L4-M1 ProcScope PPT 6-19

CIPS Level 4 Diploma in Procurement and Supply
L4-M1] Scope and Influence of

[
Procurement and Supply
Leading global excellence in procurement and supply

[L4-M1] Scope and Influence in Procurement and Supply
Contents
Chapter 1 - Added Value in Procurement and Supply Chains

1.1 Categories of spend in an organisation
1.2 Sources of added value in procurement and supply
1.3 The concepts of procurement and supply chain management
1.4 Stakeholders of procurement and supply chain function
Chapter 2 - The Procurement cycle of goods or services
2.1 The key aspects of the procurement cycle
2.2 The stages of a sourcing process
2.3 Electronic systems used in sourcing
2.4 Achieving compliance and outcomes

Contents
Chapter 3 - Organisational structure and procurement

3.1 Key aspects of corporate governance in procurement
3.2 Organizational policies and procedures in procurement
3.3 Different structures of procurement and supply chain function
3.4 Common IT systems used by procurement
Chapter 4 - Compliance with requirements in procurement
4.1 Different economic and industrial sectors
4.2 The impact of the public sector on procurement
4.3 The impact of the private sector on procurement
4.4 The impact of the third sector on procurement

[L4-M1] Chapter 1
Added Value in Procurement and Supply Chains
Chapter 1 Added Value in Procurement and Supply Chains

1.1 Types of commercial relationships in supply chains
• Definitions of procurement, purchasing and supply
• Organizational spends on goods and services
• Stock, non-stock and direct, indirect procurement
• Capital purchases and operations expenditure
• Service procurement
1.2 sources of added value in procurement and supply chain
• The five rights of procurement
• Total life-cycle costs or total costs of ownership
• Achieving the 5R’s in procurement from external suppliers
• Other sources of added value
• Defining value for money

Chapter 1 Added Value in Procurement and Supply Chains

1.3 Concept of procurement and supply chain management
• Definitions of procurement, supply chains, supply chain networks and,
supply chain management (SCM)
• Comparison of procurement and supply chain management
• Complex supply chains
• Definitions of logistics and material management
1.4 Stakeholders of procurement and supply chain
• Defining stakeholders of procurement and supply chain
• Examples of stakeholder of procurement and supply chain
• Stakeholder mapping

[L4-M1] 1.1 Added Value in Procurement and Supply Chains 1.1
Procurement
• A strategic function of an organisation that manages critical
elements of the business
• Adding value to the business
• Cost (cost reduction and cost effectiveness)
• Inventory - managing and optimising inventory
• Logistics and supply - delivery
• Purchasing - acquisition of inputs required by the business
• Quality sustenance and continuous improvement
• Waste management

Purchasing
• The process of placing orders to acquire goods and services
Supply
• The infrastructure which ensures delivery of products get from a
party to another (supplier to customer or vice-versa)

Procurement and purchasing - differences

• Purchasing is part of the procurement function
• Procurement has a wider role - not just ‘purchase or buy’
• Procurement operates on broader processes than ‘purchasing’
• Procurement is proactive, relational and strategic
Procurement functions
• Continuous monitoring of supply markets/external environment
• Qualify, appraise, evaluate and contract suppliers
• Process purchasing requisitions (PR) or replenishment requests
• Provide inputs for development of specifications
• Negotiate, purchase and develop contracts
• Manage contracts,contract performance and relationships
• Manage risks on all procurement activities
• Perform related clerical and administrative tasks

Costs within business

• Fixed costs
• Costs that are unlikely to change regardless the number of products
being produced
• Often being called as ‘sunken cost’
• Variable costs
• Costs that relates directly to the products or service.
• Such costs changes according to the quantity of product produced
Examples
Fixed costs Variable costs
Salaries of management personnel Raw materials
Insurance Salaries of workers paid by the hours
Rental of facilities Haulage costs

Total cost of product/service

• Fixed costs remain unchanged as output increases
• Variable costs increase as output increases
• Total cost = fixed cost + variable cost
Cost to produce Total cost

Q1
Cost to produce
Q2
Cost
Variable cost
Fixed cost
Cost to produce
Q0
Q0 Q1 Q2
Output

Direct / indirect costs

• Direct costs
• Costs incurred that can be attributed directly to the product
• Examples - costs of raw materials, parts/components, semi-finished
goods etc
• Indirect costs
• Costs incurred for use to support the production of goods which do
not form part of the finished product
• Examples - costs of maintenance and repair operations (MRO),
operating expenses (OPEX), stationeries, telecommunication,
cleaning agents etc

Cost within business (organisational costs)

• Cost composition varies with organisations
Examples by category
Subject to procurement influence

Stock and non-stock procurement

• Stock procurement
• The acquisition of tangible inputs that can be physically touched
and stored for use or consumption as and when required
• Examples - raw materials, components, finished products etc
• Non-stock procurement
• The acquisition of inputs that do not require storing or cannot be
stored
• The inputs are likely to be intangible in nature (services)
• Examples - security and housekeeping services, marketing
campaign, maintenance contracts etc

The procurement cycle (CIPS)

• Stages of the cycle

Direct and indirect procurement

• Indirect procurement
• The purchase of supporting items or services for the day-to-day
operations of the business
• Examples - MRO, services and other operating expenses (OPEX)
• Direct procurement
• The purchase of items or products for resale (retailing)
• The purchase of items for incorporating into products for sale
• Items (direct materials) are likely having impact on the performance
of the business (the impact of cost and supply risks)
• Requires procurement effort to manage (Kraljic Portfolio Matrix)

Managing cost impact and supply risks (Kraljic portfolio matrix)
• Establishing appropriate relationship with suppliers
• Application to both direct and indirect purchases
• High expenditure
• High expenditure • Critical items
• Many suppliers
high
• Seller market
• Buyer’s market • Impact total cost
Importance to the organization
Leverage Strategic
(cost impact)
Routine Bottleneck
• Low expenditure
• Low expenditure
• Large number of items
• High risk – not available
• Wide choice of supplier
• Seller’s market
• Time consuming low
• Dependent on suppliers
Supply Risk
high

Types of expenditure
• Capital expense (CAPEX) - costs relating to capital asset
purchases and their corresponding expenditures
• Operating expenditure (OPEX) - costs relating to the day-to-
day operations of the business

Capital purchase
• Often known as capital goods or assets
• They provide utility or benefits to firms over a period of time
• Three characteristics of capital asset (Lysons and Farrington)
• Can be viewed, physically handled or touched
• Used to produce goods or services
• Has a life-span of more than one year
• Six types of industrial equipments (Marrian)
• Buildings, furnishing and fittings
• Installation equipments
• Accessory equipments
• Operating equipments, tools and instruments

Characteristics of capital purchase

• Other than price, other related costs of purchase need to be
considered
• High dollar value - requires skills and techniques to manage
and control
• Irregular purchase - may lack purchasing skills
• Benefits may be intangible - difficult to evaluate or quantify
• Involves extensive and complex negotiation
• Difficult to draft specification due to the technical complexity
• Require cross-functional team approach (CFT)
• Purchasing capital assets will likely lead to buying services

Service procurement
• Any activity or benefit that one party offers to another that is
essentially intangible and does not result in ownership of
anything (Philip Kotler)
Distinctive features of service
• Services are intangible
• Services involve performance of activities or tasks
• Services are normally provided by people
• Services cannot be owned nor stored
• Certain services cannot be performed remotely
• Services can be complex and may create uncertainties in
contractual agreements

Service quality - measurements

• Tangibles; Reliability
• Responsiveness; Assurance
• Empathy
Monitoring/measuring service levels
• Through observation and experience
• Spot checks and sample testing
• Business results and indirect indicators
• Customer/user feedback
• Electronic performance monitoring
• Self-assessment by the service provider
• Collaborative performance review

[L4-M1] 1.2 Sources of Added value in Procurement 1.2
The FIVE RIGHTS of procurement (value-adding)

• The ‘Right’ quality - purchased goods are of satisfactory
quality, conforms to specifications and fit for purpose
• The ‘Right’ quantity - purchase sufficient quantity to meet
demand minimising excess stock holding and acquisition
costs with zero stock-outs
• The ‘Right’ place - delivered to the correct place, packed and
transported in a way to secure safe arrival in good condition
• The ‘Right’ time - delivered at the right time to meet demand,
neither late or early
• The ‘Right’ price - secure all the above at a reasonable, fair,
competitive price

The ‘Right’ quality

• Quality is the fundamental Right
• If Quality is not Right, all other Rights are of no
significance
• Rights are normally defined by functions or end-users
• Procurement needs to work with the stakeholders involved
to specifications are clear and unambiguous

The “Right’ quality - types of specifications

• Conformance specification
• Specification prescribed by buyer
• Supplier produces goods against buyer’s specification
• When issue arises (fit for use), buyer is contractually liable
• Performance specification
• Buyer describes the functions of the product (output) and its
expected performance
• Supplier produces product to satisfy these requirements with
its know-how, technology and processes
• When issue arises (fit for use), the supplier is contractually
liable

Getting the ‘Right’ quality

• Additional costs incurred due to under specification or
supplier failing to conform to the specification
• Cost of inspection and prevention
• Costs of rework and wastage
• Costs of process - customers complaints, reverse logistics etc
• Cost of lost sales or loosing customers
• Cost of changing suppliers
• Costs of holding higher stock levels
• Additional costs incurred due to over-specification
• Costs of features not required or used by customers
• Higher cost to produce unnecessarily tight tolerances
• Higher maintenance costs associated with premium products

Costs of quality

The ‘Right’ quality - procurement contributions

• Select suppliers with certified QMS
• Appraise QMS and ‘track record’ of suppliers
• Develop preferred or approved supplier lists (AVL)
• Influence quality of product at design stage
• Translate design requirements into clear, accurate
materials and service specifications
• Develop inbound goods procedures for quality inspection
and testing (if necessary)
• Manage supplier relationships
• Monitor and control suppliers’ quality performance
• Work with suppliers to resolve quality disputes effectively

The ‘Right’ price

• The price equation

The price-cost iceberg

The ‘Right’ quantity - driving factors

• Demand for the final product
• Inventory policy of the buying organisation
• The service level required
• Market conditions
• Supply-side factors
• Factors determining the economic order quantity
• Specific quantities notified to buyers by user departments,
according to identified needs

