage supplier performance and contractual obligations, the supplier's performance against key performance indicators (KPIs) should be reviewed regulary, These KPIs will have been agreed during the post contract award negotiations. rg | eg on en‘CHAPTER 1 Demonstrate the application ofthe procurement cycle In addition to reviewing KPls, suppliers and the procurement team should work Allthe organisstions that works towards perfection. Figure 1.7 shows the continuous improvement cycle. &® iptNtiey identity “opportunities in the process" | Waste of paper Exact quantity’stated Risk of buyer forgettingto | action Norneed for technology Difficult to establish the ‘generator woes ‘nibbcek nde So Risk of human error procuerienthas to check requiston raiser has {author | Information sent quickly Impersonal J Can track if e-mail hasbeen _| Risk of e-mail not being read read Generator may not respond 9 contains full details to e-mails Easy to establish generator | Risk of human error Permanent record Procurement has to check requisition raiser has authority remeron STR ‘Ay Fastand efficent Impersonal Full details included Larger quantity than needed Pre-authorised St | evento ; Cost effective: : High investment in techriology LLowrisk of human error sis is) csc i c Table 1.4 Four methods of raising requisitions Remember There are four forms that a requisition can take. + Verbal + Email + Handwritten + Automated ‘These days requisitions are mostly commonly raised using e-mail and automated methods. This is because these methods are less exposed to risk and also because organisations are keen to reduce their carbon footprint and promoteCHAPTER 1 Demonstrate the application ofthe procurement cycle ‘sustainability. Many organisations are now paperless, which means that handwritten requisitions are becoming histor Globalisation Is increasingly an economic factor in business, so verbal requisitions are not an effective way to define needs any more. Organisations Paperless are often spread around the world and in organisations with a centralised Organssatons hat. procurement function, generators of the needs may never see the buyers. Inthese sper snduse ‘sttuations, electronic methods must be adopted to ensure efficient and compliant ‘electronic methods of ‘working practices communication [Arequistion should contain all the information that the buyer wil require to react eballsation witheneed “he interconnection Ofteade throughout The requisition should contain the following elements. the world Date of the requisition Centralised A procurement Description of what is required, including any quality requirements and structure where specifications allthe ordering is conducted from Supplier if known (ie. if the need is a re-buy) fone central point - all requisitions The quantity required flow to one office, Wwihich could be in a When the need is required reteset, region Where the need is required or country fem the generator Why the need is required } who denireatne need E vrosnnoreanered Feure 1.10 shows a requisition andthe information that shouldbe included. bl @ Blt See Submit Aclors AA eee stil wie (Recmoonoomia PD Dene [new SERVERS ones Py oe a BI 00 300-0F [uss ROP Sa NORTH 14) 0 Beantentimter _v) ‘Fgure 1.10 Purchase requisition (Source: Microsoft Dynamics GO 2016 R2) ”CHAPTER 1 Demonstrate the spplication of the procurement cycle he What information should be Included on purchase requisition? Inventory, The goods or stock thatan organisation holds with a view to reselling in the future 20 ‘Automated processes used to generate requisitions are based on a material requirements planning (MRP) system. Commonly used by manufacturing ‘organisations, MRP systems aim to remove the human element of monitoring stock and raising requisitions, Map systems have the following three main goals. 4, To ensure that materials/components are always avallable as required 2. To keep inventory as low as possible 3, To plan manufacturing, procurement and delivery schedules MRP systems generate requisitions for procurement based on the activity within the manufacturing organisation, This includes the elements in table 1.5. Bill of materials (BOM) | The list of components that forms the end product, eg, for a clock, the BOM would contain the hands, the battery the clock face, et. = cgemrermggmnenem fsrscngnieaprigalon siainmenrri repo meaad Minimum order “The amounts in which procurement has to order quantities (MOQs) tHe components. This is the amount thatis most cost effective for both the supplier to produce and she,uaygr fe procure. i Current stock levels | ‘The number of components or finished goods that are avaliable within the organisation, "sales demand or “Tie number of orders that an organisation has to J planning run {uifl for its customers or consumers. Without any I sales demand, there would be no requirements : for BOMs, abi dibheebildlhasevisndi aes ycle time The time taken within a manufacturing ‘organisation to produce the end product. Cycle time starts when components are delivered and ends when the finished product