L4M8 SUMMARY NOTES

CHAPTER 1
DEMONSTRATE THE APPLICATION OF THE PROCUREMENT CYCLE
1.1 Apply the key stages of the procurement cycle to the practical procurement and supply
environment

Figure 1.1 The CIPS Procurement Cycle

(A) CIPS PROCUREMENT CYCLE STAGE EXPLAINED

Stage 1: Understand need and develop a high-level specification

The first stage is understanding the need that has been generated. The person generating the need
should communicate with the buyer to ensure there is no misinterpretation.

A procurement professional should develop a specification together with stakeholders to ensure the final
design is fit for purpose and that it meets the generated need.

Specifications can be focused on performance or conformance

Performance specifications state what the product or service must do or how it should perform but leave
the supplier the freedom to do this however they wish.

Conformance specifications give clear instructions to the supplier about what is required and how it
should be achieved e.g. chemical formulae, recipes and technical drawings.

Note: Performance specification specifies what the product or service will do or achieve. This covers the
outputs required, tolerances and any functions that product/service may have to perform. Technical
(conformance specification) specifies which standards a requirement must meet or exceed. Variance is
the difference between the budgeted amount and the actual spend. Commodity is a raw material that
can be bought or sold, e.g., oil, gas, coffee

Performance specification Conformance specifications

Allow supplier innovation No supplier innovation

Promote competition in the marketplace Reduce competition

The supplier bears the risk The buyer bears the risk

The buyer may not know exactly what they will Buyer knows exactly what they are getting

be getting

Shorter document Longer complex document

Quicker to prepare More time consuming to prepare

Takes advantage of supplier expertise Disregards supplier expertise

Stage 2: Market commodity options

The procurement professional should research the market to learn how commodity prices are behaving
in the relevant sector and how many potential suppliers are available. To fully understand the market
pricing, procurement professionals should research the level of competition. Porter’s Five Forces model is
an established way of assessing the competition.
Figure 1.2 Porter’s Five Force

By evaluating the competition, a buyer can find out if there are likely to be many suppliers battling to
win the contract or a small number of specialists who could supply the product or service. The next
consideration is whether the product or service, developed through the high-level specification should
be made or bought. This decision is called the ‘make or buy decision’. To establish which method offers
the best value, the business should think about whether the item in question is core to the company. A
core competency within an organization is a product or service that is strategic to the success or failure
of the business – it is the main focus of the business. For example, in a bakery, the core business would be
baking bread or cakes. A procurement professional can use Carter’s Outsource Matrix when deciding
whether to make or buy.

Figure 1.3 Carter’s Outsource Matrix

Note: Core competencies is the processes that are critical to an organization achieving success and
competitive advantage.
When products or services are bought in to an organization, the process is called outsourcing

Outsourcing is contracting an external company to supply goods or services that were once produced
internally.

The benefits of outsourcing can include the following.

1. Saving money
2. Reducing overheads
3. Reducing headcount
4. Using external knowledge
5. Focusing internally on core competencies
6. Helping with shortfalls in labour/expertise

The recognized disadvantages of outsourcing can include the following

1. Losing some control within an organization

2. Relying on external organisations
3. Reducing quality
4. Losing some internal knowledge

Stage 3: Develop strategy plan

Once the decision to make or buy has been made and the market has been evaluated, the next stage
is to develop the strategy or plan of how to achieve the procurement.

The STEEPLE (Figure analysis is an effective way to evaluate the external environment. This helps buyers to
assess which factors could affect their need and helps them to develop the plan accordingly.
The SWOT analysis is another useful tool for evaluating the environment before finalizing a strategy or
plan to meet the generated need as shown in Figure 1.5

Figure 1.5 SWOT analysis

Within this analysis, the strengths and weaknesses are areas within the organization and the opportunities
and threats are outside the organization. The next stage is to decide whether to use a request for
quotation (RFQ) or an invitation to tender (ITT).
Note: Request for quotation is a request for a supplier to give a quotation against a given specification.
Invitation to tender is a structured process requesting a supplier to provide a bid against a specified set
of terms, usually to carry out a service, by a stated deadline.

Stage 4: Pre procurement market tests and market engagement

Procurement professionals should consider the following.

1. Stakeholder engagement
2. Supplier engagement
3. Market research
4. Any new legislation or regulations
5. Currency fluctuations
6. Competitor’s actions

If the feedback suggests the time is right to procure, then the next stage of the cycle can be carried out.
If the feedback is negative, the procurement team should revisit the need and specification before
continuing the process. Negative feedback could include the following.

1. No desire in the marketplace for the end product

2. Limited number of suppliers with capacity or capability
3. New laws about to be passed that will force specification changes
4. Currency is weak
5. Competitors are already one step ahead

Stage 5: Development of documentation

This stage of the procurement cycle involves creating the documentation that will be sent out to the
potential suppliers. They may be requests for quotations or invitations to tender.

The choice of documentation depends on the following.

 The urgency of the need

 The type of need
 The sector in which the procurement professional works
 Regulations and legal obligations
 The procurement professional’s preferred method of working
 The documentation should include the elements/information shown in Table 1.3

Documentation Content

Specification Performance or conformance

Contractual terms Payment terms, exclusions, liability, indemnity

Date for quotation/ bid to be received by Deadline for prices to be submitted by

 Quantity Amounts of goods and services required

Quality standards Conformance to any standards, eg , ISO

Delivery schedule When will goods/ services be required?

Delivery address Where will goods/ services be delivered?

Key performance indicators Objectives against which the supplier will be monitored

Service level agreements Standards of service the supplier will be expected to

meet.

Table 1.3 documentation requirements

Stage 6: Supplier selection

Suppliers can be evaluated according to Carter’s 10 Cs, which are as follows.

1. Competency
2. Capacity
3. Consistency
4. Control
5. Cost
6. Commitment
7. Cash
8. Clean
9. Culture
10. Communication

Suppliers can be audited to ensure they have a corporate social responsibility (CSR) policy and an
ethical code of conduct

Note: Corporate social responsibility (CSR) is a business approach that contributes to sustainable
development by delivering social, environmental and economic benefits for all stakeholders. Ethical
code of conduct is a document stating an organization’s accepted standards of conduct and behavior
for its employees and stakeholders.

Stage 7: Issue invitation to tender/request for quotation

In this stage the documentation that was prepared in Stage 5 is sent to the pre evaluated suppliers from
Stage 6. In the public suppliers who have not been pre-selected. This is called open tendering. The
documentation can be sent by posts or electronically, most commonly via the procurement
organization’s e-Tendering portals.

If the documentation is an invitation to tender, all suppliers should be issued with the invitation at the
same time.
Stage 8: Bid/tender/quotation evaluation and validation

When the bids or quotations have been received by the buying organization, the next stage is to
evaluate them to select the most suitable supplier to award the contract to. It is easier to evaluate the
offers if a conformance specification has been used, because a performance specification may allow a
variety of interpretations. It is good practice to work cross-functionally and involve other team members
who have expert knowledge of the product/service, i.e. engineers, designers or people who use, or will
use, the product/service. The purpose of evaluation is to consider everything about the suppliers offer.
The total cost of acquisition should be calculated. This includes the following.

1. The price
2. The quality
3. The lead time
4. The supplier’s reputation
5. The supplier’s ethical conduct
6. The supplier’s CSR policy
7. The warranty given
8. The training requirements
9. The associated risk

The total cost of acquisition (TCA) can be explained using The iceberg model as shown in Figure 1.6

Figure 1.6 The iceberg model

Stage 9: Contract award and implementation

The procurement professional can now award the chosen supplier with the contract to supply. The two
parties will then negotiate contractual terms to reach a mutual agreement before signing the final
agreement and starting the contract. Creating mutually acceptable terms at this stage helps to reduce
risk and avoid problems throughout the contract.
Once the contract has been finalised, the procurement professional informs the suppliers who were not
successful and gives them feedback if required. This feedback is compulsory in the public sector.

Stage 10: Warehouse logistics and receipt

If the contract awarde3d is for a tangible need, then the stores or warehouse department need to be
involved to prepare for the arrival of the goods. Warehouse workers will need to allocate space for the
products, know when to expect the deliveries and understand the specification so that they can carry
out quality checks.

Stage 11: Contract performance review and continuous improvement

In order to effectively manage supplier performance and contractual obligations, the supplier’s
performance against key performance indicators (KPI) should be reviewed regularly. These KPIs will have
been agreed during the post contract award negotiations (PTN). In addition to reviewing KPIs, suppliers
and the procurement team should work towards continuous improvement. Which includes

1. Identify (identify opportunities in the process workflow)

2. Plan (how can the current process be improved)
3. Execute (Implement changes)
4. Review (how are changes working for the team)

Stage 12: Suppliers relationship/contract management

Managing the supplier relationships as well as the outcome of the contract is very important. It is possible
to have a contract that is performing well but a negative overall supplier relationship. Strategic products
and services require a more collaborative style of relationship because of the complexity and risk
associated with them.

Supplier relationship management and contract management are required during the whole contract
to ensure that the agreement continues to meet the contractual terms agreed at Stage 9

Stage 13: Asset management/end of life

Throughout the contractual stage, the procurement professional should evaluate whether the need is
still current, e.g., if the need was a component to go into an end product, is that end product still
required?

If the need is still current and unchanged, the procurement cycle process commences again but from a
different stage as the need is known and understood. If the need is not required after the contract end
date, the procurement professional should manage the end of life by aiming to reduce stock levels and
inform the supplier that there will be no further requirement after the contract has ended.
Note: Tangible is something you can touch. Supply chain is all the organizations involved in a process of
getting a product in its raw state to the consumer in its completed state.

HOW THE PROCUREMENT CYCLE CAN DIFFER FOR VARIOUS PRODUCTS, SERVICES AND TYPES OF BUY

Some criteria, such as whether the procurement is strategic to the organization affect which stages of
the cycle are followed.

The Kraljic portfolio matrix shows procurement professionals where a product fits into an organisation’s
strategy and determines its importance. Figure 1.7

Leverage suppliers Strategic suppliers

Vast competition Critical supplier to an organization

Responsible for core products
Low cost to move suppliers

Often utility services e.g. electricity

Routine suppliers Bottleneck suppliers

Low-value items Hold monopoly in marketplace

Lots of work associated with these suppliers Little or no other options

Lots of variety available e.g. stationary Low value items

suppliers

Figure 1.7 The Kraljic portfolio

There are three types of procurements/buys

 A new buy
 A rebuy
 A modified rebuy

A product or service that is a new buy is a procurement that has not previously been made by n
organization. The process must include all stages in the procurement cycle.

A rebuy is a procurement that has been previously made by the organization and so there is knowledge
and understanding of the supplier base, the product or service and contractual terms.

A modified rebuy is a procurement that has been purchased before but the need is slightly changed for
future requirements.

Amendments to a modified rebuy could be changes to the following.

 The specification
 The price
 The quantity
 The delivery
  The supplier
 The quality
 The contractual terms

(B) THE PRACTICAL APPLICATION OF THE CIPS PROCUREMENT CYCLE

DEFINING BUSINESS NEED

In business, a need is something that is required for an individual or an organisation to be able to carry
out an objective.

Needs can be any of the following.

1. Tangible
2. Intangible
3. Direct
4. Indirect

Tangible needs are things that can be touched or seen, such as components needed for end products,
stationery or machinery.

Intangible needs are equally important but cannot be touched or seen, for example, electricity and
insurance.

Direct needs are needs that are directly related to the end cost of the product or service that the
organization manufactures or supplies. For example, for a car manufacturer, any part for the finished
vehicle is a direct need.

Indirect needs are not directly related to the end cost of the product or service. For a car manufacturer,
marketing materials for the finished vehicle and the rent of the factory are indirect needs.

Needs can be established by the following people

 Individuals noticing that a product is running low on stock

 Individuals using the last of something
 Individuals making an error and needing replacements
 Individuals working on projects and understanding future requirements
 Individuals needing to recruit personnel

Needs can also be raised by groups of people within an organization, as follows.

 Project teams that establish new requirements,

 Departmental goals whose fulfillment depends on certain needs
 Organizational strategic objectives which define needs to meet the company vision, Suppliers
who outline needs in order to fulfill contractual obligations
Needs can be raised by any stakeholder to the organization, as follows

 Consumers who change their requirements

 Community groups which request a change in the function of an organization, Legislation
changes which generate additional needs
 Technological developments which create needs Communicating the need to procurement is
called raising a requisition.

A requisition can take the following forms.

1. Verbal
2. Handwritten
3. E-mail
4. Automated

Verbal requisitions are made when a person with authority to determine a need has a conversation with
a buyer to explain that there is a need to act on.

Handwritten requisitions are notes written by an individual with authority. These can be delivered in
person or left on the buyer’s desk or in-tray.

E-mail requisitions are electronic notes containing a requirement, which are sent to the buyer.

Automated requisitions are raised on a computer-based system that has been pre-populated with
parameters on which a request needs.

These four methods all still feature within the procurement today. Their advantages and disadvantages
are outlined in Table 1.4

Advantages Disadvantages
Verbal Information passed quickly Personal Open to interpretation Buyer could forget

Informal No proof of requisition has been placed High

risk of human error
Exact quantity stated
Procurement has to check requisition raiser has
authority

Handwritten Contains detail for reference Risk of getting lost Waste of paper
Informal
Risk of buyer forgetting to act Difficult to
Exact quantity stated No need for establish the generator Risk of human error
technology
Procurement has to check requisition raiser has
authority
 Automated Fast and efficient Impersonal

Full details included Larger quantity than needed requested

Pre-authorised High investment in technology

Cost effective

Low risk of human error

Globalization is increasingly an economic factor in business, so verbal requisitions are not an effective
way to define needs any more. Organizations are often spread around the world an in organizations
with a centralized procurement function, generators of the needs may never see the buyers.

Note: Globalization is the interconnection of trade throughout the world

A requisition should contain the following elements.

 Date of the requisition

 Description of what is required, including any quality requirements and specifications
 Supplier
 The quantity required
 When the need is required
 Where the need is required
 Why the need is required
 Who identified the need
 Who approved the need.

Automated MRP systems aim to remove the human element of monitoring stock and raising requisitions.
They have the following goals:

1. To ensure that materials/components are always available as required

2. To keep inventory as low as possible
3. To plan manufacturing procurement and delivery schedules

MRP systems generate requisitions for procurement based on the activity within the manufacturing
organization. This includes the elements in Table 1.5

Bill of materials The list of components that forms the end products, e.g. , for a clock, the
(BOM) BOM would contain the hands, the battery, the clock face etc.

Minimum order The amounts in which procurement has to order the components. This is the
quantities (MOQs) amount that is most cost effective for both the supplier to produce and the

buyer to procure
Current stock levels The number of components or finished goods that are available within the
organization.

Sales demand or The number of orders that an organization has to fulfill for its customers or
planning run
consumers. Without any sales demand, there would be no requirements for
BOMs.

Cycle time The time taken within a manufacturing organization to produce the end
product. Cycle time starts when components are delivered and ends when
the finished product is ready for dispatch

Lead time The amount of time it takes the supplier to deliver the goods after receiving
the order. This time is usually negotiated between the buyer and the supplier
and orders are placed in good time to allow delivery as and when required

When a requisition is received via e-mail, verbally or by a handwritten method, it is important that the
recipient within the procurement department reviews the need to consider the following.

 Is the product/service needed?

 Is the product/service needed at the time the generator of the requisition states
 Is there any stock that has not been considered before raising the requisition?
 Would any other product/service within the business meet the need instead of placing an order?
 Is the quantity requested the best value for money
 Is the product likely to be coming to the end of its life/being replaced
 Does another individual have the same need-could the volumes be combined?

MARKET ANALYSIS AND TESTING

Within procurement, once the need has been understood, the next stages are to analyse and test the
market. Part of strategic procurement is ensuring good value for money.

Analysing and testing the market includes looking at the following.

1. STEEPLE analysis
2. SWOT analysis
3. Porter’s Five Forces
4. Levels of supplier competition
5. Supply and demand
6. Push and pull
7. Supplier segmentation
8. Product life cycle
9. Ansoff matrix
10. Early supplier involvement
11. Make or buy
12. Offshoring
PORTER’S FIVE FORCES

Competitive rivalry How many organizations are there doing

the same thing?
Threat of new entrants How likely is it that another organization can
start-up and potentially affect the business?
Threat of substitution How likely are the customers to something
else to replace the product/service?
Power of buyers How easy it is for buyers to negotiate? Are
there lots of alternative suppliers or is the
supplier in question the only one? Prices will
reflect the importance of the supplier to the
buyer.
Power of suppliers How much does the supplier value the
business? Are there lots of alternative
options for the supplier to gain orders or is
the buying organization critical to the
supplier? Prices will reflect the importance
of the buyer to the supplier.

LEVELS OF SUPPLIER COMPETITION

When a market sector has a few large organisations that supply the product or service, this is known as
an oligopoly. In a situation where only one organization controls the whole market this is known as a
monopoly. In both circumstances the power is with the suppliers because if the buyers want to procure
the relevant goods or services, they have to use the suppliers who control the marketplace.

Conversely, there can also be situations of perfect competition or monopolistic competition. Perfect
competition occurs when there are many suppliers offering the same products or services. Monopolistic
competition is often called imperfect competition. This occurs where there are many suppliers offering a
seemingly similar product but there are significant variances in quality, brand and design.

There are subtle differences (Table 1.6) between an oligopoly and a monopoly within a market place
 Oligopoly Monopoly
A few companies dominate the One company dominates the market
market

Pricing is controlled by a few Pricing is controlled by one company

Companies

Very difficult to compete Competition is almost impossible

Table 1.6 Oligopoly versus Monopoly

SUPPLY AND DEMAND

Figure 1.8 Supply and demand

Procurement professionals must also think about supply and demand as part of their market analysis
when they receive a requisition. This economic factor has a significant effect on the prices charged and,
on the costs, incurred.

Figure 1.8 shows the effects the supply and demand can have on pricing. It shows that:

If the demand increases and supply remains static, a shortfall occurs, and buyers can expect to see an
inflated price

If the demand decreases and the supply remain static, a surplus occurs, and buyers can expect to see a
reduced price.

The ideal market balance (G) is where the demand and supply are equal to each other.
PUSH AND PULL

A push strategy is based on forecasting requirements, while a pull strategy reacts to customers’ needs.

If a push strategy is chosen, the buyer will place purchase orders in response to requisitions that have
been raised against forecasted sales or requirements

Buyers who use pull strategies are usually working with just in time (JIT) systems. The suppliers working with
these buyers are contracted to deliver goods at the time that they are required. This avoids surplus stock
in inventory, but it can involve high levels of risk if the supplier fails to deliver or products are defective

Table 1.7 shows the difference between the push and pull methods within the supply chain

Push systems Pull systems

Low demand variability High demand variability

Low product personalisation High product personalisation

Better economies of scale Low economies of scale

Low manufacturing variability High manufacturing variability

Low setup change costs High setup change costs

Lower lead teams Higher lead times

Table 1.7 push and pull systems

Remember: Push methods/systems are strategies based on forecasts. Pull methods/systems are
strategies that react to needs.