The ‘Right’ quantity

• Using various methods and systems to determine the
optimum quantities required
• Stock planning and control system to determine stock level
and quantity
• Production planning and control system to determine the
requirements for materials to support production
Pull inventory systems
• Just in time (JIT)
• Materials requirements planning (MRP)
• Manufacturing resource planning (MRPII)
• Enterprise resource planning (ERP)

The ‘Right’ time

• Total lead-time
• Internal lead time - prepare specification, identify suppliers,
enquiry/quotation process, select the supplier & contracting
• External lead time - time between supplier receiving and
fulfilling purchase order
• Total lead time = internal lead time + external lead time
Procurement lead time

The ‘Right’ place

• Delivered to the correct location
• Responsibilities and liabilities associated with moving
goods from supplier’s premises to the required point must
be clearly stated in the purchasing documents
• Delivery decision - consideration
• The correct delivery point and the timelines of the delivery
• The exposure to risk of goods in transit
• Type and cost of transport
• The environmental impact of transport
• The need to monitor, track or ‘expedite’ deliveries
• Constraint to delivery (if any)
• Insurance of goods during transits

The ‘Right’ time - international delivery (considerations)

• Obtaining export and import licenses
• Customs clearance and import duty
• Cost of packaging suitable for long hauls
• Freight and insurance
• Ownership and liabilities
• Incoterms shipping terms that define the following
when goods are moved between countries
• Place - where the seller delivers goods to buyer
• Cost - what seller pays up to the delivery point
• Risk - when seller passes the transit risks to buyer
Incoterm - examples
•
FOB, CIF, ex-works
•
DDU, DDP, and more ….

Total life costing (TLC) or total cost of ownership (TCO)

• A summation of all costs incurred in acquiring and using a
product during its life-span till its end-of-life
• The composition of the cost elements varies with products
Total Cost of Ownership (TCO)
TCA Tooling Disposal Insurance Operations
Storage Training Maintenance

Total cost of acquisition cost (TCA)

• TCA is a cost element in the total cost of ownership (TCO)
• It is a summation of all costs incurred in acquiring and receiving
in goods or services as inputs required by the business
• Cost factors related to an acquisition:
• The purchase price
• Quality of the product defective product leads to not being fit-for-
purpose and other incidental costs
• Lead-time - total time taken for the produce to arrive (from PR till
receiving)
• Logistics costs (transport, insurance, duties etc)
Total Cost of Acquisition (TCA)
Purchase price Product quality Lead-time Logistics

The Five ‘Rights’ of procurement

• Achieving the five Rights through:
• Robust development and management of contract with
external competent suppliers or service providers
• Performance management with key performance
indicators (KPI)

Contract
• An agreement, enforceable by law, between two or more parties
to do, or to abstain from doing, some act or acts
• Can be in written form or oral
Use of contract
• To define obligations of both buyer and seller
• To apportion liabilities between buyer and seller

• Agree on the contractual terms prior to execution (price, quantity,
completion, specification payment, place of delivery and
completion date, liabilities etc) - no restriction to agreements
• To state the applicable Law (international trading)

Legally binding agreements - elements

• Agreement (offer and acceptance) Critical – contract is non
• Consideration binding if any of the four
is not in existent
• Intention to create legal relations
• Contractual capacity - lead to contract invalidity
• No restriction on correct form except for conveyance of
deeds, bill of exchange, share transfer, hire purchase
Invalid contract
• No legal capacity - minors
• Vitiating factors - mistake, misrepresentation, duress and
undue influence and illegality

Contractual provision
• Essential contract provisions for 5-Rights and legal
compliance
Contract terms descriptions Coverage
Quality Meet quality requirement in specification The Right quality
Delivery When and where deliveries to be made The Right place and time
Lead-time • Delivery lead-time of orders The Right time
Quantity • Number of items required The Right quantity
Price • Fixed unit price The Right price
Payment • When and how invoices are paid Commercial
Currency • Currency used for invoicing Commercial
Term • Length of the contract Legal
Law • Which country’s law to comply with Legal
Notice • Notice period for termination of the contract Legal
Dispute resolution • Preferred dispute resolution mechanism Legal

Performance measurement
• Assess, evaluate and compare supplier performance against :
• Defined performance criteria
• Previous performance
• Performance of other comparable organisations (e.g. other
suppliers) or standard benchmarks
KPI - statement of performance

Criteria Performance indicator
Quality Management systems and processes are clear and documented
Cost management Consumable purchasing rates are benchmarked for value for money
Timeliness Service is delivered within the agreed periods of availability
Quantity Stocks maintained to appropriate levels to ensure continuity of service
Compliance Corporate policies and procedures are adhered to

Performance measurement - benefits

• Enable identification of best performing supplier
• Assist in determining relationship with supplier
• Ensure contract is being performed
• Identify performance issues for corrective actions
• To motivate supplier to maintain or improve performance
• Sharing common goals
• Improve communication
• Steps towards achieving the five Rights of procurement

Common KPI for supplier performance

Success factors Sample KPI
Cost management • Value or percentage of cost reductions achieved
• Number of cost reduction initiatives proposed or implemented
• Percentage range of acceptable cost variance from budget
Quality performance, • Percentage or number of rejects and returns, errors or
conformance or scrapped items delivered
compliance • Number of customer complaints and/or returns
• Certification under quality management standards (e.g. ISO
9000) and/or environmental management standards (e.g. ISO
14001)
Timeliness/ • Frequency or percentage of late, incorrect deliveries
delivery • Percentage of on time in full (OTIF)
• Acceptable schedule variance (deadline +/– x hours or days)
Service • Promptness in dealing with enquiries and problems
Resources • Minimum number of staff or resources of specified grades to
be allocated to the project (e.g. for service provision or
outsourcing)

Added value - other sources

• Additional features
• Branding
• Convenience
• Service excellence
• Market development
• Reduction of input costs
• Good organization reputation
• Innovation
• Supplier sustainability and so on ……….

[L4-M1] 1.3 Concepts of Procurement and Supply 1.3
Chain Management
Supply chain - concept

• Supply chain encompasses all firms and activities
associated with the flow and transformation of goods from
raw material stage through to end-user, as well as the
associated information flows. Materials and information flow
up and down the supply chains (Handfield and
Nichols)
• Supply chain includes all involved in organising and
converting materials through the input stages (raw
materials), conversion phase (WIP) and outputs (FG). The
cycle is often repeated several times in the journey from the
individual producer to the ultimate customers, as firm’s
finished goods is another’s input (Peter Baily)

Chain Management
The chain metaphor

• Emphasises ‘serial co-operation’ or ‘working together in
turn’
• Emphasises mutual dependency and collaboration (each
link in a chain is essential to the completeness and strength
of the whole)
• Emphasises the importance of ‘linkages’ or interfaces
between members
• It is continuous and non-directional

Chain Management
The linkages between sectors
• Primary sector
• Encompasses industries that extract natural resources from earth
• Activities - mining, oil & gas, agriculture, forestry and fishing
• Secondary sector
• Encompasses manufacturing and construction industries
• Convert raw material into finished goods for consumption
• Tertiary sector
• Encompasses service industries that support production
Primary Secondary Tertiary

sector sector sector
Raw
Manufacturing Services
materials
Customers / Consumers

Chain Management
Stages of supply chain

Chain Management
Supply chain management - definition

• Management of upstream and downstream relationships with
suppliers and customers to deliver superior customer value at
less cost to the supply chain as a whole (Christopher)
• Integration and management of supply chain organisations and
activities through co-operative relationships, effective business
processes and high level of information sharing to create high-
performing value system that provide member organisations a
sustainable competitive advantage (Handfield and Nichols)
• Management of relations and integrated business processes
across the supply chain …. Use of SCM concept entails links in
the supply chain plan and co-ordinate their processes and
relationships by weighing the overall efficiency and competitive
power of the supply chain (Jespersen and Skjott-Larson)

Chain Management
Flows in supply chain

Chain Management
Effective supply chain management - benefits/values

• Eventual total cost reduction
Support achieving the 5-Rights

• Improved responsiveness to customers’ requirements
• Access to complementary resources and capabilities
• Enhanced product and service quality
• Improved supply chain communication (information flow)
• Improved inventory management
• Reduced cycle times
• Greater transparency for cost and risk management
• Greater supply chain visibility
• Optimising the balance of service levels and costs

Chain Management
Supply chain network
• Consists of organisations involved in the process of converting
raw material into finished goods to fulfil customers requirements
consisting of:
• Suppliers, producers, distributors, customers, logistics providers etc
• Supporting outfits - financial and insurance institutions, regulators
etc
Supply chain network (Arteria Technologies)

Chain Management
Supply network design decisions (Slack, Chambers & Johnson)

• How should the network be configured?
• Where should each part of the network owned by the
organisation be located?
• What physical capability should each part of the network owned
by the company have?