is ready for dispatch. eeraremencreernennyranann reese eee ‘The amount of time it takes the supplier to deliver a the goods after receiving the order. This time is | usually negotiated between the buyer and the Supplier, and orders are placed in good time to ‘ sign. Selsn, as.and when ceaulred i Table 1.5 Information used by MRP systems to generate requisitions for procurement All of this Information Is put into the MRP system so it knows when to generate a requisition. MRP systems are only as good as the information that is entered at the start of the project.ae Figure 1.11 shows how an MRP system works to generate arequistion for Procurement. ° me biiiciacmaiua es Eo eal f ened Fished goods! . Inventory on | Purchase pM hand order | ey be I =a =a Figure 1.17 MRP flow chart Figure 1.11 demonstrates how MRP systems generate requisitions, The system will ‘know, based on the planned orders or sales demand, how many finished Products are required. Using this information, the BOM, the amount of stock already in the organisation and the lead times, the system can generate a requisition for procurement to act on. Mo's mobiles Asha is a buyer in his brother, Mohammed, factory. ‘The factory manufactures personalised mobile telephone cases to protect telephones, ] Mohammed haseteniyinvted ian i tem trthe | » BESIDES ANE 1000) N86 sx laning to ashe bows tworks Mohammed has explained the principle of MRP and that the system, once populated with data, willsave Asha | visiting the stores every day to see what products need { to be ordered to keep production flowing a Mohammed says that the Best way for Asha to 4 understand the MRP concept is with a worked example, -Mohammedhpresents Asha with a plecelofipaper asanieigd below: 1 Sales demand: 10 mobile phone covers for a 4 Somsung Galaxy with the name, BARRY on 4 BoM: tx letterb 1 letter pa RN 2 etettere! Mens 1 lettery 4 1 blank Samsung Goloxy phone cover 5% 1g of gue 1 * small cardboard box tesla: laut lacing an order? Ssthe quantity requested the best value for money? J the product likely to be coming to the end of its life/being replaced? ‘Does another individual have the same need - could the volumes be combined? ‘unitke the procurement professional, the generator of the requisition may not Be aware of all the factors, so the buyer must not presume that the requisition is sexys needed. . or example, a buyer has been Involved with a cross-functional team who have ‘been looking at changing the design of a product within the organisation. The ‘redesign means that one universal bolt can be used instead of three different- swaed ones. fa factory assembler realises that stock is rapidly reducing, they may raise a requisition. However, the buyer is aware that the requirement for that bolt 1a soon come to an end. it would not be cost effective to order the usual quantity ‘sta product that will soon be phased out,CHAPTER 1 Demonstrate the application of the procurement cycle Procurement professionals will also be aware of factors such as market trends, suppliers’ positions and the supply and demand situation within the industry in which they work. Supply and demand will be explored in depth later in thls chapter. Understanding these factors can help when turning requisitions into purchase orders. Ifthe market trends or the circumstances of suppliers are not favourable, it may be possible to order a larger volume than on the original requisition, as this could be cost effective for the organisation. Similarly, if the market prices are extremely inflated when the requisition is received, it may be cost effective to order smaller quantities and wait until the price reduces before ordering the full volume requested. Of course, when challenging and amending a requisition, its essential that the buyer communicates with the generator of the need as there may be situations where the buyer is unaware of the circumstances of the need, Although the buyer should evaluate a requisition to ensure itis genuinely required, no changes should be made to it without communicating with the person who has defined the need. Some organisational structures enable this process to occur more easily than others. Smaller organisations often have a culture where all individuals know and communicate with each other, making the communication of needs and justifying, requirements relatively straightforward, In larger organisations or centralised structures, the channels of communication are often more challenging. Different time zones, language barriers and simply not knowing who to ask can delay the process of getting a requisition turned into a purchase order. Organisations operating a devolved procurement structure could also face problems with defining needs and creating purchase orders. Within these structures, several individuals could request or order goods and services at different times. With a structure like this, although there are many advantages, one of the main disadvantages is that the best value for money may not be achieved as multiple requisitions are being raised from