SUPPLIER SEGMENTATION

Buyer’s segment current suppliers into four categories, depending on their level of integration into an
organization.
 Integrated

Strategic

Collaborative

Transactional

Figure 1.9 Supplier segmentation

PRODUCT LIFECYCLE

The procurement professional should analyse where the product or service is within its life cycle before
placing an order

Figure 1.10 shows how a product develops and finally declines over a period of time

Figure 1.10 Product lifecycle

Fewer products will be required for an item in its introduction stage than during its growth stage. The
maturity stage is when sales/usage of the product are at their peak, with the largest volumes for the
need generated. After maturity, if no redevelopment or relaunch of the product is undertaken, the
demand will reduce, and the requirements of the need will reflect this.
ANSOFF MATRIX

Strategic procurement staff should be included in high level meetings within an organization, so they are
aware of the plans and objectives of the business. If procurement professionals are not involved with the
strategic planning and are aware of the market activities there is an increased risk to the organization of
excessive inventory costs.

Using the Ansoff matrix (Figure 1.11) procurement professionals can further analyse and test the market
before placing any purchase orders in relation to the generated needs.

Figure 1.11 shows the Ansoff Matrix

The four options in the matrix are linked to decisions organisations can take in order to grow their
business.

Market penetration: this option has the lowest level of associated risk. This strategy is based on increasing
sales of a current product within a known market.

Product development: this option involves an element of risk. This strategy is based on introducing a new
product to the current customer base.

Market development: this strategy is based on trying to introduce an existing product into a new market
or to a different type of customer.

Diversification: this option involves the highest level of risk. This strategy is based on introducing a new
product into a new market.
EARLY SUPPLIER INVOLVEMENT

ESI, Early supplier involvement involves procurement professionals working closely with strategic and
collaborative suppliers in order to benefit from their expertise. If an organization chooses the product
development strategy, it may benefit from working with organisations that have experience with the
type of products that it wishes to develop. If one of its current suppliers or potential suppliers has
experience with developing or manufacturing the items in question, it makes sense to engage with that
supplier. This collaboration of resources between the buying and the supplying organization is ESI.

Note: Early supplier involvement (ESI) is working with suppliers at the start of projects to use their
experience, knowledge and expertise. Economies of scale is obtaining a more favorable cost through
increasing volume.

Through ESI, procurement professionals can gain information on the following product aspects.

1. Technical advice
2. Cycle times
3. Lead times
4. Cost of production
5. Quality
6. Potential problems
7. Risk
8. Supply chain
9. Life cycle

Advantages and Disadvantages of ESI

Advantages Disadvantages

Reduce cost for buying Supplier could unfairly influence

organization buyer

Improves specifications Buyer could become reliant on

supplier

Enhances quality Buyer loses control of product

Access to technology Intellectual property risk

Promotes innovation

Availability of expert technology

Reduces development time

Shares risk
Table 1.8 ESI Advantages and disadvantages of ESI.

MAKE OR BUY

When a buyer receives a requisition, they often have to decide whether the best value for money will be
achieved through making or buying the product/service to satisfy the need. This is especially true if the
need is a new buy.

By testing and analysing the market, procurement professionals can gather information that will help
them make the decision on whether outsourcing is a viable option.

Outsourcing is an acceptable strategy in the following situations

1. When the product or service is not core to the organization

2. When the product or service is a temporary addition to workload.
3. When the product or service is beyond the skills of the organization
4. When the product or service is generating a loss for the organization
5. When the product or service could be provided more effectively through an external provider

OFFSHORING

Offshoring is a strategic decision that involves moving the manufacturing of either part or all of the
process to another country. It sets up a physical infrastructure in another country which the organization
is responsible for. it is done in order to reduce costs. Countries that have a weaker economy can offer a
lower price to produce the goods such as India and China. This is due to the other country having

1. Lower costs of living

2. Lower rates of pay
3. Weaker currency
4. Lower costs of overheads

Note: Offshoring is relocating a part or all of a business function, manufacturing functions overseas.

Advantages and disadvantages of offshoring

Advantages Disadvantages

Reduced price Loss of control

Increased profit Risk of intellectual property (copyrights, patents)

Helping a weak economy Ethical concerns

Favourable governmental Environmental concerns Loss of jobs in home

policies country

Table 1.9 Advantages and disadvantages of offshoring

SUPPLIER EVALUATION

It is essential that contracts are awarded to the most suitable suppliers. Procedures for evaluating
suppliers can be done through site visits, audits or meetings and should be based on the following
factors.

1. Pre-qualification questionnaires
2. Carter’s 10 Cs
3. Credit checks
4. Ethics
5. Sustainability
6. Reputation
7. Benchmarking
8. Relationships

PQQs (Pre-qualification questionnaires) are documents sent to potential supplier to find out their
suitability to be included in the procurement process. The purpose of a PQQ is to ensure that these
potential suppliers could, if they won the contract, supply the product or service to the required
standard.

PQQs request details from potential suppliers on the following information.

1. Company details
2. environmental policies (CSR)
3. Trading history
4. ethical policies
5. Financial information
6. Health and safety policies
7. Quality standards
8. References
9. Insurance

CARTER’S 10Cs

Carter’s 10 Cs

competency Is the supplier competent, with the capability to carry out the
contractual obligations?

Capacity Does the supplier have enough capacity to meet the demands of the
contract (i.e. space, resources, knowledge)?

consistency What processes does the supplier have to ensure consistent quality of
product or delivery of service

Cost Is the cost offered consistent with expectations and the competition?
 commitment Is the supplier committed to doing a good job? Does it have
accreditations for quality, environmental awareness and health safety?

Cash What is the financial status of the supplier? Is it stable?

Clean Is the supplier working towards sustainability?

Culture Is the supplier’s culture compatible with the buying organisation’s culture

Communication How quickly and effectively does the supplier respond?

Control Does the supplier have control over its policies, procedures and supply
chain?

Table 1.10 Carter’s 10Cs

CREDIT CHECKS

One of carter’s 10Cs is ‘cash’, which involves researching whether or not the supplier is financially stable.
One way to do this is to carry out a credit check with a credit rating agency. Credit rating agencies
provide and manage the scores so that buyers can access them to help make decisions.

A supplier with a low credit rating would be a much higher risk to work with than one with a high score.

ETHICS

Procurement professionals should evaluate potential suppliers’ ethical policies and processes before
awarding them a contract.

The following ethics should be considered.

 Modern slavery
 Human trafficking
 Working conditions
 Discrimination
 Equality
 Fair pay
 Bribery
 Corruption
 environmental awareness
 Sustainability awareness

It is important that buyers research whether potential suppliers are reputable organisations. It is
reasonable to expect potential suppliers to supply their code of conduct, code of ethics, corporate
social responsibility policy and health and safety policy.
SUSTAINABILITY

Sustainability concerns the longevity of the organization, as well as its impact on the natural world. A
buyer should only engage with organisations that are performing well and likely to be in business for a
long time. Engaging with an organization which may stop trading any time is a high risk for a buying
organization. Buyers should also evaluate potential suppliers on the impact that they have on the
environment, e.g., are they causing pollution, or removing and not replacing resources?

REPUTATION

It is critical for procurement professionals to establish and evaluate which suppliers they wish to work
with, in order to protect the buying organisation’s reputation. Although a company’s reputation is an
intangible asset, it can contribute to the failure of the company if damaged. Reputation can be
important to the company in the following areas

1. Association
2. Quality
3. Sustainability
4. Ethics
5. Delivery
6. Fit for purpose
7. Supplier relationships
8. Contract management

BENCHMARKING

When evaluating potential suppliers, procurement professionals can carry out benchmarking.
Benchmarking is the process of comparing a function, process, performance or price to that of another,
which is best in class.

Four types of benchmarking are as follows.

1. Internal benchmarking
2. Competitor benchmarking
3. Functional benchmarking
4. Generic benchmarking

Internal benchmarking involves comparing performance, processes or procedures within an

organization, i.e. comparing how different departments carry out the same task.

External benchmarking involves comparing performance, processes or producers to those of an external

organization, such as a competitor.
RELATIONSHIPS

Relationships range from adversarial to co-destiny. When a buyer is sourcing a strategic product or
service, they will aim to establish a collaborative relationship. However, if the buyer is sourcing a routine
item, the relationship could be tactical or even arm’s length.

The style of relationship is based on the following factors.

 Product/service being procured

 How often the product/service is required
 Level of trust
 Methods of communication
 Personalities of the individuals involved
 Cultures of the organisations involved
 Length of the relationship
 Amount of competition in the marketplace

Figure 1.12 shows the spectrum of recognized relationship styles between a buyer and a supplier.

Figure 1.12 Relationship spectrum

The way buyers are viewed by their suppliers is also important and affects the relationship and its style.

Figure 1.13 Supplier preference model

This matrix evaluates how attractive the buying organization is against the amount of money it can
generate for the supplier.

The four categories are as follows.

1. Nuisance (Low value, low attractiveness): The supplier will not value the relationship. The prices
are likely to be uncompetitive and the relationship will be arm’s length.
2. Development (Low value, high attractiveness): Here the supplier sees potential in the buying
organization and will be likely to offer high levels of service and fair pricing, aiming to win more
business over time.
3. Exploitable (High value, low attractiveness): The prices will be uncompetitive as the supplier has
little or no desire to form a long-lasting relationship with the buying organization.
4. Core (High value, high attractiveness): The supplier sees the buying organization as extremely
important and a strategic part of the business. The buyers spend will be high, the supplier’s prices
will be fair and the relationship will be collaborative.

Note: Supplier scorecard is a way to evaluate suppliers against set criteria

TENDERING PROCESSES

The purpose of the tender is to invite potential suppliers to bid to supply a product or service to the
buying organization.

A tender process would be used in the following situations.

1. The need is a large or complex project

2. The law requires it, e.g., for some public sector procurements
3. Company policy states it
4. The value is high
5. A large selection of bids is required

There is lots of competition

The process of tendering has seven stages Table 1.11

Stage 1 Decide which style of tender to use

Stage 2 Prepare invitation to tender

Stage 3 Send ITT

Stage 4 Buying organization receives bids

Stage 5 Evaluate bids

Stage 6 Award contract and give feedback

 Stage 7 Contract management

Stage 1: Decide which style of tender to use

There are four types of tenders used within the procurement.

1. Open
2. Restricted
3. Negotiated
4. Competitive dialogue

In open tendering, the opportunity to bid is advertised through relevant media platforms and any
potential or interested supplier can bid. Any potential and interested suppliers can make their offer in the
form of a bid. All interested suppliers submit their bid by the deadline stated and are considered for the
contract. The criteria to evaluate the bids are decided in advance, and the procurement team
analyses the bids to decide which supplier is the best value for money for the organization.

Tenders can be advertised on media platforms including the following.

 Organization’s websites
 Trade magazines
 Online databases
 OJEU (Official Journal of the European Union)

Restricted tendering has two stages. The first stage is to shortlist the suppliers who will receive the
opportunity to bid. This is done using the PQQ. Once the suppliers have been shortlisted, they are sent
the invitation to tender and invited to bid.

Negotiated tendering is used when the project has a very high value and there are multiple solutions to
meet the identified need. In negotiated tendering, an opportunity is advertised without any
specification on how the need should be met. Interested suppliers can submit an expression of interest
to the buying organization. Then they are asked to fill in a PQQ. The buying organization evaluates the
PQQs and selects the potential suppliers. Then the selected suppliers discuss with the buying organization
how they would best meet the need. This is called the dialogue phase. The dialogue phase must include
a minimum of three suppliers. When all suppliers have been through the dialogue phase, they are invited
to submit their bids with their solution to the project requirement.

Competitive dialogue tendering similar to negotiated tendering, the opportunity is advertised and
suppliers are pre evaluated. The successful evaluated suppliers meet to discuss and agree a solution to
the need. Once a solution has been agreed, the procurement team creates the tender document and
gives it to the suppliers, which respond with their bids.

Note: Expression of interest is a document sent by one party to another outlining interest to co-operate
on a project.
STAGE 2: Prepare invitation to tender (ITT)

The second stage in the tendering process is to prepare the documentation that will be made available
to potential suppliers. The invitation to tender should contain everything potential bidders will need to
know to fully understand the need and to prepare and send a suitable response. An ITT is likely to include
the following.

 Opening letter/brief
 Company details
 Overview of project
 Non-disclosure agreement
 Specification of the requirement (including any KPIs or SLAs unless using a negotiated or
competitive dialogue process)
 Evaluation criteria
 Submission date
 Compliance requirements
 Bid style, e.g., e-mail, through a portal, mail
 Contact details for queries
 Terms and conditions for contrasts

Note: Non-disclosure agreement (NDA) sometimes known is a confidentiality agreement (CA), this
signed document is a legal agreement that information received will not be shared and remains the
property of the originator.

Stage 3: Send the ITT

Sending the invitation to tender is simple but the following rules must be followed in all cases.

 Provide the documents to all potential suppliers at the same time

 Provide exactly the same documents to all suppliers

Stage 4: Buying organization receives bids

At this stage the buying organization receives the responses to the invitation to tender. These responses
are known as bids. It is a legal requirement that the bids are received by the deadline, in order to be
considered for the contract. Any bids that arrive late must be left out of the process. Including late bids is
unfair and could lead to a challenge later in the process.

Stage 5: Evaluate bids

A cross functional team reviews and evaluates the bids to ensure they follow the required style and that
they include the required information. Only bids that match the requested style will be considered.
Incomplete bids or bids that are not formatted to the correct standard can be left out at this stage. The
evaluation process is usually carried out by a cross-functional team to guarantee complete fairness and
ensure that the chosen bid is fit for purpose in all areas.
Evaluation team considers the following aspects of the bid.

 Supplier organization
 Price
 Quality
 Ethics
 Sustainability
 Risk
 Payment terms
 Disposal
 Service levels
 Location
 Warranties

It is essential that evaluation is thorough, fair, open, and transparent. When the evaluation is complete
and the buying organization is certain that the whole process has followed legal procedure, stage 6 of
the CIPS procurement cycle (supplier selection) can be carried out.

Note: Warranty is a type of guarantee to make right any wrong that occurs within a contract. Conflict of
interest (COI) where an individual is unable to remain impartial due to a personal, professional or public
interest.

Stage 6: Award contract and give feedback.

At this stage the buying organization awards the contract to the winning supplier through formal
communication such as e-mail or letter. If the preferred supplier does not accept the contract it is
awarded to another supplier. Once accepted the buyer can tell the unsuccessful bidders by e-mail or
letter. Unsuccessful bidders can request feedback on why they did not win the contract. The buying
organization can choose whether to give feedback or not. In the private sector, the buying organization
is not required to give feedback but some organizations choose to finish the process with bidders this
way.

Stage 7: Contract management

Once the contract has been awarded to the successful bidder the contract can start. During the
contract, performance should be evaluated against the criteria in the invitation to tender. Contract
management reduces risk by spotting defects or performance issues early.

SUPPLIER AND STAKEHOLDER MANAGEMENT

Suppliers are essential to a buyer fulfilling its role, and stakeholders can help or hinder progress towards
goals and objectives. By effectively managing suppliers and stakeholders, a procurement professional
can have greater control of certain factors.
BENEFITS OF SUPPLIER MANAGEMENT

Supplier management is part of strategic procurement and starts after contract has been awarded.
Supplier relationship management involves considering the following.

 Behaviour
 Culture
 Communication
 Collaboration
 Forecasting
 Transparency

Relationships have a lifecycle similar to the life cycle of products and services. The characteristics of a
buyer supplier relationship are affected by where it is in its life cycle.

Fig 1.14 shows relationship life cycle.

Figure 1.14 Relationship life cycle

Communication is key to supplier management. Communication includes the following

 Face to face interaction

 Telephone interaction
 E-mail correspondence
 Body language
 Active learning

By forecasting requirements, a buyer can foster a collaborative relationship and so help with supplier
management. Suppliers who are aware of future demands can make plans and so are more likely to
meet the buyer’s requirements than if purchase orders are raised with little notice. For a supplier,
accurate forecasting can allow them to do the following

 Secure materials
 Obtain economies of scale
 Plan production
  Budget effectively
 Evaluate risk

Open book costing is part of being transparent within supply relationship management. In this process,
organizations share their costs and required profit margins to try to reach an outcome that works for both
parties. Effective supply management can have the following benefits

 Enhanced control
 Reduced risk
 Continuous improvement

Note: Open book costing is a process where the buyer and the supplier are aware of each other’s costs
and required profits. Bribery is the offer of a gift, financial gain or incentive to influence a decision.
Coercion is the act of forcing a person or organization to do something through threatening behavior.

APPROACHES USED IN SUPPLIER MANAGEMENT

There are many ways to conduct supplier management, including the following.

 Credit checks
 Key performance indicators
 Service level agreements
 Audits
 Benchmarking

Credit checks can be done during live contracts to evaluate the supplier. This reduces the risk of being
surprised if a supplier announces it cannot fulfill its contractual obligations.

Key performance indicators, or KPIs are measures that demonstrate the effectiveness of a supplier. KPIs
should be set to follow an organisation’s objectives, vision and mission, and should always be SMART.

The SMART acronym is explained in Figure 1.12

KPIs can be qualitative or quantitative (Qualitative is measurement by quality, Quantitative is
measurement by quantity)

By using KPIs as part of a supplier management, procurement professionals can monitor and evaluate
performance and identify any areas that need attention or improvement.

Examples of what KPIs can measure are shown below (Table 1.12)

KPI Qualitative/quantitative

On time, in full deliveries Quantitative

Supplier lead time Quantitative

Quality Qualitative

Number of defects Quantitative

Cost saving Quantitative

Communication levels Qualitative

innovation qualitative

Table 1.12KPIs
Service Level Agreements (SLA) are agreements between the buyer and the supplier that define the
level of service that is expected throughout the contract. By implementing KPIs and SLAs as part of the
supplier management programme, procurement professionals are able to standardise processes,
develop the supply chain, promote innovation and ultimately deliver good value for money.

Conducting regular supplier reviews helps with effective supplier management. Strategic relationships
usually include scheduled reviews or meetings. During reviews, procurement professionals can increase
their knowledge of the following issues

 Production
 Product shortages
 Delays
 Lead and cycle times
 External factors
 Internal factors
 Staff changes
 Quality
 Costs
 Price

Some procurement professionals keep scorecards on their suppliers, which they can present during
reviews to give a visual analysis of performance. A supplier’s performance is often shown on a
dashboard

Note: Dashboard a way of presenting feedback to suppliers on SLAs and KPIs.

STAKEHOLDER MANAGEMENT

Stakeholders, like suppliers, require management. Stakeholders can be internal or external to an

organization.

Internal stakeholders External stakeholders

Employees Suppliers

Managers Customers

Directors Government

Creditors

Shareholders

Society

Table 1.13 Stakeholders

Anyone who has an interest in or the ability to affect an organization or project is a stakeholder. Not all
stakeholders require the same amount of management, so use the Mendelow Stakeholder Management
Matrix (Figure 1.15) to decide who should be managed.
Figure 1.15 Mendelow Stakeholder Management Matrix

The matrix is based on the theory that the level of management stakeholders require depends on the
level of their power and interest within the project or organization. Once the stakeholders have been
identified and classified using the matrix, the next stage is to understand the key stakeholders. The key
stakeholders are the parties with high levels of power or high levels of interest.

