L4M1 – SCOPE AND INFLUENCE OF PROCUREMENT AND SUPPLY

Chapter 1 – Added value that can be achieved through procurement and supply chain
1.1 Describe the categories of spend that an organisation may want to purchase.

Procurement involves obtaining something. This maybe tangible such as goods or intangible such as
services. The procurement process begins by identifying a need and is complete once the goods or
services that meet the need are delivered. It is a strategic function of a business and involves high
level of skill.

Elements of procurement
 Added Value
 Purchasing – act of physically ordering and buying something
 Supply – infrastructure which ensures products of services gets to the customer from supplier.
 Cost
 Quality
 Inventory
 Logistics
 Waste Management

Difference between procurement and purchasing

Procurement involves identifying, shortlisting, selecting, and acquiring suitable goods or services or
works from a third-party vendor through a direct purchase, competitive bidding, or tendering
process while ensuring timely delivery in the right quality and quantity.

An end-to-end procurement process consists of the steps listed below:

 Surveying the market
 Spotting potential suppliers
 Creating an approved list of vendors
 Spotting internal needs
 Creating a purchase order online
 Requesting proposals and evaluating quotations
 Selecting the right supplier and negotiating effectively
 Receiving goods and performing quality checks
 Developing and managing contracts
 Obtaining invoice approvals and fulfilling payment terms
 Establishing a good supplier relationship

Purchasing on the other hand involves acquiring the goods and services that an organization
requires. It is a small subset of the broader procurement function. This process includes activities like
ordering, expediting, receiving, and fulfilling payment.

Listed below are the steps in the purchasing process:

 Obtaining a purchase requisition
 Requesting proposals and evaluating quotations
 Dispatching official purchase orders
 Receiving products and services
 Checking the quality of delivered items
 Effecting payment to vendors
  Differences between procurement and purchasing tabulated

Procurement
Activities related to acquiring goods and
services
Steps that happen before, during and after
purchase
Commonly used in production environment
Puts more importance on item value than cost
Refers to a set of tasks that spot and fulfill
needs
Includes need recognition, sourcing, and
contract closure
Follows a proactive approach to spot and fulfill
needs
Relational–focuses on creating long-term
vendor relationships
Focuses on strategic, long-term goals like
gaining a competitive advantage or aligning
itself with corporate strategy or goals.
Purchasing
Activities related to buying goods and services
Straightforward process of purchasing goods
and services
Commonly used in wholesale environment
Focuses more on item cost than it’s value
Refers to the specific task of committing
expenditure
Includes ordering, expediting, and payment
fulfillment
Follows a reactive approach to satisfy internal
needs
Transactional–focuses on transactions than
vendor relationships
Focuses on short-term goals such as fulfilling
the five rights in a transaction (right quality,
right quantity, right cost, right time, and right
place)

Organisational Costs represented by procurement of goods, services or constructional works.

A cost within an organisation is an amount payable in return for receiving something. Within
business, costs usually involve money but sometimes can be made up of time, material, effort,
opportunity.

Organisational costs may be in form of any of the following:

 Fixed cost – Does not change with the output of the organisation. It has to be paid irrespective
or performance. E.g., salaries, insurance, office or factory rent.
 Variable Cost – Changes with output of the organisation. Depends on number of goods sold or
services supplied. E.g., raw materials, haulage costs, wages for hourly paid workers.
 Direct Cost – Associated directly with a job or contract. E.g., direct cost of office block
construction includes bricks, cement, labour.
 Indirect Cost – Not directly associated with a job or contract. E.g., salary of support staff, rent of
head office, mobile telephone contracts when constructing an office block.

Intangible Costs vs. Tangible Costs

Tangible costs are often associated with items that also have related intangible costs. A tangible cost
is the money paid to a new employee to replace an old one. An intangible cost, on the other hand, is
the knowledge the old employee takes with them when they leave.

Role of Procurement Department

 Capital Purchases and Insurance – Capital

 Marketing
 Raw Materials
 Research and Development
 Salaries
 Sundries
 Training
 Vehicles, Transport & Haulage

Stock and Nonstock Procurement

Stock procurements include.
 Raw materials – Products in their natural form, comes from the primary sector.
 Components – Items used to create a product such as parts for car. Comes from secondary
sector.
 Finished good – output of production organisation which feeds the retail sector.

Nonstock procurements include.