Chain Management
Supply chain - role and position of procurement

• Procurement functions
• Develop specification, sourcing, supplier selection
• Purchasing, inventory management, waste disposition
Position in supply chain

Chain Management
Complex supply chain network

Chain Management
Automobile supply chain – supplier tiering (example) (Toyota)
• Tier 1 supplier assemble engine for the OEM
• Tier 2 suppliers provides engine components and parts to tier 1
Supply of engines

Chain Management
Logistics
• Logistics is the process of planning, implementing and
controlling procedures for the efficient and effective
transportation and storage of goods, including services and
related information, from the pint of origin to the point of
consumption for the purpose of conforming to customer
requirements (CSCMP)
• Functionality of logistics
• Handling
• Packaging/packing
• Inventory management
• Warehousing
• Transportation

Chain Management
Supply chain network - logistics

• A critical part in the supply chain
• Logistics integrates numerous
processes to ensure effective
movement of goods customer
service
• Effective logistics requires
• Demand planning
• Fleet management
• Warehousing and storage
management
• Order fulfilment

Chain Management
Materials management (MM)
• Materials and inventory planning
• Procurement of materials, parts and supplies
• Storage and inventory management
• Production control
Main processes in MM

Chain Management
Integrated systems
• Material requirement planning (MRP)
• Manufacturing resource planning (MRPII)

Chain Management
Material requirement planning (MRP)

• A production planning and inventory control system used in
manufacturing processes
• Objectives
• Ensure materials are available for production
• Keep minimum inventory
• Plan production and procurement activities
Manufacturing resource planning (MRPII)
• MRPII is an extension of MRP
• MRPII has being updated to include other areas of
manufacturing, including general accounting and resource
capacity planning

Chain Management
MRP - process / cycle

Chain Management
Enterprise resourcing planning (ERP)

• ERP evolved from the MRP and MRPII
• A cross-functional and enterprise-wide system
• It integrates all functional information systems into one (HR,
Finance, sales/marketing logistics, operations etc)
• It enables sharing of useful information for effective business
planning and decision making
• ERP - advantages
• Real time availability of information (everyone on the same page)
• Increase productivity and reduce processing costs
• Improve communication
• Improve customer service (quick response)
• Improve SCM and relationships

Chain Management
Contrasting MRP, MRPII and ERP

[L4-M1] 1.4 Stakeholders of Procurement 1.4
Stakeholder - definition
• Individuals or groups who depend on the organization to fulfil
their own goals and on whom, in turn, the organization depends
(Johnson & Scholes)
• A stakeholder of a company is an individual or group that either
is harmed by, or benefits from, the company or whose rights
can be violated or have to be respected by the company
(Jobber)
• In the context of procurement, stakeholders are individuals or
groups who hold interest in procurement activities and may
have power to influence the outcome of these activities (TM)

Why are stakeholders important

• They may influence procurement strategies and activities
• They may seek to influence the organisation
• There is strong public and regulatory pressure for business to
be ‘socially responsible’
• Organisations themselves increasingly follow (and publicise)
ethical and CSR frameworks

Stakeholders in procurement

Managing stakeholders
• Profile the stakeholders (or stakeholder mapping)
• Take into account their interests and likely responses
• Communicate effectively with them on matters affecting them
• Engage the interest, support and commitment of influential
(and potentially helpful) groups
• Manage potential issues and problem areas that might
arouse resistance or opposition from influential groups

Mapping stakeholder
• Power/interest matrix (Mendelow)

Managing stakeholders
• Once key stakeholders identified, plan a management strategy
• A standard approach to management strategy
• Goal analysis
• Desired outcomes
• Stakeholder marketing and communication programmes
• Relationship management
• Issues management

Systematic stakeholder management

[L4-M1] Chapter 2
Procurement Cycle for Goods and Services
Chapter 2 Procurement Cycle for Goods and Services

2.1 Key aspects of the procurement cycle
• The CIPS Procurement Cycle
• Pre-contract and post-contract award stages
2.2 Analysis of the Stages of a procurement process
• Stages of the procurement process
• Objectives and value-added at each stage
2.3 Electronic systems used in procurement
• e-Requisition, e-catalogue, e-ordering, e-sourcing, e-payment
• Impact of e-systems on the procurement process
2.4 Achieving compliance and outcomes
• Organization needs for structured sourcing processes
• Relation between process achievement and added value outcomes

[L4-M1] 2.1 Key Aspect of the Procurement Cycle 2.1
The procurement cycle (CIPS)

• Stages of the cycle

Stage 1 - Understanding needs and develop specification

• Get to understand customers’ (internal or external)
requirements such as:
• Description of requirements (include schematics, drawings if
necessary)
• Quantity and quality level
• Delivery time and place of requirements
• Develop specification against the descriptions for new
requirements (performance or conformance specification)
• For repeat orders
• Previous purchase order information suffice
• Check to confirm if requirements are in stock/inventory

Stage 2 - Market/commodity and options

• Review and decide on best means to fulfil the requirements
• Make-buy decision
• If decision to buy
• Review market and source for competent suppliers
• Review includes market condition (supply-demand), currency
fluctuation, economic condition, local-overseas etc
• Essentially STEEPLE
Make-buy decision matrix

Stage 3 - Develop sourcing strategy or plan

• Develop strategy or plan outlining the following:
• Source from domestic or overseas suppliers
• Evaluation of competition in the market (Porter’s 5-Forces)
• Establish the relationships with the suppliers (Kraljic Portfolio matrix)
• Decide on ITT or RFQ
Invitation to tender (ITT) Request for quotation (RFQ)

Invitation to bid Invitation to quote
Formal Relatively informal
Suppliers are pre-qualified Suppliers not usually pre-evaluated
Commonly used in Public Sector Commonly used in Private Sector
Response in set format Response in supplier’s format
Terms negotiable Terms not negotiable
Used in complex purchases Used in standard purchases
Used in high-value purchases Used in medium or low-value purchases

Stage 4 - Pre-procurement, market test and engagement
• Scan the market and the external environment
• Identify potential suppliers (micro-economics)
• Review the macro-economic factors - cost implications,
contracting terms, timeliness to act, supply and demand trend,
product life-cycle and so on
• Each process requires information (from stakeholders)

Stage 5 - Develop documentation

• Develop and prepare ITT or RFQ covering:
• Description and specification
• Quantity and details on delivery
• Service level agreement (SLA) or relevant KPI
• Terms and conditions relevant to the purchase
• Creating contract terms that would lead to the formation of a
legal binding contract

Stage 6 - Supplier selection to participate in the ITT or RFQ

• Procurement undertakes appraisal or pre-qualification on
potential suppliers by::
• Site visit and audit
• Send pre-qualification questionnaires (PQQ)
• Send request for information (RFI) - gathering information to
assess suitability Carter’s 10 C
• Types of information needed: • Competency
• Capacity
• Company history
• Commitment
• Financial performance and activity • Control
• Quality accreditations • Cash
• Capacity and capabilities • Cost
• Consistency
• CSR policy, health and safety and so on • Culture
• Clean
• Communication

Stage 7 - Release ITT/RFQ

• Procurement releases ITT/RFQ to the short-listed potential
suppliers
• For tender - the ITT, with submission dateline, should be
released at the same time to the participating suppliers
• For RFQ - less formal and restrictive

Stage 8 - Bid/tender/quotation evaluation

• Evaluation often involves cross-functional team (CFT) effort
• Evaluation outcomes will likely lead to the selection of the
most competitive supplier
• Tender - more structured and evaluated against defined
criteria
• Quotation - less formal and faster turnaround of decision

Stage 9 - Contract award and implementation

• Contract awarded to the successful bidder
• Until the supplier accepts the contract, the other bidders
should not be informed of the tender outcome
• Once the contract has been formalised (signed off by both
parties), the contract can commence
• After which, unsuccessful bidders should be provided with
feedbacks as to why their efforts were unsuccessful

Stage 10 – warehouse, logistics and receiving

• Receive in deliveries which may involve activities such as:
• Physical checks on condition of the deliveries
• Verify delivery against DO and contract or PO
• Confirm receipt on system and generate GRN (for payment)
• Move deliveries to QA incoming inspection (if necessary)
• Put-away to storage or issue to end-users

Stage 11 - Contract performance (or management)

• Review supplier performance against contractual obligations
• The use of defined measurements (KPI)
• Regular meetings to sort out and resolve issues such as
performance and others
• Maintain communication and relationship
• Work towards performance, beyond the contractual
standards, innovatively

Stage 12 - SRM and SCM and development

• Different suppliers require differing approach in managing
relationships
• Suppliers should be managed according to the type of
relationships established during the qualification stage based
on Kraljic Matrix (strategic, bottleneck, routine and leverage)
• Essential for both current and future relationships

Stage 13 - Asset management and learning

• The final stage of the procurement cycle
• Review contracts to re-ascertain the organisation’s
requirement
• If contract is still relevant - contract extension or re-tender
• If contract is no more needed - make plan for disposal of
inventory and assets (decommission and disposal)
• Recalling and learning from the experience of the relationship
to future improve in future contracts and contracting

Pre-contract and post-contract awards

• The procurement cycle consists of two segments:
• Pre-contract award (sourcing) - stage 1 to 9
• Post-contract award (Ps) - stage 10 to 13
Pre-contract award (sourcing) Post-contract award (P2P)

Understand the need Asset/inventory management
Scan the market Contract management
Supplier appraisal Contract Performance management
award and
Develop sourcing plan implement SRM
Market test Place purchase orders
Develop documentation Receiving and warehousing
Release ITT/RFQ Payment
Evaluate bids/select supplier Review relevance of contract

[L4-M1] 2.2 Analysis of the Stages of a Procurement 2.2
Process
Creating contract terms (stage 5)
• Suppliers make an offer to the terms of the ITT or RFQ
• A contract is formed when buyer accepts the offer unconditionally
• Where changes to the original terms are made, it becomes a
counter-offer which, in turn, relies on the suppliers to accept
unconditionally
• Silence or failure of response to an offer is no acceptance
Express and implied terms
• Express terms
• Terms that are agreed by the parties to the contract (e.g. price, led-
time, payment terms etc)
• Implied terms
• Terms that are not expressed in contract but are implied into contract
by law

Process
Service level agreement (stage 5)

• A SLA outlines the level of service a buying organisation
expects from the supplier
• It defines how service and service levels will be monitored
and measured and how problems will be addressed
• SLA should be developed as part or reference to the
contract to enable suppliers understand the requirements
and its measurement, in advance

Process
Service level - monitoring mechanism

• Observation and experience
• Spot checks and sample testing

• Business results and indirect indicators
• Customer and user feedback

• Electronic performance monitoring
• Self-assessment by the service provider

• Collaborative performance review

Process
Key performance indicators (KPI)
• Developing ‘SMART’ KPI S Specific
• SMART KPI - benefits
• Improved communication on performance M Measureable
and other related issues
• Motivates supplier to achieve and/or out- A Achievable
perform contractual obligations
• Promote collaborative relationship R Relevant
• Enable comparison of year-on-year
performance of the supplier T Time bound
• Focus resources and efforts only on vital
areas (critical success factors)
• Clearly defined shared goals
• Reduced misunderstanding and conflict

Process
Supplier selection - stage 7 to 9
• The process of investigating and analysing supplier capabilities
• To determine suitability of supplier to meet buyer’s
requirements (the Right supplier) and to be invited to the
bidding exercise
• Supplier appraisal can be carried out by either by the use of
PQQ and supplier audit (site visit)
• Selection criteria
• Financial standing and stability
• Technical ; production / commercial capabilities
• System/IT capabilities
• Quality and quality assurance capabilities
• CSR performance
• Organisation culture
• Price and cost factors