To understand stakeholders, think about these questions in Table 1.14

Question Possible answers

What interest does the stakeholder Financial or emotional

have In the organization/project

How is the stakeholder motivated Money or outcomes

What is the best way to communicate Face to face or written

With the stakeholder?

Is the stakeholder in favour of the Yes or no

organization/project

Does the stakeholder have the ability to Yes or no

Influence others?

What outcome does the stakeholder Success or failure

Want?

Table 1.14 Stakeholder questions

Stakeholders can be influential, so good management is necessary to get their buy in on a project and
to deal in an effective and friendly way with any objections or negative feedback.

Effective stakeholder management consists of seven elements, as illustrated in Table 1.15

Communication Keep the stakeholders up to date with projects/

development /changes

Consultation Ask for feedback and opinions and think about them.

Empathy Understand how the stakeholder is feeling- how would

you feel in their position.

Planning Prepare and plan before engaging stakeholders

Relationships Be open and honest, fair and reasonable and try to

Create good relationships

Risk Understand the risk that stakeholders could present

and have a strategy to work around this.

Compromise If the stakeholder has a valid concern then be

prepared to change strategy and accommodate
their feedback.
 CHAPTER 2

APPLYING THE KEY STAGES OF THE SOURCING PROCESS

2.1 APPLY THE KEY STAGES OF THE SOURCING PROCESS TO THE PRATICAL PROCUREMENT AND SUPPLY
ENVIRONMENT

A) THE STAGES OF THE SOURCING PROCESS

Sourcing involves identifying and vetting those suppliers who are able to supply the product or service,
as required in a specification from procurement professional.

In general, sourcing is the more strategic area of the process and purchasing is the more tactical area
Figure 2.1 shows how the different stages in procurement can be categorized.

Figure 2.1 Ordering and sourcing

Sourcing can take place in the following locations.

Localised: conducted with suppliers who are near to the buying organization.

Regional: conducted with suppliers in the same area, but slightly further away than the localized
choices.

National: conducted throughout an entire country. For example, suppliers may be hundreds of miles
away from the buying organization but they are still controlled by the same legislation and regulations.

Global: conducted worldwide. This type of sourcing often involves different legislation and regulations to
those of the buying organization.

The buyer needs to think about the following factors when deciding which type of sourcing is best.

1. Urgency of need
2. Volume of need
3. Quality of need
4. Budget allocated to need
CREATION OF CONTRACT TERMS

A contract is an agreement, made between two or more parties, that is legally enforceable Contracts
can be either of the following

 Verbal
 Written

It is best practice that contracts are agreed in writing.

THE FIVE STAGES OF FORMING A CONTRACT

Intention: the contracting parties must intend to enter into a legal contract. If there is no intention to
create a legal relationship, the contract is not legally binding.

Capacity: all parties should be of sound mind and fully are of their contractual obligations

Offer: the promise in exchange for performance from the other party.

Consideration: the exchange of one thing for another within an agreement

Acceptance: the point where the offeree accepts the proposal from the offeror

Figure 2.2 shows the formula to create a contract.

intention capacity offer consideration acceptance contact

For a contract to be legally binding, each of these five elements must be present.

INTENTION

When entering into a contract, all parties must have an intention to form a legally binding agreement.
For example, if three friends agree to meet on a weekend to go shopping, this is not a contract. This is
simply an agreement between friends.

Any contractual agreement must be entered into with caution clearly stating that there is intention. If
intention is not clear, and parties do not agree that there was intention, legal action may be required to
determine whether or not the contract is binding.
OFFER

Within contracts, an offer is a promise to do something within the agreed terms. Offers are created when
one party communicates to another, or to multiple parties, that they wish to enter into a legally binding
agreement in accordance with the terms stated. If an offer is made and no terms are stated, this
becomes an invitation to treat. An invitation to treat is an invitation from one party to another to begin
negotiations with the intention of creating an offer.

Note: Invitation to treat is an expression of willingness to negotiate with the intention of forming a
contract.

CONSIDERATION

Consideration in a contract has to have value, although the consideration does not have to be
financial. Consideration is what is exchanged between the parties. Legally consideration must be
sufficient but it does not have to be adequate. Sufficient consideration means what is exchanged must
have a value; however, this value does not have to reflect what the product or service is actually worth.

ACCEPTANCE

Offers must be accepted in order to become legally binding. They can be accepted in the following
ways.

 Body language, e.g., a nod of the head or a handshake

 A formal letter or e-mail
 By paying for goods or services

Offers can be challenged. This is known as presenting a counter offer. When negotiating, procurement
professionals present counter offers by suggesting lower prices or improved quality. Silence does not
count as acceptance. Acceptance has to happen through action.

IMPLIED AND EXPRESS TERMS

Terms can be implied or express.

Implied terms are always present in a contract and are set by national law. Implied terms do not have to
be written or verbally agreed. They always exist.

Express terms are terms that are agreed between the parties negotiating the contract. They are terms
that are negotiated and created rather than being automatically included.
Table 2.1 shows examples of implied and express terms.

Implied terms Express terms

Sale of goods act Payment terms

Goods being fit for purpose specification

Negligence Delivery details

Confidential Quantities

STANDARD TERM CONTRACTS

Some organisations, especially in the public sector, have standard term contracts that they issue to their
suppliers.

Standard term, or model, contracts are agreements between two or more parties where the terms are
defined by one party and not open to negotiation. The only choice is whether to reject it or accept it.
Standard term, or model, contracts are designed for use in many different relationships with the intention
of reducing the time spent negotiating specific terms for each agreement. The CIPS website offers a
model contract for members to use, which has been designed for use by both sellers and buyers.

Standard term, or model, includes the following elements.

 Definitions: the definition of names and terms to avoid repetition within the document
 General terms: general agreement terms and notice period
 Commercial provisions: payment terms, liability, performance and delivery details
 Secondary commercial provisions: confidentiality and intellectual property rights
 Standard clauses: force majeure and the law of the country to be followed.

Note: Standard term contract is a pre-written contract that leaves little or no room for negotiation on
terms between the parties. Force majeure is a circumstance that cannot be foreseen which prevent a
contract from being fulfilled.

Table 2.2 summarises the advantages and disadvantages of standard term contracts

Advantages Disadvantages
Saves time Bespoke terms may not be included

Saves money Better terms could be negotiated

Industry standard contracts are widely accepted Buyers do not get experience in Creating
and understood by both buyers and suppliers contracts
EXPRESS TERMS

Express terms include the following.

 Price
 Specification
 Payment terms
 Warranties
 Conditions
 Retention of title
 Damages
 Exclusion clauses
 Indemnity clauses
 Breaches
 Termination
 Conflict resolution

Remember: Express terms are terms that are agreed between the parties negotiating the contract.

PRICE

Price can be affected by several of the following factors, which should be considered when negotiating
terms

 Profit levels of the supplier

 Budget of the buyer
 Currency fluctuations
 Economic market
 Quality
 Volume
 Supply and demand
 Material availability
 Skill of the workforce
 Immediacy of the requirement

When negotiating price, a buyer can use several of the following tactics to try to create the ideal terms
for their organization.
Take it or leave it: The buyer states the price that they require and says that it cannot be changed. The
supplier has to take it or leave it.

Good cop, bad cop: The buyer takes a colleague to the negotiation, and one person acts empathically,
while their colleague acts harshly. The aim is to get the supplier to please the empathetic person, which
produces favourable terms for the buying organization.

Salami: The buyer divides the concessions that they are willing to make on the price into small, ‘bite
sized’ pieces to discuss with the supplier. This way the supplier may not realize they are conceding as
much as they are.

One last thing: The buyer makes one final request of the supplier, just when agreement is about to be
made. At this stage the supplier is so close to agreement that they will hopefully agree to the buyer’s
extra requirement.

Russian front: Two offers are presented, but one of them will never be accepted as it is unreasonable.
The unreasonable offer is explained first so that when the second offer is presented, it is much more
appealing compared to the first option.

Mother Hubbard: The buyer states that the ‘cupboard is empty’ and that they cannot offer any more i.e.,
they cannot afford to increase their bid.

Log rolling: The buyer presents many requests, where some have little or no value. When giving
concessions, the low-value requests can be conceded with negative effect.
SPECIFICATION

For a procurement professional to buy goods or services in response to a need, they sometimes require a
bespoke specification

Terms for the specification could include the following.

 Technical drawings
 Industry recipes
 Recipes or formulae
 Brands
 Samples

Note: Bespoke is a product or service made specifically for one customer.

PAYMENT TERMS

Payment terms are the terms of a contract that specify when the buying organization should pay the
supplying organization. It is usual for the buying organization to want a long time between receiving the
purchase order and paying it while the supplying organization wants payment as soon as possible
because they all want to improve their cash flow.

Payment terms are expressly written into the contract and are often stated as shown in Table 2.3

Payment term Definition

Proforma Payment is required before the goods/services are

dispatched

Net 30 days Payment is due 30 days after the date of invoice

Net 45 days Payment is due 45 days after the date of invoice

Net 60 days Payment is due 60 days after the date of invoice

WARRANTIES

Contracts have primary and secondary terms.

Primary terms are those that relate to products or services being supplied.

Secondary terms are those that relate to payment, damages or failure to perform. Warranties are as
secondary term.

Warranties are a promise from the supplier to the buyer that the product or service will meet the agreed
specification. Warranties that are written into the contract are express terms. However, if no warranty is
expressly written, the implied terms state that the product or service has to be fit for purpose. The
advantage of creating an express warranty term is to make sure that the procurement professional’s
purchase order is received exactly as required. A product or service could be considered fit for purpose,
and so meet implied terms, but it may not match the procurement professional’s expectations or the
business need.

CONDITIONS

A condition within a contract state one or both parties’ obligations that are fundamental to the
performance of the contract. An example of an express condition is an agreement between the parties
that the goods or services will be delivered by a certain time on a certain day. This contractual term is
often called time is of the essence.

Note: Time is of the essence is an express contractual term that states when goods or services must be
delivered.

RETENTION OF TITLE

The retention of title (RoT) clause in a contract state when ownership transfers from the supplier to the
buying organization. The retention of title applies to products because services are never physically
owned. It is important to remember that possession does not constitute ownership. Ownership often
transfers from the supplier to the buying organization when the supplying organization receives a
payment for the purchase order. So the procurement professional needs to understand when their
organization takes ownership in order to manage risk, i.e., to take out insurance. The retention of title is
also referred to as the Romalpa clause.

BREACHES

A breach of contract happens when one party fails to perform its legal obligations. It is failure to carry
out actions in accordance with a contract. Contractual breaches can be classified into three
categories, as shown in the Table 2.4 below.

Type of breach Example

Material One of the parties fails to perform its agree responsibilities And
the contract ceases.

Anticipatory One party has suggested that it will be unable to fulfill its
Obligations and the contract ceases.

fundamental The injured party is so affected by the failure of performance

from another party that the contract ceases.

While creating the terms, a procurement professional should agree with a supplier which types of breach
could result in the contract ending.
DAMAGES

Within contracts, damages terms will apply if a contractual breach occurs.

Damages are a sum of money that the supplier pays to the buyer if it fails to carry out its contractual
obligations. They aim to financially compensate the negatively affected party. Damages can be
liquidated or un-liquidated.

Liquidated damages: a fixed amount of money, agreed between the parties, that is payable if a
contract is breached. Liquidated damages can be enforced by law and the injured party should not
have to seek for legal action for them to be paid.

Un-liquidated damages: an unfixed amount of money. Un-liquidated damages terms are used when the
amount of money that will compensate the injured party cannot be known in advance. A court decides
on the fair amount of un-liquidated damages for a breach of contract.

Table 2.5 compares advantages and disadvantages of liquidated and un-liquidated damages.

Advantages Disadvantages

Liquidated Pre –agreed amount Could receive less than the actual
amount lost
No need for legal intervention

Un-liquidated Full amount of loss can be recovered Has to be awarded through a court

EXCLUSION CLAUSE

This type of clause is used in contracts to try to exclude one party, or to restrict the amount of liability that
might come from a breach of contract, for example if the supplier supplied poor quality goods.

Exclusion clauses can also do the following.

 Restrict or limit liability

 Seek some form of guarantee in place of normal liability for breach of contract

To be valid, the exclusion clause must pass a two-part common-law test.

1. The clause must be incorporated into the contract.

2. The clause must be constructed in a clear and precise way.

You can see exclusion clauses in car parks, where the site owners state that they hold no responsibility for
any theft or motor vehicles or possessions.
INDEMNITY CLAUSES

An indemnity clause means the other party will accept liability and risk for any loss that happens when
carrying out the contract and will replace, repair or repay what the injured party or parties have lost.

Indemnity clause may include the following.

 Costs or debts
 Loss or damage to the buyer’s property due to negligent or defective work
 Business losses experienced due to a supplier’s poor professional advice

TERMINATION

This type of term should be agreed with the supplier and included in the documents of the contract.
Termination of a contract can happen through a breach as explained below

Termination type Example

Performance One party is unable to carry out agreed actions

Prior agreement Both parties agree and this corresponds with reasons stated in the contract

Rescission One party has misrepresented itself or has committed an illegal act.

Completion The contract has ended successfully

Table 2.6 Termination types

When terminating a contract, the party trying to end the agreement must be sure of the facts if it is using
any reason other than a mutual agreement of completion. If a party terminates a contract and the
reason is found to be incorrect or unsubstantiated, legal action can be taken and damages can be
awarded.

CONFLICT RESOLUTION

Conflict is the final area for a procurement professional to think about when creating terms for a
contract with a supplier. If a conflict or dispute happens, there must be a process in place to try to
resolve it. Contract terms concerning conflict resolution are likely to include the following.

 Negotiation
 Mediation
 Arbitration

Negotiation is usually carried out between senior people within the organisations that are in conflict. If a
dispute is not resolved through negotiation, mediation is the next stage. This is where a third party tries to
help find a resolution. If mediation fails, arbitration starts. Arbitration is expensive and involves
independent professionals (arbitrators) working with all the parties to try to reach an agreement. The
format is similar to a courtroom hearing but with no legal requirement for either party to follow the
arbitrator’s recommendations. If arbitration fails litigation follows. Litigation is a long and expensive
process, which most organization try to avoid if possible. This is the last and expensive resort for solving
disputes and ends up destroying the relationship between the parties involved.

Note: Litigation is a legal process where a judge decides on the outcome of the dispute. The judge’s
ruling is final. Arbitration is a non-judicial process where an independent party aims to resolve conflict.
Remedies are the provisions in a contract that enable the injured party to take action when the other
party does not comply with the contract terms.

SUPPLIER SELECTION

A procurement professional can identify suppliers in the following ways

 Existing relationships
 Prior knowledge
 Recommendation
 Internet searches
 Trade shows
 Marketing material

EXISTING RELATIONSHIPS

If a procurement professional has developed a strategic relationship with a supplier, they may wish to
increase the level of business with them.

Selecting a supplier who is known to the organization has the following advantages

 Existing trading relationship

 Awareness of policies and procedures
 Due diligence already carried out
 Reduced risk against the unknown
 Knowledge of systems/technology
 Possibility of economies of scale
 Shared innovation

Disadvantages

 Reduced scope for negotiation

 Reduced competition
 Could be a better supplier available
 Over –reliance
 Reduced innovation
PRIOR KNOWLEDGE

If a procurement professional has prior knowledge to of a supplier, this may help in the selection process.
The buyer will be aware of the strengths and weaknesses of the supplier

and can advise on whether they would be suitable to work with on the current need. The advantage of
using a supplier who is new to the organization but known to the procurement professional is that the risk
is reduced.

RECOMMENDATION

A recommendation from another supplier, colleague or organization is another way of identifying

suppliers. It is important to be cautious when accepting recommendations; this should not stop the buyer
using the usual due diligence and evaluation criteria. What is right for one organization may not be right
for another

INTERNET SEARCHES

Searching the internet is a well-known and common method of finding and selecting possible suppliers.
There is a huge amount of information available through online portals, covering a large number of
categories.

TRADE SHOWS

Trade shows are events where business professionals can network and learn about industry standards
and up-and-coming technology. Trade shows are usually focused on one industry and include all the
suppliers that support this. For example, the following might attend a farming trade show.

 Machinery suppliers
 Animal feed suppliers
 Seed suppliers
 Chemical and fertilizer suppliers
 Labour providers
 Insurance companies
 Support organisations
 Fencing suppliers

MARKETING MATERIAL

In procurement, buyers often receive marketing material by mail or electronic methods. It is possible to
use this material to select potential suppliers. If the material contains a product or service that is being
sourced, the buyer may contact the organization to find out further information.
EVALUATING SUPPLIERS

Procurement professionals should research potential suppliers after they have been selected and gather
information about the following

 Financial performance
 Organizational structure
 Culture
 Ethical policy
 Corporate social responsibility
 Sustainability
 Environmental awareness
 Reputation
 Quality
 Global accreditations
 Technology
 Location

FINANCIAL PERFORMANCE

Procurement professionals should evaluate the financial performance of a selected supplier. A supplier
in a strong financial position exposes the buying organization to less risk. If a supplier has had financial
difficulties, it could affect the buying organization in the following ways.

 Reduced quality of products/services supplied

 Delays in product deliveries
 Shortage of deliveries
 Price increases
 Failure to supply

A supplier’s financial performance can be evaluated by the following methods.

1. Credit ratings
2. Reviewing the balance sheet
3. Reviewing liquidity
4. Reviewing profitability
5. Requesting references from other customers

The simplest way to analyse a selected supplier’s financial position is to request a credit rating from a
credit agency. Most organisations must publish their end-of-year financial results. Procurement
professionals can view this information as part of the supplier selection process.

Balance sheets are financial documents that list all of an organisation assets and liabilities at a set point
in time. An organisation in a strong financial position will have assets with a higher value than its liabilities,
i.e. the organization owns more than it owes.
The liquidity of an organization is about how quickly its assets can be converted into cash. Two ratios can
be applied to help to assess how liquid an organization is

1. The current ratio

2. The quick ratio

Liquidity ratios measure the extent to which a business has the liquid assets sufficient to meets its short
term and long term liabilities

There are two main ratios which relate to short term liquidity.

Current ratio (also called the working capital ratio) It is calculated as:

Current assets (Stock, debtors, bank and cash)

Current liabilities (Creditors and bank overdraft)

This ratio indicates whether or not the business has sufficient current assets to cover its current liabilities.
The ‘ideal’ ratio is sometimes said to be 2, if the current ratio is less than 1, it suggests that the
organization does not have enough assets to repay its liabilities.

Quick ratio (also known as Acid Test ratio or liquidity ratio). This ratio aims to reveal an organization’s
ability to meet its creditor’s immediate demands. It is calculated as:

Quick assets

Current liabilities

Quick assets are assets that are available quickly and easily, such as cash or items that can quickly be
converted into cash. The quick ratio is the same as the current ration, except it does not take inventory
into account as a current asset. This ratio focuses only on the most liquid assets (cash and debtors),
which can quickly be used to pay off liabilities (unlike stock, which has to be sold and paid for, which
may take time). The ‘ideal’ ratio is sometimes said to be 1

The profitability of the organisation is also important. Most organisations aim to generate a return on
investment (ROI) and make money. Gross profit is the amount of money an organization has left at the
end of a financial period, after deducting all costs associated with product, selling and providing its
product or service.