These are intangible procurement which are not stored within the organisation and includes.
 Cleaning services
 Telephone system
 Internet contract
 Advertisement campaign, insurance, etc.

Direct and Indirect Procurements

 Direct procurement is the sourcing and supply of a product or service that is directly related to a
specific end result such as raw material used to produce a product.
 Indirect procurement is the sourcing and supply of a product or service that an organisation
needs to continue functioning but do not contribute to the bottom line e.g., marketing, office
equipment repair.

The Kraljic Matrix

Kraljic matrix (or Kraljic model) is a method used to segment the purchases or suppliers of a
company by dividing them into four classes, based on the complexity (or risk) of the supply market
(such as monopoly situations, barriers to entry, technological innovation) and the importance of the
purchases or suppliers (determined by the impact that they have on the profitability of the
company).

The Kraljic matrix defines the following types of articles:

 Non-critical items: components that have a low impact on the company and that are found in
abundance and / or in low-risk markets (e.g., office stationery). For such items, the goal should
be to maximize efficiency of the procurement process to reduce the administrative burden.
 Leverage items: components that are important for the company but sourced from low-risk
markets with an abundant supply. For this type of component, the company tends to make the
most of its bargaining power and the abundance of the offer with frequent negotiations.
 Bottleneck items: components with a low business impact in economic terms but where supply
continuity is at risk. The management of these components should be aimed at creating
relationships of collaboration in the medium-long term between customer and supplier to
guarantee the supply, with less emphasis on the cost.
 Strategic items: components that are important for the company both in terms of economic
impact and for supply conditions from complex and / or risky markets. In this field, the horizon is
medium-long term with a continuous monitoring of the economic situation of the market, and
development of stable relationships and maximum collaboration with the suppliers.
Service Procurement

Involves procurement of intangible goods (services) which includes the following.

 Cleaning contracts
 Insurance
 Utilities like electricity, internet, gas, etc.
Due to the intangibility associated with service procurements, specification of sourcing services need
to be very detailed to explain what is required.

Organisational Budgets

This is the primary tool used by an organisation to monitor income and expenditure. It is of two
types.

 CAPEX budgets which relate to Capital Expenditure & Purchases.

 OPEX budgets which relate to Operations Expenditure.

Capital Expenditure (CAPEX) Operations Expenditure (OPEX)

An asset purchased to last a long period of time
Often paid out as a lumpsum of through a bank
loan
Accounted for and depreciating over a period
of time
They are of high value
Includes land, machinery, office building, etc.
An ongoing expense to an organisation
Paid monthly or annually
Accounted for in the current month or year
Low to medium value
Include salaries, utilities, stationeries, etc.

1.2 Analyse the different sources of added value in procurement and supply

Added value in general business sense considers all the costs that contribute towards making the
product or service.

Five (5) rights of procurement – should be considered when making a purchase.

 Right quality – involves ensuring that product or service meets the needs and expectation of
customers. Achieved by defining clear quality standards or specifications. Specification can be
conformance (what the product or service will consist of) or performance (what the product or
service is to do or achieve) based.
 Right quantity – involves ensuring that the most cost-effective amount of product or service is
procured otherwise it can lead to stockout, overstock or increased product purchase price.
 Right time – involves ensuring that products or services are delivered exactly when they are
needed. Timeline must be clearly stated which must be adhered to avoid stockouts, additional
costs or strain to relationship.
 Right place – Goods or services has to be delivered to the right place otherwise it will lead to
stockout, dissatisfied customer or additional logistics costs.
 Right price – The price of the product or service must be fair and reasonable, when considering
price, the following must be considered: Amount, Currency, Taxes, Intercoms.

Intercoms
Intercoms are shipping or delivery methods under which a supplier intends to supply goods to the
buyer. The variety of options to consider are detailed below:

EXW – Ex Works (named place of delivery)

The seller makes the goods available at their premises, or at another named place. The Ex-Works
term is often used while making an initial quotation for the sale of goods without any costs included.

FCA – Free Carrier (named place of delivery)

The seller delivers the goods, cleared for export, at a named place (possibly including the seller's
own premises). The goods can be delivered to a carrier nominated by the buyer, or to another party
nominated by the buyer.

CPT – Carriage Paid To (named place of destination)

CPT replaces the C&F (cost and freight) and CFR terms for all shipping modes outside of non-
containerized seafreight. The seller pays for the carriage of the goods up to the named place of
destination.