Process
Bid evaluation
• Each bid return will be evaluated based on criteria which
are defined and agreed by the CFT
• The process identifies the most qualified, cost-effective
and VFM bidder
Contract award
• Contract awarded to the successful supplier
• The finalisation of the contract between the parties
• Parties initiates planning and work to implement the
contract

Process
Contract management
• The process to ensure a contract is performed to the
expectations of both the buyer and the seller
Effective contract management - benefits
• Having control in the execution of the contract
• Ensure supplier performs and fulfill its commitment and
obligations stipulated in the contract
• Motivates the supplier out-perform
• Better VFM through improved control of costs and quality

• Early identification of risks and challenges which may lead to
contract failure
• Better management of legal and commercial issues
Value for money (VFM) – something that is well worth the money spent on it

Process
Key elements of contract management

• Contract development
• Contract communication
• Contract administration (change, renewal, termination etc)
• Managing contract performance

• Relationship management

Process
Supplier relationship management (CRM)
• Supply contracts do not correspond in a one-to-one way
with supplier relationship as each contract is different
• Kraljic Matrix - determine the various types of
relationships with suppliers and each relationships requires
different management approaches
• Contract management is, while CRM concerns with
working improving relationship with strategic suppliers
• Elements of CRM
• Manage relationship
• Maintain strategy
• Manage change
• Monitor performance

Process
Collaborative and distributive relationship - differences
Collaborative Distributive
Information sharing Information withheld
Willingness and effort from both parties No effort made to understand each other
Common goals, strategies and objectives No shared goals
Team-working, openness and trust One sided, meeting own needs
Aims for win-win situation Win-lose situation
Long term relationship Short term or one off relationship
Open communication Minimum communication
Promotes SRM Focuses on contract management
Collaborative relationship - benefits

• High-competent and committed suppliers contribute
significantly to business in areas such as
• New product development and process innovation
• Outperform contractual obligations
• Excellent service level
• Risks and investment sharing
• information and advice for informed decision making

Process
Procurement stages - objectives and value-add
Stage Objective Value-add
1 Understand needs and clear specification Ensure acceptable quality; specification clearly
understood by bidders
2 Understand market condition; make-buy Make or buy decision to achieve best VFM and price
3 Decide on a sourcing strategy Work out the best approach to attain best VPM and price
4 Review demand trend and PL-cycle Mitigate non-performance risk; attain best VFM and price
5 Develop bidding document (criteria, T&C) To set up requirements and bidding criteria clearly
6 Evaluate and short-list suppliers Identify suppliers which are able to fulfil the needs
7 Release bid document (ITT/RFQ) Ensure all suppliers are ‘on the same page’
8 Determine best offer (VFM) Structured evaluation to establish the best offer
9 Formalise relationship with the successful Ensure compliance to legal requirements; clear
supplier understanding of contractual obligations and liabilities of
both parties
10 Receive and quality check Ensure quality and delivery performance
11/12 Ensure contract administration, Sustain supplier performance; build on relationship to
performance and relationship building further enhance performance and attempt to reap benefits
of collaboration
13 Asses changing business needs; manage Verify if the contract is still relevant; manage end-of-life
end-of-life cost: learning from experience costs; lesson learned from the experience for enhancing
sourcing efficiency and effectiveness in the near future

[L4-M1] 2.3 Electronic Systems Used in Procurement 2.3
CIPS Procurement Cycle - the e-processing

• e-Requisitioning
• e-System for raising, approving and receiving of purchase
requisitions (PR)
• e-Sourcing
• e-system for sourcing, order placement, expediting
• e-Payment
• e-System used for financial settlement of suppliers’ invoices
• e-Catalogues
• e-System used for searching and acquiring products and services

The e-Procurement cycle

•

e-Requisitioning
• The start of the procurement cycle where end-users put up their
requirement in the form of a digitized purchase requisition (PR)
• The requisition requires online approval by management (comply
with organisation’s approval level)
• It will then be transmitted electronically to procurement for
processing
Advantages (e-requisition) Disadvantages (e-requisition)

Paperless, fast, efficient and consistent High investment and capital outlay
Better traceability and control of the process Less personal may affect working
relationship
Reduces risks (process, error, fraud etc) May encounter resistant to change
High productivity and cost savings Require training (including software upgrade)
Ease of data assess (system integration) Too reliant on technology systems

e-Catalogues
• e-Catalogues are listings, consisting a wide range of products,
items, parts etc, placed in the websites by sellers to attract or
induce offers to buy from customers or consumers
• Commonly used by commercial buyers to research or source for
products.
Advantages (e-catalogue) Disadvantages (e-catalogue)

Information always available online Assess issues (downtime, connectivity etc)
Information is constantly updated Not conducive for relationship building
Details are available (drawings, circuits etc) May be difficult to navigate
Opened online 7 x 24 Information may not be reliable (fake)
Environmentally friendly

e-Ordering
• Processing or placing purchase orders (PO) via an e-system
• Extremely useful with repeat orders or inventory replenishment
as the related information is already populated in the system
• Depending on the level of system integration, information from
the PR can either manually input into the system or automatically
transmitted into the order system
• E-Orders are approved online
Advantages (e-ordering) Disadvantages (e-ordering)
Productivity improvement and cost saving Less personal may affect working relationship
Accurate data (from e-requisitioning) System failure disrupt procurement process
Better traceability and process control High investment and capital outlay
Reduces risks
Environmentally friendly
Easy compilation of data for business
decision

e-Sourcing
• Sub-systems of e-sourcing
• e-Specification
• e-ITT and e-RFQ
• e-Negotiation
• e-Contracting
• e-Supplier evaluation

e-Auctions
• Standard auction
• Suppliers post goods online
• Potential buyers bid competitively
• All bids are ‘open’ (visible to all bidders except name of the bidders)
• Buyers may raise offers competitively during the auction
• The highest bidder, after expiry of bid date, wins.
• Reverse auction
• Buyer specifies its requirements and suppliers submit competitive
quotes
• All bids are open (visible to all bidders except name of the bidders
• The lowest bidder, after expiry of bid date, wins.

e-Auctions - benefits for buyers

• Acquisition lead-time reduction and productivity enhancement
• Higher cost savings as compared with negotiated outcome
• Create higher level of competition
• Access a wider range of suppliers
• Less interaction (meetings, discussions, negotiation, acquire info)
e-Auctions - benefits for suppliers
• Opportunities to enter previously closed markets or account
• Allows second chances
• Reduce timescale and costs of negotiation, marketing
• Reliable source of competitors/market pricing data and strategy
• Clear indication as to how to win the business

Online auctions - drawbacks

• Adversarial approach with win-lose outcome
• Suppliers vulnerable to coercion (forced to participate) and
manipulation (force current supplier to cost down with apparent
competition)
• Affected suppliers lose trust - strain in relationship
• Adverse effect on the economic performance of the suppliers
• Based on ‘lowest price’, supplier may ‘cut corners’ to compete
• Does take into account non-price criteria and other T&C
• Cost reduction not realized due to costs incurred in other
aspects (legal, costs of managing new suppliers, performance
failures, over-declare on savings by system provider, higher cost
for urgent requirements…)

e-Payment
• The final state of the e-procurement cycle where financial
settlement or payment of invoices is processed
electronically
• e-Payment can be effected through the following means:
• Bank transfer – funds transfer from buyer’s bank to supplier’s
bank account
• Debit or credit cards – payment for ‘over-the- counter purchases
or payment over internet
• Approved e-payment portals such as PayPal, PayLah etc
Advantages (e-payment) Disadvantages (e-payment)
Fast processing Vulnerable to online hackers
Traceable System failure disrupt the process
Low risk from errors, fraud, theft etc Personal relationships does not exist
High level of control
Productivity improvement and cost savings

e-Systems - impact on the procurement process

• Reduction in errors
• Reduction is waste
• Reduction in costs
• Quick turnaround of payments
• Continuous improve
• Enhanced relationships

Waste
• Anything (tangible or intangible) that is of no value or not
value-adding to the business
e-System impact on procurement
• In relation to the 7-wastes (Taichi Ohno)
The 7-waste Impact to procurement
Motion Non-value-adding movement of people. With e-systems, any such movements are
weeded out through high level of productivity
Inventory e-System (MRP) reduces inventory holding and providing procurement the correct
inputs to purchase the right quantity of need
Over-production Over-produced due to poor demand management. E-systems aid purchasing the
right quantity
Waiting Manual systems are relatively in efficient resulting in stock-outs and disruption to
production. S-Systems enables effective planning and supply
Defects e-System reduces errors due to poor work quality and processes
Over-processing E-System provides seamless processing which removes all unnecessary focus and
effort employed by procurement
Transportation e-System provides accurate and real-time information for effective planning of the
movement of the supplies (the five Rights)

Reduction of waste - ‘Lean’ thinking

• Lean is having no excess or surplus (eliminating wastes)
• Progressive removal of wastes
3P’s of the Lean approach to waste reduction (Womack and Jones)

• Purpose - understanding what customer wants and how the
customer perceive value
• Process - improving the process; removing the waste within it
• People - creating an environment that enables people to achieve
their maximum potential

e-Procurement - continuous improvement

• With the constant technological changes and improvements, it is
essential to seek improvement that are of value adding within the
e-procurement system
The continuous improvement cycle

e-Payment - fast turnaround of payment (benefits)

• Having a reputation of prompt and timely invoice settlement can
be a leverage to commercial negotiation
• Prompt payment leads to eliminating efforts and time (waste)
responding to queries by disgruntled suppliers
• Prompt payment helps suppliers’ cash-flow (sustainability)
• Early payment may lead to successful negotiation on rebates
from suppliers
• e-Payment will likely be welcomed by the suppliers and the buyer
may benefit price rebates with future orders
• Prompt payment may help to improve relationships, especially
with strategic suppliers

Electronic data exchange (EDI)

• EDI is the electronic exchange of information or documents in an
agreed format between the systems of different organisations
• A computer system communicating directly with another (system
integration) eliminating all manual efforts and intervention
• Common documents exchanged or transmitted via EDI:
• Purchase orders
• Delivery notes
• Invoices and many others
Advantages (the use of EDI) Disadvantages (the use of EDI)
Transactions at high speed (lead-time) High investment and capital outlay
Real time and accurate information Require customisation and configuring as not
all organisations use similar system
No human intervention needed (save Require training and IT specialist
manpower)
Cost reduction; environmental friendly Not all organization would want system
integration (EDI)

