Defining Business Need

Diploma in Procurement and Supply

A choice from alternative courses of action
• The choice may be between ‘Do it’ and ‘Don’t do it’ –
Yes or No.
• Alternatively the choice may lie between several
different options – Option A, or B, or C and so on.
Elements in the RAQSCI model of business needs
Need Explanation
Regulatory A procurement transaction must enable the buying
organisation to meet any regulatory or legal requirements
relating to the purchased item

Assurance of supply When a business purchases an item regularly, it will want

assurance that it will be able to obtain the materials, goods or
services when it needs them. 

Quality The need for quality might be expressed in terms of fitness for
purpose. What level of quality does the organisation need?

Service What level of service is required?

Cost Does the organisation want to meet certain targets for cost?

Innovation Does the organisation want to achieve improvements, for

example improvements in speed or efficiency, or in competitive
advantage
The RAQSCI model: moving up a
staircase
STEPn
6 Innovatio
S T E P 5 Cost
S T E P 4 Service
S T E P 3 Quality
S T E P 2 Availability/ assurance of supply
S T E P 1 Regulatory
Needs, wants and negotiations
There is a difference between wants and needs. For a
buyer:
• wants are things that the buyer would ideally like to
get
• needs are things that the buyer will consider a
minimum requirement.
Three broad types of purchase
• Straight re-buy of items already sourced from a
supplier
• Modified re-buy, where some of the requirement has
changed
• New purchase, where the requirement has not
previously been specified or sourced, and it is being
purchased for the first time.
Straight re-buy
• There is an existing specification for the purchased item.
• The buyer will probably use either the same supplier as
in the past, or will choose a supplier from a list of
preferred or approved suppliers for the purchased item.
• The buyer might have a framework agreement with one
or more approved suppliers. 
• Straight re-buys are usually for standard items, and so
may be low-cost purchases.
Modified re-buy
• Changes in the purchased product, due to product re-
design or product improvements
• Minor changes in the buyer’s specifications
• Changes in government regulations for the product,
which require some design changes in the product
• Buyer dissatisfaction with previous purchasing
arrangements
New purchase
• There are no existing specifications
• There is no existing supplier.
• There might be a bidding process.
• Negotiations are required to agree terms and
conditions of the contract.
Business needs and different types
of purchase (1)
Need/want Straight re-buy Modified re-buy New purchase
Regulatory Regulations should be Regulations might have Need to check whether there
unchanged. No need for changed, resulting in need for are regulatory issues, and
modification modification check supplier compliance

Availability Need to check that the Need to check. The Need to check availability and
supplier has supplies modification may be due to a supplier capacity to meet
available change in supplier buyer’s demands for product
or service

Quality Should be unchanged The buyer may want some
change in the specifications,
particularly if there have
been technological
improvements in the product
Need to prepare
specifications. Care needed
to ensure that specifications
meet buyer’s need for quality
of product
Business needs and different types
of purchase (2)
Need/want Straight re-buy Modified re-buy New purchase
Service Should be unchanged The buyer may want some Need to prepare
modification to the service specifications.
provided

Cost There may be some change Probable need to re- Need to negotiate a price
in price, but any increase negotiate the price: possibly with the supplier
should be acceptable to the negotiate price reduction
buyer