Profit = Sales – cost of goods sold

Note: Balance sheet is a financial document showing what an organization owes and owns. Liquidity is
the amount of assets an organization has that can be converted to cash to meet short-term financial
commitments. Profitability is the amount of money an organization makes after all expenses are paid.
Return on investment (ROI) is a measure of profitability that indicates whether a gain or loss has been
generated compared with the initial cost.

ORGANIZATIONAL STRUCTURE

Procurement professionals should research the structure of the selected supplier to understand if, in
theory, the two companies can work together and be cost effective.

The two most common organizational structures are

 Flat
 Hierarchical

Flat structures are organizations that have no, or very few, layers between the employees.

Hierarchical structures are more commonly used in larger organizations and include many layers
between the employees, from junior level up to the chief executive officer (CEO)

Table 2.7 shows the differences between flat and hierarchical structures

Flat structure Hierarchical structure

Good communication Departmental communication may be poor

Good relationships between staff and Limited relationships between staff

Senior managers And senior managers

Fast decision making Slow decision making

Easy for organization to develop Harder to make change happen

Employees have high levels of responsibility Employees have low levels of responsibility

Internal confusion as staff do not have a Levels of authority are clearly defined

specific manager

Lack of specialist resources Employees can specialize in their areas

Little chance of promotion Lots of chances for promotion.

CULTURE

For a supplier to work effectively with a buying organization, their cultures should be compatible. Culture,
according to Charles Handy, is the way things are done around here.

Organizational culture can be separated into four dimensions.

1. Power – high pace, dominance of individuals, active/direct involvement of owner

2. Role – bureaucratic, lack innovation, organic growth
3. Task – high pace, silo, team-oriented, highly ambitious
4. Personal – individual centered, organized around owner, entrepreneur driven.

Organizational cultures must be acceptable to the procurement organization, as well to the

procurement organization, as well as to its customers and consumers. If the culture is not
acceptable to any party in the supply chain, internal discontent with policies or procedures
may lead to investigations and any resulting scandals can quickly escalate.

ETHICAL POLICY

The organization should be able to give the buyer its code of conduct or ethical policy, which outlines
the behavior, processes and policies that it expects to be followed within its supply chain. The ethics
document should include statements on the following areas.

 Bribery
 corruption
 fraud
 human rights
 modern slavery
 working conditions
 conflicts of interest

CORPORATE SOCIAL RESPONSIBILITY

Although it is not a legal requirement, suppliers should have a corporate social responsibility (CSR) CSR
policy outline on organization’s positive contribution to the following stakeholders.

 Customers
 Consumers
 Investors
 Community

The objective of a CSR policy is to promote a sustainable and ethical organization. CSR policies focus on
the following themes.

Legality: the organization will: Respect the law, follow its internal policies, ensure legitimate operations,
Keep relationships open and transparent
Business ethics: the organization will conduct business with integrity and respect human rights and will
promote: The CIPS Code of Conduct, The ILO, Respect towards the consumer, Anti-bribery and ant
corruption practices

Protecting the environment: the organization understands the need to protect the environment and will:
Recycle where possible, dispose of waste ethically, Work towards using sustainable energy

Protecting people: the organization will ensure that it: Does not risk the health and safety of employees,
Supports diversity and inclusion

Charity work: the organization will make financial donations to: Education and community events

SUSTAINABILITY

It is important to ensure that a selected supplier is sustainable. If a supplier is not sustainable, it may not
be the right organization to fulfill the buying organization’s need. Sustainability can be evaluated with
the PQQ or through supplier research. Procurement professionals can set up a scoring system to rate
suppliers. Sustainability will play a key part in this and in the overall decision-making process about which
suppliers best fit with the buying organization.

ENVIRONMENTAL AWARENESS

Within CSR policy, there is likely to be information about how the organization plans to have a positive
impact on the environment. This could be a sustainability issue, for example, replacing natural resources.
It could also include recycling objectives and the reduction of energy used or pollution generated.

REPUTATION

Procurement professionals should conduct research through colleagues , the media or market talk on
the reputation of the potential supplier. The reputation of the supplier can add or reduce value across
the supply chain.

QUALITY

The quality or service should be investigated before forming relationships with potential suppliers. If the
supplier has an ISO 9001 accreditation, this would suggest that they take quality seriously. The potential
supplier may have a total quality management (TQM) system in place, which would suggest that quality
is extremely important to them.

The following points show what is included in a TQM system.

 Process thinking
 Customer satisfaction
 Total employee commitment
  Strategic thinking
 Integrated system
 Decision based on fact
 Continuous improvement
 Effective communication

GLOBAL ACCREDITATIONS

During the selection process, procurement professionals should find out if the potential suppliers hold the
required documentation. Standards that are commonly required include membership of, or working in
accordance, with the following.

ISO 9001: quality management

ISO 14001: effective environmental management.

Investors in People: effective people management and development

International Labour Organization: an agency run by the United Nations, promoting fair working
conditions.

BRC: globally recognized standards in food, packaging, storage, brokerage, consumer products and
retail

TECHNOLOGY

The supplier’s technology should be compatible with the buying organization’s technology. If
technology is not compatible, this could result in additional costs and may not achieve value for money.
Currently, a lot of procurement activity is conducted electronically, for example, using the following.

 E-purchase orders
 E-delivery notes
 Barcoding
 Scanning
 E-payment
 E-tendering
 E-invoicing

LOCATION

The location of a supplier can affect the level of risk. This risk could be any of the following.

 Political
 Economic
 Force majeure
A procurement professional should be cautious if a selected supplier is in an area or country that is mid-
election or anticipating a change of power. A change in power can result in changes to the legislation
and regulation for trade. This could mean that a favourable deal could soon become unfavourable.

Economic factors also relate to politics and include the following.

Taxes: the rate of value added tax (VAT) , import and export tax or corporation tax set by governments.

Currency fluctuation: the value of currencies depends on the state of economies, i.e., weak economies
usually mean a low exchange rate.

Supply and demand: if the economy is strong, demand is usually high and prices reflect this.

Force majeure can include the following.

 Flooding
 Earthquakes
 Hurricanes
 Tsunamis
 War
 Terrorism
 COVID 19

CONTRACT AWARD

When the procurement professional has completed all the due diligence for supplier identification,
selection and evaluation and the request for quotation or invitation has been created, sent and
received back, the next stage is to evaluate the bids/quotations offered and award the contract.

Evaluating the offers

The evaluation stage involves analysing supplier responses against the criteria, using any relevant
scoring, and selecting the supplier that will offer best value for money in fulfilling its needs. Due diligence
will have been completed at an earlier stage in the process to remove any potential suppliers that do
not match the criteria required by the buying organization, e.g., suppliers with poor reputations or
unethical conduct. The final criteria to analyse potential suppliers’ offers can include the following.

 Quality/specification conformance
 Currency
 Price
 Taxes
 Order quantities
 Transport methods
 Whole life costing
 Organizational benefits
Quality/specification conformance

If the specification was a performance specification, the product or service offered by the suppliers must
be checked to see if its fit for purpose. The buying organization bears the risk when buying with a
performance specification. This can be done using the following.

 Technical drawings
 Samples
 Demonstrations
 Testing

If the product being sourced is a new or modified buy, the supplier who gets the contract may have to
invest in new equipment or tooling. If this is the case, samples will not be produced and technical
drawings will have to suffice. If the supplier is responding to a conformance specification, the buying
organization bears the risk that the specification is correct. The buying organization sets the
conformance specification and the supplier has to provide a product or service to meet the exact
requirements.

Conformance specifications are often in the following forms.

 Chemical formulae
 Technical drawings
 Recipes

Currency

If the RFQ or ITT was sent to global suppliers, the procurement professionals should be aware that prices
submitted could be in a different currency to their own. Before doing any price comparisons, they need
to put all responses into the same currency using a agreed exchange rate.

Taxes

It is important to consider taxes, especially if products are being imported from another country. Taxes
that are collected from importation and exportation are known as import duty. The two main purposes
of import duties are as follows

1. To give local, or own grown, produce an economic advantage

2. To raise revenue for the country’s government

Order quantities

Economies of scale reduce the piece part price. However, if this means ordering a higher quantity of
products than is actually needed, the cost to source the need increases.

Note: Piece part price is price per individual item.

Transport methods

If the RFQ or ITT is for international supply, it is important to know what methods of transport will be used
to supply the product. The responses from the potential suppliers should state whether air, sea, road or
rail freight will be used. The buying organization may prefer one method of transport, depending on its
policies. If it is close to a port, then it may prefer sea freight. Alternatively, if they prefer that goods are in
transit for the shortest time possible, it may prefer air freight. Part of dealing with international freight is
agreeing Incoterms

Incoterms Title Description

EXW Ex Works The buying organization takes full responsibility for all charges
and arranges collection from the supplier.

FCA Free Carrier The supplier delivers the goods to a carrier chosen by the buyer,
at a

named destination. The supplier pays for the delivery to the

named destination.

FAS Free Alongside Ship The supplier takes the goods to the port and clears the goods for
export. Responsibility then then passes to the buyer.

FOB Free On Board The supplier takes the goods to the port, clears the goods for
export and ensures they are loaded onto the vessel.
Responsibility then

passes to the buyer.

CPT Carriage Paid To The supplier delivers the goods to their chosen carrier and the
carrier then delivers the goods to the agreed destination. The
supplier is responsible for all the costs of getting the goods to the

destination.

DDU Delivery Duty Unpaid The supplier delivers the goods to the port/airport of the buyer’s
country. The buyer takes ownership when the goods arrive in the
buyer’s home country and is responsible for all the costs of
getting

the goods to the agreed destination

DDP Delivery Duty Unpaid The supplier delivers the goods to the port/airport of the buyer’s
country. The supplier is responsible for paying any import taxes or

insurance and clearing customs.

 DAP Delivery At Place The supplier delivers the goods to the buyer’s chosen location
and

incurs all the risk until the buying organization has unloaded
them. The buying organization is responsible for paying import
clearance.

Table 2.9 Incoterms

Whole life costing

The procurement professional should consider the total cost of acquisition (TCA), which includes all the
associated costs of physically getting the product or service. Whole life costing is the total cost of the
product/service over its lifetime.

Figure 2. 3 shows the areas included in whole life costing.

Communication

The supplier who gets the contract has to be a good communicator. If there are any problems, product
defects or material shortages, the supplier must inform the buying organization as soon as possible to
minimize risk.

Organizational benefits

The final area to think about before making a decision on which supplier to offer and then award the
contract to is organizational benefits.

Procurement professionals should consider the following questions.

  Would this contract enhance an existing supplier relationship?
 Does the supplier contribute towards a cause that the buying organization believes is important?
 Does the supplier have a good reputation?
 Would working with the supplier open up further opportunities?
 Would awarding the contract to an existing supplier gain the buying organization economies of
scale or savings on delivery?

Making a decision

When they have evaluated all the criteria, procurement professionals can put the results into a weighted
scorecard. This tool can help to make the decision by presenting a fair display of how all suppliers did in
the process. The weighted scoring system helps to make a decision based on the criteria set out at the
beginning of the RFQ or tender process.

Note: Weighted scorecard is a tool with a systematic and fair process for selecting suppliers, based on
predetermined criteria.

Table 2.10 shows a basic weighted scorecard

Options

Criteria Weighting Company A Company B Company C

Score Total Score Total Score Total

Cost 5 5 25 3 15 4 20

Service level 4 3 12 5 20 2 8

Ease of 4 2 8 5 20 5 20

termination

Contract length 2 4 8 4 8 3 6

Financial 3 4 12 5 15 3 9

strength

Total 65 78 63
Accepting the offer

Once the decision on which supplier will be awarded the contract has been made, the next stage is to
physically award it to them. The reply that the supplier gave to the RFQ or ITT was its offer in response to
the buying organization’s invitation to treat. Acceptance is now needed to finalise the formal
agreement. It is best practice for the procurement professional to accept the offer in writing. However, it
is possible to accept in any of the following ways

 A telephone call
 An e-mail
 A letter
 A face to face conversation
 A handshake

Once acceptance has been given, it is good practice to formalize the agreement with a written
contract. The contract will clearly state the terms of the agreement. The contractual terms should copy
the terms in the documentation originally sent to the suppliers when the quotation or bid was requested.

Any amendments to these terms should be negotiated and agreed before acceptance.

It is important that the terms of the contract are finalized before the contract is agreed. If this does not
happen, procurement professional could find themselves in a ‘battle of forms’ situation. A battle of forms
may occur when a buying and a supplying organisation are negotiating contractual terms and each
organisation’s response is based on its own terms. For example, a buyer sends an RFQ to a supplier with
its standard terms on the back, but the supplier then sends a quotation in response with its standard
terms on the back. This means that the supplier has quoted according to the RFQ but using the supplying
organization’s terms.

The general rule in a battle of forms is that the contract is made against the last set of terms sent.

Contract mobilisation

On agreement, the contract becomes legally binding and the two parties can start work on contract
mobilization. Mobilization sets the standards and styles for the contract delivery and can form strong
relationships between the organisations and individuals involved. Mobilization is when a contract shifts
from one supplier to another.

Effective contract mobilization includes the following.

 Clear communication
 Setting clear objectives
 Liaising with stakeholders
 Managing change
 Looking for opportunities
 Managing relationships
Clear communication

The contract will include a date for the new supplier to start work. This date should be passed on to the
current supplier, if there is one. If a current supplier’s contract is terminated, the process needs to be
managed effectively to try to ensure a smooth handover. If the contract has been terminated due to
anything other than completion, the relationship between the buyer and the current supplier may have
broken down and become adversarial.

Setting clear objectives

The procurement professionals should ensure that there are clear objectives set which explain what is
required from the new supplier. If the new supplier is a manufacturer, some tooling may need to be
moved from the current supplier to a different site. Objectives set for this could include the following.

 Having machinery set up and in working order by a specified date

 Providing documentation to show the workforce has been trained on the machinery
 Creating a batch of sample products for quality control

If the contract is a service contract, the objectives would be different and could include the following.

 Ensuring staff are familiar with the building and its facilities
 Checking stock of consumables and providing the buying organization with a list of inventories at
the start
 Providing documentation to show the workforce has completed the health and safety site
training

Liaising with stakeholders

Key stakeholders will be aware that the contract has been renewed or awarded to a new supplier.
Secondary stakeholders may not have been involved in the process, so it is important that they are told
about any changes. It is acceptable to send them a generic memo informing them of the change and
inviting any questions or concerns they may have.

Managing change

Within the buying organization, a change of supplier could cause problems. Many individuals form
opinions of suppliers or have relationships with them. Within organisations, representatives from both
parties will interact, for example, delivery drivers and warehouse staff, or members of the accounts
departments. If these relationships are strong, there may be resistance to the idea of changing to
working with different individuals. There are various ways of managing resistance to change
Looking for opportunities

It is important to explore every opportunity and the transition between suppliers is an ideal time for both
the incoming supplier and individuals within the organization to present innovations. During the transition
process there will be many opportunities to improve how things are done.

Managing relationships

Managing the relationship to the end is critical to making sure supply does not suffer. The supplier taking
over the contract may need guidance at the start, until they fully understand how things work within the
buying organization, who their contacts are and how the business operates. There are four types of
leadership that suppliers may require

 Delegating
 Supporting
 Coaching
 Directing

TUPE

In the UK, if a contract is being outsourced or an outsourced contract is changing supplier, the TUPE
regulations should be followed. The TUPE regulations are designed to protect employees from losing their
jobs if a contract is moved from one supplier to another. For example, if an organization decides that
outsourcing its catering facility will be more cost effective than conducting it internally and a supplier is
awarded the contract, TUPE regulations will apply. In this situation the employees who provide the
catering will have their contracts transferred to the outsourced supplier.

Contract implementation

The implementation of new contracts includes four stages as illustrated in Figure 2. 4

Stage 1 Stage 2
Transition Start-up

Contract
implementation

Stage 4 Stage 3
Management Operations
To ensure the mobilization, implementation and management of the contract are successful, these four
stages should be followed.

1. A good transition from the current to the new supplier

2. Clear guidance and support at the start-up stage
3. Operational compliance and guidance
4. Contract and supplier management

(C) CONTRACT AND SUPPLIER MANAGEMENT

Contract management and supplier management are two distinct and different elements of
procurement. Managing contracts is about making sure that goods and services are delivered at the
correct time and place and to the specifications required, while supplier management is about forming
and developing relationships with suppliers and their organisations.

Deciding what is required

All contracts and suppliers require a level of management, but not all contracts and suppliers demand
the same level of management. Within many organisations, a large percentage of value is supplied by
quite a small number of suppliers. The rule that supports this theory is the Pareto rule. The Pareto curve
can be used to conduct an ABC analysis. By carrying out this analysis, procurement professionals can
see which of their suppliers supply the largest volume or highest value. This information can help to
decide the style of supplier management that is required.

Note: Pareto rule is also known as the 80/20 rule, meaning that 80% of the effects come from 20% of the
cases. ABC analysis is a technique to categories suppliers into three groups of decreasing value.

Having done an ABC analysis, procurement professionals can establish which suppliers belong to each
of the three categories.

Table 2.11 defines the three ABC categories.

Category Description

A These suppliers represent 20% of the total amount of an organisation’s suppliers yet
receive

80% of the total company spend

B These suppliers represent 30% of the total amount of an organisation’s suppliers yet
receive

only 15% of the company spend

 C These suppliers represent 50% of the total amount of an organisation’s suppliers yet
receive

only 5% of the total company spend.

The Kraljic Matrix is another tool that can be used when deciding which styles of management a
supplier requires. Kraljic outlined four different types of products /services that are sourced and supplied
by procurement, as shown in Table 2.12

Product /service type Description

Routine Low profit impact, low supply risk

Bottleneck Low profit impact, high supply risk

Strategic High profit impact, high supply risk

Leverage High profit impact, low supply risk

Managing relationships

The relationship spectrum states that buyer-supplier relationships can either be competitive or
collaborative.

Competitive relationships are about getting the best cost from suppliers and gaining the required quality
and delivery standards. The buyer is not concerned with the long-term relationship or sustainability of the
supplier and is focused on the cost. This style is called win-lose as what the buyer gains is at the expense
of the supplier. Competitive relationships are tactical with the buyer’s focus placed on getting the best
cost, regardless of the impact this has on the supplier.

Collaborative relationships are based on sharing information, trust, respect and both parties achieving a
positive outcome. These relationships are focused on being ‘win –win’. Collaborative relationships
promote joined-up thinking and innovation. Managing collaborative relationship does take time and
effort unlike competitive, but this type of relationship should help both parties to achieve their objectives.

Key benefits of a collaborative relationship include the following.

 Shared information
 Innovation
 Reduced defects
 Improved quality
 Continuity of supply
 Stable supply chain
 Cost reduction
The most collaborative relationship style is co-destiny. This type of relationship occurs when the buying
and the supplying organization are completely linked. If either organization fails, the other does too.

Joint ventures between suppliers and buyers are an example of a co-destiny relationship. Joint ventures
include sharing the following.