different areas of the organisation and there is litte collaboration between departments or locations, Defining and understanding needs within an organisation from a procurement. perspective is essential ifa business wants to achieve value for money through efficient and effective processes. Needs should be authorised, justified and evaluated before purchase orders are raised, to avoid the likelihood of unnecessary budget variances and to keep inventory levels to a minimum. This also optimises how successful an organisation can be, whether thats in making | a profit, spending taxpayers’ money effectively or obtaining the best value for a charity or nonprofit cause. Market analysis and testing Within procurement, once the need has been understood, defined, justified and authorised, the next stages are to analyse and test the market. Part of strategic procurement is ensuring good value for money, so itis important that buyers understand what is happening in the relevant markets, how commodity prices are reacting, whether the target audience or customer base will be receptive to what being sourced and supplied, and which suppliers are available and able to supply the need.tr Demonstrate the application of the procurement cycle "analysing and testing the market Includes looking at the following. * STEEPLE analysis © SWOT analysis, * Porter's Five Forces Levels of supplier competition . * Supply and demand Push and pull . ‘Supplier segmentation Product life cycle = Ansoff matrix ‘Early supplier involvement = Moke or buy Offshoring STEEPLE and SWOT analysis ‘Books such as STEEPLE and SWOT, which were explained earlier in the chapter, can ‘Beused to analyse the marketplace as well as the internal organisation. These foots can generate Important information to help buyers create value for money. Check ‘What do STEEPLE and SWOT stand for? = ‘Misectors of industry use STEEPLE and SWOT to help them with their strategic Zz Besision-making and associated objectives, g ARR ETT TET Tey Sector e SWOT used in sirategic decision-making in Indian ‘An area of industry, ik aerospace eg, private, publi¢o: ecosystem ‘slowly moves towards the Make in india’ initiative, along with policy changes to support it.the wlandsca ¢ is likely to prove challenging to goverhment- eae he Imes PSRaUR EE Stace Lid (HAL): Private industry is bringing competition and manufaétbring capabilities are being enhanced, presenting growth opportunities for Indian defence manufacturers As the Indian aerospace and defence manufacturing. ‘ third sector oe $ ? HAL continues to'be the market leader as india relies on imports to meet 70% ofits defence requirements, with . the remaining 30% met by domiestic companies. "HAWES tO Have Hidde Signineaht'srepese taiaraees . diversification into the civil segment’ to leverage the growth prospects of Indias civil aviation sector, which is 4 growing at 16% per year. baie sé"HAPTER 1 Demonstrate the application of the procurement cycle soenws nmeenencacie tt ZASWOT(tlengtt, wpainesses opportunites, threats) analysis carried out by HAL identified potential focus areas in the external environment of the creanisation. While fg sipenatys include long credible history, NSRSEOFT shu tc BONNCOB ad four debs ame of experience in life Cycle support, limitations remain . R.K. Tyagi, president of the Aeronautical Society of : India and former chairman of HAL, recently called for F more emphasis tobe placed ph meeting the ererging i human resource challenges in aviation and aerospace, in view of the growth potential of the sector during the coming'decades. Tyagi said there will be'a need for a imilioniprofessionalsiinghe aviationisectoninitheii, Pent decade, { . (Source: adopted frm yi ainonline cer/oviaion-newsiaerospac/. 221807 7notece gronegcpeti fomermat facieniatiliuist stb Analysis is useful for making the following types of strategic decisions. + When is the right time to procure goods or services? ‘+ What quantity is most economically viable? *+ Which currency is the most favourable to buy in? 1 + Should the product or service be made or bought-in? + Should the product or service be re-sourced? - + Should the product or service be replaced? Apply ~ With reference to an organisation with which you are familiar, explain three strategic decisions that could be made or enhanced by using the STEEPLE or SWOT analysis. Porter's Five Forces ‘The use of Porter's Five Forces, which you learned about earlier in chapter 1, can also help with market analysis. By understanding the level of competition within the marketplace, buyers can make a strategy to negotiate prices with their suppliers, Porter's Five Forces are explained in table 1.6. Compettivervary bow many organisations are there doing the same ‘ rr soap prereset Threat ofr How likely is it that another organisation can start-up entrants, potentially affect the business? Threat of How likely are the customers to find something else substitution toreplace the product/service?