BUSINESS NEEDS IN PROCUREMENT AND SUPPLY

LECTURE TWO: PROCUREMENT CATEGORIES

Goods
Refer to raw materials, products, equipment, and other physical
objects of every kind and description, whether in solid, liquid, or
gaseous form, electricity, intangible asset, and intellectual property,
as well as services incidental to the supply of the goods provided
that the value of the services does not exceed the value of the
goods themselves.
Works
All works associated with the construction, reconstruction,
demolition, repair or renovation of a building, structure, road
or airfield; Any other civil works, such as site preparation,
excavation erection, building, installation of equipment or
materials, decoration, and finishing; Services which are
tendered and contracted based on the performance of a
measurable physical output such as drilling, mapping, satellite
photography or seismic investigations. Contracts that include the
provision of works and services shall be regarded as works
contracts if the total value of the works is greater than the value of
the services covered by the contract.
Consultancy services
These are activities of intellectual or advisory nature that do not
lead to a measurable physical output and include design,
supervision, training, advisory, auditing, software development, and
similar services. A firm, company, corporation, organization,
partnership, or a person engages in or able to be engaged in the
business of providing services in architecture, economics, surveying,
or any field of professional services, and who is, according to the
context, a potential party or a party to a contract with the
procuring entity.
Non-consultancy services
Mean a service of skilled or non-skilled nature, which is
not a consultancy service and includes, but is not limited to,
cleaning, security, maintenance, and repair services. A natural
person or an incorporated body licensed by a competent authority
to provide the services and who is, according to the contract, a
potential party or the party to a procurement contract with the
procuring entity are called service providers.
Disposal of an asset
This is the process by which organizations get rid of materials that
are no longer needed in an organization. Various methods of
disposing of an asset are recycling, sale to another company, sale
by auction, destroying, dumping, or disposal by tender. Disposal of
an asset will be treated as a procurement method only if it is
facilitated by tender.
The business case process
The objective of a Business Case Process
The main objectives of a formal business case process for
developing and presenting the business case for a procurement,
proposal or project are as follows:

 Fostering strategic, business-focused thinking: requiring people

with the authority to recommend projects or proposals to pre-
evaluate their value, risk and priority.
 Improving the efficiency and quality of decision making.
 Enabling management to evaluate proposals for feasibility,
suitability and acceptability.
 Enabling management to compare alternatives and options on
objectives business cost/ benefit criteria.
 Establishing measuring yardsticks by which the subsequent
performance, deliverables or outcomes of projects can be
evaluated at key review points.
 Is the project or asset achieving the business case benefit
anticipation?
 Are the assumptions made in the business case turning out to be
accurate?
 Is the business case justification for the project still valid?
Content of a Business Case
A comprehensive business case might include the following:

 Executive summary
 Reference: project name or reference, background and current
status
 Context: Business objectives
 Value preposition: The desired business outcomes or
deliverables
 Scope: The problem or solution scope
 Deliverables: Outcomes
 Impacts: Functions and activities
  Work planning
 Resource requirements
 Risk management and contingency plans
 Commitments

Criteria for a Business Case

1. Business benefits: The business benefits of a given
procurement, proposal or project may take any of the following:
 Fulfilment of the business objective or furtherance of a
specific strategy.
 Increase revenues
  Reduce cost
 Enhanced profitability
 Enhanced value for money
 Enhanced shareholders value
 Competitive advantage
 Leverage of key resources such as technology or supplier
relationships Increase capacity, capability or flexibility.
 Improved brand or reputational equity.

2. Added Value: Value can be seen simply as the worth of the

product or service, which may be measured in two ways:
  What it costs the organization to produce or provide.
 What customers are willing to pay?
The term added value refers to the addition of greater value or
worth to a product or service as a result of all the processes that
support its production and delivery to the customer. The main focus
of procurement is that value can be added either by cost cutting or
by securing operational efficiency.

3. Competitive Advantage
Competitive advantage is defined as the ability gained through the
development, protection and leverage of distinctive competencies
and resources to deliver value to customers more efficiently or
effectively than one’s competitors.
According to Porter, a business can achieve competitive advantage
by performing strategically important activities more cheaply or
better that it competitors.
o Providing comparable value to the customer more efficiently
than competitors – Cost leadership.
o Performing activities at comparable cost but in unique or
distinctive ways, creating more value for customers than
competitors, and potentially commanding a premium price
(differentiation).
4. Costs
Another important aspect is the aspect of costs, which can be used
to balance against the expected benefits. The estimated cost can
be:
o Financial cost
o Non-financial cost
o Opportunity cost
5. Risk
Every business case for a given plan will need to take into account
a range of internal and external risks. The costing of the business
case should include the costs of:
o Risk management
o Risk event occurring
o Contingency planning

6. Cost/Benefit Analysis
Cost benefit analysis is a fairly simple technique for deciding
whether or not to pursue a particular plan or procurement.
 7. Options or Alternative Solutions
The business may be required not only to show that a proposed
solution is a good solution but that it is the optimum solution.

8. Alignment with strategic objectives

One of the key qualitative business benefits of a project or
procurement is its alignment or fits with strategic objectives. In other
words, this simply means:
 o How the proposal will further a strategy or contribute to the
achievement of a strategic objective (Such as profitability,
market share, diversification or innovation).
o How the proposal fits with the policy and values of the
organization.

9. Sustainability
Sustainability has become an extremely important aspect of
procurement of procurement policy in both the public and private
sectors in recent years.
CIPS defined sustainability as a process whereby organizations
meet their needs for goods, services, works and utilities in a way
that achieves value for money on a whole life basis in terms of
generating benefits not only to the organization, but also to society
and the economy, whilst minimizing damages to the environment.

10. Alignment with tactical objectives and timescale

In addition to the broader strategic objectives and value of the
organization, the business case must demonstrate that the project,
proposal or procurement will meet the immediate tactical and
operational objectives set for it including the five rights of
procurement.

Introduction to Market data on Costs and Prices

Distinction between cost and price;
Price: Is what the seller charges for a package of benefits offered
to a buyer.
Cost: Is what the buying organization pays to acquire the goods or
services purchased. This also include acquisition, installation,
maintenance, operating, insurance and disposal cost.
Obtaining prices from the suppliers
There are various methods in which prices can be extracted from
suppliers:

 Suppliers may have a standard price list or price schedule.

 Prices maybe be quoted on request.
 Prices may be arrived at through negotiation between the
supplier and the buyer based on price and cost analysis.
 Prices maybe determine by competition ie. Through auction
or reverse auction
 Prices may be determined by the market.
 Economic indices are published for various price data which
indicates changes and trends in average data over time.
The more specialized or customized the buyer’s requirement, the
less likely there is to be a standard price or price list and prices are
more likely to be estimated and negotiated by buyer and supplier
on the basis of the requirement.