 Ownership
 Control
 Risk
 Profit
 Loss

Note: Joint venture is a business agreement where two or more parties share and pool resources on a
project.

Joint ventures can be between a buyer and a supplier, between several buying organisations or
between several supplying organisation.

Methods of managing contracts or suppliers

Managing suppliers or contracts can be done in a variety of ways.

1. Service level agreements

2. Key performance indicators
3. Management by objectives
4. Reviews
5. Continuous improvement
6. Training
7. Amendments
8. Back-up plan

Service Level Agreements

Service level agreements are clauses in a contract between a supplier and a buyer. The purpose of a
SLA is to ensure that suppliers meet the expected and agreed level of service. In other words, its an
agreement between the provider of a service and its users, which quantifies the minimum quality of
service that meets business needs.

SLAs are based on output. They are designed to define exactly what the buyer will receive. SLAs allow
the buyer to monitor supplier performance, which is part of supplier management. When preparing SLAs,
procurement professionals should consider four principles.

 The service level should be reasonable, because unnecessarily high levels of service could result
in a higher cost to the organization.
 They should be important to the buyer.
 They should be simple and easy to monitor.
 They should be understood by all parties.
Key Performance Indicators

Key performance indicators (KPIs) are another method for monitoring how a supplier is delivering on a
contract. When creating KPIs to manage suppliers and their contracts, the areas monitored should relate
to the organization’s overall strategy. Using KPIs to manage suppliers and contract performance gives
the following advantages.

 Supplier motivation
 Improved communication
 Improved quality
 Early identification of risk

Management by objectives (MBO)

Management by objectives (MBO) is the process of defining objectives that are strategic to the
organisation, relating them to the mission and vision and communicating them to both internal and
external stakeholders. The idea is based on everyone working towards the same goals, with the aim of
achieving the desired strategic result.

Remember: MBO is based on everyone working towards the same goals, with the aim of achieving the
desired strategic results.

Reviews

Regular supplier and buyer reviews are good practice to give the buyer an opportunity to give
feedback on performance. They can also be helpful in the following ways.

 Provide updates on market news

 Inform of any potential issues/risks in the supply chain
 Provide information on the supplier’s organisation
 Inform of any innovation or technological advances
 Reduce the risk of contract and performance disputes

Reviews can be held in any of the following ways.

 Virtually
 Face-to face
 Over the telephone
 By e-mail

Feedback can be positive or negative, so it is important to deliver this information carefully to ensure it is
understood but does not upset or demotivate the supplier. Feedback should be delivered in the
following ways

 With good intentions

  In a timely manner
 In a specific style
 With empathy or sympathy
 Constructively
 With solutions where possible

Continuous Improvement

Many supplier relationships work towards continuous improvement, which is also known as kaizen. This is
a Japanese word, which literally means change for the better. Kaizen is based on a long-term process of
regular incremental changes to improve processes and reduce waste. Waste can be defined by seven
categories, according to Taichi Ohno, an industrial engineer.

Note: Kaizen is a strategic approach to continuous positive change.

Table 2.13 shows the seven types of waste that buyers and suppliers try to eliminate from the supply
chain by applying continuous improvement.

Type of waste Procurement example

Transport and handling Movement of paperwork. Approvals. Excessive e-mail attachments.

Distributing unnecessary copies to people who don’t really know.

Inventory Purchasing or making things before they are needed. Things waiting in
an (electronic or physical) inbox. Unread e-mail. Any form of batch
processing

(e.g.) transactions, reports).

Unnecessary Motion Walking to copier, printer, and fax. Walking between offices. Central
filing. Going on a safari to find missing information. Tracking between
computer

screens.

Waiting Slow computer speed. Downtime (computer, fax, phone) waiting for
approvals. Waiting for information. Waiting for clarification or correction
of

work received.

Over production Printing paperwork before it i.e. needed. Processing an order before it is
needed. Any processing that is done on a routine schedule.

Over processing Relying on inspections, rather than designing the process to eliminate
errors. Re-entering data into multiple information systems. Making extra

copies. Generating unused reports. Expediting. Using unnecessarily

cumbersome processes.
 Defects Data entry errors. Other order entry or invoice errors. Any error that gets
passed downstream only to be returned for correction or clarification.

Engineering change orders. Design flaws. Employee turnover.

Applying continuous improvement methods to contract or supplier management can achieve the
following results.

 Reduced process time

 Reduced lead time
 Reduced defects
 Improved quality
 Improved innovation
 Reduced cost
 Improved sustainability
 Improved environmental practices

Training

Training on a new or amended regulation can be done collaboratively. The procurement team can
source an outside trainer and invite every individual who would benefit from the training to attend. This
will save money for both organisations because the knowledge gained will reduce the level of risk of
non-conformance. By combining the attendees from both organisations, economies of scale will result in
a cheaper price per individual to be trained.

Amendments

Even using the best supply and contract management, procurement professionals can sometimes find
themselves in unexcepted situations. Buyers need to react to problems, for example, if a supplier has
financial problems or the macro environment creates a problem. This reaction could involve amending
a contract.

Contracts can be changed either of the following methods.

 An amendment: a physical change in the existing agreement

 An addendum: when an additional document is added to the existing contract

Remember: Contracts can be changed by an amendment or an addendum.

If a contract contains a negotiated and agreed fixed price for the period of the contract but
unexpected market forces such as an economic downturn or force majeure occur, the supplier may
have to request an amendment in order to continue to make profit. If a contract has a schedule of rates
and the market forces prices up, an addendum can be added to an existing contract with a revised
schedule. Once accepted the addendum becomes part of the original contract. Addendums are
frequently used when the forecasted cost of a project rises and approval is needed to increase the
contracted spend.
Note: Fixed price is a price that does not change during the period of the contract. Schedule of rates is
a list of prices associated with the products or services to be provided.

Back-up plans

While managing relationships and collaborating with suppliers is good practice and helpful to everyone
involved, the procurement professional should not forget that any relationship is exposed to risk. Risk can
present itself in many of the following ways.

 Financial concerns
 Product defects
 Material shortages
 Personal conflicts
 Force majeure
 Regulations
 Lack of capacity
 Loss of competence

Risk should be reviewed regularly. The possible outcomes of potential supplier or contract failure can be
plotted on a risk register. Once a procurement professional is aware of any critical or extremely high
risks, they can put a strategy in place to attempt to handle risk, if it happens.

The strategies buyers use may include the following.

 Back up suppliers
 Alternative products
 Safety stocks

Back-up suppliers are suppliers that a buyer may use if their primary supplier cannot fulfil the contract.
When selecting back-up suppliers, it is a good idea to select suppliers in a different geographical
location so that if there is a regional material shortage or a natural disaster in one area, the back-up
supplier is less likely to be affected.

In some situations, organisations may be able to use another product as a substitute if the supplier
cannot meet demand.

Safety stocks are often held in inventory to ensure product shortages does not occur. Holding safety
stocks ensures that production or supply continues if there is a temporary break in the supply chain.

Procurement professionals need to manage all suppliers and contracts to some extent if they are to
receive goods and services in accordance with the Five Rights of Procurement. However, the level of
engagement that is required closely relates to the following.

 The category of product/service

 The relationship style
 The exposure to risk
 Supply and demand
 CHAPTER 3

THE APPLICATION OF WHOLE LIFE ASSET MANAGEMENT

3.1 APPLY WHOLE LIFE ASSET MANAGEMENT TO THE PRATICAL PROCUREMENT AND SUPPLY
ENVIRONMENT

Whole life asset management (WLAM) is the process of evaluating the total price and all associated
costs of a product to make an informed decision as to which option will proving the organization with
the best value for money option. Whole life asset management is a continuous process that monitors the
performance of the asset once it is in situ and calculates the optimum time to replace or refurbish the
asset. Whole life asset management includes costs such as sourcing, delivery, installation, insurance
maintenance and disposal.

(A) INCLUSION OF ALL COSTS – PURCHASE PRICE THROUGH TO DISPOSAL AND END-OF-LIFE

Figure 3.1 outlines whole life asset management and shows the categories of costs that can be used to
evaluate an asset and its value contribution towards an organization.

Figure 3.1 Whole life asset management

Whole life asset management is based around obtaining the best value throughout the lifetime of the
asset.

Table 3.1 explains how value is perceived by different organizational departments and stakeholders.
 Finance How much money does the asset cost to the organization?

Economics How much are the benefits from owning the asset worth?

Marketing How much is the asset worth to customers/consumers?

Operations How easy is the asset to use? How well does it perform/

Maintenance How easily can spares be obtained and fitted and repairs
conducted?

Sales Does the asset give the organisation an advantage?

Ethics Is the asset providing ethical value and promoting good behavior

Sustainability Is the asset from a sustainable source?

Environmental Is the asset as kind to the environment as possible?

Quality Is the asset durable, long lasting and fit for purpose?

IT Does the asset suggest technological innovation and compatibility?

Figure 3.1 outlined eight elements that form the cycle of whole life asset management. Within those eight
elements are many factors to consider.

1. Identify need/objectives/risk
2. Procurement
3. Construction
4. Commissioning
5. Deterioration/maintenance
6. Condition performance monitoring
7. Decommissioning
8. Renewal/replacement

IDENTIFY NEED/OBJECTIVE/RISK

The first stage of whole life asset management is the same as the first stage in the CIPS Procurement &
Supply Cycle: identify need. Prior to any asset being procured, there has to be a defined need. The
need could be identified by anyone within or external to the organization. The need could be in relation
to the following.

 The current asset becoming unfit for purpose

  Completion in the marketplace
 Raised/reduced demand
 Financial concerns

Once the need has been identified these objectives of the new asset need to be created and agreed.
Objectives could include the following.

 Being more energy efficient

 Reducing cost
 Improving processes
 Keeping up with the competition
 Saving money
 Gaining a fast return on investment. (ROI)
 Increasing output
 Reducing output
 Preserving the organization
 Improving reputation

It is important to remember that the purchase of a new asset does not always mean an organization is
growing or developing. A change in asset requirements could be related to a decreased demand and
could be way of saving cost or ensuring the continued existence of the organization in the long term.

Risk also needs to be explored. When investing in a new asset there are factors to be considered around
the likelihood and potential outcomes of different risks. Factors linked to risk could include the following.

 Downtime
 Lost sales/revenue
 Associated costs
 Incompatibility
 Resistance

PROCUREMENT

The next element of the whole life asset management approach is for procurement to source and
arrange supply of the asset. This part of the process involves the whole procurement cycle. Although
there are many elements after procurement within the whole life asset management cycle, the
procurement team has to consider all these elements in its decision-making to be sure that the best
value is obtained.

CONSTRUCTION

In terms of the whole life asset management construction means the designing and manufacturing of
the asset. Much of the cost of the asset relates to the construction stage. If an organization is sourcing an
asset that is readily available or mass produced then the costs associated with the design and
manufacture will be a lower percentage of the total cost than is an organization commissions a bespoke
piece of equipment to be designed and manufactured.
Note: Mass production is continuous production of standard products that can benefit from economies
of scale.

Table 3.2 shows some examples of assets that are off the shelf (mass produced) and some that are
bespoke.

Standard/off the shelf/mass produced Bespoke specialist

Vehicle from a car showroom Vehicle with extras, e.g., supplied in corporate
colour scheme

Piece of equipment used within an industry, Purpose built machine, e.g., the robots used to
e.g., injection moulder build cars

Unit in a warehouse, e.g., modular build Newly constructed office building, e.g., sky
scraper

Within the construction element of the whole life asset management cycle, the costs that should be
considered are those associated with the total cost of acquisition.

COMMISSIONING

The commissioning of an asset includes several costs which should be reviewed when applying whole life
asset management. The costs associated with commissioning a new asset may include the following.

1. Installation
2. Training
3. Insurance
4. Testing
5. Operational efficiencies/performance
6. Quality

Note: Commissioning is bringing something new into working condition

1. Installation

The price that procurement negotiates for the supply and delivery of an asset will include the
transportation to the buyer’s site, but does not always include the installation of the asset. If the asset is a
machine to work inside a factory, for example, it is unlikely that the delivery company will be able to do
the installation. There are further costs associated with either contracting engineers to install the
machine on site or for internal engineers to undertake the work. Some contracts will include installation
and assembly as part of the total price, but this is an area that needs to be carefully evaluated when
looking at the whole life asset management.
 2. Training

Training the individuals who are going to be working with the new asset is another cost to be considered.
Training is likely to include the following.

 Operational capabilities
 Health and safety
 Accountability
 Risk assessment
 General maintenance

The training may be conducted in-house or the individuals being trained may be required to go off site
to gain the skills and knowledge required. There will also be an associated cost, e.g., training and paid
staff time, to be considered.

3. Insurance

In order to reduce financial losses if an accident or unexpected event occurs, any assets should be
insured by the organization. Insurance of assets ensures a financial pay out as compensation to the
agreed value of the asset, if specified loss occurs. Specified losses within insurance include the
following.

 Fire
 Theft
 Accidental damage
 Force majeure

It is common for the insurance premium to reduce in accordance with an asset’s depreciation.

Note: Insurance premium is an amount per annum the insurance costs an organization.

4. Testing

Once the asset is in situ it needs to be tested. Tests such as the following can be conducted

 Visual test to check for any damage/defects

 PAT (portable appliance testing) or similar
 Health and safety test-to check that all protective measures are in place
 Emissions test
 Production run-to check the asset can produce/do what it is supposed to do

Note: PAT (portable appliance testing) is a process in some countries where electricals are safety
checked.
 5. Operational efficiencies/performance

Operational efficiencies should be evaluated prior to the asset being signed off for use. The asset will
have been sold/received against a specification that should state the operational efficiencies, such as
the following.

 Electrical consumption
 Products produced per minute
 Miles per gallon
 Noise levels
 Pollution levels

6. Quality

In the commissioning of the whole life asset management process, quality must be carefully considered.
The link between quality and cost is important. Cost is attributable to both good and poor quality. Cost is
attributable to both good and poor quality.

Remember: Cost is attributable to both good and poor quality. Cost of good quality includes (prevention
costs, appraisal costs) and cost of poor quality includes (Internal failure costs, external failure costs).

DETERIORATION/MAINTENANCE

Although the TCA is integral to the calculations within whole life asset management, other factors that
require consideration include the deterioration and maintenance of the asset. Maintenance of the asset
is essential to keep it in good working order and fit for purpose and ultimately contributing towards the
organisation’s generation of products or services to meet the demands of its customers and consumers.
Within maintenance the costs that need to be accounted for include the following.

 Reliability
 Price of spare parts
 Availability of spare parts
 Skilled technicians or engineers
 Frequency of service requirements
 Downtime due to maintenance

Cost of maintenance includes

1. Reliability
2. Price of spare parts
3. Availability of spare parts
4. Skilled technicians/engineers
5. Frequency of service
6. Downtime due to maintenance
Deterioration of the asset should also be assessed.

When exploring deterioration, the following factors should be considered.

 How long will the asset last?

 At what rate will it deteriorate?
 How will deterioration affect performance?
 What is the relationship between price and deterioration?
 Can deterioration be reduced?
 How can deterioration be reduced?

The longer the asset can last without deterioration, the better value the asset represents. As well as
deterioration, depreciation needs to be explored. Depreciation features in financial document, such as
balance sheets. The purpose of calculating the depreciation of an asset is to give the organization a fair
and current view of what the asset is worth at a particular time. Depreciation is a way of converting the
cost of an asset into an expense over a period of time. Depreciation is a permanent feature listed
against an asset throughout its lifetime is based on wear and tear, reduction in performance and
reduction in value.

Note: Deterioration is the process of something becoming lower in quality or performance. Depreciation
is the reduction is value of a tangible and fixed asset over time.

CONDITION PERFORMANCE MOINTORING

Condition performance monitoring is a surveillance system that is designed to get the maximum
production up time and availability out of an asset. Condition performance monitoring can measure the
following.

 Temperature
 Vibration
 Output
 Speed
 Noise
 Emissions
 Quality

By monitoring the condition of the asset, any related performance defects can be identified from the
outset and corrective action taken early to prolong the lifetime of the asset.

If the emission levels increase to a higher than specified amount, there are five approaches that an
organization can take. Table 3.3 shows the approaches and possible outcomes.
 Approach Outcome

Do nothing: use like a commodity Worry later-likelihood of operational failure and

shortened life expectancy of asset

Reactive: fix it when it breaks Run at failure- likelihood of longer than necessary

downtime while repairs are carried out

Preventive: scheduled maintenance Plan, schedule, co-ordinate – less risk of

elongated downtime due to routine
maintenance

Predictive: fix it before it breaks Predictive faults – reduced risk based on fixing
faults before they are predicted to occur – this

could involve unnecessary costs

Proactive: continuous improvement Defect elimination-aims to remove defects by

continuously improving processes, people and

policies to minimize downtime

Table 3.4 Five options for condition performance monitoring

Note: Up time is the time in which an asset is performing or functioning effectively.

DECOMMISSIONING

Decommissioning is the opposite of commissioning. When an asset reaches the end of its expected
lifecycle, it needs to be decommissioned in its current state. The process in which decommissioning can
happen include the following.

 Removal of asset
 Decommissioning
 Disposal

If the asset is no longer required, it should be removed from the organization. Removal costs will be
incurred and these could include the following.

 Transport
 Hired expertise/labour
 Downtime

Just because an asset is no longer valuable to the holding organization in its current state, it does not
mean it is at the end of its life or that it will not have value to another owner. When an asset reaches the
end of its calculated lifetime, part of the whole life asset management process is to establish whether
the asset requires recommissioning or disposal. Costs could be recovered if the asset is able to be
recommissioned in-house. If the asset is able to be reconditioned, it could provide the organization with
several years more service. By selling the asset to another organization, money can be recovered
against the initial investment and the buying organization acquires a new asset. The disposal of assets
has to be carried out in accordance with regulations and legislation so as to reduce the negative
impact on society, the environment and the organization.

Note: Recondition is to overhaul, repair or make good a once-redundant asset.

RENEWAL AND REPLACEMENT

The final element of the whole life asset management process is the renewal or replacement of the asset
that has been decommissioned or disposed of. At this stage the whole process starts again with a
specific need already identified: that a new asset is required.

(B) HIDDEN COSTS – GLOBAL SOURCING AND RISKS ASSOCIATED WITH EXTENDED SUPPLY CHAIN

WLAM is all about the associated costs of acquiring, commissioning, operating and disposing of a fixed
asset. However, when attempting to apply the whole life asset management theory, some costs are
harder to identify. These costs are often referred to as hidden costs. Hidden costs are costs that do not
always present themselves at the onset of a project.

GLOBAL SOURCING AND THE EXTENDED SUPPLY CHAIN

Global sourcing is the practice of obtaining products or services from the worldwide market. The
purpose of global sourcing is to enable the procurement profession to take advantage of international
economies to achieve cost savings. Savings are frequently achieved by seeking efficiencies in skilled
labour, raw materials or reduced import tariffs. Extended supply chains cover every aspect of the
process from the identification of a need to the consumption of the product or service by the end user.
Extended supply chains promote joined-up thinking and collaboration between all the organizations
involved.

Figure 3.2 shows an example of a basic extended supply chain.