{ ——______ounans Demonstrate the application of the procurement cycle How easy tis for buyers to negotiate? Are there lots. of alternative suppliers or Is the supplier in question | the only one? Prices will reflect the importance of the Cee ST ita aati uatasliy How much does the supplier value the business? Are there lots of alternative options for the supplier to Power of suppliers | gain orders or is the buying organisation critical to the supplier? Prices will reflect the importance of the . buyer to the supplier. ‘ale 1.6 Porter's Five Forces Remember Porter's Five Forces are as follows. + Competitive rivalry + Threat of new entrants we + Threat of substitution 3 + Power of buyers ie + Power of suppliers Levels of supplier competition ‘When carrying out market analysis, procurement professionals may discover ‘xganisations that have a significant market share, When a market sector has - 'a few large organisations that supply the product or service, this is known as . smoligopoly. in a situation where only one organisation controls the whole ‘market, this is known as a monopoly. In both circumstances the power is with the suppliers because if the buyers want to procure the relevant goods or services, they have to use the suppliers who control the marketplace. There are no, oF very enited, options. *Gonversely, there can also be situations of perfect competition or monopolistic ‘gxmpetition. Perfect competition occurs when there are many suppliers ‘fering the same products or services. Monopolistic competition is often called ‘imperfect competition. This occurs where there are many suppliers offering a ‘seemingly similar product but there are significant variances in quality, brand and design gure 1.13 shows how the level of competition affects the ability to negotiate prices. ‘ ig Ability to negotiate with suppers * 3 Low @ Hen tow None . Level of competition ‘Reure 1.13 Levels of competition and negotiationCHAPTER 1 Demonstrate the application of the procurement cycle There are subtle differences between an oligopoly and a monopoly within a marketplace. The varlances are listed in table 1.7 Bs a SOS Qaeda utancel LOCE ata iach ‘few companies dominate the market (One company dominates the market rvroneremareemerunsopeventerinaon FPrricings controlled by afew. |: companies, INFERNO ETS Pricing Is controlled by one company Seid Competition is almost impossible Very difficult to compete Table 1.7 Oligopoly versus monopoly Supply and demand Procurement professionals must also think about supply and demand as part of their market analysis when they receive a requisition. This economic factor has @ significant effect on the prices charged and on the costs incurred. Figure 1.14 shows the effect the supply and demand can have on pricing. moe gtaneaen TESS OS FETTER 2 Quantity MS a a eal Figure 1.14 Supply and demand equilibrium Figure 1.14 shows the following. + Ifthe demand increases and supply remains static, a shortfall occurs, and buyers can expect to see an inflated price, + Ifthe demand decreases and the supply remains stati, a surplus occurs, and buyers can expect to see a reduced price. + The ideal market balance (G) is where the demand and supply are equal to each other. ‘Remember ‘The price of a product or service is directly related to supply and demand.° CHAPTER 1 Demonstrate the application of the procurement cycle " Supply and demand affect every commodity, product or service procured, so itis itical to watch the market, review historic data and understand the economic ‘Stuation in order to achieve the best value for money. Supply and demand in the food chain In the last ten yeats, food prices have risen above the rate of inflation. era Food prices have risen by over 25%, The inflation rate: . over the same timieframe has risen only 22%. What factors affect the price of food that it should outstrip inflation? i Factor’ affecting prices in the short term are those that operate immediately on the supply and demand of food. For instance, consumer preferences can change overnight. A prime example of this is the immediate demand for food that has featured on a TV cookery programme or been heavily promoted in the media: If this food item is in short supply because itis not typically popular, retailers sourcing the item from farmers wilibe at a,disadvantage.in.negotiating price, as demand outweighs supply. Adverse weather impacting the growing season of a particular crop (for example, a hard frost when fruit trees ére just blossoming) or disease affecting a crop or livestock (eg. the British foot and mouth outbreak) also have an immediate effect on food prices. Increased demand coupled with reduced supply inevitably results in higher market prices. j Factorsteftetting pricestnenéiongrtérttinelade thermore rising price of oil (affecting the cost of shipping), environfnental factors (e.g:, droughts or floods limiting supply) and increasing. public demand (globally) for more expensive food. The growing trend for organic food is a key factor: organic food is typically far more expensive because itis more expensive to produce than non-organic food. The increased demand for meshapddalnyaroducs