Electronic system - general setbacks/challenges

• High initial capital investment and set up cost
• High learning curve and training costs
• Potential integrating and reliability issues (early stage)
• Compatibility issues (with other systems)
• Data security risks
• Ethical issues - small suppliers forced to invest in costly
system

[L4-M1] 2.4 Achieving Compliance and Outcomes 2.4
Ethical sourcing
• Promote fair and transparent competition in sourcing
• Use of sourcing policies to promote positive socio-economic goals
• Specification and sourcing of ethically produced inputs
• Select, manage and develop suppliers to promote ethical trading,
environment responsible and labour standards across the SC
• Support improvement of working conditions across the SC
• Support sustainable profit-taking by suppliers and ensure fair
prices paid to suppliers across the SC
• Adhere to ethical frameworks and codes of conduct
• Comply with all relevant laws and regulations for consumer,
supplier and worker protection

The need to be socially responsible

• Unethical conduct leads to poor relationships with affected
stakeholders result in lost opportunities, values
• Impact attracting, retaining and motivating of employees and
suppliers
• Unethical conduct lead to regulatory, media and pressure group
scrutiny
• Unethical conduct may result in reputational damage
• Illegal behaviours create additional compliance and legal risk

Structured processes in organisation - importance

• Consistency in practices and in outcomes across the
organisation
• Provide process transparency (audit trail)
• Assist in risk management (quality failure, high cost etc)
• Ensure compliance to policies, rules, law, regulation etc)
• Consistent and constructive training of staff

Supplier selection criteria - beyond commercial

• Sustainability
• Corporate social responsible (CSR)
• Ethical practices

Sustainability
• Strategies designed to balance economic viability with
considerations of environmental and social responsibility
Sustainable procurement (CIPS)

• A process whereby organisations 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 organisation but also to society and the economy;
whilst minimising damage to the environment

The triple bottom-line (the 3Ps)

• Profit
• An organization’s economic focus on generating financial wealth
• People
• An organization’s socio-cultural focus on those it directly and
indirectly affects
• Planet
• An organization’s focus on its impact on the environment

Procurement contributions to sustainability

Profit: • Secure value for money • Manage cost and budget
Adding • Effective investment appraisal and • Added value
economic capital purchasing • Ethical trading
value
Planet: • Input to design and specification • Reduce the waste of resources
Adding of green products and services throughout the sourcing cycle
environmental • Source green materials and • Manage logistics to minimise
value resources (green sourcing) waste, pollution, GHG emissions
and environmental impacts
People: • Encourage diversity in purchasing • Input to health and safety of
Adding team and among suppliers products and services
social value • Monitor supplier practices • Fair and ethical trading
• Local and small-business sourcing
Responsible procurement

Supplier selection - sustainability audits

• Profit
• Carry out periodical checks on the supplier’s credit rating (by
third party credit agency)
• The use of financial ratio to ascertain supplier’s financial
stability (ratio derived from supplier’s balance sheet and profit-
loss statement)
• People
• Assess and review supplier’s CSR policy and its practices and
compliance
• Planet
• Assess and review supplier’s practices in relationship to its
environmental obligations against the relevant global standards

Corporate Social Responsibility

• It is a demonstration of ethical behaviour of an organization
• Organizations recognize these added responsibilities and to
be held accountable beyond profit making
• Failing to demonstrate CSR could result in damage to the
organization’s reputation, product branding, business
relationships and so on
• CSR comprises a set of rules and guidelines that manages
the environmental and social issues an organization will be
encountered with
• Human rights; equal opportunities; ethics and ethical trading
• Diversity and supplier diversity
• Impact on society and environment
• Sustainability
• Biodiversity
• Community involvement

[L4-M1] Chapter 3
Organization Structure and Procurement
Chapter 3 Organization Structures and Procurement

3.1 Aspects of corporate governance of procurement
• Conflict of interest
• Codes of ethics in procurement
• The CIPS Code of Conduct
• The need of documented policies and procedures
• Organizational accountability and reporting for procurement and supply
• Procurement status in the organization
3.2 Organization policies and procedures in procurement
• Procedures for procurement and supply
• The aspects of procedures for procurement and supply
• The use of procurement policies, strategies, and procurement manuals
• The involvement of internal functions in procurement
• Responsible procurement and the International Labour Organization

Chapter 3 Organizational Structure and Procurement

3.3 Aspects of corporate governance in procurement
• Centralized and devolved structure
• Hybrid procurement structure
• Interacting with people and building rapport
• The need for customer service and value for money outcomes
3.4 IT system used in procurement
• P2P systems
• Inventory management system
• Enterprise Resource Planning (ERP) system
• Communication system for internal and external use

[L4-M1] 3.1 Aspects of Corporate Governance in 3.1
Procurement
Governance (control of organisation activities)

• Legislation
• Governing law provides legal framework organisations must act
• Laid down in statutory laws of the country and upheld by the legal
system
• Regulation
• Operating conditions/regulations established by a governing body
• Laid down by a specific regulatory body and applicable to a specific
market or activity
• These bodies are empowered to independently establish rules and
regulation (include enforce, monitor and punish) of acceptable
practices
• Examples - Environment agency, Medical council, PSA, IDA etc

Procurement
Corporate governance
• Refers to rules, policies, processes and organisation structure
by which organisations are operated, controlled and regulated
to adhere to acceptable ethical standards, law and regulations
• Good corporate governance - in essence, the integrity with
which a company is managed - is a central component of a
robust CSR management programme (CIPS)
Corporate governance - framework

- Vision - Values and ethics
- Mission - Policies and procedures
Corporate - Accountability
- Strategy
Governance - Performance management
- Objectives
- Goals - Stakeholder protection

Procurement
Why procurement governance is important

• Procurement staffs
• Manage and control large sums of organisational funds
• Exposed to opportunities to commit financial fraud, misuse
systems or information for personal gain
• Their decisions benefit certain suppliers over others - creating
an incentive for suppliers to try and influence those decisions

Procurement
Conflict of interest
• A term used when an organisation or individual becomes
unreliable due to conflict between their personal (or self-serving)
interests and professional duties or responsibilities
• Conflict of interest occurs when an organisation or individual has
a vested interest (such as money, status, knowledge,
relationships, reputation and so on) which put into question
whether their actions, judgment making can be unbiased
• Managing conflict of interest (the 4-D model)
• Disclose
• Distance
• Delegate
• Disassociate

Procurement
Code of ethnics or conduct

• A set of guidelines on unacceptable behaviour for an entity,
function or a given group of professionals
Code of ethnics in procurement - elements
• Human rights (modern slavery, working conditions, child
labour, trafficking, fair pay)
• Bribery and coercion, (conflict of interest, being influenced by
gifts or being blackmailed)
• Fair - ensure supply chain partners are treated fairly
• The environment - reduce pollution, promote sustainability
and the use renewable resources

Procurement
Ethnics in procurement

Procurement
Code of ethnics - framework
• Values
• Defines organisation’s values, morals and beliefs (works fairly,
impartially and transparently to promote honesty, respect and integrity
• Principles
• Explain how organisation set to meet its values (may include customer
satisfaction, meeting standards and continuous improvement)
• Personal responsibility
• Outlines individual’s responsibility to uphold by themselves and
colleagues (including reporting to the authority)
• Compliance
• States what individual within the organisation must comply with
• Reporting
• Open door or anonymous down reporting of a concern

Procurement

Procurement
Levels of policy and its relationship
• Documenting policies and procedures in procurement - essential

Procurement
Procurement policy
• A set of rules and regulations to govern the process of
acquiring inputs required by an organisation
Procurement policy - objectives
• Ensure conformance and compliance (to standards,
legislations, regulation etc)
• Protect organisation (limiting its liabilities)
• Promote efficiency
• Promote ethical behaviour
• Provide references
• Serves as a platform for auditing purposes
• Guide and aid with legal cases

Procurement
Organizational accountability and reporting structure

• Effective organisation structure
• Clear paths of reporting and accountability
• Effective mechanisms for multi-directional information flows
and co-ordination
• Effectively short chains of decision-making
• Minimal duplication of effort
• Soft ‘vertical’ barriers between functions
• In-built flexibility

Procurement
Organisational accountability and reporting structure
• An example of a functional organisation

Procurement
Organisational accountability and reporting structure
• An example of a procurement organisation

Procurement
Organisational accountability
• Is about departments, functions and members of an organisation
working together to achieve common objectives
• Members of the organisation are diverse, varying in personality
and having different levels of competence
• Competence levels in procurement
• Tactical (admin assistant, assistant buyer, inventory planner etc)
• Operational (procurement executives/specialist, suppler chain analyst)
• Managerial (senior/chief buyer, category, contract, logistics managers)
• Professional (procurement, supply chain, operations managers)
• Advance professional (procurement, supply chain directors)

Procurement
Accountability and reporting - procurement
• Conform to the CIPS Code of Conduct and ethical policies
• Conduct supplier appraisals fairly and transparently
• Award contracts to the most suitable and cost effective supplier
• Manage spend within budget constraints
• Ensure specifications represent the actual need of the business
• Address or report potential areas of concern
Enhancing and assuring accountability through:
• Clear roles/responsibilities and promoting team leadership
• Promoting sense of ownership and team results
• Providing freedom, control, supplier and ownership
• Embracing the positives and disregarding the negatives

[L4-M1] 3.2 Organizational Policies and Procedures in 3.2
Procurement
Aspects of procurement procedure

Procurement
The development of procedure/manual

• Derived from the procurement strategy and its policies
The links between procurement strategy/policies and

procedure/manual
Standard
Operating
Strategy Policies Procedures Procedure
(SOP)

Procurement
Procurement procedure (SOP) - elements
• Provides detail methods. procedures or processes for the
function which are normally documented into a manual or
standard operating procedure (SOP) commonly
incorporating the following
• Competition
• Ethics
• KPI
• Quality
• Supplier appraisal
• Supplier evaluation
• Sustainability
• Transparency
• And so on