The extended supply chain includes the following.

 Raw material suppliers from the primary sector

 Producers from the secondary sector
 Distributors from the tertiary sector
 Retailers from the tertiary sector
 Customers/consumers

Note: Primary sector is the first stage of the production and manufacturing process (e.g., farming and
the extraction of raw materials). Secondary sector is the second stage of the production and
manufacturing process, e.g., manufacturing industries. Tertiary sector is the third stage of the production
and manufacturing process, where a service is delivered in industries, e.g., banking, communications
and marketing.

Hidden costs linked to global sourcing and the extended supply chain include the following.

 Internal overheads
 Transition/mobilization
 Language barriers
 Time differences
 Post contract reviews
 Culture differences
 Ethical behaviour
 Reputation
 Supplier financial position
 Exchange rates
 Logistics
 Lead time
 Inventory
 Incompatibility
 Changes in duties/taxes
 Trade wars

Remember: There are three economic sectors which are primary, secondary, tertiary.

INTERNAL OVERHEADS

Costs that can be incurred which relate to internal overheads include the following.

 Administering the global strategy

 Researching suppliers
 Travel expenses
 Agent fees
Transition/mobilization

There are costs to be accounted for in relation to the transition or mobilization period of the contract. All
contract mobilisations incur costs: however, global sourcing strategies usually take up more resources. If
the contract has been placed overseas for the first time, there are lots of checks that need to be carried
out prior to implementation. These checks are carried out by an agent and this comes with costs as the
agent or representative needs to be on site to ensure things happen smoothly. If things are being carried
out as per agreement, further costs will be incurred and time lost which may be detrimental to
performance. If the sourcing strategy was localized, resolving the problems is often much quicker and
less costly if there is less distance between the two organisations.

Language barriers

Overseas suppliers may not speak the same language as the buying organization and this may incur
costs that were not considered at the start of the project. A potential supplier may be able to respond to
a pre-qualification questionnaire (PQQ), request for quotation (RFQ) and invitation to tender (ITT), but
may not have the skill to be able to freely liaise with the buying organization or deal with queries or
conflict in a timely manner. If this situation presents itself, hiring an impartial translator to resolve any
situations will incur a further cost.

Time differences

What is often omitted from the costing process is the fact that in order to hold meetings or conversations
with the required suppliers within the global supply chain, buyers in the home country may be required
to work out of hours. Buyers may have to stay late, come into office early or on weekend. This of course
comes with a price.

Post contract reviews

There can be a hidden cost linked to post contract reviews as monitoring contracts and holding supplier
reviews with overseas suppliers is not as easy as the management process in the procurement
professional’s home country. Technology such as Skype may be relied on to link the global supply chain
and depending on the location, of the global supplier; the internet connection may not be as stable as
ideally required. This may mean that meetings take longer than usual, adding to costs as the people
involved could, instead, be conducting other activities that generate value.

Cultural differences

When negotiating and forming contracts within the extended supply chain, it is important that the
culture of both parties is understood. Failure to appreciate the supplier’s culture could be costly for the
buying organization and could offend the supplier.

Table 3.4 shows Hofstede’s cultural dimensions model.

 Individualistic/ How personal needs and goals are prioritized versus the needs and goals of the
collectivistic group/clan/organisation

Masculine/ The different behavioural expectations for men and women in masculine and
feminine feminine cultures

Uncertainty The degree to which people are comfortable with changing the way they work
avoidance or live (low UA) or prefer the known systems (high UA)

Power distance The degree to which people are comfortable with influencing upwards;
acceptance of inequality in distribution of power in society

Time perspective Long term perspective, planning for the future and perseverance values’ versus
short term past and present oriented perspective

Indulgence/ Allowing gratification of basic urges related to enjoying life and having fun
restraint versus regulating it through strict social norms

In order to fully appreciate a supplier’s culture and the ‘dos and don’ts” associated with it, buyers may
need to undertake training, which incurs costs against what was originally budgeted for in the contract.

Ethical behaviour

Being aware of what is ethical behaviour in global sourcing can save costs. Failure to understand how a
global supplier trades or conducts itself could result in expenses that were not budgeted for. In some
countries bribery and kickbacks are a standard part of doing business-although these are not deemed
to be good practice in accordance with the CIPS Code of Conduct. in Latin America, for example,
bribery and kickbacks are sometimes seen as an acceptable way of conducting business. Engagement
with a supplier from this region could cause problems for the buying organization. Failure to understand
a global supplier’s ethical behaviour could cause serious problems for an organization. If the supplier’s
ethical behaviour is uncovered and deemed to be illegal, legal action could be taken and contracts
annulled.

Note: Kickback is a form of bribery in which a sum of money is payable to an organization in exchange
for a contract.

Reputation

Reputation is an intangible asset within an organization, something that takes time to build up and
maintain, yet which can be instantly destroyed through one bad decision. Consumers prefer to buy from
organisations that have good reputations linked to ethics, sustainability and environmental issues. If a
procurement professional makes a bad decision that links the extended supply chain with bad
practices, the reputational damage could be dramatic. The cost associated with the bad decision
could present itself in problems throughout the supply chain and the end result could be that consumers
boycott the product or service.
Supplier financial position

A global supplier’s financial position could be a hidden cost to a procurement professional within the
extended supply chain. If the supplier does experience financial problems and the contract is breached
or terminated, finding another supplier in a short space of time in the area would be difficult. In such
situations the contract often comes back to the home country where all the savings were predicted – or
that have been realized previously – are cancelled out by costs such as the following.

 Relocation of tooling/equipment
 Resources on supplier evaluation
 Travel expenses to try to reclaim products/stock
 Expenses payable to agents working on the buying organization’s behalf
 Delays in supply
 Reputational damage of failure to supply
 New supplier costs are higher than those of the global supplier

Exchange rates

The rate at which currency is valued can be another hidden cost. This risk can be reduced by the
procurement professional agreeing a fixed exchange rate for the duration of the contract with their
supplier. The benefit of this is that both parties can budget effectively in their own currency. However, if
the agreed rate becomes considerably higher than the live rate, costs may be incurred which may have
been avoidable if the rate had been agreed on a variable contract.

Table 3.5 shows the advantages and disadvantages of agreeing a fixed exchange rate.

Advantages Disadvantages

Eliminates fluctuation Potential savings could be missed

Eliminates risk May incur higher rate than live value

Prevents depreciation of currency No flexibility

Enables effective budgeting Rate could be fixed at the wrong time

Logistics

Logistics can provide a hidden cost within global sourcing. The movement of goods can generate risk
within a localized supply chain, but the risk is greater within global sourcing. This is due to the fact that
the products have a longer journey. Localized sourcing means that the products will not have to be
exported, imported and inspected at customs. The amount of processes related to localised sourcing
are considerably fewer than those involved in global sourcing.
Note: Logistics is the movement of goods from one place to another. Localized supply chain that is
based in one area/region/country.

With risk comes cost and, as such, hidden costs can occur if there is disruption in the logistics process
such as

 Delays
 Loss of freight
 Poor/incorrect communication
 Confiscation at customs
 Incorrect export/import paperwork
 Transport breakdown
 Force majeure

Lead time

Lead times are usually longer in global sourcing than with localized sourcing. This is due to the following
factors.

 Longer periods of transportation

 Import/export requirements
 Cultural differences (not all countries share the same sense of urgency)

The hidden costs within extended lead times are that customers could be disadvantaged by not getting
the product or service at the agreed time. This could have another knock-on effect on another hidden
cost, reputation, as explained above. To try to mitigate the hidden costs of extended lead times,
procurement professionals often place purchase orders for larger quantities than they would if they were
using a localized supply chain. This theory is based around the fact that, if lead times are extended or
delays occur, there is enough stock to enable continuity of supply further down the supply chain.

Inventory

In trying to reduce the impact of extended lead times, procurement professionals can contribute
towards another cost. Holding surplus inventory reduces the risk of running out of stock however
associated costs present themselves in the amount the organization has to pay to hold that stock and
keep it in optimum condition. Costs associated with storing additional products include the following.

 Insurance
 Heating
 Lighting
 Staff
 Rent of additional space
 Security

Remember: Hidden costs are the costs associated with owning, operating and maintaining the asset
rather than the asset price itself. They include training, maintenance, staff and storage, etc.
Incompatibility

If a procurement professional awards a contract to a global supplier that does not share the same
ethical behaviour or cultural values, there may be an issue with incompatibility. Incompatibility can be
also seen in the organisations’ IT. If the two organisations’ computer systems are not compatible, this
could generate additional costs. While the buyer and the supplier may have compatible technology at
the outset, one of the problems with global sourcing is that technological, regulatory or infrastructure
changes occurring in one country may force upgrade resulting in problems exchanging data during the
contractual period.

Changes in duties/taxes

A change in the level of duty could present a hidden cost. The changes in duties related to the macro
environment are unforeseeable and non-negotiable.

Figure 3.3 shows some examples of macro-environmental factors.

Demographic Economic

Technological Political/legal

The
Natural
Company
environment Cultural

The possible outcome of an increase in duty is that a contract which represented a clear cost saving to
the buyer could instead become a contract which increases spend.
Trade wars

External factors may also mean that procurement professionals could find themselves the victims of a
trade war which could present further unseen costs. Trade wars can make importing products to a
country very expensive. It is impossible to forecast the extra costs that may be incurred if a trade war
were to start after the contract had been awarded, mobilized and implemented. If global sourcing is
the strategy that a buying organization decides to follow, the risks of unforeseen costs should be
evaluated to try to ensure that genuine cost savings are being achieved.

Remember: General data protection regulation (GDPR) was introduced in 2018 and is legislation for
data protection.

(C) ONLY DEVELOP FOR LARGER PURCHASES

Organisational assets can be varied. Table 3.6 gives examples of what can be considered an asset by
different organisations.

Organization Asset

Manufacturing company Machinery

Agriculture Machinery, land or livestock

Legal firm Office building

Transport business vehicles

Assets can be bought outright or leased. The decision as to whether assets are purchased in full or
leased is based on many factors.

 Cash flow of the organization

 Tax implications
 Depreciation value
 Is ownership required

There are advantages and disadvantages to both leasing and buying assets. They are listed in Table 3.7
and 3.8 respectively

Advantages of buying assets Disadvantages of buying assets

Ownership of the asset Depreciation has to be calculated

Changes/upgrades can be made to the More difficult to upgrade

asset

Usage is not limited Maintenance costs are incurred

Table 3.7 advantages and disadvantages of outright purchase of assets

 Advantages of leasing assets Disadvantages of leasing assets

No initial capital outlay Commitment to payment over an agreed period

of

time

Total amount payable is known Overall price may be higher than if bought
outright

Budgeting is easier Ownership never transfers

Fewer tax depreciation calculations Could be limits on usage

Table 3.8 advantages and disadvantages of leasing

When an organization has made the decision about which option is best for sourcing the asset, it can
then begin to work on the whole life asset management strategy. This strategy is only undertaken for
large-value procurements because of the following.

 It takes considerable time

 It involves many stakeholders
 It requires numerous resources.

If whole life asset management were conducted on every purchase it would not create any value for
an organization and may tie up valuable resources.

Figure 3.4 shows how many departments are involved when working on whole life asset management
strategies.
The involvement of all these departments contributes towards establishing the total value an asset
generates for an organization, how much it will cost to realize that value and over what period of time.

Marketing:

 Does the asset give a competitive advantage that can be promoted to consumers?
 What value does this give and for how long?

Finance;

 What are the tax implications?

 At what rate will the asset depreciate?
 How much will insurance cost?
 Lease or buy?
 What is the life expectancy of the asset?
 What is the resale value of the asset at the end of its life
Research and design:

 What benefit can the asset generate for the organization in terms of productivity and efficiency?
 How much will this cost/save the organization over a period of time

Operations:

 Can the asset be easily operated?

 What are the associated costs with training or managing the change?
 What effect will the new asset have on the workforce?

Sales:

 Does the asset give the sales team a competitive advantage?

 Does the asset make sales easier, quicker and better quality?

Human resources:

 What skillsets are available regarding commissioning and utilizing the asset?
 What training needs to be provided?
 Which risk assessments need to be conducted?
 How often will training updates be required?

Procurement:

 What is the total cost of acquisition?

 What environmental impact may the asset have and at what cost?
 What are the stakeholders’ views on the asset?

Maintenance:

 How easily can the asset be maintained and at what cost?

 What is the life expectancy of the asset before disposal is required
 How will disposal occur?
 What is the cost associated with disposal?

The contribution of each department can aid in whole life asset management.

(D) ENSURE SENIOR MANAGEMENT SUPPORT

Ensuring that senior management are aware of a project can give the project leader positivity and
confidence in the form of the following.

 Authority
 Buy-in
 Support
Authority

In order to gain the authority to apply whole life asset management, a business case will need to be
created and presented. The objectives related to the creation and presentation of a business case
include the following.

 Demonstrating strategic thinking

 Improving the efficiency and quality of decision making
 Enabling senior management to evaluate proposals
 Enabling management to compare alternatives and options
 Checking whether justification for the business case is valid

Elements covered in the business case are shown in Figure 3.5

Buy –in

Obtaining buy-in is important and is different from seeking and acquiring authority. Authority grants the
permission to undertake the project whereas buy-in is about senior management believing in the
concept, ideas, methods and desired outcome.

Support

From authority and buy-in comes support. Senior managers who have granted authority and have
bought-in to the concept of applying whole life costing will give support to the project and team
leaders. Support need to be managed and monitored to ensure that it remains constant from the senior
managers. The senior managers need the following.
  Regular feedback on progression and outcomes
 To understand what level of input is needed from them
 To understand any areas of support or specialism that are required

Without the support of senior managers, the application of whole life asset management would be
considerably more difficult. Problems such as the following would occur.

 Inability to secure resources

 Lack of sustainability of project
 Confusion of end goals
 No way of escalating problems or concerns
 Lack of an ally during difficult times

Whole life asset management involves a multitude of individuals across a variety of departments.

(E) CROSS-FUNCTIONAL SUPPORT – ENSURE ACCESS TO DATA

Cross functionality is about people from different areas within a business working together on a project
to achieve the same goals and objectives. Cross functional working includes all levels of experience.
Knowledge and ability and promote the sharing of ideas and different perspectives to reach the
optimum solution to a problem or response to an objective. When working cross-functionally on a
project such as applying whole life asset management, it is important that all members of the team
receive support. Support may include the following.

 Believing in the end goal

 Assisting during difficult times
 Helping troubleshoot any issues
 Providing the required resources
 Sharing information

To effectively collate and manage the whole life asset management strategy, all information should be
visible to all parties. Data can be stored on a portal or a shared directory so that everyone working on
the project can access it at any time. One of the benefits of working cross-functionally is that the skillset is
changed from the usual resources, and this also can empower individuals to think differently and
potentially come up with solutions or proposals in areas in which they would not usually be involved.

Table 3.9 shows some examples of how continuous improvement ideas could present themselves
through a cross functional team sharing data and working together.

Department Objective Improvement Generated by

Senior management Reduce downtime Conduct routine Security guard

Maintenance after

hours
 Procurement Reduce cost of spares Recondition parts Accountant

instead of disposal

Human resources Reduce accidents Up-skill operators on Marketing

safety

Maintenance Reduce waste oil Follow owner’s manual Procurement

instead of relying on
experience

Operations Create efficiencies Operate a 24/7 shift sales

pattern

(F) TEAM WORKING – REDUCE DATA COLLECTION TIME

An effective team can increase efficiencies, when working on whole life asset management. Team
individuals had a tendency to behave, contribute and interrelate with others in a particular way. Doctor
Meredith Belbin produced the team roles model. This model concluded that there are nine types of roles
within a team and these nine roles can be classified into three categories.

1. Action oriented
2. People oriented
3. Thought oriented

Remember: According to Belbin, a team is made up of nine different roles.

 Monitor evaluator
 Plant
 Specialist
 Implementer
 Shaper
 Complete finisher
 Co-Ordinator
 Team worker
 Resource investigator

In order to reach the performing stage, three other stages have to be experienced. Bruce Tuckman
published a theory on the group stages development in 1965. The six stages of team formation are as
follows.
Forming: The team first comes together here; the team will meet each other for the first time. It is a
staggered process; this stage is characterized by uncertainty. The members will learn each other’s
preference for interaction, their skills and key competencies. Decisions will need to be made regarding
how the team and the work will be organized. Each person will be learning about their role and how it
fits into the wider business. Members try to find out about each other and about how the group is going
to work. This will include questioning, focusing on group identity and guidance and direction.

Storming: Team members will compete with each other for status and acceptance of their ideas. As a
result, team performance may decline at this stage of team development. There may also be conflict in
the team as this is also the stage where the more dominant members of the group will emerge. The
team manager will need to support the team through this period, as some teams can find it difficult to
move beyond this point. Members begin to assert themselves and test out roles, leadership, behavioural
norms and ideas which will include conflict, competition, high emotions and coaching.

Norming: At this point that team performance begins to improve, as members of the team start to work
together more effectively. Working together as a team seems more natural and members may even
value the difference between them. The team members have started to trust each other and will
actively request each other’s input, recognizing each other’s key strengths and working together
towards a common goal. At this point the team has agreed on the ways of working together, the
processes and tools that will be used, how it will share information and resolve conflict. Team manager is
less involved and acts more as coach and mentor. Agreements are reached about work, sharing,
individual requirements and output expectations which include agreement and consensus, clear roles
and responsibilities, members are encouraged and supportive.

Performing: This stage the team is performing and delivering benefits, meeting its objectives and goals by
working together. The team is functioning at a high level and is motivated. The team can now agree
about change without conflict or the involvement of the team manager. The group focuses on
executing its task which will include a clear vision and purpose, focus on goal achievement,
demonstration of independence.

Adjourning: This stage refers to when the team is completing the current project and the members will
move o to new projects and form new teams. This can result in feelings of sadness for the team
members. There should be time for capturing the lessons learned and the knowledge from the project as
well as for celebrating success. The team sees itself as having fulfilled its purpose, and the group
disbands

The knowledge within the team working on projects such as whole life asset management will be varied.
Knowledge can be explicit or tacit as shown in the Table 3.10 below.

Knowledge type Description

Explicit Information that is written down.

Documented information such as books or databases

Tacit Information that is in a person’s mind.

Knowledge gained from experience, values and

practices Difficult to document

Situational leadership, developed by Blanchard and Hersey, is often referred to and this is a form of
leadership where the leader adapts their style in keeping with the style and needs of the team
dynamics. Its an adaptive style of leadership in response to a team’s abilities and characteristics.
Situational leadership includes four types of leaders. Table 3.11 explains the differences between the four
types.

Leadership Traits

style

Telling Leader tells the members what to do and is not concerned with building
relationships. A style suitable for inexperienced members who lack confidence
and

direction.

Selling Leader needs to convince the group to buy into the concept. A style suitable for
teams with low to medium levels of relevant experience and willingness.

Participating Leader works with the team to collectively make decisions. A style suitable for
experienced members, but who also lack confidence in their abilities.

Delegating Leader has to trust that the members are able and willing to carry out objectives.
The members are accountable for their own actions.

When collecting data, it is worth noting that there are two types, primary or secondary.