in develoning.couptsies nag) 4 ‘another long-term factor. Gower fr ecobradencom/son/moneypeonatnance! | 2018/07/ Sh greres-ivng-up food bil eoktop-20775106002) ected SRR Beha pee eR STS a i | Push and pull + When reviewing a generated need in terms of market analysis, procurement " professionals should decide whether the best method of sourcing would be a push or @ pull strategy. ‘Apush strategy is based on forecasting requirements, while a pull strategy reacts to customers’ needs, 29CHAPTER 1 Demonstrate the application of the procurement cycle (ez) Just in time (JIT) ‘A philosophy used in = manufacturing that Is based on suppliers delivering goods at the point that they are needed, t aims to reduce inventory costs and reduce waste in the supply chain Ifa push strategy is chosen, the buyer will place purchase orders in response to requisitions that have been raised against forecasted sales or requirements, Buyers in the retail sector typically use a push strategy to procure warm clothing in time for the cold weather. if these buyers used a pull strategy, there would be a delay meeting consumer needs. Buyers who use pull strategies are usually working with Just In time (JIT) systems. ‘These systems generate needs, often through MRP systems, as and when products are required. The suppliers working with these buyers are contracted to deliver goods at the time that they are required. This avoids surplus stock in inventory, but it can involve high levels of risk if the supplier fails to deliver or products are defective. Table 1.8 shows the differences between the push and pull methods with supply chain, the Low demand variability Tapas eenara i fl i fg isation Low product personal a High setup change costs Higher lead umes Table 1.8 Push and pull systems (Source: adapted from Vivek Sehgal, 2009, ‘wun: supplychainmusings.com/2009/10/considerations-for-push-or pull. html) Remember Push methods/systems are strategies based on forecasts, Pull methods/systems are strategies that react to needs, Supplier segmentation Wiile testing the market, procurement professionals can start to form an opinio of the potential suppliers of their need. Further evaluation will be conducted lat in the procurement cycle process. However, in the early stages, buyers can begin ‘segmenting current suppliers into four categories, depending on their level of integration into an organisation, A this early stage in the cycle buyers may be thinking about which of the types Supplier relationship shown in figure 1.15 would be best suited to the generated equlsition. Supplier relationships will be explained later in this section.CHAPTER 1 Demonstrate the application of the procurement cycle c ce eee Collaborative gure 1.15 Supplier segmentation ‘By thinking about whether the generated need is a new buy, modified or straight : ebuy, as well as where it fits within the Kraljic Portfolio Matrix, the buyer can start 'w decide which type of supplier relationship will best fulfil the need as shown in figure 1.15. Check _ What are the four quadrants within the Kraljic Portfolio Matrix? roduct life cycle - hme procurement professional should analyse where the product or service Is fmithin its life cycle before placing a purchase order. ble 1.9 shows how a product develops and finally declines over a period of time. PRODUCT LIFE CYCLE Introduction Growth Maturity Dedine \N ' Low Rising sales Hits peak Declining | sngsaes | is peak | Decing Loss Rising High Declining innovators, | Early adopiers |, Middle Laggards, saaviaceai maori eda aaiatsassui Growing Stale Declining Table 1.9 Summary of product life cycle (Source: adapted from www.himpub.com/ documents/Chapter1912,pdf and www.trifolionm.de/wp-content/upioads/2013/09/ Proceedings. Workshop_2.pdf) 35 aap 1 pemonstrate the application of the procurement cycle ; BS with Bane NOR. This shows that effective early supplier | ai involvement can significantly benefit an organisation fi HM and help it engage suppliers that it can work with as part HB ofa collaborative process. FIR source: adopt om milobarliaayevcncoinens/20661ahe- . EI no first-large-contractin-rommen) * haa ssc Make or buy ‘When a buyer receives a requisition, they often have to decide whether the best ‘sahue for money will be achieved through making or buying the product/service to saxisly the need. This Is especially true ifthe need is a new buy. ‘Pre make or buy decision, or the option to outsource (as explained in stage 2 of ‘Se procurement cycle, earlier in this chapter) is a crucial strategic choice. Check Which products or services should not be considered for v)i . outsourcing, according to Carter's Outsource Matrix igure 1.37 © Bytesting and analysing the market, procurement professionals can gather ‘e£ormation that will help then make the decision on whether outsourcing is a ‘able option. ‘Outsourcing is an acceptable strategy in the following situations, * When the product or service is not core to the organisation e.