CIP – Carriage and Insurance Paid to (named place of destination)

This term is broadly similar to the above CPT term, with the exception that the seller is required to
obtain insurance for the goods while in transit.

DDP – Delivered Duty Paid (named place of destination)

Seller is responsible for delivering the goods to the named place in the country of the buyer and pays
all costs in bringing the goods to the destination including import duties and taxes. The seller is not
responsible for unloading.

FOB – Free on Board (named port of shipment)

Under FOB terms the seller bears all costs and risks up to the point the goods are loaded on board
the vessel.

Defining total lifecycle costs or total cost of ownership (TCO)

Total lifecycle cost or total cost of ownership (TCO) are used to analyze the total costs incurred over
the lifetime of a material or service whereas total cost of acquisition (TCA) relates to amount of
money an organisation has to budget in order to physically receive a product onsite.

TCO includes TCA, Storage cost, Operation, Maintenance, Insurance, Tooling, Training, Disposal, etc.

Internal & External Suppliers – Supply is considered internal when the product or service comes
from same organisation while external suppliers are organisations that are separate business entities
from the buying organisation.

Contracts
A contract is a legally binding agreement between two or more parties in which one party agrees an
action in return for something. A contract is enforceable in law and exists in every commercial
transaction. The following must exist for a contract to be valid:
 Intention – Parties must have intention that the agreement can be enforced by law.
 Consideration – There must be some form of bargain or promise for certain action.
 Agreement – The agreement is created through offer and acceptance.

A typical contract in addition to the five rights of procurement contains payment terms, packaging
(goods), terms & conditions, currency, law, notice, dispute resolution and key performance
indicators.

Key performance indicators (KPI) can either be qualitative such as “reducing number of material
rejects” or quantitative such as “40% reduction in material default”.

Other sources of added value beyond on-time & in-full delivery (OTIF) & good price.
 Additional features – something extra to attract customers.
 Brand – an organisation’s identity which includes name, logo, color, etc.
 Convenience – convenience include time, accessibility, etc. and customers can pay more for it.
 Excellence of service – Helps to build relationship and repeat business.
 Reduced input cost – A procurement professional can work with supplier to reduce their input
cost thereby achieving more value.
 Reputation – Buyers are more likely to purchase products or services from firms with good
ethical values.
 Innovation – Adopting new concepts to make improvements from existing ones.
 Sustainability – Involves achieving value for money while ensuring positive outcomes in relation
to the environment, economy and the community.

Summary of the key areas that should be considered when trying to achieve value for money.
 Currency/Exchange rates
 Environmental factors
 Freight cost
 Maintenance cost
 Packaging
 Payment terms
 Product/Service price
 Place
 Quality
 Quantity/Inventories
 Supplier reputation
 Time
 Warranty

Definitions of procurement, supply chains, supply chain management and supply chain networks.

Supply Chain – Encompasses all organisations and activities associated with the flow and
transformation of goods from the raw materials storage, through to the end user as well as
associated information flows. It can be found within the three main industry sectors, each adding
value to the process and working together to form a chain.

 Primary sector – includes industries that extract natural resources from the earth.
 Secondary sector – includes manufacturing/transformational industries that convert raw
materials to finished goods.
 Tertiary sector – consists of service industries.
Stages of supply chain
1. Producers extract natural resources
2. Suppliers obtain natural resources from producers
3. Materials are sent to the manufacturer to process
4. Distributor collects processed material from manufacturer and delivers to the customer.
5. Customer receives the processed material which meets demand.

Supply Chain Management (SCM)

Defined by CIPS as continuous planning, developing, controlling, informing and monitoring of actions
within and between supply chain links so that an integrated supply process results which meets
overall strategic goals. It aims to reduce cost, add value, reduce risk and involves customer
relationships.

What Are the 6 Components of Supply Chain Management?

 Planning – Make vs buy decision to understand whether you will manufacturer or buy
domestically or internationally.
 Sourcing - Identifying, evaluating and building relationships with suppliers that will provide
goods and services
 Demand/Inventory - Managing inventory and manufacturing schedules to meet consumer
demand.
 Production - Ensuring the right volumes and quality of production.
 Warehouse & Transportation - Storing and delivering the product effectively.
 Return of Goods - Ensuring an effective returns process for customer satisfaction.

Value in the supply chain

Value in the supply chain comes from effective management of the following: Price, Delivery,
Storage, Quality, Ethics, Environment, Sustainability, Communication.