Primary data is derived from original work or research through experience. Primary data can be
gathered from surveys, interviews, meetings, case studies etc.
Secondary data is derived from a previous source, i.e. somebody else who has gathered the data.
Secondary data can be gained from books, websites, trade magazines etc.

Table 3.12 shows the differences between primary and secondary data.

Primary data Secondary data

Gathered directly from the original source Gathered by a third party

Takes a longer time to gather Quick to gather

Collected from surveys, interviews or experience Collected from books, journals or websites

Relatively expensive to gather Relatively cheap to gather

Specific and accurate May not be exactly what is required

(G) DECOMMISSIONING

When a fixed asset reaches the end of its life, it requires decommissioning. Decommissioning includes
many aspects and these are summarized in Figure 3.6
Preparation

Assets are usually decommissioned at the end of their life cycle when they are no longer cost effective
or require upgrading to keep up with the competition. Unexpected circumstances can force an
organization to decommission an asset. Examples of unexpected circumstances include the following.

 Environmental reasons
 Sustainability issues
 Requirement of product/service
 Legislation
 Regulations

The first stage of decommissioning is for the project leader to gain a full understanding of the plan. Once
plan is understood, resources need to be secured to carry it out. Stakeholders should be informed,
especially stakeholders with high power and high interest, as the decommissioning of an asset is an
extremely important factor that will have financial implications. If there is a risk to the community from
pollution, waste or hazardous materials, then the relevant stakeholders should be made aware.

Note: Push back is a request that a delivery is delayed for a short period of time.

Dismantling

If the asset is situated within a factory or workplace, it may need to be taken apart prior to its removal
from the site. When taking the asset apart as part of the decommissioning process, any fluids, such as oil,
or hazardous materials, such as knife blades or chemicals, should be removed.

Processing

Any hazardous waste or parts that have been removed during dismantling need to be made safe. If
chemicals are present, they should be stored in accordance with regulations and legislation until the
point of disposal. If any licences are required for the disposal of waste, or for the asset itself, these should
now be processed and checked to ensure all is in order.

Disposal

The final stage in the decommissioning process is the physical disposal of the asset. Disposal can involve
any of the following.

 Taking the asset to a landfill site

 Taking the asset to a recycling plant
 Taking the asset to a new owner
 Exchanging the asset for another asset.

Regardless of the disposal type, relevant paperwork should be received to show that disposal has
happened. Within accounting, when an asset is decommissioned, it is entered as ‘retirement’ on the
organization’s balance sheet. When an asset is retired in accountancy terms, it is shown as a liability on
the financial documentation.

(H) REMOVAL OR DISPOSAL PROCESSES

When a fixed asset reaches the end of its useful or cost-effective lifetime within an organization, the
decision is made as to whether it should be removed from the premises or disposed of. Removal of the
asset can include its being sold to another organization, whereas disposal is when the asset is truly at the
end of its functioning life. When an asset comes to the end of its life within an organization, it can be
either of the following.

1. Fully depreciated
2. Partially depreciated

A fully depreciated asset is deemed to have no financial value left whereas there vis still financial value
to a partially depreciated asset. If the asset is being disposed of, the following factors should be
considered aside from the financial and accounting implications.

Part-exchange is another way an asset can be removed from an organization. In some cases, the
suppliers of new assets will accept aged assets in part payment for their goods.

Note: Part-exchange is giving an asset to form part of the payment for a new one. Breakers is a
company that buys decommissioned machinery and strips it of useful parts to then sell on.

If the asset is being disposed of, the following factors should be considered aside from the financial and
accounting implications.

 Transport method
 Risk
 Environmental impact
 Legislation
 Reputation

Transport method

If the asset is not particularly large and does not pose a high level of risk it can be transported by a van
or lorry to the disposal site of choice. However, if the asset is large in size or contains hazardous material,
the process becomes more complicated, e.g., disposing of a temporary building.

Risk

Risks related to the disposal of assets include the following.

 Damage to premises-removing the asset from its location may be difficult and could potentially
cause damage to buildings, vehicles or land.
 Health and safety – there may be risks associated with using specialist equipment and handling
hazardous material.
  Contamination – what would be the consequences be if any hazardous waste was to be
dropped, spilled or lost?
 Security-does the asset need to be monitored through its journey for safety purposes?

Environmental impact

Failure to dispose of assets and their associated products in the correct way could have a detrimental
effect on the environment. There are designated sites for disposing of industrial waste and these should
be used.

Legislation

Being aware of the legislation regarding the disposal of assets and associated waste is very important.
There are several important elements to understand regarding the legalities of waste management.

Reputation

If an organization is found to have been irresponsible in its disposal of assets and or waste, it will lose its
reputation. Stakeholders may boycott any organization that is found to have acted in an unacceptable
way.

(I) LEGAL ASPECTS OF WASTE MANAGEMENT

According to the UK Environmental Protection Act, organisations must take reasonable measures to
prevent the unauthorized deposit, treatment or disposal of waste. Failure to comply with this duty of care
is an offence. The laws around waste management are in place to protect and preserve the following.

 Human health and wellbeing

 The environment
 Rivers and streams
 Air
 Land
 Trees and plants
 Wildlife
 CHAPTER 4

THE APPLICATION OF ETHICAL AND RESPONSIBLE SOURCING WITHIN AN ORGANISATION

4.1 APPLY ETHICAL AND RESPONISBLE SOURCING TO THE PRACTICAL PROCUREMENT AND
SUPPLY ENVIRONMENT

Ethical and responsible sourcing includes understanding the following.

 Bribery
 Corruption
 Fraud
 Human rights
 Modern slavery
 Sustainability
 Environmental issues
 Equality
 Diversity
 Values

Note: Bribery is the offer of a gift, financial gain or incentive to influence a decision.
Corruption is dishonest conduct often by individuals who hold senior positions within
organizations – can include bribery. Fraud is financial deception. Human rights are basic
rights such as fair pay, good working conditions and equality. Modern slavery is the
ownership and exploitation of humans in a workplace.

(A) BRIBERY, CORRUPTION, FRAUD, HUMAN RIGHTS, MODERN SLAVERY

Suppliers need to conform to global legislation and be a good match with the buying
organization if the relationship is to be strategic, long lasting and mutually advantageous.

BRIBERY

Bribery are usually money or gifts. Bribery is the act of giving someone something of value to
persuade them to do something that benefits you. Bribery is not an accepted behaviour in
accordance with the CIPS code of conduct.

Organisations should have the following procedures and principles in place to defend
themselves against bribery

1. Proportionate procedures
2. Top level commitment
3. Risk assessment
4. Due diligence
5. Communication
6. Monitoring and reviewing

Bribery has the following effects on the marketplace.

1. Markets do not function effectively

2. Competition is reduced
3. Transparency is reduced
4. Suppliers lose business
5. Buyers make decisions that do not add value
6. Prices are often higher

Table 4.1 shows some ways bribes can present themselves.

 Situation Description of bribe

Securing of contract Money or gifts given/accepted in return for the award of a contract

Gaining knowledge Money or gifts given/accepted in return for inside knowledge to gain
an

unfair advantage against the competition

Winning of an order Money or gifts given/accepted in return for an order being placed
with

that supplier even if they are not the best value

Ignoring poor performance Money/gifts given/accepted in return for turning blind eye to
products or

services that are unfit for purpose

Obtaining falsified Money/gifts given/accepted in return for false documentation being

documentation prepared.

Ensuring that due diligence is carried out contributes significantly to the avoidance of
unethical and irresponsible sourcing within the supply chain.

Figure 4.1 shows how bribery can affect a purchasing organization even if it has not been
directly involved with the offending organisations.

Figure 4.1 Bribery in the supply chain

Figure 4.1 shows that the purchasing organization has no direct link with the subcontractor or
the public authority, but it suggests that the supplier has paid the local authority to overlook
some performance or technical irregularity in return for the subcontractor giving kickbacks to
the supplier.
Corruption

Corruption is an unethical activity undertaken by a person with control or in authority.

Corruption may include the following.

 Bribery
 Deception
 Abuse of power
 Embezzlement

As with bribery, corruption is not illegal in every country but is seen as bad procurement
global practice. Deception involves a deliberate effort to present false information, withhold
information or influence any stage of the procurement cycle, which will be detrimental to
other parties in the procurement process. Deception occurs when an individual favours one
supplier and acts in unacceptable ways to ensure that this supplier is awarded the contract.

There are different styles associated with influencing according to Yukl and Falbe’s work from
1990.

Style Characteristics

Assertive Forceful, directive, using deadlines

Ingratiating Using charm flattery

Exchange Trading flavours

Upward appeal Requesting input for senior management

Coalition United approach with support from team

members

Rational persuasion Bringing in logic and facts to clarify

Table 4.2 Influencing styles

The abuse of power within the supply chain can be linked to corruption. If individuals with
seniority favour one supplier over another, they can exercise their power to award the
contract to whomever they wish.

Table 4.3 shows the Five Types of Power according to French and Raven

Type of power Traits

Legitimate Power that comes with authority

Reward Power generated from control over resources

Expert Power derived from having relevant expertise or

knowledge

Referent Power from charisma, charm and personality

Coercive Power generated from the ability to make threats

Table 4.3 Types of Power

If power is used in an unacceptable way, this can result in corruption.

Embezzlement is the taking of money or property that has been entrusted into a person’s
care. The money or property is usually obtained in a legal and acceptable fashion and the
individual is within their rights to possess the money or property. However, they are not the
legal owner and, as such, if they try to claim ownership, they are committing embezzlement.

Fraud

Fraud occurs when a person acts deliberately to secure monies from another party through
dishonest methods. Within procurement, fraud can present itself in many ways, some of
which have already been defined in detail earlier in this section. The following list gives some
examples.

Kickbacks: commission paid to the bribe taker for services performed.

Corrupt influence: accepting/ordering more than is genuinely required; approving a supplier

who does not conform to the required standard.

Collusion: groups of suppliers working together to submit multiple bids and splitting the profit
between the winner. Entering multiple bids raises the chances of one of the group winning
the contract.

Bid rigging: a contract is formally agreed with a chosen supplier prior to the official process –
competitive bids are accepted for the purposes of procedure but are never going to be
awarded the contract.

Invoicing fraud: charging suppliers or customers a higher labour cost than was actually
undertaken or recharging products out at higher value than is standard.

Substitutions: submitting substitutions of products or services that are under the agreed
quality standards but which appear to conform.

False claims: filing false documentation for damages to suppliers, tax returns to governments
or claims to insurance companies.

Human rights

Human rights are statutory ways in which individuals expect to, and should, be treated.
Within the supply chain, this is an area that must be carefully examined when applying
ethical and responsible sourcing. Human rights include the following.

 Dignity
 Fairness
 Respect
 Equality
 Freedom

Human rights relate to the following.

 Sexual orientation
 Gender
 Religious beliefs
 Cultural values
 Race
  Ethnicity
 Nationality

According to The Universal Declaration of Human Rights, there are five basic rights.

1. Right to equality
2. Freedom from discrimination
3. Right to life, liberty and personal security
4. Freedom from slavery
5. Freedom from torture and degrading treatment

When evaluating suppliers, procurement professionals should investigate suppliers’ policies

and practices in relation to the treatment of their workers and associated organisations
within their supply chain.

Modern slavery

Modern slavery includes the following.

Human trafficking: the process of seeking, recruiting, transporting and exploiting individuals to
work against their will. Often human trafficking includes violence, deception and coercion.

Bonded labour: also known as debt bondage, this is an individual’s promise to provide
services through exploitation as repayment, or part thereof, of a debt or other obligation.

Forced labour: work that people are forced to do with the threat of punishment if it is not
carried out.

Child labour: the exploitative and illegal employment of children.

Domestic slavery: individuals exploited through working in private households for little or no
money in return for a living accommodation.

Modern slavery can be present in any industry and no industry is exempt. However, there are
some industries where it is more prevalent than others, which include the following.

 Agriculture
 Construction
 Hospitality
 Car washing
 Domestic service

(B) APPLICATION OF THE CIPS CODE OF CONDUCT

CIPS has a code of conduct which all CIPS members are allowed to follow. The code of
conduct’s purpose is to outline the actions and behaviours that CIPS members must follow.
Members of the institute are expected to always follow the code of conduct.

CIPS Code of Conduct

Procurement professional’s organisations should work towards developing and implementing

a code of ethics within their own company which reflects the principles and standards shown
in the CIPS code.
Table 4.4 shows how CIPS members should conduct themselves in relation to each heading
within the Code.

CIPS Code heading Applied in practice by

Enhance and protect the standing of the Never engaging in unethical or irresponsible
profession sourcing related activities.

Maintain the highest standard of integrity in all Always acting in a professional manner,
business relationships disclosing any concerns or conflicts of interest
and keeping

the confidence of all parties within the supply

chain.

Promote the eradication of unethical business Regularly and thoroughly conducting due
practices diligence on suppliers, reporting any concerns
and keeping up to date with regulations by
expanding

knowledge through CPD.

Enhance the proficiency and stature of the Continually striving to gain knowledge through
profession CPD and setting positive and ethical examples
for

colleagues and suppliers alike.

Ensure full compliance with laws and regulations Complying with the country’s law to which the
procurement function has agreed and, if there is
no agreed law, ensuring that the CIPS Code oof

Conduct is followed at all times

(C) ETHICAL CODES OF PRATICE

A code of ethics is a set of morals, values and principles set out by an organization to state
what it deems to be acceptable conduct and behaviour. Ethical codes outline the values
and missions of the organization and state how professionals within the organization should
behave and perform within their role. Codes of ethics contribute towards the application of
responsible sourcing.

Figure 4.2 shows the flow relating to how an ethical code of practice should be constantly
monitored and updated in accordance with the change’s organization face.
Figure 4.2 Maintaining ethical codes of practice

Ethical codes of practice frequently contain principles on which the code will be managed
and policed. In 1995, Lord Nolan outlined seven principles of how public officials should
conduct themselves. Figure shows Nolan’s Seven Principles of Public Life.

Figure 4.3 Nolan’s Seven Principles of Public Life

Remember: Nolan’s seven principles of public life are as follows

 Leadership
 Honesty
 Openness
 Accountability
 Selflessness
 Integrity
 Objectivity

By using the seven principles identified by Nolan, ethical policies can be fairly and effectively
managed. In addition to bribery, corruption, fraud, human right abuses and modern slavery,
codes of ethics also cover the following

 Diversity
 Equality and inclusion
 Mission statement and values
 Conflict of interest
 Whistleblowing
 Non – compliance

1. Diversity

Diversity relates to the differences between individuals and accepting them in the
workplace. Diversity includes the following.

 Race
 Gender
 Sexual orientation
 Cultural background
 Beliefs
 Values
 Age
 Abilities
 Political views
 Religion

Human Rights Legislation and regulations around the world focus on the acceptance and
promotion of diversity.

2. Equality and inclusion

Equality and inclusion are about the assurance that everyone is treated equally and does
not feel left out due to their age, race, etc. For example, a male 60 years old and a female
of 25 years with a disability doing the same role should receive the same working conditions
and be included in the same events, social gatherings and training as each other.

3. Mission statement and values

Mission statement and values play a large part within ethical codes of practice. The codes
themselves are developed around the values of the organization and as such, state the ways
in which the organization will achieve them and how they aim to positively contribute to
good and acceptable ethical conduct.

4. Conflict of interest

A conflict of interest happens when a person within an organization stands to gain something
personally from a business transaction or opportunity. It occurs where a professional and a
personal interest overlap. Conflict of interest can present themselves in many forms, some of
which are the following.

 Financial
 Materialistic
 Prejudicial
 Personal
 Professional

For example, if a procurement professional is looking to award a contract for painting the
outside of a building and one of the suppliers is their close family member, that is conflict of
interest. In a situation such as this, good practice would be to let another procurement
professional run the ITT or RFQ. Best practice for dealing with conflicts of interest includes the
following and procedures such as this are usually documented with the ethical codes of
conduct.

 Disclose any suspected conflict of interest to management

 Avoid situations where conflicts of interest can occur

5. Whistleblowing

Whistleblowing is the exposure or reporting of information that suggests some form of

wrongdoing within the workplace. Whistleblowing occurs when an ethical breach has
occurred and an individual wishes to raise awareness of illegal or improper conduct.
Whistleblowing is often confidential because the people who are reporting the wrongdoing
do not wish to be identified for fear of repercussions in the workplace. Many organisations
have confidential telephone lines for whistle-blowers. Whistle-blowers need to be sure that
their identity will be protected by the organization.

6. Non-compliance

If the ethical code of conduct within an organization is breached, there are consequences
for both the individual who carried out the breach and often the associated organization. If,
for example, a CIPS member commits a breach against the CIPS code of conduct, they can
lose their right to use the CIPS designation after their name and lose their membership of the
institute. An organization could lose its reputation, contracts, accreditations or, at worse,
face legal action. For a procurement professional, conducting research on suppliers’ ethical
codes of practice is an important element of the application of responsible sourcing.
 (D) ENVIRONMENTAL FACTORS

When practicing ethical and responsible sourcing within procurement, the environment
should be considered. Responsible and ethical sourcing promotes working with suppliers who
want to have a positive effect on the environment or at least minimize the damage they
cause. When considering environmental factors, the following areas should be investigated.

 Pollution
 Recycling
 Renewable processes
 Sustainability

Pollution

Within strategic procurement, part of the sourcing process is to identify those suppliers who
are making an effort to reduce their impact on the planet. Pollution can be generated from
the following.

 Factory emissions
 Noise
 Transport
 Development
 Waste disposal

Procurement professionals should try to establish the effects such organisations have on the
environment and aim to work with suppliers who are consciously trying to reduce the output
of such pollution by changing their methods of working. Transportation is major cause of
pollution. The carbon dioxide emitted from vehicles contributes greatly to air contamination.

Remember: Sea and rail freight cause less pollution than road and air transport.

Recycling

Assessing how a supplier’s organization commits to recycling is a key environmental factor

when applying responsible sourcing. If suppliers are able to recycle or reuse products, this
contributes favourably when making a strategic procurement decision. Packaging can be
recycled or returnable which means that after it is used, it goes back to the supplier to be
used again for another delivery to another customer. Although this removes the exclusivity of
buying organisations receiving products in bespoke or branded liveries, the positive impact
on the environment should outweigh this – as well as reducing the costs of new orders and
extra deliveries. Tjhis is known as reverse logistics. Reverse logistics is the reuse of packaging
by the delivery company for another delivery or customer.

Renewable processes

With the world’s natural resources depleting, the focus is on suppliers to find ways to
generate the energy and water needed. Renewable energy is a way of producing
electricity from sources that are naturally replenished such as wind, rain or sun. Suppliers that
are producing their own energy are having a positive effect on the environment and are a
better fit for a company to work with than suppliers that are continually drawing on natural
resources. Responsible sourcing involves assessing how suppliers are producing or using
energy and trying to award contracts, where possible, to the suppliers that are making an
effort to look after the planet. Organisation’s CSR policies will reflect their views on renewable
energy and if an how they aim to look after the planet.

Figure 4.4 shows a CSR policy and illustrates what aspects it aims to include and give a
positive contribution to.