- When the product or service is a temporary addition to workload ite When the product or service Is beyond the sklls ofthe organisation +. When the product or service is generating a loss for the organisation {= When the product or service could be provided more effectively through an exernal provider 3 Apply 1 Explain how a procurement professional should decide oe whether to make or buy a product or service. ‘ Offshoring fnadcition to the outsourcing decision and the make or buy decision, buyers ‘within manufacturing organisations also have to consider if it would be more cost | A\Z ‘fective to ‘offshore’ production. . ‘Offshoring is a strategic decision that involves moving the manufacturing of Offshoring “ether part or all of the process to another country. While outsourcing uses a third Relocating . Party to undertake the manufacturing, offshoring sets up a physical infrastructure,‘ ™aNufacturing ‘which the organisation is responsible for, in another country. functions overseas “Ofishoring is done in order to reduce costs. Countries that have weaker ‘economies than the organisation's own country can offer a lower price to produce 00ds. This is due to the other country having the following. 35CHAPTER 1 Demonstrate the application of the procurement cycle-—— ‘As with most strategies, there are advantages and disadvantages to ESI. Table 1.10 outlines these, Ser eT Reduces cost for buying organisation Supplier could unfairly influence buyer Ir eo \plmproves specifications, Buyer could become reliant on suppl nh Enhances quality Buyer loses control of product intellectual prope risk Intellectual property ris leaey i hy He OEY liste Promotes innovation PASTS Sree reece Reduces development time Table 1.10 ES! advantoges and disadvantages i ae ERS ‘Scandinavian préject opts for EST One industry that may choose to benefit from the advantages of early supplier involvement (ESI) is the ransportation industry, as shown in the example below. RG Ree ‘Lars 3) © As part of an ongoing modernisation plan, Bane NOR, [a sate-ounedsainayintastucure company = Norway, was planning a significant intercity project, . pe required the construction of a 10km railway f and multiple tunnels through materials such as rock, concrete and soil. A complex project of this nature involves mulkiple } phases and the use of different suppliers, The tendering. process for the EPC contracts for different aspects of the project began with pre-qualification, : Bane NOR decided that the early involvement of suppliers at the pre-qualification stage would allow the Organisation to start a dialogue with potential suppliers f-and this collaboration would inform the final tender documents that would be used to award the contracts I for the project. * : t Bane NOR has highlighted many of the perceived benefits of its use of early supplier involvement, stating that this form of dialogue is a useful tool for problem __ Solving and ensures that the company continues to E: Innovate. The company has also shown an awareness Of the risks associated with early supplier involvement by noting that ‘any solutions presented in the dialogue y Process will not be shared with others, Even in the projects early stages, suppliers from Norway and abroad expressed an interest in working.CHAPTER 1 Demonstrate the application of the procurement eyele -$?___________ + Lower costs of living + Lower rates of pay + Weaker currency + Lower costs of overheads : Several manufacturing organisations have recently chosen to offshore their . production to countries such as China or India to take advantage of the lower costs. Although this strategy reduces an organisation's costs and ultimately increases profits, several other factors should be considered. ‘The price may be cheaper than in the home country but the total cost of acquisition (as explained earlier in this chapter and illustrated in figure 1.6) should always be considered. ‘The advantages and disadvantages of offshoring are outlined in table 1.11. agYantag: Loss of control Riskof intellectual property (cSpyrights, patents), Increased profit 3 ideas lal a Helping 2 weak economy paar mR IE e Favourable governmental poles, | Envifonméntal concerns: Loss of jobs in home country Ethical concerns Table 1.11 Advantages and disadvantages of offshoring poor NEUTER EETREN TMNT F offshoring.a concern for USA ‘Many’companies based:in the USA have considered moving their production overseas following the’ inirodiction of taxes on thelimport of foreign products, = known as tariffs. One such company is Moog Music. a manufacturer | of electronic instruments and synthesisers based in "North Carolina. Moog Music realised that the tariffs F would cauisé an incfease in the cost of the parts and _ aw materials that itimported from China to create b is products: | } | F Moog Music cantacted its customers to warn them about the potential consequences of the introduction of tariffs on imported goods. These consequences included “having to make employees redundant and the possibility ff 9f moving manufacturing processes overseas. f, This example shows how companies may choose to : "benefit from the advantages offered