Innovation Probably no change Possibly some change: eg Consider the future and
improvement in the supplier possible need for change
relationship
Straight re-buy
With a straight re-buy, there should be no change in the
buyer’s needs since the previous purchase. 
Modified re-buys
• Review existing arrangements
• Re-open existing contracts to competition
• Justify specification or contract
• Re-negotiate contract terms
New purchase
• Procurement activity is more likely to conform to the full,
systematic procurement process
• An in-depth business case justification of the modification
may be required
• New identification and specification of requirements
represents a key opportunity to build in business benefits
at the product, service or project development stage
• There will be some uncertainty about what the buyer‘s
needs are, and also uncertainty about the quality and
reliability of potential suppliers
Procurement research
• Demand analysis
• Vendor analysis
• Supply market analysis
Purchases of capital assets 
• Systematic appraisal of the benefits, costs and risks of the
investment, and likely ‘payback’ period of the investment
• Robust comparison of alternative assets or options
• Negotiation, specification and contracting with the chosen
supplier for a total ‘package’ of benefits sought over the
asset’s lifecycle
• Analysis and management of lifecycle costs
• Management and maintenance of the asset in such a way as to
prolong its useful life and maximise its residual value on
disposal
The five rights of procurement 
• The right quantity of items
• Of the right quality
• Delivered at the right time
• To the right location
• At the right price
The Kraljic model
Low
High Procurement focus
Leverage items
Key performance
criteria
Cost/price and materials
flow management
Typical sources
l Supply
Multipe suppl ier s,
chieflyloc al
Importance of
the item Procurement focus
Non-critical items
e Limited: normally
Key performance n
criteria
Functio
i al e fficenc y
Typical sources
Established local
suppliers
Low
Complexity of the supply market
High
Time horizon Procurement focus Time horizon
Varied, typically Strategic items Up to 10 years; governed
12-24 months by long-term strategic
impact (risk and contract
mix)
Items purchased Key performance Items purchased
Mix of commoditied and criteria Scarce and/or high-
specifie m
a terials Long-term availabilitys value materials
Typical sources Supply
Abundant Established global Natural scarcity
suppliers
Time horizon Procurement focus Time horizon
Bottlneck it ems Variable, depending on
12 months or less availability vs short-term
flexibility trade-offs
Items purchased Key performance Items purchased
Commoditie, som
de criteria Mainly specifie
specifie m
a terials Cost management and materials
reliable short-term
ds
sourcing
Supply Typical sources Supply
Abundantn Global, predominantly Productio- based
new suppliers with scarcity
new technology
The purpose of developing a business case
• Fostering strategic, business-focused thinking
• Improving the efficiency and quality of decision-making
• Enabling management to evaluate proposals about
procurement or supplier sourcing
• Enabling management to compare alternatives and
options on objective business cost/benefit criteria
• Establishing measurable yardsticks by which the
subsequent performance, deliverables or outcomes of
projects can be evaluated
Assessing whether the expected
benefits have been achieved
• Is the project or asset achieving the business case
benefits anticipated? 
• Are the assumptions made in the business case
turning out to be accurate?
• Is the business case justification for the project still
valid?
Contents of a business case
• Specifying the issue: what is the decision that needs
to be made?
• What business needs are involved in the decision?
• What is the recommendation, and how will this meet
the business needs?
• What are the alternative options, and why would
these be less successful in meeting the business
needs?
Informal business case structure
Introduction/background What is the issue? What is the decision about?
Overview of the business need: the objective to be met, problem to be solved, threat to be countered
or opportunity to be exploited
Priority of the need or issue 
The current situation: what has given rise to the need for a business case analysis, and what (if
anything) has been done so far

Options Options considered (if any), with reasons for rejecting or carrying forward each option

Business benefits Expected outcomes of the proposed solution, and their associated business benefits (both quantifiable
and qualitative)
Alignment of the proposed solution with business objectives, strategies, policies and values

Costs and risks Estimated costs of the proposed solution

Anticipated risks of the proposed solution
Anticipated impacts on activities and relationships (both internal and in the external supply chain)
Anticipated risks and costs of not pursuing the proposed solution (or doing nothing)

Recommendation Recommended decision, with reasons

KPIs (if data is available) Target costs and results which will be used to evaluate performance at key decision points in the project
or procurement lifecycle, to indicate that anticipated business benefits are being realised.
Contents of a formal business case document (1)
Executive This is a summary of the contents of the business case document
summary

Reference The document should give a project name or reference number, and also details of
the background to the proposal and the current stage it has reached.
Context This part of the document should set the specific business case under
consideration in the wider context of the organisation and its business
environment

Value This explains why the organisation should be interested in the business case. What
proposition and will the business case, if implemented, achieve for the organisation and its
deliverables business?
Contents of a formal business case document (2)
Impacts Who within and outside the organisation will be affected by the business
case, if implemented?
Work plan The approach; project stages; workload estimate or breakdown; sourcing
or project plans and schedules; critical path analysis.

Resourcing What resources will be needed to implement the business case, and
and sourcing where will they be sourced from?
plan

Financial plan Where the money will come from to finance the business case, and what
the expected financial benefits will be.
Business benefits: meeting business needs
• Business objective
• Increased revenues
• Reduced costs
• Enhanced profitability
• Enhanced value for money
• Enhanced shareholder value
• Competitive advantage
• Leverage of key resources
• Increased capacity, capability or flexibility
• Improved brand or reputational equity
Benefits to justify a business case
Achieving one or more
business objectives