Environment Workplace Marketplace Society

Figure 4.4 CSR policy

Sustainability

Sustainability in relation to environmental factors relates to the replenishing of natural

resources that suppliers are extracting or using. Suppliers with strong values and ethics will
have a programme to return anything taken from nature in the form of replanting or
replacing. Here are some examples of suppliers that are proactively promoting sustainability.

 A paper manufacturer that is replanting trees

 A fishing company that leaves enough fish in their natural habitat to breed
 A supplier that is 100% neutral in its emissions

The supply chain is changing and sustainability is becoming a serious concern. Procurement
professionals have the responsibility to promote good practice by working closely with
suppliers that are trying to make a difference and improve the environment.

(E) SUPPORTING INFORMATION ON ETHICAL PRACTICES IN SUPPLIER QUOTATIONS AND

TENDERS

Through supplier identification, evaluation and selection, procurement professionals can

assess which suppliers or potential suppliers appear to meet the criteria associated with
ethical practice. However, it is important to validate the existence of the documentation
and processes that are assumed to be in place. This is not about mistrusting a supplier, but
protecting the interest of the organization for which the buyer works and the entire supply
chain. The documents and processes in place must meet the required standards and
regulations in accordance with the need that must be fulfilled. When a supplier provides a
quotation or bid in response to an RFQ or ITT, it is good practice to ask for its ethical policies
to be included. This means that when prices are reviewed the ethical documents can also
be examined. If a supplier is accredited or is a member of an association that promotes
good ethical conduct, a statement to this effect is likely to be featured on its company
documentation. This could be in the form of letters after the organisation’s name or the
authorized use of a logo.

Figure 4.5 shows a few examples of accreditations that suggest an individual or an

organization is aware of and is practicing good ethical conduct.
Accreditation information should be verified by the procurement professionals either asking
the organization for a certificate to prove membership or accreditation or checking on a
professional register.

Note: Professional register is a list managed by the awarding body detailing all individuals or
organizations who are members or hold an accreditation.

Suppliers could be linked to the organisations shown in Table 4.7 below, which promote good
ethical conduct

Organization/association/body Details

CIPS Global leader in procurement and associated

professional standards

International Labour Organisation Tripartite UN agency promoting fair labour standards

ILO across the globe

Ethical trading initiative ETI An initiative to drive fair and ethical trading across the

globe

Fair Trade Foundation Promoting fair deals for growers and good prices for

workers in developing countries

Ethical company organisation Research company benchmarking organisations on

ethical conduct

Anti – Slavery International International, non-governmental organization,

registered in the UK, promoting human rights

Amnesty international A London based organization campaigning globally

to

improve human rights

 Red tractor A food standards agency that regulates the source,

origin and movement of food throughout the supply

chain

ISO 14001 International Standards Organisation accreditation for

quality management

IEMA (Institute of Environmental A worldwide alliance pf professionals aiming to make

Management and assessment) businesses future-proof through sustainability

Carbon Trust A world leading body for assessing carbon footprints

and awarding the standards for companies
achieving

carbon neutral status

(F) SUPPLIER MONITORING AND KPIs

Once suppliers have been awarded contracts to supply buying organisations, it is important
that they are continually monitored to ensure that the ethical and responsible practices on
which they were selected in the earlier stages of the procurement cycle are adhered to.

Specific ways of monitoring ethical and responsible sourcing include the following.

 Monitoring key performance indicators

 Using a scorecard/dashboard
 Holding supplier reviews
 Ensuring suppliers keep their accreditations up to date
 Keeping up to date with changing legislation/regulations
 Being aware of media stories

Some examples of KPIs relating to the measurement of supplier ethical performance in table
4.8 below.

KPI Monitoring

How many complaints have been Acceptable behaviour within relationships

received?

regarding diversity

How much packaging is being Environmental awareness

Recycled?

What percentage of energy is generated Reduction in carbon footprint

by renewable sources?

How many employees leave each year Working conditions within the

organisation
 How many additional deliveries are there Awareness of pollution related to transport

per order?

The KPIs in the above table are quantitative, which means that they are easier to monitor as
they are not subjective. It is possible to have qualitative KPIs to measure ethical performance,
but these are more difficult to manage.

KPI results can be plotted on a scorecard to give a visual representation of how each
supplier is performing ethically. This creates a dashboard which gives an overall view of each
supplier’s performance. By holding regular reviews or meetings with suppliers, a procurement
professional can monitor whether the application of ethical and responsible sourcing is being
carried out. Although suppliers may have the required accreditations when they are initially
evaluated, is is important to make sure that they keep up to date with their commitments
and requirements throughout the contract’ life. Procurement professionals should aim to
keep abreast of any changes and react accordingly. If legislation around a product is
changed, it is important for the whole supply chain to conform. By following current affairs
through reading news articles or watching media footage, procurement professionals can
be aware of any issues or global concerns that may relate to the supply chain to which they
belong.

Table 4.9 shows some examples of unethical behaviour and the effects such behaviour could
have on the supply chain.

Examples of unethical behaviour Potential effects of unethical behaviour on supply

chain

Disposal of hazardous waste into waterways Supplier closed down Shortage of products

Inhumane working conditions Price rise due to demand outstripping supply

Recyclable waste dumped in landfill Reputation by association

Unequal treatment of races within an Stakeholder backlash

organisation
Loss of investment

Unacceptable living conditions for animals Reduction in sales/profit

Supplier evaluation process challenged

(G) THE TRIPLE BOTTOM LINE – PROFIT, PEOPLE AND PLANET

Trying to measure how sustainable an organization was used to be a challenging

undertaking. However, during the 1990s, a concept thought up by American John Elkington
changed the way sustainability was measured. This framework is known as the triple bottom
line (TBL) and measures sustainability in relation to organizational performance and
investment against the 3Ps. TBL is a concept that measure sustainability

1. Profit
2. People
 3. Planet

Figure 4.6 shows the 3Ps.

Figure 4.5 The 3Ps.

Profit relates to the financial dimension

Although profit is related to the amount of money made, within the 3Ps, profit is not just about
paying the employees and shareholders; it is about ensuring the continuity of the
organization and enabling good work to be carried out in the community.

People relates to the social dimension

This is the effect that the organization has on its stakeholders. This includes employees and
consumers as well as the producers and suppliers of raw materials. Strong ethical principles
should be in place and the organization should be giving something back to the community.

Planet relates to the environmental dimension

This is the effect that the organization has on the environment. This includes pollution, waste
management and renewable energy. The planet aspect of the 3Ps is also related to the
long-lasting effects of the organization throughout its life cycle so takes the replenishment of
and the reduction in the use of natural resources into consideration.

Table 4.10 shows how 3Ps can be measured.

Dimension Measured by

Profit The amount of money made

Organizational net worth

People Social responsibility

Perception in the community/globally

 Planet Impact on the environment

Policies on recycling/sustainability

The 3Ps in practice

Profit:

 A packaging manufacturer reinvests its profits in state-of-the-art recycling machinery

for its waste cardboard.
 A vegetable packing operation generates enough money to be able to expand and
increase the number of employees.

People:

 A large privately owned call centre donates its end-of-life computers to local youth
clubs and social groups to help the underprivileged gain internet access.
 A legal firm opens its canteen over festive periods to provide a meal to individuals in
the local community who cannot afford a celebration.

Planet:

 A driving instructor uses only hybrid vehicles to teach her learners, thus reducing CO2
emissions.
 A chocolate manufacturer only buys cocoa beans from ethically run and sustainably
maintained cacao plantations.

The TBL (triple bottom line) or 3ps is a way of recording how sustainable an organization is.

The triple bottom line theory has both advantages and disadvantages associated with it.
Table 4.11 outlines these.

Advantages Disadvantages

Encourages awareness of sustainability Is just a reporting tool

Promotes the use of CSR policies No legal requirement to conduct

Support awareness of the environment Hard to measure effectively

(H) ADOPTING SUSTAINABLE PRACTICES, STANDARDS AND SPECIFICATIONS IN THE SUPPLY

CHAIN

As reducing the negative effects on the environment becomes a higher priority within the
global society, it has become key for procurement professionals to focus on making
procurement a sustainable function within an organization. Sustainable procurement is the
process whereby economic development, social development and environmental
protection are balanced against business needs.

Sustainable practices

Sustainable practices within procurement are vast and varied and include the following.

 Evaluating and monitoring suppliers in relation to ethical conduct

 Considering TBL as a way of reporting on suppliers’ organisations
 Actively working to reduce environmental damage in the supply chain
  Evaluating needs and only procuring what is required
 Gaining standards and accreditations
 Removing waste from the supply chain
 Applying continuous improvement in the supply chain
 Developing the procurement professionals of the future
 Amending specifications

Using TBL as a way of reporting on supplier organisations can contribute towards adopting
sustainable practices within procurement. Evaluating the results of the 3Ps gives a
procurement professional a good insight into how sustainable a supplier is. Procurement
professionals can work alongside their suppliers to establish the best value on quantities, not
only in relation to price but also giving consideration to the environmental impact. Although
JIT (just in time) systems can offer the buying organization significant savings on holding and
managing stock, it is important to consider the effect this may have on the environment.

Remember: JIT systems may have a negative effect on the environment.

More deliveries equate to more transport and more packaging, which ultimately produces
more pollution. It is a difficult decision and requires a high level of skill for procurement
professionals to calculate the best value considering price, volume and the issue of
sustainability. In some circumstances the number of deliveries cannot be reduced further
without being detrimental to an organisation’s profit or financial sustainability. There are other
options that procurement professionals can consider when working with suppliers to reduce
the environmental impact and promote sustainability in the supply chain, such as revising or
amending specifications.

Sustainability and standards

Working with suppliers who are working towards sustainable and environmental
accreditations, as well as the ones who openly promote their allegiance to organisations
such as ILO or ETI, contributes significantly to the adoption of forward-thinking practices in the
supply chain. By removing waste from the supply chain, sustainability can be enhanced.
Waste does not have to be a physical product; it can also be processes. By reducing waste
in the supply chain, the negative effect on the environment will be reduced, i.e., less
processing in a factory will use less electricity, which in turn produces fewer emissions and
uses fewer raw materials.

Continuous improvement also contributes towards adopting sustainable procurement.

Continuous improvement is about the continual evaluation and enhancement of processes,
e.g., in order to make an organization more cost effective, to develop better products or to
improve customer service.

Figure 4.6 shows which factors need to be adopted for the future sustainability of
procurement.
Figure 4.6 Factors associated with sustainable procurement

Sustainability and specifications

Specifications need to adapt and develop to reflect the changing requirements of the
consumer and also to comply with regulations and legislation as these are amended.
Standards, regulations and legislation are continually evolving and new updated versions of
existing guidelines, as well as completely new initiatives, are being released. In 2018, as part
of the drive on the reduction of plastic waste, the supply chain was tasked with looking for
sustainable products to replace thousands of plastic components. This involved the
recreation of many specifications to remove, or at least reduce, the amount of plastic in
them. Specifications have constantly had to evolve and will continue to do so as science
and technological research discovers more about what harms the planet and which raw
materials are becoming scarce.

(I) CONSIDERING THE SOCIAL IMPACT OF THE ORGANISATION’S BEHAVIOURS

Social impact is the effect that an organization can have on the community and its
stakeholders. Social impact is formed from several factors listed below.

 Impact investing
 Health
 Social entrepreneurship
 Human and civil rights
 Education
 Public sector and public policy
 Corporate social impact
 International development
  Environmental sustainability
 Non-profit and social enterprise

Organisations should aim to create a positive social impact. As well as assessing the actual
behaviour demonstrated by an organization, it is important to consider how this behaviour
will be perceived. The perception of the behaviour contributes to the social impact.

Every person has a different mix of values, needs and experiences and, as such, each
individual can form a different perception of an organization and its social impact. However,
the general consensus is that an organization either provide a positive or a negative impact
on society. Organizational social impact can be formed from many factors. These include
the following.

 Ethical behaviour
 Environmental behaviour
 Sustainable behaviour
 Political and legal behaviour
 Economic behaviour
 Cultural behaviour
 Technological behaviour
 Donating/giving

Ethical behaviour

An organization that can demonstrate good ethical conduct in accordance with its code of
ethics, international standards and any applicable regulations will have a much more
positive impact on society than one which does not conduct itself in an appropriate way. An
organization which has good ethical values will be deemed a better place to work and is
likely to have a strong workforce with a low staff turnover. On the other hand if an
organization is known in society for not being a fair payer, or one that has poor working
conditions for its employees, it will find it harder to attract and maintain a workforce.

Note: Staff turnover is the number of employees that leave an organization in a specified
time period.

Environmental behaviour

The environmental behaviour displayed by an organization relates to how much pollution it

creates, how it deals with any waste generated and its recycling policy. An organization
which creates pollution will have a negative social impact because the effects of this will be
felt by the local or global community. Likewise, if an organization’s waste is either non-
recyclable or seen to be dropped by consumers, this could create a negative social impact.
Although organisations cannot dictate how their consumers dispose packaging socially it is
expected that organisations who do create pollution through waste should try to raise
awareness and improve standards.

Sustainable behaviour

Sustainability of an organization relates to three aspects: profit, people and planet. The 3Ps
are a way of reporting how an organization is performing in terms of sustainability. An
organization which is sustainable and shows the community that it is actively replenishing the
resources it uses will have a favourable impact on society. If the economy is booming and
jobs are plentiful, organisations which are ethical, environmentally friendly and sustainable
are much more likely to attract and keep workers over those organizations which exhibit less
acceptable behavior.

Political and legal behaviour

Politicians influence or create the legislation that organisations must adhere to. Legislation
and regulations include the following.

 Taxes
 Salary
 Working hours
 Trade regulations
 Quality standards

Organisations which are not behaving in accordance with the required policies and
processes, e.g., not paying their taxes, are likely to have a poor social impact. When
organisations do not pay their taxes, the general public suffers because the taxes which
should be paid would contribute towards the running of the country. Stakeholder loyalty to
organisations which are not behaving in accordance with the law will be affected and
stakeholders may consider moving to competitors. In some countries where there are
political divides, organisations may also have a negative social impact if they are seen to be
supporting or promoting the ‘wrong political party within an area.

Economic behaviour

Economic behaviour includes the following.

 Pricing
 Inflation/interest rates

Good economic behaviour should seethe prices that organization charges reflect the
current economic trends. If inflation or interest rates rise then it is to be expected that price
rises will follow. However, this should not be seen as an excuse to overinflate the increases.
Organisations which impose unfair prices often receive negative media coverage, which
contributes towards a negative social impact. If an organization is perceived as being fair by
charging fair prices, consumers are likely to support the organization and this contributes
towards the company’s growth, profit and its stability to further strengthen the local
economy.

Cultural behaviour

Culture plays a large part in how an organisation’s impact is perceived. Culture is made up
of six elements

 Stories
 Symbols
 Power structures
 Organizational structures
 Control systems
 Rituals and routines
If these elements are deemed to be acceptable behaviour within the community, then the
organisation’s social impact will be a positive one.

Technological behaviour

Technological behaviour plays a part in social impact. With the ever-developing use of
technology, organisations are often under pressure to keep up with numerous technological
advances. This can be seen as a positive aspect which contributes towards having a good
social impact, but it can also be seen as a bad thing. The positive aspect relates to
organisations in the community keeping up to date and being in line with modern times. Jobs
could be created in line with technology, but these are often located away from the local
community. The negative side of this is that advances in technology can often result in the
lack of requirement for human input and, as such, jobs could be lost.

Donating/giving

Actively working within the community and being involved in projects, charities and events
contributes significantly towards positive social impact. Organisations which are involved with
raising awareness as well as funds for local causes are creating many benefits within the
community. The North-western University Kellogg School published some work on how
organisations can promote a positive social impact.

The work focused on five key areas, as presented in table 4.12

Key area Description

Create Create products and services that positively impact people and planet

Strive Strive for operational standards that value people and their work

Recognize Recognize a responsibility to the community and the environment

Measure Measure and share their impact with all stakeholders

Believe Believe in the power of collaboration for mutually beneficial social impact

Measuring social impact

If an organisation’s behaviour is poor, this will create a negative social impact which is likely
to be reflected in the business performance. Organisations which display poor behaviour see
outcomes such as the following.

 Reduced brand loyalty

 Difficulty in recruiting
 Negative media coverage
 Reduced sales/profit
 Reputational damage

Organisations which create good behaviour create a positive social impact. The community
in which they are based and to which they supply will benefit from the following.
  High employment
 Fair wages
 Low pollution
 Sustainable resources
 Engagement and involvement with local organisations

The positive social impact of an organization can be measured through several factors.
Table 4.13 gives examples of this across different sectors.

Sector Measurement

Agriculture Higher yields through technology and training

Education Greater number of learners wishing to get qualifications

Training More qualifications gained in the community

Pollution Lower levels of noise, smell and emissions

Average wage Higher amount earned in the community

Employment Greater number of people in work

Involvement Higher amount or time spent working with local causes

Reputation More positive perception of the organisation

The way an organization behaves has a direct effect on the community in which it operates.
Displaying good ethical conduct, being sustainable and being environmentally friendly all
contribute towards acceptable behaviour, which generates a positive social impact.

(J) EXPANDING REPORTING FRAMEWORKS TO INCLUDE ECOLOGICAL AND SOCIAL

PERFORMANCE

Reporting frameworks are set of criteria that are used to measure and present an
organization’s performance and the position of the business. In most circumstances,
reporting frameworks are based around financial activity. Reporting frameworks usually
include some or all of the following.

 Cash flow statement

 Profit/loss account
 Balance sheet
 Shareholder value
 Predicted versus achieved sales
 Future budget

Although it is important for the financial results of an organization to be established and

presented to the stakeholders, consideration should also be given to the inclusion of
ecological and social performance. Social and ecological reporting frameworks include a
multitude of methods for gathering and reporting performance and the associated social
impact. Methods to gather and evaluate data include the following.
  Quality systems
 Impact tools
 Feedback
 Output focused tools
 Outcome focused tools

Note: Output is what is produced or delivered. Outcome is level of performance achieved in

relation to the output.

Remember: Output and outcome are different evaluation methods.

The selected methods are then used to measure the various aspects of social impact and
ecological performance. Due to the diverse nature of the subject, what is included in social
and ecological reporting can be quite complex. The information gathered in relation to
social and ecological impact and performance is both quantitative and qualitative. Table
4.14 gives some examples of the different types of information on performance that can be
measured.

Qualitative Quantitative

Stakeholder perception Reduction in emissions

Reputation Amount of funding donated

Good ethical practices Amount of training courses delivered

Benefit to the economy Percentage of resources replaced

Reporting social values include the following.

 Percentages
 Statistics
 Case studies
 Testimonials

Some organisations are able to put monetary value on their social impact, although this is
often subject to interpretation and lacks objectivity. However, it is a good way to show the
‘good’ an organization is doing for the community. Reporting in accordance with social,
ethical and ecological values is becoming more expected and accepted. By reporting on
ecological and social performance, organisations which are making a concerted effort to
follow regulations and be sustainable and ethical will be noticed and preferred to those
which are not. Procurement professionals can request any social impact reports during their
due diligence or pre- qualification and evaluation exercises. The findings detailed within
these reports will contribute towards the purchasing department being assured that true
value for money is being gained across every aspect of strategic procurement.