by offshoring, while simultaneously avoiding negative economic changes in “ the organisation's own country. (Source: adopied from uk businessinsider.com/rump-chinc-torimoog move here da‘asreness of how the market is performing and knowing the organisational ‘Srategy can help procurement professionals to make informed decisions on the ‘Sestand most cost effective way to source and supply the need that has been ‘generated and given to them in the form of a requisition. ‘Market analysis and testing takes a lot of time, but this is time well spent, In the ‘erg term the benefits gained will outwelgh the time that has been taken to carry eat this analysis, Apply Describe three ways in which a buyer could analyse or test the. Market in order to assist them with determining a need. Supplier evaluation ‘Supplier evaluation is an important part of the procurement process. Stage 6 of ‘Re CIPS procurement cycle is about supplier selection. It is essential that contracts se awarded to the most suitable suppliers. in order to decide which potential ‘spplier is most suitable, procurement professionals complete several processes, ‘Sxery organisation has its own policies and procedures for evaluating suppliers. ‘These can be completed through site visits, audits or meetings and should be ‘based on the following factors. ** Prequalification questionnaires + Sustainability bas Carter's 10.Cs + Reputation “* Credit checks * Benchmarking * Ethics + Relationships site visit is probably the best way to understand a supplier. During a site visit, ‘buyers can meet the workforce, look at documentation, assess working conditions ~ and review quality policies. However, this is not always practical, e.g, if the ‘Supplier is overseas or if the supplier is being used for a one-off procurement. Hite visits are not possible, buyers should conduct an audit using a P-pre-qualification questionnaire (PQQ), also known as a selection ‘questionnaire (SQ). A meeting will be set up to gather the information required vl order to fairly evaluate the supplier. “pags “PQs are used in many procurement functions across all industry sectors, but they are particularly used in the public sector. PQQs are often standard forms that buyers send to potential suppliers. These suppliers may have been identified as ‘Be0d candidates to be awarded a contract. The purpose of a PQQ is to ensure that \ these potential suppliers could, if they won the contract, supply the product or fppervice to the standard required. Qs request details from potential suppliers on the following information. Company details * Environmental policies (CSR) Trading history + Ethical policies, Financial information + Health and safety policies Quality standards + References Insurance CHAPTER 1 Demonstrate the application of the procurement cycle ey ka Pre-qualification questionnaire (PQQ) Adocument sent to potential suppliers tofind out their suitability to be included in the procurement processCHAPTER 1 Demonstrate the application of the procurement cycle Once a supplier has completed and returned the PQQ, the buyer will analyse this and select the suppliers that meet the rec the criteria will not be able to quote or bi Table 1.12 sets out what might be covere asked. General information on the company including the following. + Registered company name Registered office address Other trading names Website Legal status of the company (e.g., whether a partnership or limited company) Te Se | registration, tax registration). iniiheeasi mines edd akg Licences or required trade organisations reeset neers Persons of signific wershipidirectorship of the company, Offences committed and action taken as a result - particularly in the areas of corruption, fraud, terrorism, trafficking, child labour, modern slavery, tax evasion, environmental regulation, collusion, etc. alstanding Financi Relevant experience rece insurance cover OME Team: quired criteria. Suppliers that do not meet id for the contract. In a PQQ and why the questions are ascent + To understand the general nature of the company To ensure that itis a properly constituted company To give clarity on who the contracting party will be To find out about links to other companies To understand any risks associated with the legal setup PAR UREA aga NERC [St ihteraatotiatand nstionalows require checks and controls against | | iffaud and corruption j ee + To ensure the company is legally permitted to provide the service offered art of the international fight against NSE cuit Can be a reason to exclude suppliers from the process - part of international efforts to promote ethical purchasing and supply, and to reduce fraud and corruption segments ~ ‘To determine the financial stability of the company and whether it has the capacity for the proposed ji Eterm i To demonstrate successful delivery of similar goods/services in the past To give an indication of the capacity to deliver the scope, complexity, scale, timescales, etc, of the proposed contract Does it meet the contract requirements or can the company confirm it will be increased if