Procurement
Procurement strategies
• High level procurement plan and objectives developed in
support of the corporate strategies
• May encompass the following;
• Acquire value-add fro within and the supply chain (e.g. cost
reduction, JIT, supplier rationalisation, achieve competitive
advantage, pursue innovation and creativity etc)
• Ethical, social and environmental matters
• Responsible procurement and fair trade

Procurement
Procurement strategies
• Drivers and influencing factors
• Corporate strategies and objectives
• Demand and demand forecast
• The prevailing economy and market condition
• The level of competition in the market
• Budget

Procurement
Procurement strategies - benefits

• Provide guidance and a ‘road-map’ to achieving objectives
• Provides continuity to achieving objectives
• Promotes ethical behaviour
• Promotes fair trading and treatment of suppliers
• Maintain control over the function and its operations
• Enhance procurement credibility and its value-adds
• Provides procurement expertise allowing other functions to
focus on the core activities
• Provides the function a focus on its strategies and objectives
• Promotes accountability
• Sustain or improve good governance

Procurement
Procurement strategies - change management

• Implementing strategies constantly require making
changes within the organisation and its supply chain
• This implies the need to manage the changes to ensure
achieving the related objectives

Procurement
Change management
• The three steps change model (Kurt Levin)
Unfreeze Change Freeze
1. Determine what 1. Communicate often 1. Anchor the changes

needs to change 2. Dispel rumors into the culture
2. Ensure strong 3. Empower action 2. Develop ways to
support from senior 4. Involve people to sustain the change
management the process 3. Provide support and
3. Create the need for training
change 4. Celebrate success!
4. Manage and
understand the
doubts and
concerns

Procurement
Step change and incremental change - comparison

Procurement
Incremental change - benefits

• It builds on existing skills, routines and beliefs in the
organisation
• It allows flexibility and responsiveness to environmental
changes and feedback, allowing constant re-alignment of
strategy
• It gives a continuous sense of progress, even through with
uncertainties and difficulties
• It empowers employees

Procurement
Cross-functional team (CFT) in procurement
• Gathering together members, from the various functions,
with different skills, knowledge and expertise
• CFT provides significant value-adds to procurement
• CFT - functions involvement and their value add
Function Value-add
Procurement Acquire inputs (needs) - provides supply market intelligence; suggest potential
suppliers, create awareness of commercial and legal aspects of procurements;
enforces procurement process and disciplines
Sales and Provide an insight of customers’ needs and perceived value; sales volume forecast;
marketing demand market situations
Finance and Budgets, provide financial guidelines, terms and conditions; costing; assist in the
accounting analysis of suppliers’ financial performance
Human resource Provide advice on social and ethnical standards and compliance; training and
development
Operations Undertake testing, training, resource requirement forecast; assist in WLC costing
Research and Develop specifications, provide details on components, parts (quality level material
development type, functionality etc); provide ideas for cost reduction

Procurement
Responsible procurement and labour standards

• The use of labour standards (BSI)
• Procurement to ensure knowledge of what the standard
requires
• Standards clearly communicated to suppliers
• Supplier understands clearly the requirements
Procurement and labour standards

• The International Labour Organisation (ILO)
• The Ethnical trade Initiative (ETI)

Procurement
The International Labour Organisation (ILO)

• An UN agency that promotes human, civil and labour rights
• Develops consensus document, codes of conduct, resolution
and declarations (recommendations)
• The declaration of fundamental principles and rights at work
1998) - covers four core principles
• Elimination of child labour, abolition of forced labour
• Equality, freedom of association (worker representation and collective
bargaining)
• The declaration of principles concerning MNE and social policy
on contribution to economic and social progress
• General sustainable development and compliance policies
• Employment, work-life condition and industrial relations

Procurement
International Labour Organisation (ILO) - objectives

Objective Comment
Work for all Decent work considers the aspirations of people in their working lives
Employment ILO identifies policies that help create/maintain decent work and income
Fair globalisation ILO seeks ways of ensure benefits of globalisation reach more people
Rights at work Freedom of association and collective bargaining; elimination of forced
labour; elimination of discrimination; and elimination of child labour
Social dialogue Negotiation, consultation and exchange of information between,
governments, employers and workers on issues of common interest
Social protection Access to an adequate social protection (medical, social security etc)
Working out of People should have the ability to improve their situation not only in terms of
poverty income but also in terms of respect, dignity and communication

Procurement
The ethical trade initiative (ETI) - code of labour practice

• Employment is freely chosen
• Freedom of association and right to collective bargaining are
respected
• Working conditions are safe and hygienic
• Child labour shall not be used (exploited)
• Living wages are paid
• Working hours are not excessive
• No discrimination is practised
• Regular employment is provided
• No harsh or inhumane treatment is allowed

[L4-M1] 3.3 Different Structures in Procurement 3.3
Structuring procurement - factors

• Size, nature and role of the procurement in the organisation
• Alignment with corporate structure and strategy
• The structure and environment within which procurement
operates
• The strategic objectives of the procurement function

Procurement structures
• Centralised structure
• Decentralised (devolved) structure
• Hybrid structure (a combination of centralised and devolved
• Other structures
• Lead-buyer structure
• Consortium
• Shared service
• Outsourced purchasing

Centralised procurement structure

• Operating with one central procurement function and in
one location supporting requirements of all other functions
• Advantages
• Specialisation of procurement staff
• Potential for the consolidation of requirements
• Greater co-ordination and control of procurement activities
• Greater standardisation of specifications
• Minimize conflict between business divisions
• Better access to specialist skills, contacts and resources
Disadvantages
• May not be supportive of domestic economy due to the
geographical spread of the buying organization
• Higher level of bureaucracy and ‘red tapes’

Decentralized procurement structure (devolved)

• Operating with separate procurement units residing in functions of
business divisions
• Advantages
• Better communication and coordination between procurement and
user departments (or stakeholders)
• Enhances customer focus (internal and external)
• Quick response to operations/user needs and environmental changes
• Knowledge and relationships with local suppliers
• Each business unit (SBU) responsible for their own performance
• Enables central procurement to focus on strategic tasks
Disadvantages
• Unable to take advantage of consolidation of requirements
• Supplier relationship not being valued
• procurement processes may be inconsistent
• Higher risk of ‘irresponsible’ procurement

Hybrid structure
• A combination of centralized and decentralized structures
• Purchasing activities and tasks are placed within the structures
where they best fit
Local or devolved procurement function Centralised procurement function
Small order value (against an agreed value) Management of major procurement and supply
policies
Items that are used only by the local Development and standardisation of
business units specifications
Urgent purchases (customer requirements; Negotiate of bulk contracts for a a group of
to avoid production stoppages business units
Items to be sourced location per CSR Materials (direct or indirect) which are generic
policy to all business units of the organisation
Procurement research
Procurement of capital assets

Lead buyer approach

• The lead buyer for a purchasing family/segment leads a
purchasing team working on the same kind of purchases.
• The lead buyer analyzes the market and contracts and sets
objectives for that family, particularly in terms of overall
strategy
• The ‘lead buyer’ approach is traditionally reflected in the
predominant ‘buyer’ of a particular ‘item’ putting in place a
contract, managing it and ensuring that all those within the
organization have access to it. The benefits of leverage are
gained but sometimes the ‘lead buyer’ becomes ‘precious’ of
the contracts and is reluctant to move towards alternative
solutions (Baily et al)

Consortium buying
• A collaborative effort in which two or more organizations
combining their requirements for a specified range of goods
and services
• The primary objective is to gain supply advantages
(commercial and technological) through higher volume of
purchases

Consortium procurement
• Benefits
• Enhanced bargaining power (economies of scale)
• Productivity and efficiency - a consortium can establish framework
agreements, simplifying purchase administration for members
• Knowledge -consortium members can pool expertise, knowledge
• Challenges/risks
• Costs and effort associated with communication and coordination,
and staff/policy development
• Transparency between consortium members (internal conflict)
• Consortia may suffer from lengthy negotiation and decision making
• Aggregated demand may create extremely large contracts
• Members are not obliged to purchase to the agreed specification
• Very large consortia may fall foul of laws and regulations (suppress
competition, anti-trust etc)

Type of consortium structure (consortia)

• Loose - where two or more entities collaborate for better pricing
• Voluntary - involving a purchasing agent buying on behalf of the
group of organizations
• Regional - organizations from the same region forming a
consortia to benefit from group buying
• Profit-making - The use the strength in numbers approach to
achieve economies of scale to enhance their profit margin
• Member-owned – a membership group where members to the
consortia having to pay a joining fee or annual subscription to
take advantage of the economies of scale created by members
collectively
• Non-profit – similar to for-profit consortia except the benefits
from the consortia belongs to the consortium

Shared service
• Organizations pooling or centralizing its support functions into a
structure and sharing their services across the organization (e.g.
Human resources, ICT, finance etc)
• Shared service - objectives
• Uniformity in policies, procedures and standards
• Service Improvement
• Cost saving

Outsourcing procurement
• When and what to outsource
Circumstances What activities to outsource
Procurement (or ‘purchasing’) is a peripheral • Purchase orders
rather than a core activity • Locally and nationally procured needs
• Low-value acquisitions
• Brand name requirements
• Call-offs against framework agreements
• Administration and paperwork associated
with purchasing needs
The supply base is small and based on proven • Well-defined or limited tasks
cooperation, and there are no supply • Jobs that are easily separated from other
restrictions tasks
• Jobs that have no supply restrictions
The supplier base is small, providing non- • Outsource purchasing to specialist
strategic, non-critical, low-risk items purchasing and supplier organisations, or to
buying consortia

Outsourcing
• Functions managed in-house are, instead, contracted to
external contractors working in close collaboration with the
buying organization
• In most cases, outsourced functions are non-core functions or
competences to the business
• Outsourcing free up resources enabling the buying
organization to focus on their core businesses
• May also be a strategic move to improve service and reduce
cost

Outsourcing procurement
• Benefits/advantages
• Free up of resources (to focus on other core businesses)
• Able to draw on procurement knowledge, experience, expertise,
contacts, systems and technology
• The potential for third party purchasers to aggregate demand and
consolidate orders for different clients
• Greater flexibility to adjust to peaks and troughs of demand for
procurement activity
• Challenges/disadvantages/risks
• Organisation loses commercial skill and knowledge base
• Organisation loses control over vital data and IP
• Additional management resources needed to manage the outsource
service provider