Supply chain network (SCN)

This is the handling of the flow of goods and services from the raw manufacturing of the product
through to the consumption by the consumer. SCN are usually designed around five areas.
 External Suppliers
 Manufacturers
 Distribution/wholesale centers
 Logistics
 Consumer demand
It also includes managing flows. Both physical flow of goods and information/communication flows.

Logistics and Materials Management

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 point
of origin to the point of consumption for the purpose of confirming to customer requirements.

Internal & External Logistics

Internal logistics includes Extraction/production, Manufacturing, Warehousing/Storage.
External logistics includes Distribution, Transport, Retail.

Areas to be managed in order to keep entire logistics running effectively

 Demand Planning – knowing what is required and when
 Fleet Management – a broad term covering organisation’s solution to transport goods from one
location to another
 Inventory Management – knowing how much stock is available and when to place order
 Warehousing and Storage – Storing products in the right order, condition and a way that makes
product selection easy.
 Order fulfilment – getting required goods/services to the customer/end user

Materials Management
Part of supply chain and covers the handling, storage, inspection and issuing of raw materials,
components and finished goods.
Material requirements planning (MRP)
Involves use of electronic system which can schedule orders, monitor inventory and manage
production process. The three main objectives of MRP system are as follows.
 To ensure that the parts or materials needed for manufacturing and end products are available.
 To establish when to place orders and schedule deliveries
 Keep inventory value as low as possible.
Within its calculation, MRP system will work out order quantities based on minimum order
quantities (MOQ), bath quantities (amount of products produced at a time), buffer stock (minimum
inventory) and lead times which includes supplier lead time and cycle time (time it takes for
production cycle).

MRP has however evolved to Enterprise Resource Planning (ERP) which includes several other
organisational functions beyond BOMs, raising requisitions, creating POs, etc. these functions
include.
 Accounting
 HR
 Manufacturing
 SCM & Material management
 Customer relationship management

1.4. Differentiating the stakeholders that a procurement or supply chain function may have.
Any group or individual who can affect of is affected by the achievement of the organisation’s
objectives is a stakeholder. Stakeholder can be internal or external.
 Internal stakeholders include people or groups who are directly involved with the business e.g.,
directors & employees
 External stakeholders are people or group who have interest in the organisation and could
either be impacted by it or have impact on it. E.g., customers, banks, suppliers, community,
government.

Stakeholders in a supply chain function.

Internal stakeholders
 Colleagues with a need who can create a requisition which procurement should action.
 Accounts department which is responsible for managing organisation’s budget.
 Company owner who has significant power to decide on the strategy and direction or the
organisation.
 Manufacturing department who relies on procurement and supply chain operations to source
and supply its components.
 Stores department which relies on procurement and SC function to procure and supply the
products that it is in turn responsible for booking in and storing until its needed.
 Quality department which is responsible for checking both the goods that procurement has
ordered and the end product.
 Sales department which helps to generate the demand from customers
 Transport fleet which makes it possible for materials and finished products to be moved across
the supply chain.

External stakeholders
 Producers
 Shareholders
 Suppliers and external manufacturers
 Banks/Lenders
 Local community
 Customers and consumers
 Media
 Government and regulatory bodies – create and enforce regulations within the state/country
 CIPS – ensuring that all members conform with code of ethics and promotes professionalism.

Mendelow’s stakeholder matrix – identifies four groups of stakeholders and suggests how the
group needs to be managed.
 Keep satisfied – stakeholders that have a high level of power
but are not very interested in running of the business. Such
as investors who are only interested in good returns.
 Manage closely – has high level of interest in the business
and have high power. They need to be involved in decision
making process and have clearly identified role. E.g.,
government.
 Minimum effort – least important in terms of power and
influence but are still key to successful functioning of the
organisation. E.g., professional regulatory bodies like OSHA.
 Keep informed – Do not have much power within the
organisation but are potentially powerful outside. E.g., local activists.