Achieving lower Achieving greater Better quality of

production costs efficiency and higher output products
output

Remaining
competitive
Added value
• A commercial firm is profitable if the realised value to
customers exceeds the cost of value creation, or if the
same value can be given to customers at a lower
overall cost.
• In the public sector, adding value is either a reduction
in costs, or an improvement in services at no increase
in costs, or providing additional benefits that justify
any additional cost in providing them
Competitive advantage
• Making a product at a lower cost than competitors,
so that the firm can sell the product at a lower price;
or
• Performing activities at comparable cost but in
unique or distinctive ways, creating more value for
customers than competitors, and potentially
commanding a premium price (product
differentiation)
Costs
• Financial costs
• Non-financial
• Opportunity costs of choosing one option over
another
Risks (1)
• Risks arising from (or as a result of) the recommended decision, and the
possible consequences if they occur.
• Risks which might affect the proposed project or procurement, and which
might jeopardise the anticipated benefits. 
• For example, with the purchase of major items, such as capital equipment,
there are risks that installation and testing will take longer and cost much
more than expected, and so on. 
Risks (2)
The costing of the business case should include the costs
of:
• Risk management
• Risk events occurring
• Contingency planning (for high-impact risks, however
improbable)
Risks (3)
With the procurement of capital equipment major risks
may be:
• failure by the supplier to deliver the equipment on
time
• disruption to operations
• an unexpected and high level of disruption due to
frequent equipment breakdowns
• higher running costs or less output efficiency than
anticipated.
Specimen cost benefit analysis
Options or alternative solutions
• Other specific options that have been
considered
• Other options that might be considered,
perhaps representing typical procurement
choices
Buy vs lease (1)
Advantages of outright purchase
Total cost is low, compared to rental
The user has total control over the use of
the asset
The asset may have residual re-sale value
at the end of use
Capital allowances may be set against tax,
and government grants may be available
Disadvantages of outright purchase
High initial expenditure ties up capital:
impact on cashflow, and opportunity cost
of capital
User bears all costs and risks of
maintenance, operation and disposal
Risk of technological obsolescence: eroding
value, requiring upgrade expenditure
Wasteful, if equipment is needed only for a
short period (eg a particular project)
Buy vs lease (2)
Advantages of leasing
No initial investment to tie up capital
Protects against technological
obsolescence: ease of upgrade and
replacement
Costs are known and agreed in advance
Fewer complex tax and depreciation
calculations
Disadvantages of leasing
Long-term commitment to pay
instalments: may be difficult in recession
User does not have total control of asset:
lacks flexibility (and prestige) of ownership
Total cost may be higher than purchase
Large organisations may get better terms
by securing their own finance to purchase
(benefiting from capital allowances)
Alignment with strategic objectives
• How does the proposal support a strategy, and
contribute to the achievement of a strategic objective
• How does the proposal ‘fit’ with the policy and values
of the organisation
Business objectives and purchasing objectives
Business objectives
Maintain or increase market share
Improve profits, cashflow, and return on capital
Shorten time to market
Eliminate non-core activities
Introduce continuous improvement measures to
improve efficiency or effectiveness, or reduce costs
Become world class business
Purchasing objectives
Provide supplies to match customer needs; assure
quality; reduce delivery lead time; reduce cost
Reduce stocks; improve reliability; more frequent
deliveries
Early supplier involvement
Develop effective make-or-buy policy for non-core
activities
Reduce supplier base; partnership approaches; reduce
product complexity; increase accuracy and reliability
of operations
Work with suppliers to establish world class
standards; improve flexibility of response to market
conditions; liaison with technological sources
Johnson, Scholes and Whittington
• Suitability. Does the proposal fit the strategic
objectives and circumstances of the organisation?
Does it solve the business problem or meet the
business need?
• Feasibility. Can the proposal be implemented? Will it
work in practice? Do the benefits outweigh the costs?
• Acceptability. Will the strategy be acceptable to key
stakeholders?
Sustainability
• Economic sustainability (Profit)
• Environmental sustainability (Planet) 
• Social sustainability (People)
Alignment with tactical objectives and timescales (1)
• Secure supply within the timescales required by wider
production, marketing or project plans
• Secure adequate levels of performance and process control
(eg for the implementation of new systems etc) within the
timescales required by wider organisational and project plans
(eg schedules and milestones)
Alignment with tactical objectives and timescales (2)
• Be feasible within existing resource constraints (eg
expenditure budgets, managerial time, skills or production
capacity, given existing commitments)
• Be capable of fulfilling agreed specifications and achieving
agreed objectives, standards, targets and KPIs
The role of procurement
Nature of decision Comment
Decisions relating to the supply market or individual The procurement function is best placed to make a business case, since it is the point of
suppliers. Whether to recommend making a framework contact between the organisation and suppliers.
agreement for repeat orders.

Decisions relating to specifications. A technical department or user department will be best placed to develop a business case for a
procurement transaction. But he procurement function may be involved.

Decisions relating to purchase price The procurement function has responsibility for the costs of procurement, ie prices paid.

Decisions relating to contract negotiations For high-value transactions, negotiations with a chosen supplier might be complex.

Regular purchases of non-critical low-cost items Responsibility may be delegated to user departments, or an e-procurement method may be
used. Procurement has little or no involvement.