Working with stakeholders (building rapport)

• With members from the functions within the organisation
• With stakeholders outside the organisation (connected and
external stakeholders)
Map and categorise stakeholders (Mendelow matrix)

Cross-functional team (CFT) in procurement

• Gathering together individuals, from the various
departments, with different skills, knowledge and expertise
• Usually, CPT is formed to work on strategic developments or
projects
• Four key roles for procurement in a CFT (Dobler et al)
• Provide process knowledge and expertise (supply base,
negotiation, etc)
• Provide content knowledge (market, commodity etc)
• Coordinate supply staff to ensure fulfilment of project needs and
priorities
• Provide supply management point of view (trade-offs, priority-
setting, policy etc)

Building rapport - various methods

• Positive body language
• Make eye contract
• Listen and use positive gestures for emphasis
• Ask questions
• Be empathetic
• Respect all ideas
• Remove preconceptions
• Be honest
• Justify opinions and feedback

Procurement customer service (internal and external)

• Good customer service actions
• Answer the telephone and respond to emails
• Do not make promises knowing they cannot be fulfilled
• Do what has been committed
• Deliver goods and bad news honestly
• Encourage feedback
• Aim to resolve complaints efficiently and effectively
• Be helpful and show willingness

[L4-M1] 3.4 Systems Used by Procurement 3.4
Information communication technology (ICT) in procurement

• Procure to pay (P2P) process
• Communication

Inventory management systems

• Material requirement planning (MRP)
• Just-in-time (JIT)
• Kanban
Other uses of ICT
• The internet
• Customised (bespoke) software
• Bar coding, electronic tags and readers
• Artificial intelligence (AI)

Enterprise resourcing planning (ERP)

• A cross-functional and enterprise-wide system
• It integrates all functional information systems into one (HR,
Finance, sales/marketing logistics, operations etc)
• It enables sharing of useful information for effective business
decision
• Useful modules and features for procurement
• Remote access capable
• Enable cloud-based systems
• Social media modules – to facilitate organisation to management
monitor their social media from the ERP
• The supply chain management module – (requisition, place PO,
receiving, payment)

Communication systems
• Extremely important to ensure seamless flow of information
between stakeholders (both internal and external)
• Various forms of communication
• Machine (system) to human - human assess information from
system
• Human to machine - human input information into machine
• Machine to machine (M2M) - systems interfacing with each with no
need for human intervention (e.g. automatic inventory
replenishment including placing order, updating of vehicle location
or delivery status update)

Impact of information communication technology (ICT)

• Increase speed of communication, data accuracy and data
processing
• Wide access to environmental and supply market information
• Support 24 x 7 global business
• Support paperless transactions and service delivery
• Create opportunities for cost savings
• Free up procurement resources to focus on strategic tasks
• Improve productivity
• Facilitate and enhance management of information
• Create ‘virtual’ relationships (suppliers, customers, teams and
organisations)

[L4-M1] Chapter 4
Compliance with Requirements in Procurement
Chapter 4 Compliance to Requirements in Procurement
4.1 Different economics and industrial sectors
• Economic and industrial classifications
4.2 Impact of the public sector on procurement
• Objectives of public sector organizations
• Regulations that impact procurement and supply chain operations
• Need for competition, public accountability and value for money
4.3 Impact of the private sector on procurement
• Objectives of private sector organizations
• Regulations that impact procurement and supply chain operations
• The importance of branding
4.4 The impact of the third sector on procurement
• Objectives of the third sector (not-for-profit)
• Regulations that impact on charities
• The need for regulated procurement

[L4-M1] 4.1 Different Economic and Industrial Sector 4.1
Sectors
• Economic sector
• By ownership (public or private)
• By objectives (profit making or not for profit)
• Industry sector
• By industry types (raw material, production, services)
• By activity types (retail, manufacturing, finance, construction)
• By size (small-medium enterprise, multi-national corporations …)

Economic sectors
• The public sector
• The private sector
• The third sector (not-for-profit)

Public sector organizations

• Central government
• Government departments
• Local government authorities
• Quasi-Autonomous National Government Organisations
• Public corporations
• Municipal enterprises
• Armed forces
Public sector – objectives
• Provide essential public services
• Encourage national and community development
• Pursue socio-economic goals

Public sector - social and economic objectives

• Social goals
• Law and order, national defense
• Equality of opportunity (minimum levels of social infrastructure)
• Health and safety - maintenance and betterment
• Reduced level of social infrastructure, income and welfare
• Education, old age and retirement
• Economic goals
• Economic growth
• Nurture infant industry (against competition)
• Local/regional economic development
• Industry/technology development and investment
• Underwrite and subsidize national cost of production and
exchange

Source of revenue (funding)

• Company and personal tax
• Local tax (community charging)
• Sales tax
• Specific duties
• Custom and excise duties
• Fines
• Other fees and charges

Stakeholders in the public sectors

Private sector organizations

• Sole trader (un-incorporated)
• An individual carry on a business
• Partnership (un-incorporated)
• A group of individuals carry on a business together by legal
agreement
• Company (Incorporated)
• A large number of people carry on a business according to specific
legal requirements for ‘incorporation’
Private sector organisations - objectives
• Making a profit
• Increasing market share
• Increasing shareholder value
• Ensuring CSR

Private sector - sources of finance (funding)

• Initial capital investment by owners of the business
• Investment by venture capitalists
• Share capital - the issuance of shares in the company
• Retained profits
• Loan finance - bank overdraft, bank loans and debentures
• The sale of assets
• Government grants

Sole trader (un-incorporated)

• No legal formality required - only tax declaration to authority
• Personal financing (may acquire loans)
• If business fails, bank make good the loan against the
owner’s personal assets
ADVANTAGES DISADVANTAGES
Few costs or legal requirements to The proprietor is personally liable for the
establish the business business’s debts
No public accountability (though financial It may be difficult to get finance for the
records are required for tax purposes) business (e.g. a loan by personal guarantee)
The proprietor controls all decisions for Resources are limited to what the proprietor
the business - and enjoys all the profits can personally generate

Partnership
• Formed by a partnership deed, drawn up solicitor covering
• Capital invested by each partner
• How profit or losses/liabilities to be shared
• Nature and amount salary to be drawn by the partners
ADVANTAGES DISADVANTAGES
Partners contribute capital and expertise Decision-making has to be shared/negotiated
Partners share managerial and financial Profits have to be shared among the partners
responsibilities and liability
With greater asset backing, it is often easier Partners are generally personally liable
to raise loans than for a sole trader ‘without limit’ for the partnership’s debts
Suits professions - members are prohibited
from practising as limited companies

Company (incorporation)
• Limited liability company
• Owned by two or more shareholders (owners with invested shares)
• Shareholders not responsible for running the company
• Shareholders have limited liability (to the value of investment)
• Two forms of limited liability company
• Private limited (Ltd) - private companies, not listed in stock
exchange
• Public limited (PLC) - companies listed in stock exchange (public
can trade shares)

Public limited company

• Registered under companies Act (ROC)
• Memorandum of association (MoA)
• Name and address of company
• Capital of the company (authorized share capital)
• Articles of association
• The appointment of directors
• Rules relating to shareholder meeting and voting
• Types of shares and shareholders’ rights
• Rules and procedures for transferring shares
• Share prospectus
• All contracts entered into by the company in the past two years
• Audited report on assets, liabilities, profits, losses and dividend (5 yrs)
• Details of proceeds of shares used to acquire property or business

Company (incorporation)
Advantages Disadvantages
Limited liability protects owners from Expense and red tape of incorporation, and
personal liability for contracts and debts the constraint of a written constitution
Shares are a stable source of finance: the Subject to regulatory e.g. public disclosure (in
amount of capital is unaffected by trading, financial reports and accounts etc)
and is not subject (like loans) to finance
costs
Directors provide the expertise the Share trading can result in unwanted change
business needs, without ‘diluting’ of ownership
ownership

The third sector (not for profit sector)

• Non-governmental organizations (NGO)
• Operate on a not for profit basis
• Activities to further social, environmental, cultural and other value
driven objectives
• Examples - charities, religious organizations, political parties,
cooperatives, trade unions, pressure and advocacy groups,
professional bodies such as CIPS
• Voluntary sector
• Controlled by a few individuals (trustees), operate by voluntary
contributions (donations, grants …)
• Religious organization, Interest group
• Subscription sector
• Own by members who pay subscription (clubs, trade unions etc)

Third sector - objectives

• Raise public awareness of a cause or issue
• Political lobbying on behalf of a cause, issue or group
• Raise funds to carry out activities
• Provide aid and services to the public or specific beneficiaries
• Provide services to members
• Mobilise members of the public in community projects, for
mutual benefit

Classifying industry sectors

• Primary industries
• Extracting natural resources (oil and mineral extraction)
• Agriculture - cultivating, harvesting and processing of plants and
animals to products used in other sectors
• Secondary industries
• Transform raw materials into components, assemblies or finished
goods (FG)
• Manufacturing. Engineering, construction
• Tertiary industries
• Develop and provision of services
• Professional services, financial services and transport

The product journey across the three industry sectors
Gold and Customers

Gold and Jewelries
diamond purchase the
diamond dispatched to
mined from jewelries
made into the market
mother earth from the
jewelry for sales
market
Primary sector Secondary sector Tertiary sector

Organisation and industry sectors

• Organisations from any of the three economic sectors can fall
under a specific industry sector
• Public sector organisations are likely to fall under the tertiary
sector (service related)
• Private sector organisations can fall under any of the three
industry sectors (primary, secondary and tertiary)
• Primary sector - mining, quarrying, agriculture, forestry and so on
• Secondary sector - manufacturing
• Tertiary sector - services providers (transport, hospitality,
professional services, engineering etc)
• Third sector organisations fall under the tertiary sector
(service provision in support of a cause)

[L4-M1] 4.2 Impact of the Public Sector on Procurement 4.2
Public procurement strategy and objectives

• Better quality services through sustainable partnerships
• A mixed economy of service provision, with ready access to
a diverse and competitive range of suppliers
• Achieving continuous improvement by collaborating with
partners
• Greater value from a corporate procurement strategy
• Realising community benefits
• Stimulating markets and driving innovation in the design,
construction and delivery of services