2.0. Key steps when procuring goods or services

CIPS Procurement lifecycle – a comprehensive diagram which shows each stage in procurement
process
Stage 1 – Understanding he need and developing a high-level specification
The need is generated from the customer and communicated to the buyer in various ways including
PO/SO/WO/WA, etc. and should include details such as description, quantity, quality, delivery time
and place and a clear specification (performance or conformance) for product or service.
Stage 2 – Market/commodity and options.
Involves market research, make or buy decision.
Stage 3 – Develop Strategy/Plan
The plan should outline the type of supplier, level of competition and evaluation process.
Step 4 – Pre-procurement, market test and market engagement
This means engaging with the market, suppliers, considering macro-economic factors to establish
how best to develop the specification, the cost implication, seasonal trend & optimal contracting
terms.
Step 5 – Develop documentation
Involves preparing relevant documentation to send out to potential suppliers such as RFQ or ITT and
should include description/specification, quantity, delivery details, service level agreements, T&Cs.
Step 6 - Supplier selection to participate in the ITT/RFQ
Buyers could conduct desktop through pre-qualification questionnaires (PQQs), RFIs or physical
audits on potential suppliers to gather information and access their capabilities. They are later
graded using Cartel’s 10Cs to determine if they meet the criteria for selection.
Step 7 – Issue ITT/RFQ
It is important That all documents are sent to potential suppliers at same time with same deadline.
Step 8 – Bid/Tender/Quote evaluation.
Involves evaluating submitted responses against stated criteria by cross-functional teams. It is
important to consider TCO when evaluating commercial responses.
Step 9 – Contract award and implementation
It is good practice to advise the winning supplier before notifying the unsuccessful ones. Once the
supplier accepts the offer, T&Cs can be finalized and official contract/agreement is executed.
Step 10 – Warehouse, logistics & receipt
Where the contract is for products, the receiving warehouse at buyer’s organisation needs to
prepare to receive them.
Step 11 – Contract performance review
Once the contract is established, the suppliers should be reviewed periodically by the procurement
department via KPIs to ensure performance to required standards.
Step 12 – Supplier Relationship Management (SRM) with SCM & Development.
The Kraljic matrix can be used to help manage supplier relationship by understanding the level of
interface or buyer’s input during the duration of contract performance.
Step 13 – Asset Management and Lesson Learned
This is the final stage of the procurement cycle and involves reviewing the overall contract
performance to check if it meets organisation’s needs.

Cartel’s 10Cs for supplier evaluation

 Competency
 Capacity
 Commitment
 Control
 Cash
 Cost
 Consistency
 Culture
 Cleanliness
 Communication

Differentiating between pre-contract award and post-contract award stages.

Steps 1-8 in the cycle above are pre-contract award stages while steps 10-13 are post contract
award stages.
Failure in conduct of pre-contract award stage could result to the following:
 Supply of wrong product
 Agreement of wrong price
 Too few or too many product order
 Selection of incorrect supplier
 Litigation
Failure in conduct of post-contract award stage could result to the following:
 Warehousing and logistics issues
 Lack of awareness or hindsight in supplier performance
 Failure to improve processes
 Incorrect disposal of assets

2.2 Key stages of a sourcing process (Stages 1-6)

1. Defining needs – Involves developing specification for what will be sourced and considering what
the buying organisation needs from the supplier.
2. Creating terms of contract – Includes developing terms and conditions and other legal
requirements of bidders. Two major components procurement agreement is offer and acceptance.
Terms in the agreement can be implied (such as regulations & legislations) or express (such as price,
specification, lead-time, et.). SLAs are also developed at this stage.
3. Supplier selection – Involves finding the most suitable supplier to work with. Tangible factors such
as financial status are evaluated as well as intangible factors such as reputation and culture. Both
factors must fit with the buying organisation for a successful relationship.
4. Contract award – Once the supplier that offered best value have been selected, the supplier can
be offered the contract which he is free to review and accept/reject.
5. Contract or supplier management – Contract management is operational whereas supplier
relationship management (SRM) is about relationships. Only important contracts need to be
proactively managed and the strategy is described by the Kraljic matrix which identified four types of
suppliers (leverage, strategic, routine and bottleneck).
SRM includes four main factors – Manage relationship, Monitor performance, Maintain strategy and
Manage change.

Added value created by each stage of the CIPS procurement cycle/sourcing process.
Stage Purpose
Understanding needs/
developing specs.
Market/commodity and options
Develop a strategy & plan
Pre-procurement, market test
and engagement
Developing documentation –
PPQ/PQQ, etc.
Supplier selection
RFQ/ITT issue
Bid/Tender/Quote evaluation
Contract award
Warehouse logistics & receipt
Contract/Supplier management
Asset management/end-of-life/
lesson learned

How electronic systems can be used at different stages of the sourcing process.