Public sector procurement regulations

• EU procurement directives
• Anti-corruption law
• Freedom of information law
• Review by the National Audit Office (central government
and public bodies) and the Audit Commission (local
government authorities)

EU procurement directives - objectives

• Applicable to public procurement with value above defined
threshold levels
• Open up the choice of potential suppliers for public sector to
stimulate competition and reduce costs
• Open up new, non-discriminatory and competitive markets for
suppliers
• Ensure free movement of goods and services with the EU
• Ensure public sector procurement decisions are based on
value for money (via competition) and contracts are awarded
efficiently and without discrimination

EU procurement directive - good procurement practice

• Clear and concise objectives
• Full understanding of the market and law
• Clear specification
• Professional selection of suppliers, service providers and
contractors
• Well-considered contract award criteria
• Effective contract management
• A sound supplier contract performance review process

EU Directive - tender process

• Open procedure
• Tender open to all member states with buyer receiving numerous bids
• Restricted procedure
• Two stage process where suppliers are pre-qualified
• Only suppliers qualified will proceed to the tender
• Negotiated procedure (applicable to situations)
• Single source (utility, only part replacement etc)
• No suitable bid received from previous tender
• Emergency or details of purchase not known
• Competitive dialogue procedure (apply to complex/large purchase)
• Due to high cost and need of flexibility, contracting authority may
conduct purchases in successive stages to reduce (on the basis of
previously indicated contract award criteria) the number of tenders while
maintaining competition

Public sector - impact on procurement

• Compliance to standard (goods and service)
• Health and safety (activities, goods and services meet
relevant standards)
• Environmental (activities, goods/services meet relevant
regulation)
• Transparency and accountability (demonstrate probity, due
diligence and processes)
• Clear audit trail (proper documentation to demonstrate
business decision)
• EU Directives (provides transparency, fairness, audit and
competition)
• Achieve a wide range of services and service levels

Public sector purchasing - challenges

• Procurement has to achieve defined service levels
• They are responsible to the general public
• They have to satisfy a wider range of stakeholders
• They may have a wider range of activities
• They are subject to procurement procedures and legislative
directives
• Often subject to budgetary constraints, cash limits and/or
efficiency targets

Stakeholder demand (Impact to purchasing)

• Need for accountability
• Need for probity (upright and honest)
• Cost effectiveness and efficiency in the use of public funds
• Transparent sourcing processes and award criteria
• Open, non-discriminatory and fair competition
• Compliance to regulations
• Appeals and complaints procedures
• Policy and procedures

Public accountability
• The National Audit Office
• Scrutinises public spending on behalf of Parliament, with a
programme of regular reviews covering central government
departments and a wide range of other public bodies
• The Audit Commission
• Performs a similar role in relation to local government authorities
• The Public Accounts Committee (PAC)
• Audits and scrutinises the probity of expenditure and value for
money obtained

Value for money (VFM)

• Guidelines from Treasury and the NAO (2004)
• More efficient processing of transactions and reduced processing
overheads (productivity)
• Getting better VFM for goods and services purchased
• Direct negotiation with suppliers
• Collaborative or consortium buying
• Improving project, contract and asset management
• Making procurement decisions on the basis of long-term value
• Combining competition with innovative procurement methods
(while managing risks effectively)
• Utilising e-procurement and good practice
• Using tools to promote and measure VFM gains

Value for money (NAO)

• Obtaining VFM in the public sector is paramount
• Accessed and evaluated by the National Audit Office (NAO)
based upon the 4-E’s of VFM - efficiency, economies,
effectiveness, equity
• Efficiency - the relationship between the output from goods or
services and the resource to product them (spending well)
• Economies - minimising the cost of resources used on the inputs
(spend less)
• Effectiveness - the relationship between the intended and actual
result of the spend (spending wisely)
• Equity - the extent to which services are available to and reach
all people that they are intended to (spend fairly)

The process of assessing VFM

[L4-M1] 4.3 The Impact of Private Sector on Procurement 4.3
Private sector organisations - objectives

• Making a profit (the primary objective)
• Increasing market share
• Increasing shareholder value
• Ensuring CSR

Market share
• The portion of a market controlled by a company or product,
measured in percentage of volume or value of sales
• The main driver to increase market share - increase value to
customers, examples:
• Competitive pricing and value for money
• Delightful customer service
• Product quality and innovation
• Strong integrity and reputation
• Branding and so on
• Increasing market share – benefits
• Reduces threat from competitors
• Increase sales volume, revenue and profits

Shareholders
• Shareholders are stakeholders having rights with the
organisation in which they invested in and own shares
• Shareholder rights:
• Rights to influence company decisions (rights to vote)
• Rights to buy more shares or to increase their holding
• Rights to a share of the company’s profits
• Rights to take legal action against the company for wrongful acts

Shareholder value
• Profits generate return on value of shareholders’ investment
of capital in the business in the form of:
• Dividends a share of profits distributed to shareholders
• Growth in capital or equity value of shareholders’ investment by
way of
• Re-investing profit in the business
• Sustain or improve the value of the company’s share
• Sustain or improve the value of the company’s assets

Corporate social responsibility (CSR)

• Law, regulation and Codes of Practice impose certain social
responsibilities on organisations
• Voluntary measures may enhance corporate image and build
positive branding
• Above-statutory provisions for employees and suppliers may
be necessary to attract, retain and motivate them
• Increasing consumer awareness of social responsibility issues
creates a market demand for CSR
• Social responsibility helps to create a climate in which
business can prosper in the long term

Private sector organisation - Internal regulations

• CIPS Code of Conduct
• Code of ethics
• Anti-bribery policy
• Sustainability policy
• Environmental awareness
• Transparency
• Accountability

Private sector organisation - generic regulations and standards

• International Labour Organisation (ILO)
• International Organisation for Standardisation (ISO)
• Consumer Rights Act 2015
• General Data Protection Regulation (GDPR)
• Health and Safety Regulations
• Transport Driving Regulations

Private sector organisations - key features

• Branding
• Differentiating from competitors
• Foster value, quality and customer loyalty
• Brand values - the views of customers and stakeholders
• Alignment / co-operations with suppliers
• Supplier development
• Collaborate to reduce cost and waste
• Collaborate to improve quality
• Build innovation and creativity
• Work together to improve labour and environment

[L4-M1] 4.4 The Impact of Third Sector on Procurement 4.4
Third sector organisations - objectives

• Objectives differ as it depends on the nature of the
organisation
• Generic objectives of the sector
• Raise public awareness of a cause or issue
• Political lobbying on behalf of a cause, issue or group
• Raise funds to carry out activities
• Provide aid and services to the public or specific beneficiaries
• Provide services to members
• Mobilise members of the public in community projects, for
mutual benefit

Third sector - characteristics

Objectives and • May be multiple service objectives and expectations
expectations • Expectations of funding bodies are usually very influential
• May be subject to political lobbying
• Multiple influences on policy: complicates strategic planning
• Consultation and consensus-seeking becomes a major activity
• Decision-making can be slow
Market and • Beneficiaries of services are not necessarily contributors of
users revenue or resources
• Multiple stakeholders and customers
• Service satisfaction is not measured readily in financial terms
Resources • Multiple sources of funding
• High proportion from sponsors and donors
• Resources received in advance of service delivery, often with
attached expectations
• Tends towards strategic emphasis on financial or resources
efficiency rather than service effectiveness
• Strategies and communications may be addressed as much
towards sponsors and donors as clients

Charities commission - objectives

• Register charity organizations
• Ensure charities meet legal requirements and equipped to
operate properly and within the law
• Check charities are run for public benefit (not for private
advantage)
• Ensure charities are independent and trustees take their
decisions free of control or undue influence from external
• Detect and remedy serious mismanagement or abuse
• Work with charities and regulators to enhance public
confidence in charities and their work

Third sector - impact on procurement

• Alignment with the values and culture of the organisation
• Accountable to the members and trustees
• Compliance to legislations and regulations
• The need to source inputs for a wide range of activities and
may serve as retailer (goods may be resold to raise funds)
• The need to differentiate to compete for attention, volunteers
and funding (reputation management)
• Limited resources - cost effective and efficient use of
organisation resources and budget
• The need for economic sustainability
• The need for probity, transparency, accountability and
stewardship

CIPS Level 4 Diploma in
[L4-M1] Scope and Influence of
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CIPS Level 4 Diploma in Procurement and Supply

L4-M1] Scope and Influence of

Procurement and Supply

Leading global excellence in procurement and supply

Chapter 1 - Added Value in Procurement and Supply Chains

Leading global excellence in procurement and supply

Chapter 3 - Organisational structure and procurement

Leading global excellence in procurement and supply

Chapter 1 Added Value in Procurement and Supply Chains

Leading global excellence in procurement and supply

Chapter 1 Added Value in Procurement and Supply Chains

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Procurement and purchasing - differences

Leading global excellence in procurement and supply

Costs within business

Leading global excellence in procurement and supply

Total cost of product/service

Cost to produce Total cost

Leading global excellence in procurement and supply

Direct / indirect costs

Leading global excellence in procurement and supply

Cost within business (organisational costs)

Subject to procurement influence

Stock and non-stock procurement

Leading global excellence in procurement and supply

The procurement cycle (CIPS)

Leading global excellence in procurement and supply

Direct and indirect procurement

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Characteristics of capital purchase

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Service quality - measurements

Leading global excellence in procurement and supply

The FIVE RIGHTS of procurement (value-adding)

Leading global excellence in procurement and supply

The ‘Right’ quality

Leading global excellence in procurement and supply

The “Right’ quality - types of specifications

Leading global excellence in procurement and supply

Getting the ‘Right’ quality

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

The ‘Right’ quality - procurement contributions

Leading global excellence in procurement and supply

The ‘Right’ price

Leading global excellence in procurement and supply

The price-cost iceberg

Leading global excellence in procurement and supply

The ‘Right’ quantity - driving factors

Leading global excellence in procurement and supply

The ‘Right’ quantity

Leading global excellence in procurement and supply

The ‘Right’ time

Procurement lead time

Leading global excellence in procurement and supply

The ‘Right’ place

Leading global excellence in procurement and supply

The ‘Right’ time - international delivery (considerations)